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AWE Shucked
Investors take note: 2004 could be rough for AT&T Wireless.
December 15, 2003: 5:12 PM EST
By Eric Hellweg, CNN/Money contributing columnist

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BOSTON (CNN/Money) - Earlier this year, when cellular providers were told that they would have to offer number portability by Nov. 24, the industry estimated that a switch could be completed in two and a half hours. Now, three weeks into the new era, a more realistic estimate is five days.

Clearly the cellular industry is struggling with the transition, but according to Federal Communications Commission data and informal surveys, AT&T Wireless is having the toughest time of them all. As a result, the company could feel the effects of number portability for months to come.

Any technical challenge of this magnitude during what is historically one of the busiest times of year for the cellular business is bound to create headaches and snafus.

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"This was the biggest operational challenge the industry has ever faced," says Jeff Kagan, an independent telecommunications analyst.

It's clear, however, that some carriers are doing a better job than others.

The FCC released data last week on the number-portability-related complaints it has received. AT&T Wireless was the clear loser, provoking more than half of the 600 calls.

Complaints are continuing to pour in at a rapid clip, and "AT&T Wireless is still the biggest source," says an FCC spokesperson.

As a result, the FCC sent a public letter to the company asking for an explanation.

"All the carriers had problems," says another FCC spokesperson, "but the problems with AT&T Wireless were more significant." The company responded to the FCC last week, saying that it had fingered the culprit and that things were running much more smoothly.

"We determined that part of the problem was with software we were getting from an outside vendor, and we're continuing to improve the experience," says Marc Siegel, a company spokesman. "But we're telling our customers to expect a three- to five-day wait [for the port]. You need to be realistic."

AWE's perfect storm

Investors need to be realistic as well. Since mid-November, when AWE (AWE: Research, Estimates) reported its tepid third-quarter earnings, the stock is up 9 percent. The upward movement is not based on analyst recommendations: Since Nov. 4, six analysts have downgraded their calls on the company.

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Most analysts I spoke with said that the repercussions from number portability and other network issues could have a negative effect on the company's financials for at least the first half of 2004.

Here's why: Most of the analyst downgrades occurred when the company was experiencing another network problem -- before number portability even started.

For roughly two weeks beginning in early November, the company experienced a technical glitch and could not upgrade users to its new, faster GSM network.

Hardly the situation a company wants to encounter when its customers are days away from being able to switch to another provider. "It's a bit of a perfect storm for them right now," says Ned Zachar, an analyst with Thomas Weisel Partners. "They seem to be stubbing their toe in a couple different ways."

These "toe stubs" likely will lead to an increase in customer churn, a metric eyed carefully on Wall Street.

Several analysts I spoke with mentioned informal surveys they or their firms had conducted that showed most number porting thus far moving away from AT&T Wireless -- not toward it.

Given the network hiccups the company experienced in November, combined with the complaints about its ability to handle number portability, we could see customer-churn rates head north for at least the first half of 2004.

Customer churn has an inversely proportional relationship to income, so if the company reports a higher-than-expected churn rate, look for a tough reaction from the Street.

In its most recent quarterly filing, AWE warned of such a possibility: "Going forward in the fourth quarter, although we will remain aggressively focused on renewing the contracts of profitable customers, there will continue to be upward pressure on churn with the expiration of an even larger number of contracts, as well as the impact of local number portability."

Of course, the data sample we're working with is far too small to draw definitive long-term conclusions. "This is very early in the process," Siegel says. "Anything anyone sees now is anecdotal."

This may be true, but given the company's rough run-up to number portability, combined with its scolding from the FCC, the first half of next year -- at least until customer-churn rates stabilize -- could be rough going for the nation's No. 2 wireless company.


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