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Mobile matchmaking

Today's wireless woes may lead to tomorrow's consolidations

Going back to the late 1990s, one of the most common predictions made by US wireless telecommunications analysts has been that (insert next year here) will be the year the industry undergoes a long-overdue shakeout and round of mergers.

The prediction keeps not coming true. But the underlying rationale may now be stronger than ever. With six major national brands -- two of them failing to make money -- and another half-dozen strong regional players, the wireless sector is seen by Wall Street as plagued by the same kind of chronic hypercompetition that has ravaged the US airline industry.

Consumers may love it, but some wireless investors see an industry poised for the same wave of megamergers that has distilled the US railroad, oil, and banking industries into a handful of giants. A consolidated US wireless industry could offer somewhat more reliable service, with merger partners filling in some of each other's service gaps, and faster innovation for consumers -- but probably less price competition and more focus on returning merger-driven cost savings to investors than to subscribers.

The potentially powerful new force that could finally unleash the merger wave in 2004, many analysts say, will be the full reach of "wireless number portability," the Federal Communications Commission policy that took effect Nov. 24 allowing consumers to keep their existing cellphone number when switching to a new carrier.

Number portability got off to a slow start, plagued by reports of red tape and lengthy delays by carriers in processing number-switching requests. Despite predictions that anywhere from 10 million to 30 million of the 153 million US cellphone owners would within months flee their current provider, most consumers seem to have heeded advice to hold off while wireless giants get their number-switching act together.

If quarterly earnings numbers in late January bear out early reports suggesting significant customer defections from AT&T Wireless and Sprint PCS and big gains for industry leader Verizon Wireless, number portability could prove to be the kick Verizon rivals need to pair off and bulk up.

"It seems like we keep adjusting our predictions for consolidation out by six to 12 months," said Christopher J. Foster, a wireless analyst with Technology Business Research in Hampton, N.H. "We need to see if portability causes enough pain, either through pricing pressure or carriers hemorrhaging subscribers," that it pushes weaker performers to sell out or merge.

Mark Lowenstein, managing director of Mobile Ecosystem, a Wellesley wireless consulting firm, counts wireless number portability as just one of several factors that have increased the possibility of deals. Among others: January's US Supreme Court resolution of a years-old wrangle over the fate of wireless licenses owned by bankrupt Nextwave Telecom Inc. and solid progress by Sprint PCS and Nextel working down their debt loads, making them more attractive takeover targets. Distinctions between local and long distance are also blurring, as companies like Verizon and Sprint are marketing wireless service bundled with landline.

"There were these major impediments to consolidation that are now no longer there or are less pronounced," said Lowenstein.

All six companies declined to offer comment on possible mergers, saying they do not speculate as a matter of policy. For merger scenarios, one key factor is the network operating systems used by the six major national carriers, which most analysts agree makes the most likely mergers a Verizon-Sprint union or some combination of AT&T Wireless, Cingular, and T-Mobile.

Verizon and Sprint both use CDMA equipment and software, which stands for code division multiple access. T-Mobile uses the dominant European standard, GSM, or Global System for Mobile, and AT&T and Cingular are both most of the way through converting their older networks to GSM. Nextel uses a unique operating system, IDEN, developed by Motorola to support both cellular phone service and Nextel's walkie-talkie "DirectConnect" service, which generally leaves Nextel left out of takeover talk.

Merging with a carrier that operates a different network would make far less sense than teaming up with another provider whose subscribers could be easily migrated into the buyer's network without massive network reconstruction or replacement of millions of handsets.

Foster said he thinks AT&T Wireless "needs consolidation more than any other wireless company, and Cingular would be the perfect match for AT&T."

Amassing 40 million wireless subscribers under the strong AT&T brand would create a force to rival 36 million-subscriber Verizon Wireless, Foster said. The 60-40 ownership of Cingular by SBC Communications Inc. and BellSouth would give also the company a pair of powerful Bell System partners.

