Wireless Carriers Find Their Market Isn't Maturing Gracefully

U.S. wireless phone companies are noticing a wrinkle here, a love handle there.

This week finicky investors unflatteringly compared the AT&T Wirelesses (AWE) and Sprint PCSes (PCS) of the world to a Nokia (NOK) that was showing dark circles under the eyes for the first time. Handsets and wireless providers don't share an identical fate. But just as equipment makers are facing a new era of slower growth, wireless carriers in the U.S. are applying face lotions and signing up for yoga class as the effects of aging set in. New subscribers are increasingly hard to find, and carriers are getting less money each month from those they have, even as they still need to raise money in a brutal market to upgrade networks.

Both sectors are hitting a transitional period and an economic slowdown at once. For the wireless carriers, gone are the days of corporate-expense-report fattened executives racking up roaming charges. This year, average revenue per user (ARPU) is expected to go down, as younger and more price-conscious consumers swell the ranks. Buyers of cheaper prepaid plans keep subscriber-addition numbers up, but eat into that ARPU number and increase churn in subscriber ranks. AT&T Wireless invoked investor wrath by using lower-revenue prepaid numbers to enhance its subscriber figures.

As with Motorola (MOT), Ericsson (ERICY) and Nokia, though, the economy exacerbates carrier problems. The wireless business in the U.S. is a high-growth, high-cost proposition. Companies are constantly raising money to build out better networks and add more coverage. Sprint PCS and its parent have been dying to do a $3 billion PCS offering for the past six months. Nextel's (NXTL) stock price has fallen 60% since January as investors fear for its ability to raise the money to keep moving toward its growth targets. Similarly, AT&T Wireless is prepared to go public July 9 in a less friendly environment than it might've wanted, dropping 21% since the April 18 fed funds rate cut that saw wireless carriers' last stock chart peak. Sprint PCS is down 20% over the same time frame.

In turn, Nextel management has pared back expansion in hopes of convincing the Street that it is investor-worthy. Many carriers have trimmed their capital expenditure plans back to balance growth with cash concerns, something that further exacerbates equipment providers' woes but doesn't directly affect carrier revenues in the same way. Nextel may cause cash concerns, but it gets an average of $70 a month out of its users, a very springy figure compared with Sprint PCS's $60 reported in the first quarter.

As for the direct correlation between handset sales and carrier health, J.P. Morgan's Tom Lee warned investors to remember that the U.S. market is dwarfed by its European and Asian brethren and is "the tail that lags the global industry and does not wag the dog." He estimates that the U.S. makes up 14% to 15% of global handset sales.

Robinson-Humphrey further illustrated the disconnect between Nokia and its U.S. customers by explaining that while its analysis indicates 50% of 2001 handset sales will be in the replacement market, that market does not necessarily benefit the carrier. Sprint PCS hadn't had a chance to fully recover from the May 29 Radio Shack (RSH) second-quarter warning that linked slow Radio Shack handset sales to PCS's quarterly performance.

It's the vision of the U.S. market growing as mature as Nokia's other regions -- not Nokia's second-quarter sales slowdown -- that scares Sprint PCS, AT&T Wireless and the like. If subscriber growth numbers start to sag along with revenue per user this quarter, expect a Nokia-like response in the carrier stocks. It'll be time for some nipping and tucking of expectations.

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