AT&T Wireless: Spin-off Yields Concessions

On Monday, AT&T Corp. will spin off AT&T Wireless, marking the official
beginning of a year-long process that will split the venerable telco into
four separate businesses: Wireless, Broadband and Cable, Business Services
and Long Distance and Internet Dial-up.

AT&T Wireless is already public; AT&T Corp. released 15 percent of its
holdings in the company last year as a tracking stock under the AWE symbol. On Monday, AT&T Corp. will convert those shares into an asset-based stock
and release the bulk of its remaining AWE shares. However, it will hold on
to $3 billion in AWE shares which it plans to divest in the fall.

The move has been a year in coming, and though it may mean some short-term
gains for AT&T, which took a sharp hit from last year’s economic downturn,
Zona Research has suggested the company may be giving up a large long-term
advantage by splitting up.

“This is more of a short-term play than a long-term play,” said Clay Rider,
an analyst with Zona. “It makes sense right now. It will help the financial
aspect of AT&T Corporate. But we think the price of this may be that in the
longer run the company is going to forego some complementary opportunities
it might have two or three years down the road.”

On the other hand, the move may well give AT&T Wireless agility it would not
otherwise have had.

“All things considered, this separation helps AT&T Wireless better
concentrate on offerings that capitalize on this new medium,” Zona said in a
report, “AT&T Wireless: Breaking up is Hard to do Again,” issued this month.
“It’s difficult to imagine but this large multi-billion dollar sibling of
AT&T Corp. with 29 thousand employees will be more nimble and quicker to
react to these monumental challenges at hand than if it were tethered to the
parent company.”

And those challenges are truly shaping up to be monumental. Despite the fact
that wireless has been around in one form or another since the 1980s, the
technological changes are coming fast and furious these days as wireless
carriers figure out which path they will take to 3G services. Carriers that
choose the proper path dramatically improve their chances of success, while
carriers that choose to utilize a technology that is not adopted by the
majority of other carriers will face the prospects of trying to grow their
businesses on infrastructure and protocols that can’t necessarily
communicate with the infrastructure of other carriers around the country.

For better or worse, AT&T Wireless has already made its choice: WCDMA (also
known as UMTS), an outgrowth of the GSM technology popular internationally
but not well-developed in the U.S. The alternative 3G technology is
cdma2000, an outgrowth of Qualcomm’s CDMA technology, which dominates U.S.

AT&T Wireless may be out on a limb for that choice — it is the only carrier
to date that has officially stated that it will migrate to WCDMA — but
chances are it won’t be alone.

Zona noted that Verizon Wireless (which has a 27 percent share of the
wireless market) has a significant stakeholder in European carrier Vodafone,
whose migration strategy incorporates WCDMA. VoiceStream, with 6 percent
market share, is backed by Deutsche Telekom, which is also migrating towards

“Verizon and VoiceStream stakeholders Vodafone and Deutsche Telekom,
respectively, wield undeniable influence and given their current migration
strategy, we expect that both Verizon and VoiceStream will also embrace
WCDMA, not merely from the standpoint of stakeholder insistence but also
because it makes good sense from a perspective of worldwide compatibility,”
Zona said.

AT&T Wireless, according to Zona, has about 18 percent of the wireless
market in the U.S. If Verizon and VoiceStream both swing towards WCDMA, that
means the three will have about 51 percent of the U.S. market.

“This is a sizable and growing chunk of the market that would be
transitioned into a WCDMA environment,” Zona said. “Given this scenario,
should either Cingular (21 percent market share) or Nextel (9 percent) also
choose WCDMA, then the 3G battle in the U.S. is largely won and Qualcomm’s
cdma2000 market status is reduced to that of an RC Cola. From our vantage
point, AT&T Wireless may not skew the standards war but it does seem it has
chosen a standard that could go the way of Windows OS should these scenarios
take place.”

But making the right choice is just the first step. Implementing it will be
even more difficult, and that rings as true for AT&T Wireless as it does for
any other wireless carrier.

