Cingular Slams Saturation Fears

Subscriber growth beat targets. Maybe the U.S. wireless market is growing after all.
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Jumps in subscriber growth at two big shops could point to an eagerly anticipated wireless warming trend.

If recent numbers from

Nextel

(NXTL)

and

Cingular

are any indication, customer additions should be a major bright spot this quarter across the industry. With

AT&T Wireless

(AWE)

due to post second-quarter results today and

Verizon

(VZ) - Get Report

and

Sprint PCS

(PCS)

scheduled to report next week, a group whose growth prospects looked tapped out only last year could be in for a late-summer surge.

The strong numbers come after a long rally in the big wireless carriers that has pushed many of these stocks near their 52-week highs. On Wednesday, AT&T Wireless and Nextel were both down slightly, with AT&T Wireless off 23 cents at $7.66 and Nextel down 43 cents at $19. Sprint PCS was unchanged at $5.95.

Polyunsaturated?

Cingular, the 60/40 wireless joint venture between

SBC

(SBC)

and

BellSouth

(BLS)

, said Wednesday that it added half a million new customers in the second quarter, doubling expectations. And just last week,

Nextel added 591,000 new subscribers, helping to dispel the notion that the U.S. market was nearing saturation. Nearly half of people in this nation already have a mobile phone.

The gangbuster sales have been fueled by heavy promotions, a new crop of camera and color screen phones that are largely subsidized by the telcos, and extra generous retention plans -- essentially bribes to sign on for new contracts.

All of this

sales muscle is aimed at helping to lock in as many customers as possible by November, when number portability rules kick in. By federal mandate, users then will be able to keep their phone numbers as they jump to different services.

The era of big wireless subscriber growth came to an abrupt halt last year after outfits like Sprint PCS recorded their first-ever experiences of losing more customers than they gained. But much of that shrinkage had to do with purging deadbeats from the customer ranks. Since then, the sign-up machinery has been purring along smoothly.

Churn

One concern amid the sales excitement is that the telcos will watch their customers drift away before the carriers can recoup the $300 or so in acquisition costs they sink into adding each user. This so-called churn is expected to soar as customers earn their freedom to flee to better services and cheaper price plans.

The wireless carriers have a formidable weapon at their disposal, however: the one- and two-year service contracts they've convinced their customers to sign.

"It's kind of logical that churn rates go up with number portability, but for the next six months I don't think it will be a big problem," says Friedman Billings Ramsey analyst Susan Kalla, who has a buy rating on AT&T Wireless.

The nation's No. 3 cell-phone service, AT&T Wireless, is expected to release earnings after the close Wednesday. You can be sure Wall Street will be watching to see if the company can continue the growth streak and exceed the 360,000 net adds analysts are expecting for the quarter.