News: Analysis & Commentary: TELECOMMUNICATIONS
SCARY SIGNALS ON PAGERS
A profit crunch has the industry looking ripe for a shakeout
In the early '90s, the paging industry buzzed with promise. As the rage to page swept the nation, beeper operators saw subscriber rolls triple between 1990 and 1996. To capitalize on hot growth and investor enthusiasm for all things wireless, nine companies went public, floating offerings totaling $425 million.
But recently, the messages beeped to paging execs have come from concerned stockholders. Determined to outdo competitors, operators have spent freely to expand their networks. That has pushed debt past the $1 billion mark for major players such as Paging Network and Arch Communications. And many have relied heavily on low-margin basic paging to grab market share.
Those misfires have hurt earnings: While subscribers for the top eight paging companies increased 34% in 1996, earnings rose just 16%, says Prudential Securities. This year, subscriber growth slowed to 17%, and earnings rose just 10% through the third quarter. In response, paging stocks have sagged. A Prudential index of eight paging stocks was off 1% for the year as of Dec. 12, lagging behind cellular stocks and the Standard & Poor's 400.
RADICAL SHIFT. The casualties are mounting. No.3 pager Mobilemedia Communications Inc. filed for bankruptcy in January. No.5 Metrocall Inc. gobbled up No.8 ProNet in August, and in late November, AT&T indicated it might sell its paging unit. The $5 billion industry, say analysts, is in for more consolidation and restructuring.
Industry executives concede they have put themselves in this box. Pushing what they dubbed the cheap beep, paging companies boosted pagers in service from 26.3 million in 1994 to an expected 49.8 million this year. But they cut prices to do so. This year, on average, a pager user will pay $9.11 a month for service, vs. $12.31 in 1994.
Pager makers have also been hurt by a profit squeeze. Motorola Inc., the No.1 supplier in the U.S., has been left with extra inventory as paging companies have pared orders, says John Zahurancik, pager analyst for consultant Strategis Group. Sluggish pager sales contributed to a 13% decline, to $889 million, for Motorola's pager group's third-quarter earnings. Robert D. Pollack, Motorola's vice-president for North American paging, says orders fell because operators forecast demand poorly.
Price competition spun out of control as paging companies gave more business to resellers--companies that lease service at a discount and then resell it to subscribers. Resellers allow carriers to acquire customers without the costs of billing and customer care--but many paging companies charged resellers less than $3, compared with the $9 they charged consumers. Paging Network, the country's biggest carrier, charged some resellers under $1 a month, less than a third of what it needed to break even. CEO John P. Frazee acknowledges the low-price strategy was flawed. Now, he says, "We don't want to be in that business."
Several paging companies are trying to reverse the profit slide. PageMart, which did 35% of its 1996 business through resellers, is focusing on retail outlets such as Office Depot Inc., where it can charge $7 a month. It lost $92,000 in the third quarter, but that's an improvement over the $3.7 million it lost a year earlier. "`The subscriber at any cost' was a doomed strategy," says CEO John D. Beletic.
BIG GUNS. Meanwhile, the industry keeps consolidating. Already, the top eight companies, each with 1.5 million or more customers, control over 75% of the market. By 2000, three or four could control as much as 90%, analysts say. Several are betting that group will include PageMart, Paging Network, Arch Communications, Mobile Telecommuni-cation Technologies (Mtel), and a merged Metrocall/ProNet.
Companies with the latest services, such as two-way paging and voice paging, will prosper, analysts say. Mtel was the first to roll out two-way paging, which lets customers receive and return text messages without using a phone. After a few false starts, Mtel has worked out the kinks in its service, and its stock has doubled, to 17, this year.
Mtel and other paging companies are marketing services such as instant stock updates and sports scores. Still, executives know they have their hands full competing with digital phones with similar capabilities. Investors can only hope paging companies can get the buzz going again.By Roger O. Crockett in Chicago, with Dee Gill in Jackson, Miss.