"Some Carriers Won't Make It"

Cingular CEO Stephen Carter sees a wave of consolidation sweeping the wireless provider industry, with Cingular left standing

The name Cingular Wireless first appeared a year ago in a costly ad campaign aimed at creating a single brand for the 11 cellular operations owned by Cingular's parent companies, BellSouth and SBC Communications. The campaign turned Cingular into a household name, but it couldn't keep the company from stumbling in last year's fourth quarter, as did many other wireless service providers.

The Atlanta-based company, which serves 21.6 million customers, gained less than half of the 700,000 new customers analysts had expected it would pick up during the holiday season -- a problem that also afflicted rivals Verizon Wireless and Sprint PCS. Wall Street panicked, and wireless stocks nosedived. Even so, Cingular CEO Stephen Carter says the industry's growth is far from over. Carter spoke to BusinessWeek Online reporter Olga Kharif on Feb. 1 about the industry's future, including the nifty new services on the way. Edited excerpts from their conversation follow:

Q: Do you see the slowdown in subscriber growth as a problem?


Our view is, you have to balance the analysts' maniacal enthusiasm for net-customer adds with the old-fashioned things like making a profit, having a good balance sheet, keeping accounts receivable in order. In the fourth quarter, although a few people were disappointed with our number of new subscribers, I think they were pleased that we showed an increase in average revenue per user. All of our financials were good. [In the fourth quarter, the company posted $3.4 billion in operating revenues and $553 million in operating income. For the year, the numbers were $13.2 billion and $2.5 billion, respectively. Because Cingular isn't public, it's impossible to determine the net income or loss.]

Q: You blamed increased competition from companies like Sprint PCS for your failure to get more customers in the past quarter. What can you do to win the price war that's raging between wireless operators today?


We have to create value for customers by giving them great service. We have some incredible products now -- ring-tones [the musical notes that sound when calls come in] and interactive games -- that encourage the use of phones for things other than voice calls. Some carriers won't make it. They have business models that, in the cold light of day, really don't make any sense. We just have to wait for them to run out of money.

Q: Do you expect a lot of consolidation in the industry?


There will be some among the smaller, regional players. There's almost bound to be a need for them to ally themselves with somebody much stronger. That could take the form of consolidation, or it may mean more affiliation agreements between companies. But I think it's harder and harder for some smaller companies to make it on their own. And some have business models that defy logic. Those, I think, are going to run out of capital.

Q: You mentioned ring-tones and interactive games. Service providers are starting to roll out new cell phones designed for these and other new services. What trends are you are seeing in handset design and capability?


We are starting to sell the first color-screen product right now. You can pull up a screen that will show you menus -- a lot like what you're used to with a computer, just smaller. Color gives you an ability to show things on the screen in so much clearer detail that it will encourage use. We're also seeing a thing called polyphonic sound. When you download a ring-tone now, you can recognize the song, but you hear the tune in beeps. Polyphonic sound [would allow cell-phone users to hear the notes as though they're played on a musical instrument].

Q: Last year, you had your "emotional" marketing campaign, in which you said Cingular is about self-impression. Will your marketing strategy be different this year?


I think it will be a bit different. Twelve months ago, nobody had heard of Cingular. I think just about everybody acknowledges that we've done an incredible job in terms of gaining awareness for Cingular and also gaining a reputation for being lighthearted, a little irreverent.

Now, you'll also see us talking about some other brand attributes. For example, we'll begin to address the business customer more specifically, plus population segments such as youth. Not only will people understand that Cingular is a wireless company, they'll start to attribute values to it.

Q: A a lot of talk centers around how wireless operators will, in the end, just manage the networks, while some other organizations will rent the networks and take on marketing products to consumers. That has already happened in Europe. And in the U.S., Sprint PCS has struck a marketing deal with Virgin, in which Virgin provides services to young people using Sprint's network. Do you expect to see more such deals?


I think one of the differences in the U.S. vs. Europe is that most of the operators here have no surplus of spectrum used to transmit calls. In Europe, most of the service providers have two or three times the amount of spectrum of most of the U.S. operators. Carriers here aren't really looking to give up capacity for relatively marginal returns. It's a bit of an admission of defeat to say that you need to have another company market for you. I'm not sure why we would do that.

Q: You mentioned the shortage of wireless spectrum. Do you think the Federal Communications Commission and the government have done their jobs in helping operators resolve that issue?


The last spectrum auction was a farce, an absolute disaster. [It ended up in the courts.] The operators that bid -- Cingular wasn't one of those, but we have some interest in Salmon PCS, which was a participant -- had a huge amount of money waiting, doing nothing, waiting for some sort of resolution from the courts or the FCC.

Another spectrum auction has been postponed several times now. I expect it will be postponed again. You've also got issues with satellite spectrum, which has been tied up in nonprofitable entities that can't make the service viable. And there's all sorts of spectrum that's underutilized.

My conclusion would be that what we need is a plan. And that's where the government could take a proactive and constructive role. We need a plan with certainty [as to when and which spectrum will be auctioned off], with dates and realistic pricing [to ensure the spectrum won't cost billions], so that whoever uses that spectrum can afford to build it out and will attract the capital to do so.

Q: A lot of wireless users are unhappy with their service. All have experienced dead zones. Do you see a lot of consumer backlash? What's to blame for these problems?


Think back to seven or eight years ago: The amount of time you could talk without interruption was much more limited. You used to see people carrying two or three spare batteries around. You would never dream of taking a conference call on your wireless phone because static or interruptions would be disruptive, and it wouldn't look professional. And you expected, as you drove around different places, that you were going to drop calls -- that was a fact of life.

Fast-forward to 2002, and service is very different. The devices give you incredible talk time. It's common to take important business calls on your wireless phone. In conference calls, it's the norm that you are going to have as many people on wireless lines as on regular phones. Usage patterns have changed. People expect that a wireless phone will work almost exactly like a regular phone, so the standards by which the service is judged are different.

Meanwhile, people now talk on their cell phones for 400 minutes a month, instead of the 50 minutes to 100 minutes a few years ago. That means the networks are being utilized much more. And yet there's not more spectrum available -- and you do have increasing pressure to build more and more infrastructure just to cope with increased traffic.

Q: You just entered into an agreement with AT&T Wireless to build and operate a wireless network together. What are the benefits of this agreement?


To build out rural areas, where the population is not very dense, is an expensive proposition. So this was simply a matter of economics and customer service. On the economics side, by banding together the two companies, [you] only spend one set of capital. We get a state-of-the-art network in rural America and give our customers really good service. It's a very smart use of capital, and it will keep our customers happy from a service level.