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Get ready for a wireless war
Carriers will likely spend heavily to keep customers once number portability kicks in this November.
September 5, 2003: 12:43 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - On Nov. 24, the long-awaited wireless number portability rule kicks in, which will allow cell phone users to keep their numbers when they switch service providers.

So if the hassle of letting people know your new number is the only reason you've stuck with your current service, you will soon be in luck. And based on the backlash the wireless industry received after last month's blackout, there may very well be a bunch of customers looking to switch.

Curiously, the pending change has not fazed investors. (Maybe they are too busy chatting away on their cell phones to notice.)

Shares of Nextel are up 64 percent this year. AT&T Wireless has surged 56 percent. Sprint PCS is up 26.5 percent. And the stocks of several regional wireless carriers, such as Triton PCS (TPCS: Research, Estimates) and Western Wireless (WWCA: up $0.27 to $19.93, Research, Estimates), have rallied sharply as well.

It's going to get ugly

But wireless number portability has the potential to make an already tough business even more competitive. "This is going to cause a mess next year and into 2005," said Patrick Comack, an analyst with Guzman & Co. "It's going to be an ugly period for a while."

Whoa there, wireless!
Pure play wireless carrier stocks have surged this year...
CompanyYTD price change
AT&T Wireless56.1%
Nextel64.0%
Sprint PCS26.5%
Triton PCS51.9%
U.S. Cellular14.1%
Western Wireless259.1%
Source:Thomson/Baseline

Comack said that wireless carriers would likely have higher churn rates, which means more customers dropping service. In addition, many may increase the amount of handset subsidies, i.e. offering prospective subscribers cell phones at discounted prices.

And in a recent research note, Wachovia analyst Jennifer Fritzsche noted that the biggest negative associated with wireless number portability is not that carriers will lose a lot of customers but that they will spend a ton to keep them.

In other words, if you think wireless companies advertise a lot on television now, you ain't seen nothing yet.

Local and long distance lag
...but wireline phone companies have missed out on this year's rally.
CompanyYTD price change
AT&T-14.8%
BellSouth-1.4%
Qwest-12.0%
SBC Communications-15.3%
Sprint3.6%
Verizon-6.5%
Source:Thomson/Baseline

And of course, the carriers will likely come up with creative new pricing plans in order to lure customers and hang on to existing ones.

Add all that up and you have lower profit margins.

"This is going to cause more price wars, minute wars, whatever you want to call it," said Comack. "It's great for consumers but terrible for the wireless companies."

Time to hangup on wireless stocks

So which carriers are at the most risk? Mike Hodel, an analyst with Morningstar, said that companies that are doing a good job of holding onto customers, firms like Nextel (NXTL: down $0.01 to $19.32, Research, Estimates) and Verizon Wireless (which is co-owned by Baby Bell Verizon (VZ: down $0.15 to $36.50, Research, Estimates) and British telecom Vodafone) will probably see the lowest increase in customer churn.

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Sprint PCS (PCS: up $0.25 to $5.94, Research, Estimates) and T-Mobile (owned by Deutsche Telekom) will see the biggest spikes, Hodel said while Cingular (co-owned by Baby Bells SBC Communications (SBC: down $0.01 to $23.11, Research, Estimates) and BellSouth (BLS: up $0.08 to $25.73, Research, Estimates)) and AT&T Wireless (AWE: up $0.18 to $9.01, Research, Estimates) will be in the middle.

Regardless of which companies win or lose the most though, wireless number portability should further hammer home the biggest problem with the sector: there is little that distinguishes the services other than price.

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The one true technological differentiator had been Nextel's push-to-talk walkie-talkie service and that's no longer unique either as Verizon Wireless entered the market and other carriers are looking to do so as well.

"We don't think too highly of wireless carriers as investments since products are so similar to each other. It doesn't give these companies a strong competitive advantage," said Hodel.

So let's add it up. This is an industry where the only real selling point is price and companies spend heavily on advertising, keeping margins thin. Plus, with the coming rule change in November, it will be easier for consumers to change service providers.

It sounds like wireless is facing the same problems as the long distance and local phone companies. And those stocks have been dogs this year. There's a disconnect somewhere and it looks like it's on the wireless side.

Analysts quoted in this story do not own any of the stocks mentioned. Guzman & Co. has performed investment banking for AT&T Wireless, BellSouth, SBC, Sprint and Verizon. Wachovia has performed investment banking for Nextel, Triton PCS and Western Wireless. Morningstar has no investment banking business.


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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.