February 18, 2004 4:00 AM PST

Conflicting technologies may stall cell mergers

Cingular's planned $41 billion acquisition of AT&T Wireless puts new merger pressure on U.S. cell phone carriers, but incompatible back-end technologies could make it difficult for would-be partners to find a match.

Assuming Tuesday's deal goes through, five national cell phone carriers will remain in the United States supporting two major wireless standards: GSM and CDMA. That technology split could hamper further industry consolidation in the short term, according to analysts, who noted that network interoperability played a key role in a reported bidding war that erupted over AT&T Wireless.

"It's so much easier to combine networks that use the same cell phone standard...It played a role in Cingular Wireless' decision" to pick up AT&T rather than another competitor, said Joe Laszlo, Jupiter Research analyst.


What's new:
If Cingular's deal goes through, five national cell phone carriers will remain in the United States supporting two major wireless standards: GSM and CDMA.

Bottom line:
The incompatible back-end technologies could make it difficult for would-be partners to find a match.

More stories on this topic

GSM (Global System for Mobile Communications) is the world's most popular cellular standard, running about 70 percent of the world's billion plus cell phones. Qualcomm's CDMA (code division multiple access) trails with about 20 percent of the market, mainly in the United States, Canada and South America. The remainder run a mix of older standards such as TDMA or GSM variants such as iDEN, which is used by Nextel Communications.

In the United States, Cingular, AT&T Wireless and T-Mobile run GSM networks, while Verizon Wireless and Sprint PCS use CDMA.

Interoperability between standards is expected to arrive eventually with so-called third-generation (3G) wireless data networks that carry data as well as voice. Widespread adoption of 3G could takes years, however, complicating short-term merger plans and effectively ruling out combinations that would marry GSM and CDMA networks, analysts said.

By buying like-minded network operators, cell phone service providers avoid numerous pitfalls, such as forcing subscribers to carry multiple cell phones or to face limited range. It's easier to maintain a network with just one standard than one with three or, in the case of Cingular Wireless, four different standards. It's also less costly for carriers to upgrade compatible networks for wireless broadband and other pending 3G services.

The AT&T Wireless/Cingular deal raises the possibility of future mergers, which will partly hinge on cell phone standards. Likely candidates for a buying spree in the United States are U.K. telephone giant Vodafone, a GSM provider that reportedly bid on AT&T Wireless.

Vodafone took part in the bidding for AT&T Wireless, partly out of concerns over its own standards problem. It owns a large percentage of CDMA-backer Verizon Wireless. Vodafone reportedly pursued AT&T Wireless after an unsuccessful attempt two years ago to pressure Verizon Wireless to change cell phone standards.

Room to roam
Having lost out in the bidding for AT&T Wireless, analysts said Vodafone's only real alternative would be T-Mobile USA, a GSM carrier that's owned by Vodafone's European rival Deutsche Telecom. A Vodafone spokesman had no comment.

Rumors have swirled that Verizon Wireless will counter the Cingular/AT&T deal by buying Sprint PCS, which, like Verizon, uses CDMA.

But Laszlo said with the U.S. cell phone population set to grow by 50 million in the next three years, there's ample opportunity for Verizon to continue capitalizing on its status as the largest U.S. cell phone service provider, presumably with the farthest reaching network.

"Verizon has been growing amazingly well," he said. "Buying another carrier for their spectrum and subscriber base is much more expensive to do than grow organically."

Cingular co-owner SBC Communications will be responsible for contributing $25 billion toward the AT&T Wireless purchase, while partner BellSouth is on the hook for $16 billion. If the deal closes at the end of the year as expected, SBC will continue to own 60 percent of Cingular, while BellSouth's share remains at 40 percent, executives said.

AT&T Wireless and Cingular have 46 million subscribers between them. Should the deal close, the combined entity would unseat Verizon Wireless, which has 36 million subscribers, as the No. 1 U.S. cell phone service provider slot.

"Hey Verizon, can you hear us now?" AT&T Wireless Chief Executive Officer John Zeglis said during a conference call following the deal's announcement. Zeglis added that he's likely to resign after the deal closes.

The hyper-competitive nature of the cell phone industry, where major markets have nine or more competing carriers, will help the deal pass regulatory muster, Jupiter's Laszlo said.

Although the deal reduces the number of cell phone rivals in the United States, analysts said it will likely do little to ease competition in a market where up to nine different carriers are battling for customers in major cities, Sigman said.

"There will continue to be price pressures" and continued cuts to the price of making a cell phone call, Sigman said. "We've (only) gone from six national carriers and two or three regional niche players in each market down to five national carriers."


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