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Verizon's Wireless Wonder

By Steve Rosenbush Verizon Communications (VZ) Chief Executive Ivan Seidenberg is a fan of management guru Jim Collins, known for the business books Built to Last and Good to Great. Several years ago, Seidenberg held a meeting for hundreds of senior executives in New York. Collins was hired to speak to the managers, who had received copies of the latter book. And referring to the former, "It is very important to us to build something that will last," Seidenberg said in an interview last August.

One year later, it appears that Seidenberg and his team have achieved that goal with their giant Verizon Wireless division. It's already the largest wireless company in the U.S., and it's growing faster than all its rivals. During the second quarter, Verizon Wireless added 1.53 million subscribers. That's more than Cingular, AT&T Wireless (AWE), Nextel (NXTL), and Sprint PCS (FON) combined.

Verizon Wireless is more than just a great telecom company, though. It's one of the best companies in the world -- and may be one of the best ever.

SPEEDY GROWTH. Since Verizon Wireless is a division of Verizon Communications, its accomplishments are often muddied in the murky financial waters of its strategically challenged corporate parent. But anyone who takes a moment to look closely will realize that Verizon Wireless is on par with the elite.

"What's remarkable is a $30 billion dollar company growing at this rate, which is faster than Cisco, (CSCO) Intel (INTC), or Microsoft (MSFT) grew at comparable size," says Michael Price, vice-chairman of Evercore, the investment bank established by former Treasury Secretary Roger Altman. Price worked on Cingular's acquisition of AT&T Wireless, which is expected to close this year. He also engineered the sale of wireless pioneer McCaw to AT&T.

Despite its enormous size, Verizon Wireless remains a growth company. An Evercore analysis shows that the $27 billion behemoth achieved a compound annual growth rate of 30.6% from 1999 to 2003. That's faster than Cisco, Intel, or Microsoft (MSFT). It's even faster than Dell (DELL), which posted 12.8%. Looking forward, Evercore expects Verizon Wireless to ring in a rate of 14.2% from 2003 to 2006, beating Cisco, Intel, and Microsoft and trailing Dell by about 1.5 percentage points.

OUT-EXECUTING. The profit picture is just as sharp. Verizon Wireless is expected to post $3.5 billion in net income for 2004. Over the next few years, Evercore expects it to boost revenues at a compounded rate of 32.4%, faster than Cisco, Dell, Intel, or Microsoft.

There was nothing inevitable about Verizon Wireless's ascent. AT&T Wireless, or SBC Communications (SBC) and BellSouth (BLS), which control Cingular, could have done the same. Verizon simply outperformed them with a masterful combination of smart acquisitions, bold capital investments, and top-notch execution under the leadership of Chief Executive Denny Strigl.

Over the years, Strigl has repeatedly said the company's success flows from its relentless focus on business basics. Indeed, Verizon Wireless outperforms its peers by almost every operations metric. Its churn rate, which measures the percentage of subscribers who leave in a given quarter, is the lowest in the industry, at 1.45% in the second quarter. Nextel was second-best with a rate of 1.6%, followed by Sprint PCS (2.3%), Cingular (2.4%), T-Mobile (2.8%), and AT&T Wireless (3.4%). Verizon Wireless also had a higher operating cash-flow margin than its rivals.

SMART BUYS. But Verizon's Wireless' success really stems from a willingness to make hefty technology investments. It has been pouring capital into its network at a rate of at least $4 billion a year ever since it was created, the largest amount in the industry. It's spending $5 billion this year as it rolls out superfast data connections that will allow people to access the Internet from a mobile phone at a speed comparable to DSL or cable modems.

Verizon Wireless also has shown a rare ability to make successful acquisitions. It bought PCS PrimeCo and GTE in the '90s and smoothly integrated them, with many executives retained. It has even shown it can make inherently difficult joint ventures work well.

When it lost the bidding war for West Coast cell-phone heavyweight Airtouch to Vodafone (VOD) in 1999, it persuaded Vodafone to combine its U.S. operations with Verizon's East Coast assets, creating a nationwide network. Many observers expect Vodafone eventually to leave the partnership, where it's a minority owner. But that's not easy, because Verizon Wireless is Vodafone's best-performing unit.

UNDER ATTACK. The real question now is whether Verizon can obtain the same results for its landline network. Seidenberg is spending big on advanced technology that will carry voice, video, and data to people's homes over fiber-optic lines. Verizon will pony up $2 billion to $3 billion a year over the next 10 years. That strategy resembles the one that helped make Verizon Wireless a success.

But the landline business is mature and under fierce competitive attack from the cable companies and Internet upstarts like Vonage. So the huge outlays must be made without the revenue growth that funded wireless investment. If Seidenberg can pull this one off, management gurus will be studying him for years to come. Rosenbush is a senior writer for BusinessWeek Online in New York

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