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A Cingular challenge

After an 18-month buildup, Cingular is launching service in the No. 1 U.S. wireless market: New York. The journey there is hardly risk-free, say Wharton faculty and other analysts.

It's time for Cingular's final exam. The United States' second-largest wireless company, with 21.6 million customers to Verizon's 29.4 million, has spent the 18 months since its creation building a brand, integrating its back offices and figuring out what to do with its two clashing wireless technologies.

This summer, Cingular finally launches service on Verizon's home turf, in the No. 1 wireless market in the nation: New York. Success there and across the country will rely on Cingular's ability to integrate its dozen original networks into one seamless whole. The prize: millions of cell phone customers.

"To me, the national footprint is the whole story," said Wharton public policy and management professor Gerald Faulhaber.

The Cingular born in October 2000 was a Frankensteinian patchwork of a company, sporting 60 call centers, 11 billing systems and the leftover IT systems of several legacy acquisitions. Formed from the merger of SBC and BellSouth's wireless units, the newborn company was still dealing with the aftermath of even earlier mergers, such as the absorption of SNET, PacBell Wireless, Cellular One and Comcast Cellular into SBC.

The company first focused on integrating and unifying--and it did it fast. Cingular will have shrunk to 20 call centers and two billing systems by the end of 2002, said Kathy Dowling, Cingular's senior vice president for customer service. According to Roger Entner, a wireless analyst with The Yankee Group, that puts Cingular ahead of Verizon, which is juggling at least a dozen billing systems.

"When you have a choice between Cingular, Verizon, AT&T Wireless and maybe Sprint, you're not going to put up with much."
--Gerald Faulhaber, Wharton public policy and management professor
One billing system would be best, but two is better than more, said David Croson, Wharton professor of operations and information management.

"If I were Cingular, I would build a single flexible-price billing system that could handle many different types of plans, create a custom set of plans replicating each acquisition's legacy and pricing, and deep-six each proprietary billing/customer service system," he said. "At that point, continuing or terminating the different service plans becomes a marketing decision, not a systems decision."

According to Entner, Cingular has already done a good job at unifying its back-office systems, cutting down on the number of network operations centers and call centers. "They've done their homework on the back-office side," he said.

But as Faulhaber points out, in an intensely competitive market such as wireless, the carrier can't afford a misstep. "When you have a choice between Cingular, Verizon, AT&T Wireless and maybe Sprint, you're not going to put up with much," he said.

Filling in the gaps
Cingular may be huge and diverse, but up until this month it wasn't truly national. With no small carriers left to snap up in New York City, the company found itself locked out of the nation's most populous metro market.

So Cingular cut a deal with VoiceStream Wireless, the smallest (and most financially struggling) of the national carriers. Cingular needed airwaves in New York; VoiceStream wanted to enter California and Nevada, where Cingular has a strong network. The two formed a joint-operating company in the three states, and Cingular and VoiceStream buy airtime minutes from the joint venture.

Meanwhile, Cingular has gone in on another venture with AT&T to build GSM (Global System for Mobile Communications) infrastructure in rural areas where that digital network is weak. "They can compete nationwide quite well now," Entner said.

The Cingular-VoiceStream joint venture allowed the companies to circumvent the huge costs of building duplicate networks from scratch. But G. Anandalingam, adjunct professor of operations and information management at Wharton, believes Cingular's multifarious network strategy may backfire. "If you look at any telecom network, one of the biggest costs is the interconnect cost where they pay somebody else for carrying their traffic," Anandalingam said. "I'm sure that Cingular's cost structure will be much worse than Verizon's."

"Customers are never more vulnerable to being poached as when their old provider has just been gobbled up."
--David Croson, Wharton professor of operations and information management.
Currently there is one major integration challenge left for Cingular. Thanks to earlier acquisitions by both SBC and BellSouth, the company is saddled with two different, incompatible digital wireless network systems. Where Verizon only acquired carriers that used analog or the CDMA (code division multiple access) digital system, Cingular juggles analog, TDMA (time division multiple access) and GSM.

TDMA customers entering Cingular's GSM markets must roam on another carrier's service--even though Cingular serves that city--and vice versa. Customers may not notice, but the roaming costs Cingular money.

Bringing the whole system over to one technology will create cost savings in the long term, Anandalingam said. "What customers really want is a good service, the right price and the ability to reach lots of people without getting into a roaming environment. (Cingular) has gotten a good job done (running both TDMA and GSM systems), but it's coming at a cost, and the cost is an additional investment needed to ensure translation between the two networks."

The company agrees, according to Dave Williams, Cingular's vice president of strategic planning. Cingular is in the process of switching its TDMA markets over to GSM, the standard adopted by most of the world outside the United States. And though there's a significant cost involved in installing the new technology, Williams and analysts say Cingular has it pretty much under control.

"The most difficult issue with building out wireless is the acquisition of radio sites," Williams said. "We already have those, with TDMA. Overlaying a new technology...is just a case of putting extra cabinets on the sites." The company's goal is to have half its cities covered by the end of 2002 and the entire network switched over by 2004, he said.

Jeff Rickard, a wireless analyst with Current Analysis, says new TDMA/GSM hybrid phones will help smooth the transition for customers. Cingular is introducing two hybrid phones this year, one from Nokia and one from Sony Ericsson. The company will also have time to push GSM handsets on former TDMA customers, Rickard said, adding that "it's not like they're just going to automatically turn TDMA off and turn GSM on."

A Cingular future
As it gears up to assault Verizon in New York, Cingular has been focused on expanding its network and promoting its brand rather than on further acquisitions. "All their marketing money during their first year was basically spent on establishing a brand name and thereby destroying the old ones (SBC and BellSouth). It's a significant issue," Entner said.

But there's a danger inherent in switching brand names, Croson noted. "Customers are never more vulnerable to being poached as when their old provider has just been gobbled up...(They) expect nothing less than complete perfection during the transition."

Analysts say Cingular has avoided bleeding customers during this crucial period and has run a top-notch marketing campaign, but that both Cingular and Verizon have suffered from a low number of "net adds"--new customers joining their services. Cingular's net adds dropped from 866,000 in the first quarter of 2001 to 234,000 in 2002. "Something is not adding up as much as it should be," Entner suggested.

This also may not be the last acquisition round for Cingular, and speculation abounds as to which major wireless carrier will be next to fall prey to acquisition. Faulhaber said Sprint is in a weaker position than other carriers; as a CDMA carrier, though, it would be a natural technology match with Verizon. That might send Cingular or AT&T stalking each other or VoiceStream, which is owned by Germany's T-Mobile.

Said Paul Dittner, a wireless analyst with Gartner Dataquest: "Over the next couple of years, we anticipate there's going to be consolidation" among the major wireless carriers.

 
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All materials copyright © 2002 of the Wharton School of the University of Pennsylvania.