Tech Outlook: Consolidation Alters a Deal-Hungry Wireless Industry

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Is the world getting smaller, or are telecommunications companies just getting really big?

That's the question investors in wireless telecom are asking themselves. Consolidation is here and it's not going away, though Wall Streeters say at some point M&A action will move to the back burner as big internationally minded firms prepare for the next upgrade cycle. After all, more than two years of frenzied acquisition activity has left the U.S.'s six reigning carriers looking much like Russian nesting dolls: Peek inside and you'll find wireless roots.

We have two extremes left now, the babies and the behemoths. Deutsche Telekom's (DT Quote) $50 billion bid to buy a U.S. presence through VoiceStream Wireless (VSTR Quote) has Wall Streeters wondering who might court Sprint (FON Quote) or Nextel (NXTL Quote). An interesting opportunity lies with BellSouth (BLS Quote) and SBC Communications (SBC Quote) through their new wireless venture, which could also beckon a foreign partner.

Lest we forget, though, there are still a few independent U.S. holdouts (think Alltel (AT Quote), Centennial (CYCL Quote), Dobson (DCEL Quote), Powertel (PTEL Quote), Price (PR Quote), Rural Cellular (RCCC Quote) and Western Wireless (WWCA Quote)). You can bet the farm there will be some action there as well.

With consolidation continuing to create a smaller and more powerful group, global carriers will begin the arduous transition to providing next-generation services, such as wireless Internet and video transmission. Highflying stock valuations -- instrumental in mergers and acquisitions -- won't be as helpful to carriers facing the enormous capital requirements for next-generation network buildouts, though they're always nice.

Ericsson Place

But the challenges faced by mobile carriers haven't caused quite the same stir as those surrounding mobile phone manufacturers, which have a lot to prove starting in the fourth quarter. Nokia (NOK Quote), Ericsson (ERICY Quote) and Motorola (MOT Quote) shares are all well off their 52-week highs on concerns that product demand is weaker than expected.

Shadow of Doubt Ericsson, Nokia reverse long warming trend.

Source: BigCharts

Investors have been strongly bullish on the wireless-phone industry, believing that use is expanding so quickly that all the makers of handsets and chips will face a surfeit of demand for years to come. The only worry has been capacity bottlenecks, not the seemingly distant prospect that sales would slow on their own.

But reality isn't playing along. After Nokia's third-quarter earnings warning late last month drove wireless and chip stocks down sharply, some observers noted the recent lukewarm results throughout the sector and wondered how strong the wireless thesis really is. At the very least, Nokia, a longtime favorite, will face a rough patch as investors mull its failure to satisfy investors' high-pitched expectations.

The companies each say they're simply retooling and refueling -- with new products, new business strategies or both -- and that any fears of discovering the three emperors have no clothes will be put to rest in short order. But skepticism, long absent in this sector, is casting a long shadow.