FCC Decision Will Kick Off a Mating Dance in Wireless

A ruling that allows multiple licenses will have carriers looking for matches in 2002.
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Wireless carriers aren't making a run on the wedding chapel -- yet.

The Federal Communications Commission voted on Nov. 8 to eliminate the restrictions that keep carriers from owning more than one cellular license in urban mobile-phone markets. Additionally, the FCC raised the amount of spectrum available to carriers in urban markets immediately, and vowed to eliminate spectrum limits in urban markets altogether in 2003.

The government's move signals satisfaction that wireless carriers have sufficient competition in big cities to keep them from hoarding spectrum, becoming monopolists and gouging consumers. That said, carriers most likely will spend the next year eyeing their prospects to get as close as they can to that vision, sizing up rivals for their suitability for marriage. The Justice Department and Wall Street are cracking their knuckles in preparation for chaperoning the consolidation ahead.

There are a half-dozen large wireless carriers in the U.S. scrambling and spending to provide nationwide service, including

AT&T Wireless

(AWE)

, Cingular,

Nextel

(NXTL)

,

Sprint PCS

(PCS)

,

Verizon Wireless

and

VoiceStream

.

Given the considerable price tag associated with constructing new networks, economies of scale and the acquisition of existing networks are appealing options for growth. Carriers couldn't always do that with the limit on the spectrum and licenses they could own, but in 2003 that will change. Rural markets are still the exception, and the FCC will keep defending those vulnerable areas. The government will allow a company to own two licenses in the same rural market only on a case-by-case basis.

Investors can expect pairings along technology lines in the next year leading up to the change, with AT&T Wireless, Cingular and VoiceStream on the TDMA/GSM technology side and Sprint PCS and Verizon Wireless in search of CDMA buys.

Nextel confuses things with its recent decision to forgo a rumored CDMA upgrade and instead stick with oddball iDEN technology for cost reasons. When and if it moves to a mainstream technology, the financially troubled carrier will become an obvious acquisition target because of its need for capital to keep building out its networks.

AT&T Wireless becomes the most attractive of the bunch in the near term because all the other parties have yet to become independent companies. AT&T Wireless took the gamble in a weak market to separate itself from

AT&T

and get its own currency for acquisitions, a move Verizon recommitted to on Friday when it emphasized its continued plans for an initial public stock offering in 2002.

Additionally, smaller carriers become potential targets once there is no limit to the amount of spectrum a company can own -- which led to the affiliate model propagated by giants such as AT&T Wireless and Sprint PCS. But the rural-license constraints will preclude an acquisition frenzy.

Nonetheless, Morgan Stanley analyst Luiz Carvalho points to

Western Wireless

(WWCA)

,

Dobson Communications

(DCEL)

,

U.S. Cellular

(USM) - Get Report

,

Rural Cellular

(RCCC)

,

Alltel

(AT) - Get Report

and

Leap Wireless

(LWIN)

as independent carriers who will benefit from the ruling because larger carriers will be more desirous of their networks in soon-to-be unfettered markets.

For comparison, Leap Wireless expects to finish out 2001 with 1.1 million customers, and its two biggest markets are Phoenix and Denver. Verizon Wireless has 28.7 million wireless customers and has networks in 97 of the top 100 U.S. markets.

Paul Wuh of Goldman Sachs believes the FCC's move could help the U.S. avoid a fate similar to the highly competitive market in Hong Kong. With six carriers, Hong Kong's penetration rate is at 80%, Wuh reports, with high monthly churn from 5% to 6% and an

EBITDA profit margin that ranges from negative 5% to plus 5%.

While analysts don't expect immediate mass consolidation, companies will be eyeing the competition in 2002, and the pairings will begin before 2003 comes.