In February 2002, AT&T and Cingular launched a $100 million joint venture to build out GSM networkcoverage along 3,000 miles of interstate highways in nine Western states. Some analysts who see an eventual merger of the two as likely have interpreted that venture as a way for the companies to live together while they decide whether to get married.

As the smallest of the six national carriers, T-Mobile has often been seen as takeover fodder for AT&T or Cingular. German phone giant Deutsche Telekom bought the former VoiceStream in May 2001 for $40.7 billion and renamed it T-Mobile. A year later, as the collapsing tech stock market drove writedowns of over $20 billion on the deal, T-Mobile entered merger talks with both AT&T and Cingular, which broke off.

T-Mobile has since begun posting substantial revenue and cash-flow growth, with its "Get More" ad campaigns featuring sultry Hollywood star Catherine Zeta-Jones helping T-Mobile make substantial inroads in the coveted young-adult market. T-Mobile added 670,000 subscribers in the third quarter to reach 12.1 million total.

In late November, T-Mobile International chief executive Rene Obermann told Reuters that Deutsche Telekom was delighted with T-Mobile's growth prospects, saying, "I don't see any concrete signs for immediate consolidation."

But despite the denials of consolidation, SBC and BellSouth were reported last week to be considering selling shares in an initial public offering of Cingular stock that would value the operation at around $30 billion. Among other implications, the IPO would help create currency for SBC and BellSouth to launch a stock-swap takeover bid for AT&T, T-Mobile, or another carrier.

Sprint PCS's appeal as a takeover target has been complicated by Sprint's moves this fall to more closely integrate its long-distance and wireless operations. Verizon has already eclipsed Sprint as the third-biggest US long-distance carrier, and it may see little need to take on Sprint landline operations valued at more than $14 billion as a cost of getting a $5.5 billion cellular operation. But if an AT&T-Cingular marriage threatened Verizon's clout as the largest by far US carrier, Verizon might come around to a Sprint deal.

Some other scenarios floated around the industry:

* Vodafone, which operates GSM wireless networks with 125 million subscribers around the world, pulls out of Verizon Wireless in order to acquire a US GSM carrier -- more likely AT&T or T-Mobile than Cingular -- that it can more easily integrate into its international operations.

Outside of last week's move to let Vodafone and Verizon subscribers exchange phone-to-phone short messages across the Atlantic, Vodafone has been able to exercise little influence over Verizon Wireless operations in the United States, and some analysts think it may itch for an American wireless operation it can control.

* AT&T Wireless, which became independent from AT&T in July 2001 and now commands a roughly 30 percent greater market capitalization, reunites with its venerable namesake and pursues a Sprint-style close amalgamation of wireless, business, and consumer phone services under the powerful AT&T brand.

* BellSouth, which had been looking at taking over AT&T Corp. earlier this fall, sells its Cingular stake and buys Sprint, both to get a nationwide business telecom service platform and a wireless operation it can run solo, instead of its current partnership with SBC running Cingular.

Obviously, merger scenarios remain as much fun as fantasy football for many wireless industry executives, even if some observers, like Gartner Group analyst Philip Redman, believe that the schemes may remain just speculation for some time to come.

"There's not really enough pressure yet on the carriers to consolidate. All of these guys to some extent are still growing, even if the rate of subscriber gains is slowing for some," Redman said. "I'd be pretty surprised to see anything major happen in 2004, because there's not pressure yet to make a dramatic move."

But after years of discussion, recent developments suggest that long-debated merger fantasies may finally be getting closer to reality, with wide-ranging implications.

"When you think about wireless consolidation, it affects the entire telecom industry, and you really have to think holistically," said Mobile Ecosystem's Lowenstein.

"You've got six major wireless carriers, three long-distance carriers, and four incumbent local Bell carriers, not to mention a half-dozen cable companies offering phone service, and that's just too many service providers for voice communications."

Peter J. Howe can be reached at howe@globe.com.

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