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Wireless Roundup: Goldman Names 3 Must-Haves

Though the wireless sector has felt the pinch in past months as the overall economy has slowed, Goldman Sachs & Co. Friday, initiating coverage of wireless, was impressed enough by three of the top six players to add them to its Recommended List.

The investment research firm came out behind consumer-side heavy-weight Sprint PCS, rapidly growing AT&T Wireless, and Nextel Communications, which has a strong presence in the service industry.

Sprint PCS

Sprint PCS is a tracking stock for Sprint Corp.'s wireless business. It owns licenses covering the entire U.S., and GS estimated that its network will cover 186 million POPs by the end of 2001.

"Sprint PCS has been extremely successful at growing its subscriber base, adding more subscribers in 1999 and 2000 than any other carrier, with penetration gains of 1.84 percent and 2.23 percent," GS said. "Sprint ended 2000 with 9.8 million subscribers, for a penetration rate of 5.29 percent. We estimate that Sprint PCS will add 3.8 million subscribers in 2001 and more than 3.5 million in 2002."

The company has focused on the consumer segment, and GS attributed its industry-leading growth to its simplified one-rate pricing model.

"We believe that subscribers like the no roaming, no long-distance model and have been attracted to the simple pricing PCS offers," GS said. "As Sprint PCS continues to build out and improve its network, we believe the company's churn rate will fall."

GS was also impressed with the way Sprint PCS prepared its customer base for growth in wireless data. The company has already attracted a substantial base of more than 1 million data subscribers and has been selling data-enabled handsets for 18 months, putting those handsets into the hands of more than 80 percent of its customers.

That, GS said, positions Sprint PCS to maintain a leadership position in wireless data, an area GS believes is poised for rapid growth with the introduction of high-speed, packet-data networks in 2002.

Sprint PCS unveiled its migration path to 3G high-speed services at the CTIA Wireless 2001 show in March. The company is gearing up for a four-phase deployment of 3G services. The first phase is a rollout of 3Gcdma2000 1x, intended to double the voice capacity of its network and increase data transmission speeds ten-fold, from today's 14.4 kbps to up to 144 kbps. Sprint plans to complete the first phase in 2002, making speeds of 144 kbps available in all its U.S. markets.

GS said it estimates initial capital expenditures for the upgrade -- consisting mainly of installing a new card at each cell site and a software upgrade for its Internet gateways -- will be about $800 million over the next two years.

By 2003, the company anticipates moving into the second phase, getting speeds up to 307 kbps. By late 2003, it predicts speeds up to 2.4 mbps using cdma2000 1xEV-DO technology. Finally, in early 2004, it plans to attain speeds between 3 mbps and 5 mbps using 3Gcdma2000 1xEV-DA (Data and Voice) technology.

"This upgrade path could prove to be a key competitive advantage for Sprint PCS and the other CDMA carriers, as it requires less initial spectrum and capital commitments compared with WCDMA," GS said. WCDMA is the standard AT&T Wireless has selected for its 3G rollout.

Another factor in Sprint's favor, according to GS, is that it built its PCS network from the ground up, making it the only national wireless network operating on one spectrum band with an all-digital network. It also has one billing system and one seamless network.

AT&T Wireless AT&T Wireless is a tracking stock for AT&T Corp.'s wireless business. It has licenses covering 98 percent of the United States and is also one of the fastest growing wireless businesses. It has added nearly 2.6 million subscribers since its IPO in April 2000, for an incremental penetration gain of 1.58 percent, GS said. The company ended 2000 with more than 15.2 million subscribers, for a covered penetration rate of 9.32 percent. At the end of first quarter 2001, about 93 percent of its subscribers were using digital handsets.

"AT&T Wireless operation performance has been stellar over the past year, consistently beating our estimates," GS said.

The company has also managed to gain a strong foothold in the business sphere, which, in part, GS attributed to its Digital One Rate price plan. The plan features no roaming or long-distance charges nationwide, on or off the company's network.

AT&T Wireless is also well-prepared for a 3G rollout due to its alliance with Japan's NTT DoCoMo, according to GS. The company partnered with DoCoMo in November 2000, under a deal in which DoCoMo agreed to invest $9.8 billion for a 16 percent stake in AT&T Wireless. The two companies agreed to form a mobile multimedia alliance (a wholly-owned subsidiary of AT&T Wireless) to develop and deliver wireless data services in the U.S. The alliance gives AT&T Wireless access to DoCoMo's highly popular i-mode technology as well as DoCoMo's expertise in transitioning to the WCDMA 3G standard.

But the company is also currently building a GSM/GPRS overlay on its existing TDMA network. While GS said the plan is a long-term positive for AT&T Wireless, the research firm said there is risk in the short term because the company will have to operate a network with two digital technologies (TDMA and GSM) as well as its analog network.

Nextel Communications

Nextel's network covers 194 million POPs, about 84 percent of its licensed POPs. It had more than 6.7 million subscribers at the end of 2000, representing a penetration rate of 3.4 percent in its markets. It is also the only national wireless operator to offer a dispatch-type service which allows subscribers to speak to one or more subscribers simultaneously. The service, called DirectConnect, has a particular appeal to workers in service industries like construction, real estate and delivery, according to GS.

"Nextel has created a loyal customer base because of this unique product offering," GS said. "Customers who rely on DirectConnect service tend to churn less once their businesses are set up on a network of Nextel phones."

The company also benefits from its low spectrum costs. It has an average of 19 MHz (16 MHz in the 800-MHz range and 3 MHz in the 900-MHz range) across its markets, and acquired its footprint with an average cost per POP of $10, or an average MHz per POP cost of about 53 cents.

It also benefits from strong investors with some deep experience in the wireless industry, including Craig McCaw, Motorola and Microsoft. Craig McCaw controls about 13 percent of the company through two holding companies -- Eagle River Investments and Digital Radio -- and ran the largest publicly traded cellular company, McCaw Cellular, before selling to AT&T in 1995. Motorola owns 14 percent of the company and Microsoft owns slightly less than 5 percent.

The company has also expanded internationally through its Nextel International subsidiary. It offers services in Argentina, Brazil, Mexico, Peru and the Philippines. In addition, through its roaming agreement with Nextel Partners, the company has access to an additional 23 million POPs in the U.S.

However, Nextel utilizes Motorola's iDEN technology on the 800 and 900 SMR band, making it dependent on Motorola for infrastructure and handsets.

"With only one source for infrastructure and handsets, Nextel has little ability to influence pricing," GS said. "In addition, we remain concerned that Motorola cannot produce enough iDEN equipment to reach maximum efficiency to be able to offer better pricing for Nextel."

GS also noted that there may be risks associated with an upgrade to 3G on Nextel's part.

"In the next generation of technology, we believe that Nextel might deploy 1XRTT [3Gcdma2000 1x], though the company has not made an official announcement," GS said. "The risks, we believe, are the unknowns: timing, network compatibility, and cost."

GS said it is not certain of timing, but suspects a launch of 1XRTT sometime in 2002 or 2003, six months to a year after Sprint PCS and AT&T Wireless deploy their own "2.5G" solutions. Also, the research firm said that if Nextel does settle on a 1XRTT overlay, it will raise questions about frequency clearing and difficulties associated with operating a network that can handle both iDEN and CDMA protocols.



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