News: Analysis & Commentary: TELECOMMUNICATIONS
SPRINT'S OFFSPRING TAKES WING
Cellular company 360 Degrees makes a half-billion acquisition
Dennis E. Foster, CEO of 360 Degrees Communications Co., is determined to kick sand in the faces of telecom's giants. His new cellular phone company, spun off from Sprint Corp. on Mar. 7, had revenues of only $834 million last year, making it a 98-pound weakling compared with such cellular network giants as AT&T, SBC Communications, and Bell Atlantic. But Foster is determined to change all that--fast. On Apr. 24, 360 Degrees announced it will buy Independent Cellular Network Inc.'s wireless operations for $518 million in stock and assumed debt. The acquisition will add 120,000 customers in Pennsylvania, West Virginia, Ohio, and Kentucky to 360 Degrees's roster of 1.5 million customers.
Chicago-based 360 Degrees still has a way to go to live up to its name, which is supposed to suggest the company "surrounds and supports its customers." Unlike its bigger cellular rivals, 360 Degrees has no local or long-distance services. This acquisition doesn't change its ranking as the eighth-largest wireless operator, either. Plus, it's about to face a lot more competition from the next generation of wireless technology--a lower-cost, all-digital version of cellular called personal communications service (PCS) that will roll out in the U.S. during the next year. Most of its larger rivals are betting on PCS. Indeed, Sprint spun off 360 Degrees so it could focus on the newer technology.
THINK SMALL, ACT FAST. Foster, though, is a true cellular believer. And the Independent Cellular acquisition is part of his strategy to outpace the giants: Think small and act fast. His company operates networks in small cities and rural areas, where it expects minimal competition for three years or so. That's because the more powerful cellular signal has an inherent advantage in rural areas. Because PCS operates at a higher frequency, it requires more antennas per square mile than cellular. In densely populated cities, that's not a big problem. In the country, it can add significantly to infrastructure cost. "It's just not economical for [PCS operators] to build out these areas," says Steven R. Yanis, a Salomon Brothers Inc. analyst. Foster figures that by the time the larger wireless companies focus on his territories, it may be simpler for them to buy capacity from 360 Degrees than to build their own networks.
The company already has one leg up on the competition: It's making money, a rarity in the cellular world, where high capital costs eat up profits. On Apr. 23, 360 Degrees reported a first-quarter profit of $7 million, compared with a $5.9 million loss in the year-ago quarter. The company also has one of the highest market penetration rates in the business--7.6% in its regions, compared with an industry average of 6.3%.
To squeeze out more growth, 360 Degrees will try offering other services along with cellular. It has struck deals to resell Sprint's long-distance and Pagemart Nationwide's paging services. The company also plans to resell local calling--for now. Ultimately, 360 Degrees hopes to replace traditional wired phone service with cellular--and soon, not in the 10 years most experts project. "I'll be disappointed if we're not [replacing wired service] within a three-year window," says Foster.
What 360 Degrees won't be doing is branching out to new regions. The Independent networks, for example, serve small cities that are adjacent to existing 360 Degrees markets. "The [regional Bell operating companies] are frying big fish," says Foster. "Maybe we're frying minnows. But we'll keep frying them."
The big risk: The competition might go after the minnows as well. If PCS operators defy the conventional wisdom and invade the company's small markets soon, 360 Degrees could see falling margins and minimal revenue growth.
Indeed, those companies that bought PCS licenses in 360 Degrees's territories may decide they want to recoup their hefty investments quickly--in as many markets as possible. "I don't know many people who buy a car and then let it sit in the garage," says Keith Paglusch, operations vice-president at Sprint Spectrum, Sprint's wireless venture with three cable companies. The venture owns a PCS license in 360 Degrees's Toledo region. For now, though, 360 Degrees has its markets to itself. And the longer rivals stay away, the more this 98-pound weakling looks like Charles Atlas.By Peter Elstrom in ChicagoReturn to top