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Resale Channel: Wireless Resellers Fight Exclusivity ... Again

Channel Partners

July 1, 2000

10 Min Read
Resale Channel: Wireless Resellers Fight Exclusivity ... Again

Posted: 07/2000

Wireless Resellers Fight Exclusivity …
Again
By Kim Sunderland

Until now, the issue of "exclusivity" arrangements between wireless
carriers and resellers has been a moot point. Such pacts allow carriers to
supply service to a reseller at specific rates, terms and conditions if a
reseller agrees to sell that carrier’s service exclusively.

These pacts were common until 20 years ago when the FCC (www.fcc.gov)
ruled the practice an unreasonable restriction on resale, which violated the
commission’s rules.

The exclusivity issue has been reborn recently, as the FCC attempts to clear
its backlog of wireless cases. One case, filed in 1997, involves AirTouch
Communications Inc. (www.app.airtouch.com),
a commercial mobile radio service (CMRS) provider with domestic and
international interests in cellular, paging, PCS and mobile satellite services.

AirTouch, which merged in 1999 with Vodafone Group plc of the United Kingdom
to form Vodafone AirTouch plc (www.vodafone-airtouch-plc.com),
is a wireless powerhouse, which also has formed Verizon Wireless (www.verizonwireless.com)
with Bell Atlantic Mobile (www.bam.com) and
PrimeCo Personal Communications (www.primeco.com).

In April 1997, AirTouch asked the FCC to declare that "optional"
exclusivity arrangements are lawful. In its petition, AirTouch says when a
reseller wants to voluntarily agree to an exclusivity clause in return for more
favorable contract terms, the reseller should be allowed to do so. AirTouch
wants the FCC to clarify its policy regarding the permissibility of optional
arrangements, maintaining that some confusion exits regarding the legality of
such optional arrangements.

While the FCC has collected comments on the AirTouch petition, the commission
hasn’t issued a ruling. The resellers’ lobbyist, the Association of
Communications Enterprises (www.ascent.org),
formerly known as the Telecommunications Resellers Association (TRA), says the
situation soon may change as the AirTouch filing gains momentum at the FCC’s
Wireless Telecommunications Bureau (www.fcc.gov/wtb).

"If there was ever an esoteric issue, this is one of them," says
ASCENT’s executive vice president David Gusky. He adds, the outcome of
AirTouch’s case will impact the future of wireless resale.


Graph: Wireless Subscribers Using Resellers

Wireless Resale Thrives

One likely driver behind the alive-again AirTouch petition is that the state
of the wireless resale industry is mushrooming, says the Yankee Group (www.yankeegroup.com),
a Boston-based research firm, which predicts a threefold increase in the size of
the wireless resale market by 2005.

The Yankee Group conducted a study of wireless resale for ASCENT to determine
whether a business case could justify carriers relying on resellers as a key
distribution channel. The group’s February report, "Wireless Resale: A
Viable Distribution Channel for Facilities-Based Carriers," confirms the
profitability of the reseller channel.

As of December 1999, almost one-third of all U.S. residents (85 million) had
active wireless phones, the Yankee Group says. Approximately 2.5 million (3
percent) of these users buy service through a wireless reseller, with three
wireless resellers accounting for more than half of this share.

Overall, the Yankee Group projects that resellers will account for more than
5 percent of total wireless subscribers by 2002, up from the current 3 percent
level, and 10 percent of all wireless customers by 2005, or some 17 million
people.

After comparing two business models, one in which a generic carrier with 1
million subscribers employs resale and one in which the same carrier does not
use resale, the Yankee Group concludes that carriers would make a sound business
decision using resellers as an important means of distribution. The report says
that lower operating costs would allow the generic carrier to enjoy 3 percent
higher net revenue ($38 million) by employing resellers.

Sprint Does Wireless Resale

Such information is not lost on Sprint PCS (www.sprintpcs.com),
which has launched its Private Label Services program, a distribution channel
for wireless resale. Through the program, wireless resellers will develop and
promote their own branded programs, with network services provided on the Sprint
PCS network.

Under such a deal, a reseller’s customers will have access to Sprint PCS
service anywhere on the Sprint PCS nationwide network, which serves more than
330 major metropolitan areas.

Currently, Sprint PCS has signed resale agreements with companies such as
WorldCom Network Services Inc. (www.wcom.com),
Excel Communications Inc. (www.excel.com) and
Simple Communications LLC (www.simple-com.com).

