It’s Not Enough to Be Just a Phone Company

If there is one thing Cingular Wireless's acquisition of AT&T Wireless shows, it is that being either a traditional phone company or a mobile phone carrier may not be quite enough anymore. The industry is moving into an era of telecommunications megacarriers; smaller, independent operations - whether offering wireless or traditional phone calling - are likely to feel increasing pressure to find partnerships and joint ventures, industry analysts said. The sale of AT&T Wireless for $41 billion proved the enormous expectations for growth in the mobile phone business. But the deal also highlights larger transformations in telecommunications, as the consumer markets for traditional phone services, data transmission, mobile calling and even television converge into one industry.

Already, cable companies are offering video, high-speed Internet access and voice calls, and telephone companies are establishing partnerships with satellite companies to add television service to their voice and data transmission capabilities, said Jeff Kagan, an independent telecommunications industry analyst. "It'll blur into one huge communications industry," he said. Wireless and traditional phone companies, he added, are beginning to see that partnerships or joint ownership agreements can give them an advantage over stand-alone competitors. Basically, the more services they offer under one roof, the greater their ability to sell packages, or bundles, of wireless and traditional phone minutes - with greater convenience for customers and perhaps lower prices. They can "compete for customers who are looking for bundles that they otherwise wouldn't have a shot at," Mr. Kagan said. Some telecommunications giants have already moved in this direction. Cingular Wireless is jointly owned by the local telephone giants SBC Communications and BellSouth.

The boards of those two companies clearly saw the AT&T Wireless acquisition as crucial for their future. Verizon Communications, based in New York, owns a 55 percent stake in Verizon Wireless, while Sprint PCS is owned by Sprint, which also offers local and long-distance service. The ability to bundle services is particularly important in a volatile, fiercely competitive market where subscribers can easily switch providers whenever a slightly better deal comes along. Bundling, industry analysts said, can help companies reduce customer "churn," or the rate at which they leave for a competitor. "Of course, stand-alone companies will survive, too," Mr. Kagan said. "But they will be much smaller in size and scope." Neither Nextel Communications nor T-Mobile is associated with a local telephone giant. Both are multibillion-dollar wireless carriers; Nextel has 12 million subscribers and T-Mobile has 13 million.

And Qwest Communications, a former Bell operating company based in Denver that offers local phone services in the West and Midwest, is a major industry force that does not own a nationwide wireless network. Can these companies survive in the long term without offering the full panoply of services as part of a larger conglomerate? Qwest plans to phase out its own wireless service, which it operates in only 65 percent of its 14-state territory. But according to Mark Pitchford, vice president for consumer marketing at Qwest, the company thinks it is more cost-efficient to shut its limited wireless network than to invest billions to expand or upgrade it. Mr. Pitchford said bundling was essential. But he said Qwest would approach bundling through partnerships, at least for now. Starting March 1, Qwest will sell wireless services operated by Sprint in its region. Mr. Pitchford said Qwest would offer its local telephone customers a $5 savings on any cellphone plan. Verizon, BellSouth and SBC offer similar discounts to entice their customers to sign up for their affiliated wireless services, said Roger Entner, an analyst with the Yankee Group.

In a slightly different twist, he said, Sprint PCS wireless customers get 50 free minutes of long-distance calling each month if they are also Sprint long-distance customers. In addition to the discount for wireless, Qwest's bundled plans offer high-speed Internet digital subscriber lines to customers with Qwest local phone service for $26.99 a month; without local service, which costs $25.99 a month, the cost of a high-speed line is $34.99, Mr. Pitchford said. Qwest subscribers who order long-distance and wireless service also get free long-distance at nights and on weekends when calling from a home phone. Mr. Pitchford conceded there were downsides to entering into a partnership, rather than owning a mobile provider.

For instance, he said, the company will have less flexibility to create specialized pricing packages because it only leases space on the Sprint network, and does not control how that network is used. "Qwest is at the whim and caprice of Sprint," said Rich Nespola, president and chief executive of TMNG, a telecommunications consulting company that has worked for Cingular, AT&T Wireless, BellSouth, SBC and other major companies. Mr. Nespola, for one, thinks that the wireless companies connected to local phone companies will have long-term advantages. Still, he said Nextel and T-Mobile, which is a unit of Deutsche Telekom, could thrive, at least in the short run, without a local phone company parent, by focusing on their niche markets: Nextel has made a name for itself serving the business customer, while T-Mobile has grabbed cost-conscious consumers with lower prices. "Do they have sustainable business models? The immediate answer is yes," Mr. Nespola said. "Will they face challenges as bundling becomes ubiquitous? Yes." Raul Katz, director of the telecommunications practice with Booz Allen Hamilton, a consulting firm, said bundling services on one bill was what consumers wanted, but the concept oversimplifies the tough challenges of blending companies or subsidiaries with separate billing, customer services and technology.

"This is not trivial from a business operations standpoint," he said. This is one reason, he said, phone companies with wireless divisions have not moved quickly to bundle wireless and traditional phone services. Over the long run, Mr. Entner of the Yankee Group said, carriers may well see a diminishing impact on customer churn as they bundle more services into one bill. When a company ties two services like long-distance and local service together, its churn falls one quarter, he said. But when phone companies bundle a third product, Mr. Entner noted, the churn rate declines another eighth; adding a fourth product reduces churn an additional sixteenth. The bottom line, he said, is that "the moment customers are really upset, they leave no matter how many services they have."