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Mobile

Size matters as wireless giants consolidate in 2000

In a year when much of the telecommunications world stumbled, the wireless industry reshaped itself around a new vision of what a mobile phone company needs to be.

In a year when much of the telecommunications world stumbled, the wireless industry reshaped itself around a new vision of what a mobile phone company needs to be.

Year in
review special report Driven by changing market demand, snowballing competition, and the first glimmers of viable wireless Internet access, companies launched a merger and consolidation binge that changed the face of the industry.

Verizon Wireless and Cingular Wireless, the two largest companies going into 2001, didn't exist a year ago. AT&T Wireless, once the industry's leader, has in effect been spun off twice--once through an initial public offering and again in Ma Bell's planned breakup. And the biggest overseas players, Deutsche Telekom and Japan's NTT DoCoMo, now have strong footholds in the United States.

For the average consumer, this game of brand-name musical chairs translated into falling rates--or at least calling plans with more minutes and national coverage. Most of the companies were rewarded with sharp increases in subscribers, as the industry as a whole posted double-digit gains.

The seeds of most of these moves were planted years ago. Carriers Sprint PCS and AT&T Wireless started a year ahead of the game, with offers of cheap long-distance service already in place and sprawling national networks eager to serve more wireless-hungry customers. For much of the rest of the industry--locked inside smaller, regional service areas--the year marked a frantic game of catch-up.

"Sprint PCS was knocking the cover off the ball for a while," said Peter Friedland, a wireless analyst at WR Hambrecht. "The other carriers saw it was working so well and said it's tough to compete with a national brand."

Data dreams
A few strategic undercurrents also represented signs that the carriers were beginning to think hard about shifting their business plans to focus on wireless Net access, a service that has yet to make a significant dent in the American consumer consciousness.

The big companies are looking to the future "third generation" of wireless technology, when today's snail-paced data connections will be replaced by sizzling high-speed connections that will turn cell phones into miniature Net terminals, video phones or music players.

Analysts have been bullish on the notion, predicting that several hundred million people at least will gain access to wireless Internet connections over the next several years. Both the analysts and the carriers see this as a potentially significant additional revenue stream, as long as consumers ultimately get hooked on--and can be persuaded to pay for--these services.

In the meantime, the companies have had to find a way to finance their visions, which will potentially involve spending billions of dollars on new wireless spectrum and upgrades to their networks. For some that has meant going public, although the downturn in the market has delayed some of the biggest planned IPOs. For almost all, it has meant merging with others so that costs can be shared as much as possible.

Keeping up with the Joneses
For many of the carriers, however, a simple game of catch-up served as the most significant motivation behind the wave of mergers.

See 2000 timeline As far back as mid-1998, AT&T Wireless pioneered a then-novel calling plan in which customers could call anywhere in the United States, without paying long-distance fees. This proved enormously popular, prompting rival Sprint PCS to follow suit.

The regional players, which then included Vodafone AirTouch, Bell Atlantic, BellSouth and others, wanted to jump on board. But they lacked national networks, a gap that put them on the hook for expensive "roaming" fees when customers called outside the network.

That calculus alone helped drive much of the consolidation, analysts say. In the national drive, Verizon Communications arose from the merger of Vodafone AirTouch with Bell Atlantic and GTE. That created a giant with close to 25 million subscribers.

A similar joint venture between BellSouth and SBC Communications' wireless properties created Cingular Wireless, which is still getting off the ground. AT&T Wireless continued to snap up smaller properties, while smaller VoiceStream Wireless pursued a series of mergers that helped it attract the attention of buyout partner Deutsche Telekom.

Analysts say the bulk of the consolidation binge is likely over. After all, there are few major companies left unaffiliated. However, WorldCom still lacks a wireless division, a gap that could spark skirmishes somewhere down the road.

Instead, in 2001 and beyond, companies are likely to focus on finding ways to bring consumers into the world of wireless data and to keep subscriber growth high now that nationwide competition is fierce.

"We're seeing the first stage of the maturation of wireless digital services," said Phillip Redman, a Gartner research director. "Now that the stabilization has really happened, we'll see a lot of progression on next-generation strategies."