A Wireless World

In a few years, mobile phones will dominate U.S. communications

The days when the cell phone was a luxury for business executives and Hollywood power brokers are long gone. More than half of all U.S. consumers already have one, and many families have a slew of them. Robert Steffen, 53, a letter carrier for the U.S. Postal Service, pays for four -- for himself, his wife, and his two daughters. And why not? He's forking over only about $105 a month for all of the minutes his family needs. "Cell phones are everywhere. I would estimate that 75% or 80% of the people at the post office have one," says the 32-year postal veteran from his perch in the cab of his truck in Manhattan's Hell's Kitchen.

Rain, snow, heat, and gloom of night won't stop the inevitable: In a few years, wireless will become the dominant form of communication service in the U.S. Already, there are about 147 million cell phones in the country, compared with 187 million traditional phone lines, according to the latest figures from the Federal Communications Commission. The 20-year-old wireless business is growing at such a speedy clip that it's on track to overtake the regular phone business in about two years. "Wireless is redefining telecom," says Verizon Communications (VZ ) CEO Ivan G. Seidenberg.

The shift is shaking telecom's Establishment to its foundations. The big local phone companies, which had been the steadiest performers during the turmoil of the past few years, are suffering a dangerous erosion in their core businesses. For the first time ever, local phone revenues began shrinking in 2001 and have slid steadily since. That has driven down profit margins for the Bells from around 39% to an expected average of 35% by yearend. Even Verizon, which has a strong wireless business, must cut costs as its core local business declines.

For companies without a solid wireless position, the challenges are more severe. Qwest Communications (Q ),, for example, doesn't have a wireless business of its own, and its local phone lines, which now total 16.5 million, are dropping by about 5% per year. The squeeze may mean it won't be able to survive as an independent company. "Resolving that migration [from traditional to wireless service] is a huge issue," Qwest Chief Executive Richard C. Notebaert told investors last month. However, a spokesman says the company believes it can maintain its independence by bundling its telephone and Internet services with wireless service that it will buy wholesale from other telecom players.

Telecom equipment companies are feeling the heat, too. As phone companies such as Verizon and SBC Communications cut costs, they have less money to purchase equipment from suppliers such as Lucent Technologies and Nortel Networks. Both companies have seen severe revenue declines in recent years: At Lucent, sales dropped from $27 billion in 1999 to an expected $9 billion this year. That pressure will probably lead to consolidation among telecom equipment players over the next year or two.


The implications for U.S. communications policy are no less far-reaching. During the 20th century, federal and state regulators strictly controlled everything from pricing to reliability in the U.S. telecom industry. In much of the rest of the world, phone service was a government-run monopoly, like the post office or national defense. Now, the transition to wireless means that governments everywhere risk losing their tight grip. "Wireless is shaking up the system. You are moving from universal service and monopoly to [a system] where service is a private contract between the company and the customer, and there are no guarantees," says analyst Rudy Baca of Legg Mason. Congress held a hearing on Sept. 24 to review the public-policy challenges. Regulators in California, Utah, and Virginia are concerned enough that they're considering trying to step up their own regulation of wireless phone prices and service by the end of this year.

While the wireless future is fraught with risks for many, customers are seeing huge benefits. All the competition means choices aplenty, tumbling prices, and innovation on the rise. And as cell phones become more sophisticated, consumers are ending up with what is essentially a small computer in their pocket, opening up all sorts of new possibilities for services and entertainment. In an early example, Candide Media Works has pioneered a cell-phone-guided walking tour of the Lower East Side in New York, with narration by actor Jerry Stiller and a soundtrack by composer John Zorn. "There's no getting away from it. [The technology has] unending possibility," says Stiller, 76.

At the extreme edge of the mobile revolution are people like Lena Tatar, 34, who has completely cut the cord. Such people, although still small in number, represent the future of telecom. Late this summer, Tatar and her husband decided to shut off the regular phone at their Manhattan apartment and replace it with two wireless phones. The transition has gone relatively smoothly. When people dial her old number, the call is automatically forwarded to her new cell phone. The couple pays about $50 a month for a plan that provides 600 anytime minutes and 5,000 night-or- weekend minutes. The phone is generally reliable, although Tatar has some trouble picking up her voice-mail in the city and getting service at her father's house. "Overall, I'm glad I made the change," says the New Yorker, who owns a T-shirt business and attends Hunter College.

An increasing number of consumers are comfortable cutting the cord. About 5% of callers have ditched their regular phones, including many students and younger people. As many as 50% of consumers would like to go completely wireless, but only after differences in cost and reliability are eliminated, according to a study by Ernst & Young. Depending on features and usage, the price differential has disappeared for many people. But the reliability gap is still substantial, and some veterans of traditional telecom think it will never close. "It's not going to displace the wireline network," said Edward E. Whitacre Jr., chief executive of SBC Communications Inc. (SBC ), which jointly owns wireless player Cingular Wireless with BellSouth Corp. (BLS ) "It's certainly going to be a big product, but it's never going to be the substitute. Reliability is one reason."

As wireless grows, profits for the entire telecom industry are coming down. Wireline revenues for the Bells and long-distance carriers are expected to fall 5% this year, to $143 billion, according to Swiss financial giant UBS. Their combined profit margin is expected to decline, from 38% last year to 35% this year. Wireless, however, is growing. Revenue for the six national carriers will rise an estimated 10% this year, to $77 billion, according to Legg Mason. And their wireless profit margins are rising, from 31% in 2002 to 33% in 2003.

Phone companies are racing to diversify their revenues, adding more wireless to the mix. Wireless is likely to drive another wave of telecom consolidation over the next 18 to 24 months, according to investment bankers. It's possible that SBC, which gets just 17% of its revenue from wireless, will have to do something to catch up with Verizon, which gets 30% of its revenue from wireless. SBC has a range of options, beyond continuing to run Cingular jointly with BellSouth. Many analysts expect Cingular will eventually wind up under the full control of either BellSouth or SBC, leaving the other partner free to acquire another carrier, such as AT&T Wireless (T ) or T-Mobile International (DT ). SBC declined comment. BellSouth says it's happy with the current structure of Cingular.

As wireless becomes ever more important, it is transforming the fundamental design of all other communications networks. BellSouth recently introduced a cell phone that operates as a cordless phone when the user is at home. Upstart ICG Communications Inc. (ICGX ) is offering telephone service that's simply an application on a laptop equipped with a wireless Internet connection. With microphones attached to their laptops, workers will be able to make calls and check their voice mail from the road, just as they would read or send e-mail. "What we will see is that networks will converge. All the different devices will be processed off one network," says Frank A. Dunn, CEO of equipment maker Nortel Networks (NT ). And someday soon, all of those devices will be mobile.

By Steve Rosenbush

By Steve Rosenbush in New York, with Roger O. Crockett in Chicago, Christopher Palmeri in Los Angeles, and Peter Burrows in San Mateo, Calif.

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