Telecom's Irrational Customer

As you know, Cingular purchased AT&T Wireless' customers (not the name) this year. SBC and BellSouth own Cingular. Why wouldn't they merge in the future?

Verizon owns Verizon Wireless with Vodafone while leasing its network to Virgin Mobile.

And Sprint, which recently recombined its tracking stock for Sprint PCS, will also lease its network to the future AT&T Wireless, also owned by AT&T. At the rate the old Ma Bell is going, Sprint may just buy that up as well.

Nextel, a rare independent, has successfully fought for and won extremely valuable spectrum from the government to continue to compete against the biggies. It also owns teen-targeted, pre-pay service Boost Mobile.

Finally, T-mobile, which was originally known as Voicestream here in the U.S. is actually a huge global brand owned by German telecom giant Deutsch Telekom.

MCI? Everyone's expecting them to get bought out soon.

In 5 to 10 years time, we may see just SBC/BellSouth, Verizon/Nextel/AT&T, Sprint/T-Mobile remain. Why? There are two major events occurring right now in telecom which will ultimately leave just one or two firms remaining: a deployment of fiber across the country to replace old copper lines and the increasing usage of the internet to make phone calls, also called voice over internet protocol or VOIP. Why is this a big deal? Because it'll effectively decrease the cost to the end user, as well as dramatically enhance capacity and number of services deliverable to a home from a pipe. It's cable's business model, but 5 years late. And even though bundles of services to the home hasn't been proven to be cheaper to acquire customers, nor cheaper for customers (1), this is the inevitable direction of all pipe owners. As the industry heads in this direction, there will be ugly price wars, (2) with each firm fighting tooth and nail for remaining customers (3).

The scenario I've just laid out may occur, and as usual, governments will try to prevent natural market forces in the name of fair competition, and as usual, a disruptive market entrant will change the dynamics of the market, forcing government to back off and turn into a coddling protector of weak companies. In time, everyone will attempt to copy the disruptive entrant, and in the end, competition will be restored.

It's The Network, Stupid

Although no telecom executive admitted to seeking any other acquisitions in 2005, they've all tied up substantial portions of their free cash in some fiber deployment or another. The prevailing strategies are either fiber-to-node (the cheapest alternative at approx $300/hh, which connects a neighborhood to this node), fiber-to-curb (which is slightly more expensive than "to-node" and places fiber closer to home), and finally, the costliest at approximately $1000 to $1300 per household is fiber-to-home. Of all the telecom firms, Verizon is the only one deploying this strategy (they're even selling off their copper lines to pay for it all.) According to Verizon Chairman/CEO Ivan Seidenberg, their analysis of fiber-to-home has shown it to be less costly than others estimate, and ultimately the best pre-emptive strategy (not least of which is less regulatory headaches and new business opportunities such as content distribution). Both strategies depend on concentration of subscribers, which in Verizon's case are clustered more closely than their competitors.

Seidenberg clearly takes pride from Verizon's role in growing the entire market for everyone, rather than his success at stealing away users from other telecom firms. Like any CEO, he claims not to care what his competition does and manages his business for the customer. This is definitely evident in our landmark study published in March of this year, al berrios & co. Wireless Consumer Study March 2004 (4). As demonstrated in our study, Verizon Wireless has the teen market all to itself and maintains a unique perception among its subscribers of exceptional quality versus other carriers. This, however, hasn't helped its average revenue per user, which is lower than its peers, and as we pointed out in our study, is the result of Verizon Wireless having the highest prices in the industry. Although Seidenberg acknowledged as much, he's doing something we typically recommend: maintaining premium pricing despite market forces to the contrary. Consumers are more willing to pay regardless of whether or not the product is considered a commodity (think bottled water) (5).

Indeed, even MCI President/CEO Michael Capellas and Nextel President/CEO Tim Donahue agreed that the key to their success has been their investment to expand their networks that keeps their customers happy. A lack of investment in their network is what Donahue claims did AT&T Wireless in. Due to Nextel's focus on slow-churning businesses and government personnel, competitors' push-to-talk feature hasn't affected them as greatly as the industry expected it would. Once again, that irrational subscriber shows up willing to pay more for essentially a commodity.

Write to Al Berrios at


1 The underlying logic behind bundles isn't lower costs or additional value for customers, but rather, to turn a commodity service into something akin to a banking relationship or even your relationship with your email provider; once you're in bed with it, it's hard to leave. This naturally extends the length of any relationship and increases the probability of profiting from this relationship.

2 SBC Chairman/CEO Ed Whitacre recently claimed that SBC will take "aggressive" pricing actions to gain (and keep) market share

3 In case you missed it, customers haven't exactly remained loyal to their carriers as wireless service and internet calling become more affordable and easier to use.

4 "The al berrios & co. Wireless Consumer Study March 2004 Abstract"

5 Review our Reports on "Why Consumers Spend"


Disclaimer: The recommendations, commentary and opinions published herein are based on public information sometimes referenced via hyperlinks. Any similarities or likeness to any ideas or commentary from any other sources not referenced is purely coincidental. al berrios & co. cannot control any results occurring from advice obtained from this publication nor any opinion(s) conveyed by any reader of this publication.

(c) 2004. All Rights Reserved. al berrios & company, inc. Published by al berrios & co. This Report may not be reproduced or redistributed in any form without written permission from al berrios & co., subject to penalty.