By Khali Henderson

Posted: 7/2003

Wireless Resale Gets Second Look

By Khali Henderson

AT&T plans to resell wireless
services from none other than AT&T Wireless, the company it spun off in July
2001. Similar moves are being considered by other large carriers and are
indicative of a changing view among carriers about network ownership and
increasing pressure on wireless operators to cut customer acquisition and
support costs.

For its part, AT&T this summer will offer its
residential long-distance customers in selected markets the ability to manage
their combined wired and wireless spending through a single provider. The
wireless portion of the new plan will be branded as AT&T Wireless.

AT&T spokesman Gary Morgenstern says the
overriding motivation for the deal is to reach parity with the RBOCs by adding
wireless, data and local services to the bundle. The company uses resale as
means to do this. In addition to its resale arrangement with AT&T Wireless,
it offers local through the UNE Platform and has a resale agreement with Covad
Communications Co. to offer DSL through a linesplitting arrangement. No DSL
offer has been rolled out yet, but Morgenstern said it would be soon.

Other Tier 1 carriers are looking at the resale
strategy, too. As PHONE+ reported last month, Qwest Communications International
Inc. is pursuing ways to expand its wireless coverage. We are pursuing
numerous options to deliver a national wireless footprint to our customers,
says Qwest spokeswoman Carey Brandt, who declined to discuss a story in the Wall
Street Journal that reported Qwest entered talks with Verizon Communications
Inc. and Sprint Corp. about renting capacity on their national wireless
networks.

Qwest Wireless was launched in Denver in 1997 and
serves 1.1 million customers in major cities in its 14-state territory,
including Minneapolis, Phoenix, Salt Lake City and Portland, Ore.

In addition, MCI Chairman and CEO Michael
Capellas said, in a May interview with Bloomberg News, the company has held high-level
talks with a couple of mobile-phone companies.

This is particularly interesting since MCI (then
WorldCom) last year shed its wireless resale business, referring its 2 million
customers to underlying carriers the company had used. At the time, executives
said the company would save some $700 million a year by unloading the business.

WorldCom resold wireless services for about five
years, but never acquired its own network though it made several attempts. In
1999, it considered acquiring Nextel Communications, a Reston, Va.-based
wireless carrier focused on the corporate market. In 2000, the proposed
mega-merger of WorldCom and Sprint Corp. fell apart, quashing WorldComs hope
of acquiring Sprint PCS.

Certainly, MCI/WorldCom was criticized over the
years for its lack of wireless facilities. But it appears those attitudes may be
changing.

At this point its not about ownership,
says industry pundit Jeffrey Kagan. Its about marketing and providing the
customer what they want the way they want it.

We think that this market trial we are going
to do with resale is going to show that you dont need to own every service
component of your offer – bundled or otherwise, says AT&Ts Morgenstern.
We said somewhat the same thing when we sold off the satellite business years
ago. We didnt have to own the satellites to provision satellite services to
our customer.

Morgenstern says AT&Ts strategy goes back
to October 2000 when then-CEO Mike Armstrong announced the company would spin
off its wireless and cable properties. As you might recall, we did that to
free each of the entities to pursue each of the markets they believed would be
most beneficial for their shareholders without being encumbered by competing
priorities of the parent company, he says.

Indeed, Mark Siegel, a spokesman for AT&T
Wireless, says, Because we are a pure wireless play, unlike most other
wireless companies, we dont have to rationalize what we do in the marketplace
with the needs of a parent company that happens to a local phone company. We
have unusual freedom in that regard.

In a press statement, AT&T Wireless Chairman
and CEO John Zeglis says the AT&T agreement supports an important
strategic thrust for AT&T Wireless of attracting new customers in creatively
cost-effective ways as we drive toward our goal of becoming free cash flow
positive in 2003.

In fact, Siegel says the company has many
channels and uses indirect channels to reach out to new customers and at the
same time potentially lower the cost of customer acquisition.

Thats where a resale arrangement becomes
valuable is when you dont have to incur all the marketing costs, says
wireless analyst Adam Guy of Yankee Group.

While that certainly has been the case all along,
reselling has evolved from a contentious relationship to a cooperative one in
recent months. Guy says one possible reason is a lack of available customers has
made resellers more attractive to wireless carriers.

When there were professional people out there
without cell phones, wireless carriers didnt need resellers, he explains.
Now, theres nobody left, [so they are saying,] Lets deploy some
alternative channels to steal customers from our competitors and reach out to
the remaining few [new] customers more cheaply.

If there is a way to get more customers, wireless
carriers will do what they have to do, says Guy even if that means
offering a more value-oriented plan. But, he adds, in order to make that
profitable, they have to reduce the cost of customer acquisition. One of the
ways is to employ a reseller with a loyal subscriber base.

Cost of acquisition isnt the only concern, Guy
says. Another pain point for the carriers is the soonto- grow support costs,
he says. Just think about the service and support burden that IT managers and
carriers are going to face when you no longer have fleet of cell phones or
two-way pagers but of pocket PC devices with Pentium processors and custom
enterprise applications.

Guy points to the recent spate of channel
programs wireless carriers have established in an effort to use VARs and systems
integrators to tap the enterprise market as evidence that wireless carriers are
anticipating this growing concern.