Cheap cellular phone service

The ranks of upcoming personal communications services (PCS) providers chasing after current cellular users may boost the value of existing groups of subscribers - namely, cellular resellers.

As a result, MCI Communications Corp.'s purchase of Nationwide Cellular Service Inc. in May could be one of the last of its kind in terms of the amount MCI paid per nationwide subscriber, according to research conducted by Chantilly, Va.-based BIA Consulting Inc.

The appeal of acquiring cellular resellers, said Jonathan Foxman, director of strategic and business planning at BIA, is that a PCS provider can switch subscribers accustomed to paying a premium for reseller service to its own network, and gain the additional profit margin from not paying a carrier.

However, the availability of potential customers once PCS becomes broadbased is another factor.

While agreeing with BIA's theory, Jon Hulak, senior industry analyst at BIS Strategic Decisions, Norwell, Mass., said, "We think the C- and F-block auctions will go undersubscribed. There's going to be markets available."

As a result, "A player looking to pick up markets here and there doesn't need to pick up resellers," Hulak said.

The cellular reseller industry is not large. Nationwide was the only publicly held reseller, but there are "a handful of private ones," Foxman said.

But the boosted profit margins that Foxman sees in acquiring reseller customers is an undeniable attraction. Cellular reseller margins of 30 percent to 40 percent would give way to PCS carrier margins "of more than twice that level," Foxman said.

In turn, this added profitability will boost the potential acquisition price of cellular resellers. MCI purchased Nationwide Cellular's 275,000-subscriber network for $190 million, or roughly $690 per subscriber.

On the other hand, BIA estimates that the investment value of a cellular subscriber to a PCS licensee is around $2,000. "Even considering such additional costs as replacing the subscriber's handset and assuming that as many as one-fourth of the acquired cellular subscribers will be unwilling to switch to PCS service, the value remains approximately twice what MCI paid for Nationwide," Foxman said.

But the cost of acquiring a suddenly valuable reseller, coupled with the costs of spectrum auctions and infrastructure build-out, may end up pushing PCS end-user prices upward. However, Foxman observed that the value of a reseller will not rise past the point where it is more costly to add reseller subscribers than to acquire them through conventional means.