TOPICS > Economy

Wireless Revolution

February 17, 2004 at 12:00 AM EDT


RAY SUAREZ: The merger between Cingular, the nation’s number two cell phone provider, and number three provider AT&T Wireless could reshape the fiercely competitive cell phone market. We should say that Cingular is owned by NewsHour underwriter, SBC. The new company will go by the name Cingular, have about 46 million customers in the U.S., and have a network that covers 49 states.

Here to discuss the merger and its potential impact on consumers and the industry is Charles Golvin, a principle analyst covering the wireless industry at Forrester Research, an independent technology consulting company. So, Charles Golvin, multiple companies were in the hunt for AT&T. How did Cingular win out?

CHARLES GOLVIN: Well, ultimately Cingular won out because they offered the most money. I believe there was also some slight of hand in trying to turn the time difference between the U.S. and the U.K. where Vodafone is placed and they were able to place a last minute bid to top the dollar that Vodafone had offered.

RAY SUAREZ: Why was AT&T wireless such an attractive takeover target for these two companies?

CHARLES GOLVIN: Well, AT&T Wireless was the only independent with the largest market share not someone with an alliance with an existing wire line provider like Cingular and Verizon wireless. And ultimately, AT&T decided they could get the most value from their long-standing investment by selling the company today. And absent the opportunity to grow organically, just by adding more subscribers through their daily efforts, this was the greatest opportunity any of these carriers had to really jump market share and extract a bigger piece of the pie.

RAY SUAREZ: Well, if you’re a customer with either, will you find, if the merger goes ahead, that the two mesh easily? Do they use similar systems, similar towers, similar networks, similar hardware?

CHARLES GOLVIN: They do operate the same kinds of networks. Actually, both companies operate two different technologies today and they’re migrating from the old to the new. But in both cases, it’s the same.

I think the main thing that customers of Cingular and AT&T Wireless are going to experience as the primary benefit is that the overall call quality and service quality is going to improve fairly significantly. That’s because the two companies have different towers in the same places by and large, and now customers from both companies can share all the wireless spectrums that they own so it can be more evenly divided among a more even base of customers and more spectrum is available. More spectrum means more call capability and so that means fewer dropped calls, better chance your calls go through and stay on.

RAY SUAREZ: Should customers either with other wireless companies or with the two involved in the merger worry about a smaller number of companies creating less incentive for price competition and less incentive for technical innovation?

CHARLES GOLVIN: Well, on price competition, I don’t think so. We still have five national wireless carriers today. They’re all quite aggressive in trying to win customers. In fact, today, more and more of the customers that they’re after are existing wireless subscribers with their competitors and they’re very aggressive in trying to win those over. So price competition I think is something we are going to continue to see just because there are a lot of players out there. But on the point of innovation, I think that because these two large players, Verizon and Cingular have parent companies who are regional Bell operating companies who own the fixed lines into most consumers’ homes and the pain that those companies feel today more than anything else, is the loss of those lines and their core business.

I think that the innovation we see from these two larger providers is really going to be focused on applications, services that give consumers an incentive to buy both wireless and wire line services from the same provider, from Cingular and SBC, if you live in California or Texas, from Cingular and BellSouth if you live in the Southeast — from Verizon and Verizon Wireless if you are in the Northeast. And as a result, we are not going to see the same focus on pure wireless innovation and new wireless services that we would have seen from a company like AT&T wireless which was a stand-alone wireless company and no fixed line investments that they had to protect.

RAY SUAREZ: So we are not seeing, for example, large numbers of consumers deciding to do without a hard wire phone all together and just having their cell phone be their phone?

CHARLES GOLVIN: Well, today we have about 4 percent of U.S. households tell us that they have a wireless phone and no fixed line phone. So it’s not a gigantic number today. It is growing rapidly. But these customers who are cutting the cord, if you will, are primarily doing so for cost saving reasons. They’re not the customers who spend the most with wireless companies.

But in the future, we are going to see more and more young people who simply never get a land line phone. And that is really the greater threat to these fixed line operators is this young — young professionals who move into the work force and already have a wireless phone that is the number where everybody knows how to reach them and simply have little motivation to actually go to their fixed line provider and get a home line installed.

RAY SUAREZ: Before this merger becomes an accomplished fact, it has to clear regulatory hurdles. Should they be worried when number two and number three merge to create a new number one that it just might not get past the regulators?

CHARLES GOLVIN: I don’t think that the regulatory hurdles are going to be all that significant in this case. Again, we do have other national wireless providers like Nextel and Sprint PCS and T-Mobile. It would be a problem if they limited the choices to two or three, but with five competitors I don’t think that will be a significant concern and I don’t think the regulatory concerns about spectrum ownership, which have inhibited mergers in the past are going to be an issue at all because those barriers have been removed by the FCC by a previous ruling.

RAY SUAREZ: Quickly, what about the other companies in this business, do they start looking for merger or acquisition targets as well?

CHARLES GOLVIN: Well, one of the big challenges with mergers in the wireless space is that U.S. carriers use multiple technologies. And there isn’t any synergy in bringing two companies together if their basic technologies are not the same. Now the smaller carriers that are out there today, T-Mobile, Nextel and Sprint all use different technologies. So none of them can actually get together in a very synergistic way and create a competitor which comes close to the numbers that Cingular and Verizon have.

I think we will see over the next several years, although not immediately, a number of other mergers and acquisitions. Initially these will be big buying small so small regional carriers being swallowed up, but I believe in the future we will see another large acquisition that will reduce the number of national carriers down to four or even possibly three.

RAY SUAREZ: Charles Golvin, thanks for joining us.

CHARLES GOLVIN: My pleasure. Thanks for having me.