Best cellular phone plan

The cellular business is blooming, but so are the growing pains

With the Rick of an ankle, TV's bumbling secret agent Maxwell Smart could pick up his hoe and dial himself out of a jam. Today, cellular is a $3 billion business, and it is the nation's 25 major service providers that are falling over themselves, signing up subscribers and swallowing up rivals.

Like cable TV and VCR's, mobile phones have moved into the mainstream. Costs for both equipment and service are dropping dramatically. Car sets that averaged $2,000 five years ago can be had for as little as $200, while off-peak rates have halved monthly bills to $120. The discounts have spurred sales; more than 2 million Americans are now hooked into cellular systems, a 68 percent increase over last year. Success has spawned a spate of takeovers, including a recent $ 6.2 billion hostile bid by McCaw Cellular Communications, the nation's largest mobile-phone concern, for New York-based Lin Broadcasting Corporation. Netting the fifth-largest telecommunications firm would make McCaw the only cellular network with nationwide service.

Not just for the rich. Little more than expensive executive toys only five years ago, mobile phones have become a vital tool for working stiffs from plumbers to drug dealers. Five years ago, the typical user was male, over 55 years of age and earned upward of $60,000 a year, reports Jim Gerace, a spokesman for Nynex Mobile Communications in New York City. Today, one quarter of subscribers are women, ages range from 35 to 55 and income is often as low as $35,000. In Upstate New York, farmer James Webb uses his set to call wholesalers from the cornfield and determine how many ears to cut for market. Portable phones let Maryland developer Harvey Spa run his company while cruising the Potomac River and link far-flung sales forces with their headquarters. Even some Manhattan taco vendors have gone cellular. Analysts predict that by 1995 the ranks of mobilephone users could top 20 million, or one tenth the number of those using the regular phone system. Infrastructure costs are high, however, and many cellular systems are running in the red.

Much of the boom may come from nonbusiness users. According to Herschel Shosteck Associates, a consulting firm in Silver Spring, Md., as of last December, 26 percent of new-phone purchases were by private buyers. And a recent Nynex study reveals that even among corporate subscribers, 60 percent spend half their phone time on personal calls. Many executives buy mobile phones as a safety feature for the family car, and both Ford and Chevrolet plan to offer cellular options in next year's models.

Cellular owes much of its explosive growth to a combination of technology and pricing. Each service area consists of a series of radio-tower sites, or cells, that relay mobile calls to a central computer switch and into the regular phone networks. Carriers have spent over $3.2 billion so far to expand their systems, which now cover all metropolitan areas and 75 percent of the U.S. population. Lotteries for rural-market franchises promise to create a seamless nationwide mobilephone network.

As systems spring up, so does new equipment. Hand -held sets that once cost $3,000 now sell for $600. These portables, the smallest and priciest of which is Motorola's 10.7-ounce Micro TAC, can be adapted easily for automobile use. And while they represent just 10 percent of mobile-phone sales, they are expected to overtake the market as prices continue to drop. Additional improvements promise to further broaden cellular's appeal. With pocket-size phones, train commuters will be able to tap into computer databanks, while car sets may one day include fax machines, real-time traffic information and alarm systems that pinpoint the auto's location and alert police in case of an accident. "Cellular technology is limited only by the imagination," says Piyush Sodha, a director of cellular systems at Northern Telecom.

Certainly there has been no lack of spark on Wall Street, where cellular's profit potential has boosted share prices by as much as 58 percent over the past 24 months. Last week, McCaw saw stock values rise $1.50 to $40.25 after upping its $110-a-share offer for Lin to $127.50 in cash and securities. If successful, the tug of war would nearly double the Kirkland, Wash., firm's subscriber base (see chart) and extend its coverage to such key metropolitan areas as San Francisco, Miami and Philadelphia--a prospect valuable enough to prompt McCaw to pay around $300 for each potential customer. That is twice what British Telecommunications spent per subscriber when it bought a 22 percent chunk of McCaw last January, in a bid that was considered a 40 percent premium over market value at the time.

High milers. Cellular investments are not for the fainthearted. Soaring share prices reflect projections of cash flows as much as five years into the future, rather than present revenues. Shares of regional Bell companies are considered a safe bet, since their cellular operations are still undervalued, say analysts, but prices of totally cellular concerns may already be too high. Many cellular-service providers remain in the red, having invested billions in infrastructure, McCaw, for instance, is $2 billion in debt, though that has not interfered with the company's buying binge. "The companies doing the best job are those losing the most money," observes consultant Shosteck, who fears that many cellular firms may buckle under the pressure for short-term earnings and shortchange investments. Cellular-service-industry revenues are expected to climb to $4.4 billion by 1990. But costs are bound to rise, too, as more companies fight to buy a shrinking number of properties. In rural areas, for example, providers may end up paying more to acquire licenses than to build systems.

Some of the cost pressure may ease with the introduction of new technology. Last January, the industry agreed to a shift from analog radio waves to digital, a move that will increase calling capacity by as much as 1,000 percent by the year 2000. With further advancements to smaller cells, as many as 35,000 subscribers per square mile can be served by cellular, up from a maximum of 1,500 with today's analog system. Digital technology allows massive economies of scale that could make mobile phones as common as conventional ones; service providers who now spend between $750 and $1,000 for each new subscriber will see those costs fall by half, while consumers could shave phone bills by as much as 25 percent. And by broadening service areas, people "will start to associate a telephone with a person rather than a place," says Geoffrey Johnson of Argus Research.

After the dust settles from the buying-and-building frenzy, industry analysts forecast a period of enormous consolidation. With the exception of McCaw, which will offer nationwide service, superregional Bells will dominate the industry. "Fifteen or 20 companies will control 90 percent of the business," predicts consultant Shosteck. All have been avid buyers and builders of cellular properties as a way of hedging against any erosion in their traditional customer base. The Baby Bells enjoy a leg up on cellular rivals because they bought into mobile services carly, when franchise costs were lower, and thus can capture customers for less. PacTel, for instance, has paid an average of $16 for each potential subscriber in its service areas vs. McCaw's nearly $300-per-head offer for Lin.

Still, cellular's future is far from certain. Growth could be curtailed by persistent quality problems, such as dead spots caused when a building interrupts a radio signal. Static, calls dropped between systems and eavesdropping still trouble many users. Those snags are partly responsible for the fact that 30 percent of subscribers drop mobile-phone service annually. A change in regulation could also imperil cellular providers. The Federal Communications Commission set up duopolies in each cellular market, which tends to stabilize prices, but deregulation would usher in new players, perhaps unleashing an all-out price war.

Even worse, a recession could topple debt-laden cellular providers such as McCaw. Cellular has many subscribers in the construction and real-estate industries, which are especially sensitive to economic downturns. And mobile phones remain somewhat of a luxury to many users, the first thing to go when times get tough. Even so, Denver, with one of the worst economies in the country, saw cellular climb by 25 percent last year.

Cellular fans are quick to point out that today's luxury will rapidly become tomorrow's necessity. After all, such staples of modern life as land-line telephones were all but dismissed when first introduced. But skeptics have examples of their own. Remember the Picturephone?