By Kenneth M. Leon
In the last few weeks, Murfreesboro, Tenn., has been in the midst of a hiring frenzy. What's going on? Verizon Wireless has been filling 450 coveted positions while establishing a new state-of-the-art customer call center to handle number-portability transactions later this year. Verizon Wireless (a joint venture of Verizon (VZ ) and Vodafone (VOD )) and its peers are responding to Federal Communications Commission (FCC) regulations allowing customers to keep their mobile-phone numbers if they choose to change carriers.
These are exciting, but confusing times for wireless services. Consumers are beginning to hear a groundswell of offers aimed at retaining them or enticing them to switch using wireless local number portability (WLNP), which the industry plans to introduce on Nov. 23. Verizon Wireless says it won't impose a termination or deactivation charge to customers who want to take their numbers with them. Other wireless carriers, though, may charge the additional fees if customers flee.
The mandated WLNP will cause wireless-service providers to reevaluate how they can differentiate their products from competitors. We at S&P believe they may be come up with some surprising price initiatives and other maneuvers to retain customers and protect their revenue base. We expect the marketing battle to start right before the December holiday period and lead into the first half of 2004.
At this time, it's still difficult to sort out the winners and losers. We think as local-number portability rolls out later this year it's likely to increase competition, customer churn, and market-share changes. This may give investors a reason to take profits in wireless-services stocks, which have shot up this year on accelerating subscriber additions, revenue growth, and cash flow.
Year-to-date through July 25, the S&P Wireless Telecommunications Index was up 50%, vs. a 13.7% rise in the S&P Super 1500 Composite Index. Stable pricing, higher margins with managed marketing costs, lower bad-debt expenses, and improved balance sheets amid restrained capital spending have helped boost results of many wireless companies.
It's worth watching the events leading up to WLNP's rollout this fall. Kicking around the industry and the FCC's corridors since 1998 and planned to come out late last year, WLNP is designed to promote wireless-to-wireless and wireless-to-wireline competition for the consumer's best interests. If all goes according to theory, a customer will be able to use WLNP to get the best service at the best price (see BW Online, 7/15/03, "Portability: Survival Tips for Cell-Phone Outfits").
Small to midsize businesses may be especially eager to take advantage of WLNP, because of the economies of scale and cost savings that may arise from the wireless-service provider that wants to retain them or the competitors that want these prized customers to switch to their networks.
It's hoped that the network complexities of making WLNP work seamlessly will be invisible to customers. Some of the challenges for the wireless providers involve retooling their network architectures, rethinking the role of network intelligence through software, and changing protocols that allow traffic to be routed and recorded at specified rates for billing purposes. Equipment vendors have been working with carriers to address most of these issues.
According to the Cellular Telecommunications & Internet Assn. (CTIA), even if providers have upgraded their networks, they'll still require at least 90 days to implement the new rules and policies that have been awaiting FCC resolution. The CTIA believes that window is necessary to load and test software and systems, install circuits, obtain numbering resources, and train customer-service personnel.
When a consumer selects another wireless carrier, a "mixed service" period occurs where the customer would essentially have two carriers using the same mobile number for a period of time. The order process between wireless- and wireline-service providers is still being negotiated.
WLNP still has some regulatory snarls. In a prior order, the FCC ruled that the largest 100 metropolitan markets would be required to meet WLNP guidelines, and it's still unclear whether the suburban to rural markets beyond to the top 100 metro areas would need to comply, which may upset consumers and small business in those markets. By Kenneth M. Leon The technology side has some concerns that WLNP could degrade the availability of 911 emergency service. Issues have come up involving the routing of a wireless phone activated for service prior to the completion of the WLNP change activation, so the emergency call may be routed to the previous service provider. For consumers, the pace of the incumbent local exchange carrier's (ILEC) efforts to complete a changeover may affect the availability of critical 911 services.
Another question is whether service providers will cooperate with each other on network issues related to WLNP. The FCC still doesn't have specific guidelines for how providers should follow procedures on switching customers to competing wireless providers. Certainly, the poor experience of the last decade between the ILECs and the emerging competitive local exchange carriers (CLECs) related to network access doesn't bode well for WLNP implementation.
The CTIA and its members have developed a Service Level Porting Agreement (SLA) based largely on the terms and conditions wireless carriers have used for years. SLA may be able to allow number portability between wireless providers and wireless-to-wireline providers in an organized manner.
Still, the CTIA is concerned that the ILECs may erect obstacles to portability by carrying out lengthy negotiations and delayed dispute resolution. Certain regional Bell operation companies such as BellSouth (BLS ) and SBC (SBC ) argued that the SLA terms for number portability is an interconnection agreement that must be filed and approved by the relevant state public utility commissions.
Of course, the CTIA takes issue with these claims, and the dispute may threaten the FCC's authority over the relationships between ILECs and wireless providers. We believe this may lead to further delays, and the issue might go to Congress or the U.S. federal courts. If an ILEC is likely to lose wireless customers to a competitor, it may stall for time. After all, regulatory filings, petitions, and rebuttals have been a common telecom industry practice.
The CTIA believes that engaging in interconnection negotiations that are later subject to state review may serve only two purposes: to significantly delay the availability of number portability and to permit incumbent monopolists to raise their rivals' costs and inhibit competition. We agree with the CTIA that the consumer may be harmed by resistant ILECs, and the ultimate arbiter of any disputes about WLNP should be the FCC.
Consumers, too, may find some hidden challenges with number portability. Put simply, switching a wireless number to another carrier will require service-level agreements among the carriers that include the individual rates or charges coming from specific rate centers located around the network. That means the salesperson or service rep has to know what rate center the customer is in. Given wireless carriers' reliance on retail distribution channels (such as RadioShack), a salesperson at a large wireless retail center may not be able to identify the two relevant rate centers to switch the wireless number.
A customer also may not be able to switch unless the underlying carriers have established some agreement for doing so. From past experiences in the retail wireless center, we at S&P believe it's a leap of faith to assume the salesperson will know how to execute all these changes related to WLNP.
S&P believes WLNP will be a wild ride for the wireless industry that's likely to benefit the consumer with more choices -- and perhaps more aggravation. Investors' heads, too, may be spinning for a while before it's clear which companies are benefiting from the new world of number portability.
Analyst Leon follows wireless telecommunications stocks for Standard & Poor's
Edited by Karyn McCormack