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 / Fourth Quarter 2002 / Issue 29(originally published by Booz & Company)


Consolidation: The Wireless Way

As pressures to merge rise yet again, wireless operators need innovative approaches to yield economic benefits.

Illustration by Peter Kramer
The U.S. wireless industry is barely catching its breath from a sweeping round of consolidation over the last five years — and yet it’s likely to launch into another one during the next six to 18 months.

The industry landscape has been reshaped by multibillion-dollar acquisitions and ambitious partnerships that produced powerhouses Verizon Wireless Inc., a combination of Bell Atlantic and GTE’s domestic wireless operations on the East Coast and Vodafone AirTouch’s U.S. wireless businesses on the West Coast; Cingular Wireless, a joint venture between SBC Communications Inc. (formerly the Southwestern Bell Corporation) and the BellSouth Corporation; and T-Mobile USA Inc. (formerly the VoiceStream Wireless Corporation), essentially a portfolio of regional wireless companies that became a major mobile presence after being bought by Deutsche Telekom AG. These deals were primarily cross-regional, a way for carriers to combine complementary regional network coverage so they could offer competitive, broad-based calling plans. And while this was going on, Sprint PCS Group and Nextel Communications Inc. were quietly transforming themselves into nationwide networks by gobbling up huge amounts of spectrum through the federal government’s auction of cellular bandwidth. The upshot: There are now six national wireless companies — AT&T Wireless, Cingular, Nextel, Sprint PCS, T-Mobile, and Verizon Wireless. And instead of a carrier or two, 75 percent of the U.S. now can choose from five or more cellular network operators.

But with the cellular marketplace radically redrawn, wireless companies are facing a disturbing truth: Aggressive expansion has produced an unstable and untenable business environment. After a period during which market penetration ballooned — at the end of 2001, cellular companies had signed up 45 percent of the U.S. population, doubling their subscriber base in just four years — growth is slowing. Analysts estimate that at best, U.S. penetration of cellular will reach only about 60 percent in 2005. With a half-dozen national carriers chasing fewer untapped customers, and the ever-present possibility of losing existing subscribers to rivals offering a better deal — about 35 percent of cellular customers change carriers each year — cellular companies are locked in a no-win round of price wars. They’re liberally giving away “free minutes” and discounted handsets to entice new subscribers, and lowering rates for existing subscribers, including the highly profitable heavy users. As a result, the average monthly bill for mobile phone customers has dropped about 8 percent, to $61 at the end of 2001 from $66 in 2000, according to J.D. Power and Associates.

To extricate themselves from this hammerlock, we believe cellular companies will begin a second wave of consolidation. Unlike the prior approach to consolidation, which involved companies’ adding markets by buying carriers or spectrum in new regions, the next wave will be distinguished by carriers’ acquiring competitors, large and small, within their regional service areas. The end game is a return to a relatively balanced oligopoly led this time by large, national carriers that will offer pricing stability and reduce customer churn.

The problems that wireless carriers are being forced to address are not unique to these companies. Commoditization pressures (which are partially the result of overexpansion, a surfeit of companies chasing fewer customers, less demand than anticipated, and overoptimistic market forecasts) have also left many retailers; manufacturers of appliances, personal electronic devices, and computers; and service companies such as airlines mired in distressing business environments. In many cases, consolidation to eliminate competition will be the only way for these companies to stem revenue erosion and dwindling profit margins, as well as to trim operational costs. In fact, such deals have already begun to occur. Consolidation was the driving force behind Hewlett-Packard Company’s acquisition of the Compaq Computer Corporation, its rival in the crowded and increasingly unprofitable PC market; eBay Inc.’s purchase of PayPal Inc., an electronic payment company that was siphoning customers from the online auctioneer’s own digital money service; and the acquisition of the Budget Rent a Car Corporation by the Cendant Corporation, which already owned the more upscale Avis Rent A Car System Inc.

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  1. Raul L. Katz, Eric J. Riddleberger, Bharat V. Sarma, and Daniel H. Yang, “Will Prepaid Service Be the Next Wireless Frontier?” s+b enews, 8/15/02; Click here.
  2. Wouter Rosingh, Adam Seale, and David Osborn, “Why Banks and Telecoms Must Merge to Surge,” s+b, Second Quarter 2001; Click here.
  3. Simon Romero, “Consolidation Stalls in the Wireless Industry,” New York Times, September, 9, 2002; Click here.
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