Will Phone Users Cut Their Cords?

With local number portability, many mobile customers will switch carriers, but wireline telcos may have the most to lose

By Todd Rosenbluth

Wireline phone companies aren't breathing easy these days, as customer loyalty is fading fast. While it isn't unusual for customers to change long-distance providers based on price, the local-phone business used to be more stable. Consumers for the most part stuck with their local service provider to meet their home needs.

Now, the telcos are fighting wholesale local carriers for traditional, price-sensitive customers and with cable-telephony outfits for early adopters. Indeed, in the 12 months ended September, 2003, the Baby Bells lost 4% of their total local-access lines on average.

However, S&P believes that wireless substitution is the 800-pound gorilla hammering at the door. Beginning Monday, Nov. 24, customers living in the country's largest 100 metropolitan markets will be able to move their landline or wireless phone number to a new wireless carrier, thanks to a recent Federal Communications Commission ruling that customers can go wireless and keep their old wireline number as long as they stay within their local calling area.


  The FCC mandate for local number portability (LNP) has caused wireless-service providers to reevaluate how they can differentiate their products from competitors. S&P has long believed that mobile carriers would come up with some surprising initiatives to handcuff existing customers before the requirement is implemented (see BW Online, 8/1/03, "As Number Portability Nears").

In the last month, the carriers have been true to form. T-Mobile, a division of Deutsche Telekom (DT ; not ranked by S&P; recent price: $16), has expanded its weekend plans -- when calls are free -- to include Fridays. Sprint PCS (PCS ; ranked 3 STARS, hold; $4.15) has seemingly created early daylight savings time by expanding the time of its free night-time calls by two hours, starting at 7 p.m. Even the smaller regional players are entering the fray: California-based wireless outfit SureWest Communications (SURW ; 2 STARS, avoid; $38.70) is launching an unlimited calling plan for $29.

It's too early to sort the wireless winners from the losers, given that the majority of customers are still under contract and would have to pay as much as $150 to break away. However, we expect the LNP battle's biggest losers will be the wireline outfits such as BellSouth (BLS ; 3 STARS; $25.29), Cincinnati Bell (CBB ; 1 STAR, sell; $5.26), Qwest Communications (Q ; 3 STARS; $3.70), SBC Communications (SBC ; 2 STARS; $23), Sprint (FON ; 2 STARS; $14.92), and Verizon Communications (VZ ; 3 STARS; $32.21).


  We see LNP creating a double threat to their customer loyalty. First, folks with both wireline and wireless phones have been relying more on the latter. As they take advantage of all-you-can-talk mobile plans that offer a large, affordable bucket of minutes, including free long-distance, usage of telcos' landline minutes has declined. In the third quarter of 2003, BellSouth's usage of landline minutes fell 5% from the prior year. While some minutes have simply moved from BellSouth's wireline side to its wireless joint venture, Cingular, others have also shifted to the five other national wireless rivals.

We expect that expanding free calling times and other yet-to-be-announced pricing initiatives from the wireless carriers will increase wireless substitution in the fourth quarter and into 2004.

Second, as users have become more comfortable with wireless service, they're no longer being faithful to their wireline phone. A study from researcher IDC earlier this year showed 16% of respondents using their wireless phone for all calls made or received. The youth segment of that study, respondents under the age of 24, was even more unlikely to need a wireline phone, with 20% using mobile service for all calls.


  While users haven't been ditching their primary and secondary phone lines at home for wireless to that extent, the FCC's LNP ruling has created a greater incentive to cut the cord. And unlike wireless users, wireline customers looking for a cheaper, more mobile alternative aren't restricted from moving to a new carrier by any contract.

S&P doesn't, however, expect a mass migration over the next couple of quarters. One reason is that it's unclear how many consumers are aware of the wireline-to-wireless LNP ruling. So far, wireless carriers have limited their marketing appeals to existing mobile customers. Furthermore, while wireless reception in apartment buildings and homes is improving, a certain percentage of the population enjoys the safety and reliability of a landline phone.

Still, the pressure from wireless has prompted the traditional telcos to search for ways to keep their long-standing customers. S&P expects the them to offer further pricing discounts on their service bundles -- which include local, long-distance, wireless, and DSL high-speed Internet access -- to retain customers. We believe these discounts will put pressure on revenues. In addition, we see marketing costs climbing in 2004 as players try to instill customer loyalty through advertising. We also believe the telcos will need to reach into their bag of tricks to keep their customers.


  One unique customer-retention approach already on the market, called Fast Forward, comes from SBC and BellSouth, Cingular's parent companies. Fast Forward is a battery charger for Cingular's wireless phone that forwards calls to your local home phone or office phone. Calls forwarded to the wireline phone are not deducted from the customer's pool of minutes and should allow better service quality when indoors.

We believe investors of the wireline stocks will be eagerly waiting to see what these outfits think up next. In our view, thanks to LNP, the next couple of quarters are going to be a bumpy ride for their customer loyalty -- as well as their shares.

Analyst Rosenbluth follows telecommunications services stocks for Standard & Poor's

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