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Static grounds AT&T Wireless IPO

The communication giant's stock offering, the largest IPO in Wall Street's history, could have been spectacular.

AT&T's wireless stock offering, the largest IPO in Wall Street's history, could have been spectacular.

That investors received it with only tepid enthusiasm underscores how cautious they remain after this month's Wall Street roller-coaster ride. But it's also an indication that they are looking under the hood of Ma Bell's wireless growth engine and not entirely liking what they see.

AT&T Wireless shares were at $31.56, a $2.06 gain, at the 1 p.m. PT close of regular trading. The IPO priced at $29.50.

Just six months ago the unrivaled king of the U.S. mobile phone market, AT&T Wireless now finds itself outstripped by two new joint ventures that will have more subscribers and--at least today--a stronger bottom line. Though people are quickly signing up for AT&T Wireless services, smaller competitors are outstripping the division's growth considerably.

"Their margins are lower than some of their competition," said William Power, a financial analyst with J.C. Bradford and Co. "It's a competitive marketplace now."

For months, the buzz around wireless phone and data services has been building rapidly, driven by skyrocketing projections and snowballing subscriber figures. Analysts project that close to 1 billion mobile phones will be in use worldwide by 2003, and the biggest communications see related story: Companies fight over wireless users companies have been scrambling to sign up customers and merge with each other in an effort to win as much of that market as possible.

With 12.2 million subscribers at the end of 1999, AT&T until recently led that pack as the largest carrier in the United States. But in the past few months, Bell Atlantic and Vodafone Airtouch have merged their operations into the new Verizon Wireless brand, which will have more than 23 million subscribers after GTE joins the company. SBC Communications and BellSouth also have agreed to merge their mobile units, which will rank second with 16.2 million customers.

Verizon and the Baby Bell joint venture are each expected to go public later this year or early next year.

Still behind, but growing quickly, are Sprint PCS and smaller player Nextel. AT&T added 414,000 subscribers during the first quarter of this year, while Sprint added 831,000, and the much-smaller Nextel jumped by about 500,000 customers.

But even aside from this strict competition, AT&T's wireless profit margins--suddenly a concern for cautious investors--aren't looking as good as those of its new competitors.

Ma Bell's mobile operations pioneered the "Digital One Rate" system, under which subscribers can make long-distance calls without paying long-distance fees and can use their phones anywhere in the country for the same price.

see story: Creating wireless giants This system has proven to be extremely popular and has helped swell AT&T's subscriber figures substantially over the last year. But it's also extremely expensive, analysts note.

"That really changed the industry. They signed up a tremendous amount of customers and grew revenue," said Peter Friedland, a wireless equity analyst at WR Hambrecht & Co.

The trouble is that AT&T's "nationwide" footprint isn't really nationwide. It's missing big chunks of territory, such as San Francisco and most of the Southeast. Every time a subscriber makes a call from one of these regions the company loses about 10 cents a minute because it has to pay the local phone company the "roaming" charges that a subscriber would ordinarily pay.

As a result, the company's costs are high, eating into the bottom line. SBC and BellSouth's wireless operations, for example, have profit margins nearly twice as high as AT&T. Analysts say this gap is likely to narrow, however.

SBC and BellSouth have roughly the same footprint as AT&T, so the two will face the same kind of costs if they decide to offer the nationwide service once their venture is complete. Verizon, with a substantially larger footprint, is in a better position.

But AT&T is still growing, through the old-fashioned means of building from scratch and by acquiring new companies. As its network grows, its bottom line will look more solid, analysts say.

"They've got strong revenue growth," Friedland said. "Now they just have to worry about chipping away at the cost structure."

The company can now take a page from the Web industry's book and use its new stock to help fund this expansion more quickly, analysts added.