Sunday, February 22, 2004

The US cell phone industry: consolidating or not? The recently announced acquisition of AT&T Wireless by Cingular would seem to the beginning of a rush toward industry consolidation in the cell phone sector. After all, this has been one of the most competitive segments in the economy with a six major national competitors who have been expanding service and cutting costs to gain or at least maintain market share. A few more big deals like the Cingular/AT&T Wireless one and a classic tight oligopoly would be in place, probably with higher consumer prices and fatter profits for the survivors. Or maybe not, according to an interesting recent Wall Street Journal article ("Big Name Mergers Won't Ease Crowding in Cellphone Industry", 2/13/2004). That article notes two new challenges that offset the big deal: new entrants into the area and competition from new technologies. Among the new entrants are companies that set up new phone services by piggybacking on the infrastructure of an existing cell phone company. These resellers include companies with existing brand recognition and marketing budgets. For example, Virgin Mobile USA, which is a joint venture of British magnate John Branson and Sprint, has signed up 1.4 million customers in a year, thanks to advertising targeting younger users. QWEST Communications, the fourth largest local phone company (RBOC) is doing the same, and MCI is gearing up likewise. The article reveals that even Walt Disney Company is working on getting into the business. Even AT&T (the mother company, not the wireless offspin) may start offering its own branded wireless service. So just when the industry looks like it might contract into fewer players, it's getting more. These new competitors can offer services the standard cell phone companies do not. For example, the Virgin offers something unique in the US, at least, though common in Europe. It allows you to buy prepaid cell phone usage, a version of a phone card. That means you pay only for the usage you make with no nasty surprises at the end of the month, since you can see exactly how much you are using as you use it.That's a great advantage for anyone who only has occasional need for a cell phone. Other such services might involve added applications such as personal data access or, online phone directories, city maps, buyers guides for shoppers, and other reference guides, the kind of thing that gets more important as cell phones converge with PCs. (I find it fascinating that this convergence, so loudly touted in the 1990s, is now, at last, just ready to begin though most of the hype is over.) Another area of disruption comes from wireless Ethernet technology. With the growing availability of Wi-Fi connectivity, companies are offering solutions that allow you to bypass conventional carriers, harnessing the power of the Internet for low-cost long distance calls. The inroads of VOIP are still small, but growing steadily as companies like Cisco Systems have started pushing the technology. The next thing in the works (from Motorola and others) is dual-mode phones, that can switch from Wi-Fi to standard cellular depending on whether you are in a Wi-Fi "hot spot" or not. While more consolidation among the top companies is inevitable in the US phone industry, the ongoing technical innovation provides a climate in which disruption is a fact of life and new, more specialized firms are continuing to enter the market. What might happen is a vertical disintegration of the industry, where at least some carriers (Sprint PCS being the current leader in this way) offer infrastructure (middleman) services to retailers that offer specific branded plans with special, innovative features. 10:10:27 AM

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