Grab Your Partners For The Wireless Ball

It isn't just politics that makes for strange bedfellows. The race to build a national cellular network is also prompting some unexpected alliances. Just look at the previously fractious Baby Bells. They're suddenly doing deals with each other at a furious pace--in the past two months there have been mergers between the cellular operations of Pacific Telesis Group and US West Inc. and between those of Bell Atlantic Corp. and Nynex Corp. Ameritech, meanwhile, is talking to everyone from other Bells to long-distance carriers in an effort to expand its cellular network.

Why the sudden change? Because the long-balkanized cellular industry is about to face two tough new competitors. AT&T's pending takeover of McCaw Cellular Communications Inc. and MCI Communications Corp.'s 17% investment in Nextel Communications Inc. will create the one thing wireless customers want most--seamless nationwide coverage. And those networks will have brand names that already are household words.

CRAZY QUILT. Suddenly, wireless is no longer a sure cash cow for the seven Baby Bells. Each was handed one of two cellular licenses in its region in 1984 by the Federal Communications Commission and hasn't worried much about cooperation since. They bought up licenses piecemeal outside their territories, so a crazy quilt of networks developed across the country with no overall identities or standards. The result: The Bells charge some $2 a minute if a rival operator connects a call in their territory. And the same phone won't always work in every region.

Such an approach won't pass muster in the face of AT&T/McCaw's and MCI/ Nextel's national wireless networks. Which is why the deals are coming together now. PacTel and US West had spent two futile years haggling over a plan to combine their abutting cellular operations. "Just because it made strategic sense didn't mean we could get the deal done," says Samuel Ginn, former PacTel chairman.

All that changed in the face of competition. In early July, US West and AirTouch Communications, PacTel's newly spun-off wireless business, announced merger plans that would create the nation's fourth-largest cellular network, with 1.7 million subscribers. A month earlier, Bell Atlantic and Nynex signed a similar deal to form a cellular behemoth serving 1.8 million customers.

Expect more shotgun marriages soon. Doing the deals now will tell the Bells where the gaps in their networks are--and thus where to bid for some 2,000 licenses for new wireless systems called personal communications services (PCS). The licenses will be auctioned off by the FCC in December.

So who's going to dance with whom? To figure it out, check a map for the holes in coverage. Using that approach, Nynex/Bell Atlantic's lucrative Maine-to-Virginia network is the belle of this ball. If BellSouth joined them, coverage would extend deep into the South. US West/AirTouch, which has no eastern presence except in Atlanta, could also use East Coast access, while Bell Atlantic would like to get into California. "We will be talking to Sprint and US West/AirTouch over the next 30 to 60 days," says Lawrence T. Babbio, executive vice-president of Bell Atlantic.

STRATOSPHERIC. In theory, the Bells could all link up in one seven-way national network and challenge AT&T head-on. In practice, they aren't that much in sync. Many of the Bells already have overlapping cellular properties, so a merger would make little strategic sense. Take Chicago-based Ameritech Corp. "It would be much more difficult to do something with the AirTouch/US West group than it would be with Bell Atlantic/Nynex," says Ameritech Chairman Richard C. Notebaert. Ameritech and US West/AirTouch both have cellular operations in Michigan and Ohio. Has he had discussions with Bell Atlantic/Nynex? "Maybe," he says, adding that the company is talking to a number of potential partners. Notebaert, for instance, is keen on an accord with AT&T/McCaw. "There is no overlap there," he says.

No matter how many pacts are inked, most partnerships will still have coverage gaps. The Bells see PCS as the solution, and alliances are being made to snap up the licenses. But relying on the new service could be dicey. The bidding is sure to be supercompetitive. And if the FCC's first auction in July is any indication--PCS paging licenses raked in $617 million, more than double the expected take--bids will be stratospheric.

What's more, it could cost $100 million and up to build PCS systems in a major city. That explains why MCI officials are considering something close to blasphemy: joining with AT&T to build the networks. "That would not be a far-fetched kind of arrangement," says MCI President Gerald H. Taylor. While the two have not talked directly, neither is dismissing the idea. And if AT&T and MCI can do such a deal, any marriage is possible in the wireless world.

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