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)

“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

“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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