SAN FRANCISCO (CNN/Money) -
Thanksgiving will come three days early this year for cell-phone users. A three-member judicial panel in Washington, D.C., ruled on Friday that cellular-network carriers must allow "number portability" by Nov. 24, meaning that cell-phone users in the United States will be able to keep their phone numbers when they switch service providers.
The ruling rejected an appeal by Verizon Wireless and the Cellular Telecommunications & Internet Assn., which had argued that number portability would burden the providers with enormous recurring costs.
It's still uncertain exactly how the changes will come to pass and what the final cost will be, but investors in the cell-phone sector should watch this development closely.
The end of a long road
The Federal Communications Commission mandate in question was first drafted in 1996, and the industry has appealed it several times. Last week's ruling marked the end of the road.
"I don't expect us to appeal this decision," says Travis Larson, a CTIA spokesman. The association has sent a 36-page request to the FCC, asking for specific information about the change. If the FCC does not respond by Labor Day, many believe the portability deadline will be pushed back, possibly to early 2004.
The CTIA is quick to cite a Cahners/In-Stat report that puts the bill for the technology change at $1 billion for the first year, and $500 million every year after that.
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One analyst I spoke with says his conversations with a cell-network executive pegged the total at about $50 million to $60 million per year. The recurring charges are to cover training and retraining for retailers across the country, Larson says.
There's clearly a large discrepancy between those two cost estimates, and I'd caution investors not to give much credence to the high-end projection, for two reasons: because of the nature of the technology changes required, and because I don't think consumers will jump from one service provider to another as spontaneously as the alarmists would have you expect.
A software issue
All parties agree that the technological adjustments are mostly a matter of software, not hardware. It's not as if suddenly all the cell towers will need to be replaced.
To vastly oversimplify the situation, the process by which two cell phones communicate will need to have a few extra levels of intelligence coded in. Rather than requesting a connection from a number and recognizing simply from its position that it belongs to Sprint, for example, the software will need to query the number itself to find out which service it belongs to.
Aside from the cost of actually implementing the change, the biggest area of concern for the carrier networks (and their investors) is the issue of customer churn.
If consumers can keep their phone numbers when they switch, the argument goes, more consumers will switch, leading to more lost customers and higher retention costs, as well as diminished profit margins. The current rate of cell-phone customer churn in the United States is 2.5 to 3 percent per month, according to IDC. But simply because customers are going to be able to switch without losing their phone numbers doesn't mean they will.
Many service plans require yearlong contracts and certain kinds of phones, and Shiv Bakhshi, an analyst with IDC, cautions that we ought not "underestimate the social costs of learning a new device."
The ruling is good for consumers -- who will no longer feel compelled to stick with a provider only so they can keep the same number. But will it prove to be a bad thing for all providers?
Not necessarily. It will likely result in some downward pressure on pricing plans, but that can be offset in other ways. Namely, if customers have fewer barriers to switching, providers will be less likely to subsidize the cost of the phone and can accrue additional revenue from phone sales.
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