A. Michael Noll
February 19, 2004
The offer by Cingular Wireless to acquire AT&T Wireless for $41 billion signals the end to the telecom doldrums. But other lessons for business and consumers are to be learned from this apparent return to tulip time in telecommunications.
(1) The price seems reasonable. The price being paid, though high, is much less than some past acquisitions. Only four years ago, Deutsche Telekom paid a costly $50 billion to acquire VoiceStream Wireless, now called T- Mobile, which worked out to be about $20,000 per wireless—clearly far too costly a deal. Cingular will pay about $2,000 per wireless subscriber, acquiring nearly 15 percent of the US wireless market for $41 billion, which seems reasonable.
(2) Wireless appears essential to the future of telecommunication. Two Baby Bells own Cingular jointly: SBC Communications and BellSouth. The fact that these two conservative Baby Bells were able to outbid their rival, the deep-pocketed British firm Vodafone, shows how essential the Baby Bells believe wireless is for their future. More and more consumers seems to be abandoning wire line telephone service in favor of having only a wireless cell phone. By increasing their share of the wireless market, the two Baby Bells seem to assure their future either way: wire line or wireless.
(3) The Verizon Wireless partnership appears headed for a divorce, or at least counseling. The third Baby Bell, Verizon Communications, owns 55 percent of Verizon Wireless, with Vodafone owning the remaining 45 percent. Verizon has now learned that its partner, Vodafone, who was outbid and out-maneuvered by Cingular, was eager to create its own presence in the US wireless arena, even in competition with Verizon Wireless. This trans-Atlantic partnership will clearly be strained.
(4) Verizon Wireless will need to regain first place. Verizon Wireless, with less than 20 percent market share after the acquisition of AT&T Wireless by Cingular, will have to respond to being pushed from first place, perhaps making an offer for Sprint. But now issues of technological compatibility arise. Verizon and Sprint use compatible CDMA technology. AT&T Wireless, Cingular, and T-Mobile use GSM technology. This also leaves T-Mobile as a potential future target for Cingular or for Vodafone.
(5) Some of the long-anticipated consolidation in the US wireless market has finally started. Indeed, there seem to be far too many players in the US wireless business, and mergers and acquisitions are inevitable. The acquisition of AT&T Wireless by Cingular will reduce the number of players from six to five, and after the acquisition, the combined Cingular will have about 1/3 of the US wireless market.
(6) The Baby Bells have increased their control of wireless in the US. With the acquisition, well over half of the US wireless market will be controlled by the three Baby Bells: BellSouth, SBC, and Verizon. Whether this will cause more competition in the cellular wireless market remains to be seen. These three Baby Bells all come from the common heritage of the old Bell System and still retain much of the thinking of their past status as a monopoly.
(7) AT&T will finally regain total control of its brand and logo. The “AT&T” logo will most likely disappear with the acquisition by Cingular, particularly since the two Baby Bells who own Cingular will not want to appear affiliated in any way with their former owner. Actually, AT&T had nothing to do with AT&T Wireless, and the “AT&T” logo was a carryover from the days when this wireless business was a part of AT&T, but was divested from AT&T in 2001. It will be good for AT&T to have an end to any confusion about an affiliation with AT&T Wireless.
Yes, indeed, tulip time in telecommunication is back, with room for more future mergers and acquisitions in wireless and other segments of the telecommunication sector. And action like this is good for the stock market, although we are left with the worry that another bubble will be created.