Deutsche Telekom values VoiceStream at $22,000 per customer

Deutsche Telekom's $50.7 billion bid this week for U.S. wireless service provider VoiceStream put a steep price tag on subscribers: about $22,000 per customer.

The lofty price-per-subscriber figures underscore two trends: companies are intensely interested in wireless technologies for their ability to deliver voice and Internet services to customers nearly anywhere, and international carriers want to crack the lucrative U.S. communications market.

The high purchase price for VoiceStream raises questions about how Deutsche Telekom--and others that follow suit--will recoup the acquisition costs. After all, the German communications company would need to collect an average of $75 per month from each of VoiceStream's 2.29 million customers for nearly 25 years to break even.

For example, the $22,000 per customer for VoiceStream dwarfs the $3,000 to $5,000 per subscriber that cable operators were getting recently when consolidation in the cable industry was at its height roughly 18 months ago.

But analysts say the immense potential for growth of wireless services, and the higher profit margins they garner, make premium wireless acquisition prices easier to swallow.

"We are seeing higher revenue per subscriber than we saw a few years ago now that carriers are bundling long-distance and buckets of minutes," said Elliott Hamilton, a senior telecommunications analyst at Strategis Group.

"DT is buying subscribers, but they're also buying the potential subscribers in the U.S.," Hamilton said. "People see so much growth that current subscriber levels may not be the best way to measure these deals."

POP numbers
Many analysts, including Ric Prentiss of Raymond James & Associates, believe a better metric is the price per "POP," or the total number of people within a wireless carrier's coverage area--all of which are potential customers, theoretically.

With a coverage area and licenses capable of serving more than 220 million people, VoiceStream went for about $265 per potential customer. Comparatively, the Vodafone-AirTouch deal was valued around $339 per potential customer, and the France Telecom-Orange deal went for about $675 per "POP"--both higher than the DT-VoiceStream deal.

Still, on a per-subscriber basis, Deutsche Telekom's bid represents more than $22,000 for each of VoiceStream's 2.29 million customers. In comparison, Vodafone paid approximately $7,000 per subscriber when it acquired AirTouch Communications last year.

"A more usual acquisition price point would be $3,000 to $4,000 per subscriber," Eddie Hold, principal wireless industry analyst for Current Analysis, a market research firm, wrote in a report this week. "Although the cost per subscriber is incredibly high, valuing a company based purely on its current subscriber rates often provides a false impression of a company's worth, as it implies a relatively static growth.

"Contrary to this, VoiceStream is actually growing at a very rapid rate, and therefore, to a great extent, Deutsche Telekom is paying for the potential of the U.S. operator, rather than the present."

According to the Strategis Group, the United States claims a wireless penetration rate of only about 33 percent compared with roughly 60 percent in Europe. That, analysts say, leaves plenty of room for the U.S. wireless market to expand--even double--in the next several years.

The price to pay
To be sure, acquisition costs in the communications industry have steadily increased in recent years.

Many analysts blame Microsoft's billionaire co-founder Paul Allen, who owns Charter Communications, and AT&T for driving per-subscriber costs higher as the two cable operators made a series of acquisitions during the past two years.

But cable television, with a penetration rate of roughly two-thirds of U.S. homes, is a far more mature business than wireless, which remains limited but has more growth potential.

To a certain extent, the high-priced wireless acquisitions are simply the result of the limited number of quality nationwide networks and the high demand for owning wireless properties.

"To put it bluntly, this is the price that an operator must pay to break into the U.S. market at this time," Hold said. "After all, Deutsche Telekom was not the only operator chasing after VoiceStream: Both NTT and France Telecom signaled their interest in the operator, and WorldCom was also potentially interested now that the Sprint merger has fallen through."