What's It All Mean?
By Carlo Longino, Thu Feb 19 14:15:00 GMT 2004

Cingular pulled off a huge deal this week when it nabbed AT&T Wireless for $41 billion in cash. The buyout will definitely make an impact in the wireless industry, but on who and how big?


Cingular had to fend off perpetual takeover-maker Vodafone to win AT&T Wireless and create the biggest US carrier, and it's paying a big price in return. The merger will have an effect on a wide swath of the wireless industry. Let's take a look at the impact of the deal on its constituents.

The New Cingular

Securing the deal may have been the easiest part for Cingular. The merged company, which will drop the AT&T brand and operate under Cingular's mantle, has to clear several hurdles before it can call the buyout a success.

The real work is in the integration of the two networks and businesses. Both Cingular and AT&T are operating both TDMA/Analog and GSM/GPRS networks, and are in the process of phasing out the older TDMA networks, something that's been a bumpy ride thus far, and should only get more difficult.

AT&T's problems with some back-end software upgrades for its GSM network made it nearly impossible to add new subscribers for several weeks in the fourth quarter, costing the company $100 million in revenue, and it experienced further difficulties with number portability, so forgive us if we're not confident that everything will be just peachy.

The companies' execs are talking about how coverage and quality will skyrocket, and while some of this is true, it's mostly merger double-speak. Cingular will have a truly nationwide network that will rival Verizon's, with coverage in 49 states and 97 of the top 100 markets. It will be able to expand into areas where it didn't before have coverage, and increase its spectrum in other areas, which of course, is a good thing. AT&T has been much more agressive than Cingular in deploying EDGE, though, and Cingular's strong coverage in some troublesome areas for AT&T's GSM network, like California, provide a couple mutual benefits the two should eventually see.

But neither AT&T nor Cingular are fighting from a real position of strength, either. AT&T's recent problems are well-documented, its churn is rising, Cingular's ARPU is slipping, and the carriers combined added less new subscribers last quarter than Verizon. The two companies don't have stellar customer-service records or reputations, and the confusion that will inevitably reign during the integration could damage customer confidence even further, giving rivals an opportunity to pounce.

The Competition

Consolidation, schmolidation. Cutting from 6 to 5 national carriers isn't going to instantly reduce the level of competition in the industry significantly and free the operators from the price wars they say are hobbling them. If anything, competition is likely to increase in the short term. Verizon now has competition in terms of coverage, and neither Cingular nor AT&T are known for their low prices, leaving the remaining carriers plenty of room to undercut them.

The other carriers also aren't going to stand still while the new Cingular catches its breath. Verizon is planning heavy capital spending this year, keeping its "Can You Hear Me Know?" focus on call quality and also expanding its high-speed EV-DO data network. Sprint's already launched a new calling-plan promotion, and Nextel is waiting in the wings, ready to swoop for AT&T's prized business customers.

Cingular's got to do everything it can to keep their current customers happy and make the merger as smooth as possible, particularly in light of the new number portability rules.

Equipment Vendors

It's likely that had Vodafone bought AT&T, they would have pumped a whole lot of money into expanding and improving its GSM network, which doesn't offer near the coverage to which Vodafone's accustomed. Conversely, Cingular's been touting the cost reductions the merger will allow, with pricey network equipment at the top of the list. The company says it will be able to cut capex by up to $900 million in 2005 and up to $1.2 billion in 2006, figures that have the still-shaky network businesses of Ericsson and Nokia a little worried.

While Cingular will be able to trim some costs, it really can't afford to cut all that much. As stated earlier, it and AT&T are transitioning to GSM, and their network construction isn't complete. Cingular also can't afford to put all capex on hold while they integrate, a move that would annoy users demanding the end of dead spots and ever-expanding coverage. And Verizon's nationwide EV-DO network will be a tasty alternative for mobile workers.

Vodafone

Where does the global giant go from here? Its first move has got to be to do something about the rocky relationship with Verizon. Vodafone's dalliance with AT&T may have done some serious damage to the relationship, so the carrier needs to either move quickly to repair it, or take advantage of clauses in its contract that force Verizon Communications (the wireline parent) to buy out its stake.

Vodafone's shares reacted well to the news that the company had lost out on AT&T, with many shareholders and investors concerned the price tag was way too high. But they, like the company itself, know it's got to make some kind of move in the US market. Rumors have had Vodafone making a play for Verizon Communications or Sprint, the US' other national CDMA carrier, but neither of these solve Vodafone's main issue -- conflicting standards with the rest of their global networks.

It's likely the company will turn its focus to its ongoing tussle with Vivendi for French carrier SFR, as well as look at carriers in Russia and Poland, turhoopla settles down. Number-four player Nextel hasn't made a concrete commitment to a 3G network, making it a possibility.

But the most intriguing rumor has Vodafone waiting to see just how the Cingular merger plays out, if it bungles the integration, or if the combined carrier stumbles like the separated companies have of late, and mounting a takeover bid -- hostile or otherwise -- of the company to which it originally lost out.