US mobile phone consolidation – five and counting

Column The hectic pace of mergers, acquisitions and strategic alliances among the American mobile operators shows no signs of letting up. Let's do a short recap. Half a year ago there were three mobile operators widely regarded as national players: Sprint, AT&T and Nextel. All three use a different digital standard, all three have a different marketing strategy. Sprint is currently launching a heavily advertised mobile data initiative to gain a technological edge over AT&T. AT&T is relying on an extensive analogue network and tri-mode phones to offer the widest possible roaming coverage by combining the AMPS network with two types of digital mobile networks. Nextel is going after professional people and offering a unique phone-to-phone radio link in its models in addition to the plain vanilla mobile phone features. So far, so simple - relatively speaking. But there are also literally dozens of regional players in USA, formerly dismissed as also-rans, but now rapidly consolidating into new coast-to-coast operators. Consolidation among GSM operators was triggered earlier this year by the Voicestream take-over of Omnipoint, resulting in a good West-East match of network assets. Earlier this month, the newly bulked-up Voicestream made another move by taking over Aerial. The most likely next target is Powertel with its strong Southeast presence; but even without that, Voicestream is now a national player. Unlike the original Big Three, Voicestream lacks coverage in some major cities such as New Orleans, though. The most important missing piece is California, where Pacific Bell is running a successful GSM operation. The weakness of Voicestream lies in the piece-meal fashion it has chosen to build its coverage - but this is also the main advantage of the company. Sprint and AT&T went directly for nationwide coverage and ended up being mile wide and inch deep. They currently have coverage problems even in some of the five largest cities. Voicestream has achieved relatively good coverage in those markets it has targeted - and zero elsewhere. So far, the strategy has worked. Voicestream's subscriber growth towered above AT&T and Nextel during the last quarter and came comfortably ahead of Sprint. The big question is now how well the company can translate the successful regional operations into a national brand. California is another enigma; can Voicestream merge with Pacific Bell's mobile operations at some point to achieve a genuine national status? Not long after Voicestream had staked its claim as the fourth national operator, the expected merger between the mobile operations of Airtouch and Bell Atlantic Mobile took place. This is another good West-East fit ... but on a ten times bigger scale. The subscriber base of these two CDMA operators combines into a 20-million sub behemoth that seems like the real gorilla of the US mobile market. Or does it? Actually, over 85 per cent of the BAM subscribers use analogue phones. The real battle for US consumers is the one fought over digital subscribers. And here the new Airtouch-BAM faces a formidable dilemma. How to convert the existing analogue customers into digital subscribers and still keep the overall subscriber expansion going on? This is the problem AT&T has been grappling with. Its Digital One Rate plan has been a smash success despite the quality problems. But because AT&T keeps shuffling its own AMPS customers into the new digital plan, the overall subscriber growth has been stuck around a rather sluggish 40 per cent. That's fairly bad compared to Nextel's 70 per cent - and disastrous compared to Voicestream's 180 per cent. So the purely digital operators seem to hold a clear growth advantage over chimera operators trying to juggle a fading analogue customer base with a booming digital unit. Airtouch/BAM probably can't wait to get rid of the AMPS users and lure them into the digital programs, where they can be seduced into using bill-busting mobile data features. Among Voicestream's main growth advantages are the absence of the analogue customer burden and the so far elusive promise of international roaming as a future market. Some of the hottest new phones announced recently work not only in the Voicestream networks - but also in 100 other GSM markets around the world. Both Ericsson and Motorola have hit on a new strategy of launching GSM-1900 handsets. Since this frequency is only used in North America by less than 5 million subscribers, it hasn't made economic sense to launch high-end GSM-1900 models before. But the new Ericsson and Motorola phones bundle GSM-1900 with GSM-900 - making it possible to sell these phones both in USA and in GSM-900 markets around the globe. This has enabled the companies to start selling genuinely cutting-edge items in GSM-1900 format for the first time. Until now, Voicestream customers have had to make do with Nokia's highly popular, but rather bourgeois 6100 and 5100 series. Ericsson's T28 and Motorola's L-series are now opening a new era in the US mobile phone market. They are shameless, indulgent luxury items weighing little, costing a lot and featuring exotica like voice-dialling, infra-red link-up and predictive text-input. This year's surprise popularity of pricey miniature models in Europe bodes well for this sales tactic in USA, where in-your-face luxury products have always done better than in the tightly egalitarian EU markets. Whether Voicestream can translate the appeal of these phones into acquiring coveted business subscribers remains to be seen. ® Tero Kuittinen is the Vice President of Wireless Telecommunications, an investment firm based in New York. The firm may hold positions in companies featured in his columns. The opinions expressed in the columns are personal views of Mr. Kuittinen and they should not be interpreted as investment advice.