A Cell Phone In Every Pocket?

The bidding war over AirTouch reflects the explosive growth in wireless calling

The bidding is fast and furious. Bell Atlantic Corp., according to analysts, opened with a stock-swap offer for AirTouch Communications Inc. valued at nearly $45 billion over New Year's weekend. Never mind that Bell Atlantic is still awaiting approval to buy GTE Corp. for more than $60 billion. But its audacious AirTouch bid, which Bell Atlantic acknowledged on Jan. 3, was quickly topped by Vodafone Group PLC. According to analysts, by Jan. 6, the British wireless upstart was offering $54 billion in cash and stock--about $10 billiOn more than Bell Atlantic was willing to pay.

Why AirTouch? The wireless revolution. Huge price declines over the past decade have turned what had been a luxury item for Hollywood agents and investment bankers into a daily necessity for everyone from cab drivers to retired schoolteachers. The number of wireless users in the U.S. has boomed over the past decade, to 66.5 million from 1.6 million, according to the Cellular Telecommunications Industry Assn. Sanford C. Bernstein & Co. figures that number could reach 110 million in 2002. Worldwide, in five years, there could be more than 400 million. "People are using wireless as anytime, anywhere communications," says Daniel R. Hesse, CEO of AT&T Wireless Services.

The will lead to sweeping changes in how business gets done and how phone companies will have to serve consumers. Many experts believe that wireless will become our principal means of communication. "Our children's children willsee old movies with wired phones and wonder why anybody ever used them," says Andrew Cole, head of consultant Renaissance Worldwide Inc.'s wireless practice. Adds Merle Gilmore, president of Motorola's Communications Enterprise: "Wireless has become an equal player."

The shift to wireless is what makes a property like AirTouch such a hot commodity. With AirTouch, which covers the western U.S., Bell Atlantic can offer cellular service across the country. For Vodafone, AirTouch's operations in 12 countries could make it a global player in wireless. Or maybe both things could happen, if Bell Atlantic and Vodaphone can figure a way to divide the baby.

Bell Atlantic is highly motivated to make the deal for competitive reasons. It has been hearing from customers--particularly its most prized business clientele--that they want it to offer them wireless service, regardless of where they are. Today, Bell Atlantic customers can call when they're out of their home region, but only by paying "roaming" fees to cover the 50 cents a minute or more that Bell Atlantic has to pay other carriers when customers need to call outside Bell Atlantic's region.

LOSING CUSTOMERS. National networks, such as AT&T and Sprint Corp., face no such fees and are both aggressively marketing national coverage for 10 cents to 15 cents a minute for using cell phones outside the home region. AT&T says its plan is attracting 100,000 customers a month--each paying at least $90 monthly. "If you don't have [national coverage], there's a growing percentage of customers who won't buy from you," says Andrew Sukawaty, CEO of Sprint's wireless operations. "That used to be 15% or 20% two years ago. Now, it's 50% to 60% of the customers--and growing."

The fight over AirTouch also reflects how the consolidating U.S. phone industry is shaping up--into nationwide carriers offering all sorts of service. Among them, wireless is essential. While only 7.6% of all phone minutes were on wireless networks in 1998, that share is projected to grow to 17.7% in 2002, according to market researcher Yankee Group Inc. That means that without a big wireless presence, carriers are likely to see more and more of their business siphoned off. "Any operator that doesn't play significantly in wireless is going to lose," says Bob Egan, research director for Gartner Group.

So AirTouch isn't the only property being sized up. Likely buyers include SBC Communications Inc. and BellSouth Corp., which--like Bell Atlantic--have only regional wireless networks.

The company with the biggest need is MCI WorldCom Inc., which has virtually no wireless operations. Bankers and investors figure MCI WorldCom will have to make a wireless deal--and soon--even though CEO Bernard J. Ebbers has claimed to have no interest in one.

So, who would MCI WorldCom buy? The most likely candidate, say analysts, is Nextel Communications Inc., based in McLean, Va. Nextel, targets the same corporate customers that MCI WorldCom fancies. Meanwhile an array of independent wireless players, such as Aerial Communications and Omnipoint Communications Inc., are likely targets for other phone companies.

Despite rapid growth, it could be risky to pay too much for wireless capacity now. The same factor that's driving usage--falling prices--is also squeezing margins. Prices now average 44 cents a minute, according to Sanford C. Bernstein, and bottom out at about 10 cents a minute. With five or six competitors in most markets, analysts predict that price declines will average about 20% annually. "Price will hemorrhage over the next two years," says Renaissance's Cole. "We think you'll see 3 cents a minute in the near future."

Even now, the declines are dramatic. "Our prices are where I thought they were going to be two years from now," says George Schmitt, president of New York-based Omnipoint, which provides wireless service on the East Coast.

WHO WILL PAY? Another issue: Until some technical improvements arrive, wireless phones won't match wired ones in some key areas. Most important, mobile phones aren't very good at carrying data traffic--and almost all wireless users have PCs. Modems for wireless phones top out at about 9.6 kilobits per second. For $50, you can get a 56-kbps modem for your PC. While data speed is supposed to hit 2 megabits per second in third-generation wireless technology--called "3G" in the industry--it won't be introduced until at least 2002.

Another major issue for wireless use in the U.S. is who pays for the call. In Europe and most other parts of the world, people accept all kinds of incoming calls on their mobile phones because they don't pay anything for them; only callers pay. In the U.S., wireless users pay for incoming as well as outgoing calls. Late last year, the board of the cellular industry association endorsed what's called "calling party pays" in a letter to the chairman of the Federal Communications Commission. But a host of thorny issues need to be solved.

A Cell Phone in Every Pocket?

Vodafone, for one, might like to take up the challenge. The wireless player is known for pit-bull aggressiveness: It frequently forces British Telecommunications PLC to match its rate cuts in Britain. But Vodafone's brash CEO, Chris Gent, may find himself having to contend with Bell Atlantic's equally determined CEO, Ivan Seidenberg. Since Vodafone primarily wants a piece of the booming international wireless market, and Bell Atlantic wants AirTouch's domestic operations, there could be a compromise. For the right price, AirTouch could be split in two, with Bell Atlantic taking the U.S. business and Vodafone taking the rest. Such a deal could give both buyers what they need--and AirTouch shareholders could see a rich payday.

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