Wireless LNP is Here

Wireless local number portability rules took effect yesterday. That means Americans now have the convenience of keeping their phone number when they switch to a new wireless provider, removing one of the biggest obstacles limiting churn. That luxury comes at a hefty price to the wireless industry, however, say analysts.

WLNP, which went into effect for all carriers serving the top 100 Metropolitan Statistical Areas (MSAs), will eat into earnings as the phone companies fork over an estimated $2 billion to $3 billion for such expenses as new handset subsidies, sales commissions and the cost of new activations, says Roger Entner, program manager with The Yankee Group. “It might bring the industry from a $2 billion profit to a breakeven year,” Entner says. He adds that WLNP will cost the industry about $1 billion to implement, but says most carriers are recovering the costs through regulatory fees on customers’ bills. During an interview in October, Entner estimated the industry had recovered about $600 million so far.

Jeff Rickard, a senior analyst with Current Analysis, says acquiring new customers and keeping them is increasingly important in an industry previously characterized by rampant growth. “That becomes very expensive industry-wide because you are all competing for the same customers in a market that really doesn’t have a lot of growth left to it,” Rickard says. “At some point we are going to hit a peak where everyone has a cell phone.”

Analysts with Goldman Sachs predict WLNP will result in an overall decline in earnings and free cash flow. “Many different scenarios can develop,” say the analysts in a July research report, “but we think the most likely is one that increases the number of churning customers among the six national operators by about 15 million from 2003 to 2004 and can lead to a $1.5 billion decline in EBITDA.”

WLNP may contribute to a wider rift between the weak and the strong, creating a greater incentive for industry consolidation, according to the Goldman Sachs report. “If this process is sustained over time, logic suggests that the weaker players will either fail or be more motivated than they are today to seek deals.”

Jonathan Atkin, equity analyst with RBC Capital Markets, says number portability could spur consolidation under the most extreme circumstances “if the weak become really weak and they start to no longer generate free cash flow and run into solvency issues.”

But the analyst says that is not likely.

Most of the wireless carriers are generating free cash flow and pricing discipline has held steady since the beginning of the year, he says. “I think the carriers are in a more comfortable financial situation,” Atkin adds.

WLNP is expected to trigger a ferocious marketing war aimed at stemming attrition and adding customers, but analysts differ on who will prevail as the winners and losers, although all believe Verizon Wireless is well positioned for the fight.

“I think the two winners are going to be Verizon and T-Mobile,” says Entner, whose research firm predicts the winners will be companies with a higher percent of customers on a contract, a “stronger brand identity,” and those carriers that are “better differentiated on value or quality.”

Tom Hart, an analyst with Gartner Inc., agrees that Verizon Wireless and T-Mobile will benefit from number portability, but he notes AT&T Wireless and Nextel Communications Inc. also will take advantage of the federal requirement. The analyst says he expects Cingular Wireless and Sprint PCS to suffer because they “have had the hardest time gaining subscribers over the past couple of quarters. WNP not does help that situation. [It] makes it more acute.”

Yet, Goldman Sachs analysts say Cingular is among three carriers best positioned to exploit the number portability requirement. They also name Verizon Wireless and AT&T Wireless. “These are companies with staying power, a broad reach in the market, scale and probably an ability to fix whatever vulnerabilities they possess today.”

In October, The Management Network Group Inc. released a study finding 42 percent of subscribers are aware they can take their phone numbers with them when WLNP goes into effect. Consequently, the wireless industry should be prepared to handle 30 million porting requests during the first year, according to the management consulting firm. TMNG says that translates into 60 million transactions because two wireless carriers must process each request. Peter Firstbrook, a senior research analyst with META Group, says he expects churn to double next year, but subsequently settle down.

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