“In its ultimate goal to reach the nirvana of 3G broadband, AT&T Wireless is
hurriedly upgrading its networks and building a GSM/GPRS overlay over its
current TDMA network,” Zona said. “This would allow the company to provide
data services on GPRS technology which it eventually needs to easily
transition and achieve its 3G goal of developing WCDMA. The migration from
current TDMA to WCDMA, which has to be rolled out in a specific order, is
not trivial nor is it economical. In fact, the whole process is much akin to
the privilege of paying a toll to cross a minefield. On the other hand, the
competitive disadvantage of not upgrading, thereby not providing enhanced
wireless Web-based services, is significant.”

And because of the costs and difficulties involved, AT&T (or any other
wireless carrier for that matter) will not upgrade everywhere at once.
Instead the company will initially roll out upgraded services in key areas,
then spread those upgrades out into secondary and tertiary markets. That
means carriers will have to support older infrastructure while rolling out
the new.

“Expect that by late 2002, AT&T Wireless, along with its competitors, would
need to provide and sustain nationwide services on a network consisting of
as many as five different technologies,” Zona said.

Doing that will require tremendous capital outlays, Rider said, and it has
to remain transparent to the customer. That, in turn, means that AT&T
Wireless phones may for a while have to support as many as five different
standards — from analog to TDMA, GSM/GPRS, EDGE and WCDMA.

“Isn’t that grossly inefficient?” Rider asked. “Yes, but if you’ve got to do
it, it’s better than not offering service.”

Due to the capital required to make that work, Rider said it is definitely
one place where AT&T Wireless will feel the pinch of not having the
resources of AT&T Corp. behind it. But, at the same time, AT&T Wireless has
two aces in the hole: NTT DoCoMo and Nokia. AT&T Wireless has secured both
companies as partners, and both partners are rolling out their 3G services
ahead of AT&T Wireless.

“Like Verizon and its relationship with Vodafone, AT&T Wireless has the
great opportunity to watch and learn from the market leaders before they
venture a similar path,” Zona said. “Even without the security of AT&T
Corp., the experience gained from past migrations, coaching from
stakeholders and commendable personnel capacity should help them get through
this with manageable levels of customer satisfaction and churn.”

Of course, technology is one thing, convincing users that they need the
technology while keeping it profitable is another. That, Zona suggests, will
require an evolution of wireless into a new medium Zona has dubbed the
“Mobile Medium.”

“Carriers can ill afford to have free services or Internet-style free
surfing,” Zona said. “Instead, the Mobile Medium will evolve to contain
unique content relevant to “being mobile” and will not simply port the World
Wide Web to a handheld device. Rather than the unfettered access of the
Internet medium, the un-tethered access of the Mobile Medium and the
wireless Web will come at a price to end users — a price that they may just
be willing to pay.”

Content is an area that is new to AT&T Wireless. However, the company has
recently partnered with AOL Time Warner, and has standing content agreements
with NTT DoCoMo, both of which are experienced in delivering content for
which users are willing to pay.

Regardless, AT&T Wireless will negotiate the path over the next several
years, but once those obstacles are cleared and the other three AT&T
businesses have matured somewhat, Zona predicted the architects of the
break-up may look back and scratch their heads over their decision.

“By breaking up AT&T Corp., it stands to lose a critical advantage in being
able to leverage the performance, revenue and knowledge base as a large,
well diversified conglomerate,” Zona said.

“While it would be easier for us to see the long-term value of the split up
if all the businesses were completely different, the problem is that each of
the soon to be separate entities, in many ways, offer products and services
that are converging and overlapping. In some cases, cannibalizing each
other, as is the case between AT&T Broadband and their Internet dial-up
service, WorldNet. This cannibalization would likely continue as
communication technologies evolve and converge across TV broadcast, the
Internet and burgeoning Mobile Mediums…The split up, in all likelihood,
offers the struggling AT&T Corp. a short, immediate fix to its current woes
but sacrifices long-term dominance in a significantly more important
communication industry. AT&T Wireless, on the other hand, will likely be one
of the contenders in an emergent wireless medium and this will be done with
or without mommy’s help.”

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