Cellular phone for sale

"There was an electricity in the air," she says. "You knew you were part of history." But Sue Mason also knows that it was just a warm-up. The U S West executive bid for her company in the federal government's first-ever auction of the airwaves in July. She gasped with the rest of the crowd as opening bids for advanced paging licenses were announced at $10 million and $20 million; then she watched in amazement as the offers headed even higher. Big players were bidding an extra $10 million without blinking, notes Mason, adding, "Ten million is what they spend on doughnuts each year."

In the main event, no one will be bidding doughnut money. In what will undoubtedly be the largest auction ever held, the Federal Communications Commission is selling to the highest bidders airwaves for wireless voice and high-speed data that are expected to fetch an estimated $10 billion to $22 billion. The auction, which begins December 5, will break the duopoly that has allowed just two cellular phone companies in a market. Intense competition from as many as six new wireless players in each city is expected to drive down prices, spark new services and make portable phones as commonplace as home computers. Declares FCC Chairman Reed Hundt: "What we're selling in these auctions are the phone companies of the 21st century."

Linking up. Some of the most dramatic impacts of the impending auction are being felt well before December 5. Preparing to build wireless networks that could stretch from coast to coast, telecommunications giants are forming alliances and mergers that would have been unthinkable a decade ago, when the government split Ma Bell into AT&T and the seven Baby Bells. Last week, three of those big babies, Bell Atlantic, NYNEX and U S West, announced a wireless partnership with AirTouch--created when Pacific Telesis spun off its cellular and paging businesses. The collective assets of this alliance, which will be marketed under one brand name, make it the largest cellular operation in the nation. The foursome also plan to bid jointly in December's auction. The new consortium's most formidable competitor will be AT&T, which recently purchased McCaw Cellular for $11.5 billion in stock. Rumors of other negotiations continue to fly, and potential deals could involve Sprint with various cable companies and AT&T with Southwestern Bell. MCI is reportedly pursuing a host of possible partners. Analysts expect last-minute linkups to be announced this week, in advance of the FCC auction's October 28 filing deadline.

The effects of those maneuverings could extend well beyond the wireless world. William Deatherage, a telecommunications analyst for S.G. Warburg, predicts that once these merged giants have established and marketed a nationwide brand name for portable phone services, they will want to leverage that visibility in a variety of wired services such as long distance or video.

Surging growth. The rush of competition is not waiting for the auction, either. With only two rivals in each market and a service in hot demand, cellular companies haven't had to do much to attract customers over the past 10 years, according to Mark Lowenstein, a wireless analyst with the Yankee Group. Cellular rates in the top 10 markets, for example, were virtually unchanged from 1985 to 1991, calculates Herschel Shosteck Associates, a cellular market research firm. With the impending competition, however, rates have come down, and Shosteck Associates projects that they will continue to fall 5 to 10 percent a year. One company is even considering a price plan of $10 a month and 10 cents a minute, approximately one third of today's rates, says Richard Siber, a wireless analyst for Arthur Andersen Consulting. In addition, wireless phone prices, which have been falling steadily, are now so heavily subsidized by cellular providers that in some markets the handset comes free with the service as companies try to lock in new customers. Partly as a result, the industry is adding 17,000 customers a day, which translated into growth of 48 percent over the past 12 months. Never mind that the new networks may not be up and running until 1997, says Shosteck: "To gain the benefits of competition, all you have to do is threaten it."

In the impending wireless price war, cellular companies will have to battle the significant cost advantage of their new rivals. The auction winners are widely expected to build digital networks, which are common in Europe but rare in America. Digital infrastructure can cost 30 to 40 percent less to build than the original analog cellular networks, with the capacity to carry three to 10 times as many calls per channel. Now, cellular companies are promising their own digital networks. Southwestern Bell and Bell Atlantic, for example, have limited digital service available in scattered markets. And Ameritech, the Baby Bell of the Great Lakes region, with over 1 million cellular subscribers, will begin constructing a digital infrastructure next year in Chicago and its other major markets.

New services. Ultimately, if the new competition wants to take markets from the established cellular order, it will have to offer more innovative services. The FCC has placed virtually no restrictions on how auction winners use their licenses for PCS, or personal communications services. One widely anticipated service would assign each customer one number and one handset that would function as a cordless phone at home and at work and a cellular phone on the road. Incoming calls would find the customer wherever the handset happened to be. But aggressive cellular companies are trying to make a pre-emptive strike against this service. GTE offers a one-number, one-phone service for car and home called Tele-Go. And Southwestern Bell has introduced FreedomLink, a similar product that works in the car and the office.

The next step could be to cut the wire to the local telephone company completely. Long-distance providers, which pay 45 percent of their revenue--a massive $23 billion--in access fees to local phone monopolies for originating and completing calls, would be especially happy for a wireless bypass to homes and offices. Using fiber-optic networks, competitive access providers such as Teleport Communications Group have built a small but growing business connecting big-city offices directly to long-distance services. But wireless PCS licensees could link businesses and homes outside of downtown areas without costly wiring. Andersen Consulting predicts that by the end of the decade, up to 28 percent of residential phone connections will be wireless. Ironically, the Baby Bells may end up stealing the business from themselves. Eric Ensor, president of BellSouth Wireless, says his company will use a defensive strategy. "If there's going to be some erosion of the [local phone] business," he explains, "we'd like to pick it up on the wireless side."

The new PCS licensees will have an advantage in delivering such radical wireless services because they can design their networks from scratch for something more than just car phones. But as threatened as today's cellular providers are by the coming competition, PCS licensees may face greater risks. John Stupka, CEO of Southwestern Bell Mobile Systems, explains that for a market like Dallas, a PCS licensee may pay $120 million at auction and $150 million more to build a network, just to compete with two carriers who have spent a decade capturing the heaviest cellular users. "If you're not really confident that you're going to get market share fast," says Stupka, "you're going to lose sleep." Predicts Evan Richards, vice president of network planning at Ameritech: "A bunch of people who win licenses will go out of business."

Innovators. Three PCS licensees will have an edge over fellow auction winners. The "pioneer's preference" winners were selected by the FCC for their technological advances in wireless communications. Each of the three--American Personal Communications in the Baltimore-Washington market, Omnipoint Communications in New York and Cox Enterprises in Los Angeles--will pay 85 percent of the auction value of its license. The companies were also given a chance to prepare networks before the auction. APC, 70 percent owned by the Washington Post Co., expects to have its digital wireless network ready next year.