Telecommunications- The USA: The US Wireless Sector (April 2005)
The US Wireless market is growing by leaps and bounds, with a net addition of around 4-5 million (mn) subscribers made in each quarter – in fact, it is arguably the best growth market in the developed world, as Western Europe is pretty much saturated, with 90% plus penetration in most markets. The US Wireless market has an estimated 185mn wireless subscribers with an estimated wireless penetration of merely around 64% at the end of Q1 Y05. Post 2002, almost all the US wireless companies have improved their operations and have come out of the red, albeit with a few hiccups. The companies have been improving their cash flows and operating figures, which indicates the improving health of these companies in particular and the sector in general.
Significant M&A activity in the US Wireless Sector had been in a lull for several years, post the acquisition of Voice Stream and Powertel by Deutsche Telekom (DT) in mid-2001. However, this lull has been broken and Cingular Wireless (SBC & BLS) has acquired AWE in the largest ever M&A in the US Wireless Sector and the biggest all cash deal ever of $41 bn, Consolidation in an industry sometimes means a reduction in level of competition. At other times it may mean a change in competitive position for one of the other players, which may require changed tactics. There may be other intended and unintended consequences for various players in the industry.
Enthused by the smooth merger of Cingular and AWE, Sprint and Nextel during December ’02 have agreed upon their marriage that will make the company ‘Sprint-Nextel’ the strong 3rd largest wireless company in the US. During Jan ’05, Alltel (AT) has agreed acquired a small wireless outfit Western Wireless (WWCA) for around $6.5bn. All these deals are to get approved by the govt. authorities.
The US Wireless sector has been dominated by two giants Cingular and Verizon who controls more than 50% of the total market. The other two big players are Sprint-Nextel and T-Mobile (a wireless subsidiary of DT). All four companies cumulatively hold around 80% of the market. Other smaller players are Alltel, Virgin, Tracfone etc. Verizon and Cingular have launched their 3G services in the selected markets in the US, while Sprint would soon launch its 3G services. T-Mobile would launch 3G during 2007 in the US.
In the US, MVNOs (Mobile Virtual Network Operators) are also experiencing robust growth. Companies like Virgin Mobile, Boost, Tracfone-all are doing well on the subscriber addition front. A MVNO is a mobile operator, which does not have its own spectrum and usually does not have its own network infrastructure. Instead, MVNOs have business arrangements with traditional mobile operators to buy minutes of use (MOU) or they lease the use of wireless infrastructure from another company for sale to their own customers. These MVNOs primarily target the youth segment, which still remains an under-penetrated market in the US. Qwest Communications (Q), Virgin Mobile, Boost Mobile, etc are some of the successful MVNOs, which are adding subscribers at much faster rates. While the former two operate on PCS’ network, Boost operates on NXTL’s network.
The US market is lagging behind its European peers in terms of penetration level, primarily because of under penetrated prepaid market that constitutes youths and teens. The large operators target the contract segments to maintain their key operating metrics. They were reluctant to the prepaid segments, until they realized the segment’s importance as was evident by the strengthening MVNOs that largely target the prepaid segments. Of late the biggies have come out with their special plan to target the untapped segment-Prepaid.
The big wireless operators perform various credit checks before signing up customers and in most of the cases, also require a customer to sign a contract for certain duration. This is one of the most important reasons for the lower wireless penetration in the US market, as many of the interested ‘would be’ customers fail to fulfill their criteria. These policies also eliminate a large portion of the youth market, which is a substantial market segment elsewhere, and also a significant driver of non-voice revenues.
T-Mobile has lagged behind other biggies in the ongoing M&As activities and hence would become a distant 4th post Sprint-Nextel merger. However if it acquires smaller players like US Cellular and Rural Cellular it can spread its presence across the US and would become a strong no. 4. Though there would be some technological issues as US Cellular operates on CDMA while T-Mobile operates on GSM.
Significant M&A activity in the US Wireless Sector had been in a lull for several years, post the acquisition of Voice Stream and Powertel by Deutsche Telekom (DT) in mid-2001. However, this lull has been broken and Cingular Wireless (SBC & BLS) has acquired AWE in the largest ever M&A in the US Wireless Sector and the biggest all cash deal ever of $41 bn, Consolidation in an industry sometimes means a reduction in level of competition. At other times it may mean a change in competitive position for one of the other players, which may require changed tactics. There may be other intended and unintended consequences for various players in the industry.
Enthused by the smooth merger of Cingular and AWE, Sprint and Nextel during December ’02 have agreed upon their marriage that will make the company ‘Sprint-Nextel’ the strong 3rd largest wireless company in the US. During Jan ’05, Alltel (AT) has agreed acquired a small wireless outfit Western Wireless (WWCA) for around $6.5bn. All these deals are to get approved by the govt. authorities.
The US Wireless sector has been dominated by two giants Cingular and Verizon who controls more than 50% of the total market. The other two big players are Sprint-Nextel and T-Mobile (a wireless subsidiary of DT). All four companies cumulatively hold around 80% of the market. Other smaller players are Alltel, Virgin, Tracfone etc. Verizon and Cingular have launched their 3G services in the selected markets in the US, while Sprint would soon launch its 3G services. T-Mobile would launch 3G during 2007 in the US.
In the US, MVNOs (Mobile Virtual Network Operators) are also experiencing robust growth. Companies like Virgin Mobile, Boost, Tracfone-all are doing well on the subscriber addition front. A MVNO is a mobile operator, which does not have its own spectrum and usually does not have its own network infrastructure. Instead, MVNOs have business arrangements with traditional mobile operators to buy minutes of use (MOU) or they lease the use of wireless infrastructure from another company for sale to their own customers. These MVNOs primarily target the youth segment, which still remains an under-penetrated market in the US. Qwest Communications (Q), Virgin Mobile, Boost Mobile, etc are some of the successful MVNOs, which are adding subscribers at much faster rates. While the former two operate on PCS’ network, Boost operates on NXTL’s network.
The US market is lagging behind its European peers in terms of penetration level, primarily because of under penetrated prepaid market that constitutes youths and teens. The large operators target the contract segments to maintain their key operating metrics. They were reluctant to the prepaid segments, until they realized the segment’s importance as was evident by the strengthening MVNOs that largely target the prepaid segments. Of late the biggies have come out with their special plan to target the untapped segment-Prepaid.
The big wireless operators perform various credit checks before signing up customers and in most of the cases, also require a customer to sign a contract for certain duration. This is one of the most important reasons for the lower wireless penetration in the US market, as many of the interested ‘would be’ customers fail to fulfill their criteria. These policies also eliminate a large portion of the youth market, which is a substantial market segment elsewhere, and also a significant driver of non-voice revenues.
T-Mobile has lagged behind other biggies in the ongoing M&As activities and hence would become a distant 4th post Sprint-Nextel merger. However if it acquires smaller players like US Cellular and Rural Cellular it can spread its presence across the US and would become a strong no. 4. Though there would be some technological issues as US Cellular operates on CDMA while T-Mobile operates on GSM.
posted by Vikas Maheshwari, CFA at 7:44 PM
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