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Cell-Phone Love Affair Still Alive

Carriers continue to confound the experts by adding subscribers.

Like buzzing cicadas, wireless investors are getting louder as the summer progresses.

The growing chorus of enthusiasm turned up a few notches last week, thanks to a strong sales update from sector darling



. The king of the wireless business communications niche said Thursday that 2003 revenue could top the $9.9 billion currently projected as its unique walkie-talkie features continue to attract and keep customers.

But Nextel isn't the only wireless shop entertaining newfound consumer demand despite a tepid economy and rabid competition.

It seems a crop of snazzy new phones, heavy promotions and lavish retention offers from telcos are bringing people into stores and keeping would-be defectors from bolting. Encouraged by the level of sales activity usually reserved for the holiday season, some analysts and investors expect second-quarter earnings reports to show gangbuster sales results.

Rebirth of the Cool

"Have you been in a phone store lately? They are like discos. People were three-deep at the counters," says Friedman Billings Ramsey analyst Susan Kalla, who initiated coverage on

AT&T Wireless



Sprint PCS


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and Nextel with buys earlier this month. Friedman Billings Ramsey has no underwriting ties to these companies.


notorious pessimism during the heady market heights at the century's turn make her an odd beacon of optimism now. But her timing on wireless seems to have caught the recently downtrodden industry on the upswing.

Less than a year ago, wireless wasn't so sunny. With over half the population already carrying a cell-phone, the era of rapid growth was suddenly losing steam. In fact, in September, you may recall, Sprint PCS achieved an industry first by revealing that it actually lost more users than it gained in the quarter. Thanks to PCS' aggressive prepaid sales efforts, the telco wound up with a long list of deadbeat customers which had to be purged.

Sprint has since

changed management and cut costs, and it boasts the best lineup of fancy phones in the industry.

Better Habits

Though an extreme example, Sprint PCS is somewhat emblematic of the sector.

As analysts and investors point out, trimmed capital spending plans, manageable debt levels, profits or at least break-even financials, more creditworthy customers and growing data sales have helped improve the outlook for some of the wireless carriers.

A few investors, watching in amazement as Nextel shares rose 50% this year in defiance of its critics and credit watchers, have vowed not to miss the boat entirely. One New York hedge fund manager has decided to go long AT&T Wireless on the basis of the company's financial strength -- some $4.7 billion in cash -- and the low-risk success of its EZ-Pass-like GoPhone prepaid subscriber push.

Subscriber growth is maintained both by adding new subscribers and keeping old ones. A revolving door of customers coming and going has long plagued wireless. But lately, companies have decided it is cheaper to keep customers than to seek new ones.

Net ads are improving because the telcos are managing their churn, says CIBC World Markets analyst Cannon Carr. "The carriers are doing a better job to keep customers from defecting."

As the hedge fund manager points out, "It cost the carrier $300 to acquire you. So don't be surprised to find that they will pay you $100 or offer you a new color-screen phone for free to keep you."

Of course, come Nov. 24, when customers can keep their phone numbers as they jump around to other carriers, that purchase of that loyalty will be put to a stronger test.