The agreements grant resellers Sprint PCS’ roaming agreements, ongoing phone
software development and relationships with key phone manufacturers, according
to a Sprint spokesperson. The program also offers a turnkey solution for
customer care and billing through an exclusive arrangement with Martin Dawes
Technologies (www.martindawessystems.com).

Resellers also have access to postpaid and prepaid products, which include
voice mail, caller ID and call waiting.

"The Sprint PCS Private Label Services program provides opportunities
for resellers to focus on specialized market niches, while offering access to
the nation’s largest all-digital wireless network," says Andrew Sukawaty,
president of Sprint PCS. "This program offers resellers the advantages of
our nationwide network and provides Sprint PCS with an additional source of
revenue."

According to Ashley Pindell, Sprint PCS’ senior manager of media and analyst
relations, the company has no exclusive resale agreements.

Because of the program, Excel, for example, introduced its Excel Wireless on
April 1. Excel’s network services are provided on the Sprint PCS Network and
through a network of independent representatives. Excel now offers wireless
service in seven markets: Boston; Chicago; Dallas/Ft. Worth; Memphis; Portland,
Ore.; Raleigh, N.C.; and Sacramento, Calif.

Excel also plans to expand coverage for national service in the future, says
Christina Gold, vice chairwoman and CEO. This may happen with or without Sprint
PCS, depending on what Excel’s customers want.

Offering multiple products allows a reseller to better serve its customers,
Gusky says.

WorldCom, formerly MCI WorldCom Inc., also began offering wireless resale
service in February through its agreement with Sprint PCS in Atlanta; Boston;
Chicago; Cincinnati; Cleveland; Columbus, Ohio; Denver; Houston; Los Angeles;
New York; Philadelphia; Phoenix; San Diego; San Francisco; Seattle; and
Washington.

Simple Communications launched its prepaid wireless service in Houston on
March 1, with more than 250 local indirect retailers. Under Simple’s arrangement
with Sprint PCS, customers have access to PCS service anywhere on the Sprint PCS
nationwide network, says Scott Behuniak, Simple Communications’ CEO.

Analyst Jeff Rickard of Current Analysis Inc. (www.currentanalysis.com)
says the Sprint PCS Private Label Services program allows wireless resellers to
rent its nationwide network to resellers, which in turn develop, brand, market
and sell their own services using the rented network capacity.

Current Analysis is "taking a positive stance on Sprint PCS’ launch of
[this] program, because it formalizes what Sprint PCS has been offering for
months," Rickard says. "[It] will allow the company to capitalize
better on the resale channels in niche markets across the country. Through the
program, Sprint PCS gets to have its cake and eat it too, as it has to invest
very little in the way of acquisition costs but gains additional cash for the
rented network."

Under the Sprint PCS pact, these resellers are also responsible for the
customer service and the billing process, although Sprint offers a customer
management solution. Considering that the average acquisition cost per customer
is approximately $300, Sprint’s participation requires little effort and, more
importantly, little capital, Rickard notes.

For example, WorldCom in its resale deal with Sprint PCS, covers all costs to
market and sells the service, as well as handles customer service
responsibilities, while Sprint PCS provides the network capacity, Rickard says.
"The end result is that both parties are happy," he says.
"WorldCom is able to provide a wireless solution, and Sprint PCS gains an
additional revenue stream for very little effort.

"Sprint PCS maintains the upper hand in its relationships with the
resellers," Rickard says. "The wireless resellers have to do all the
legwork and provide the capital to acquire new subscribers [such as branding,
marketing, customer services and billing], while Sprint PCS can sit on its
network and watch the money trickle in."

Rickard also says there are few companies that can replicate Sprint PCS’
Private Label Services program nationwide, as most wireless carriers have
regional wireless coverage. Verizon and AT&T Wireless Services (www.attws.com),
both with their own nationwide networks, are the two competitors capable of
offering a similar program, and both probably offer similar programs informally,
according to Rickard.

"Sprint PCS’ Private Label Services plan offers a good way to lock up
agreements before competitors like Verizon and AT&T can," he says.

Regulatory Concern

Such great wireless resale deals will flourish as long as the FCC’s ban on
exclusivity arrangements remains in place, Gusky says.

For instance, the suggestion by AirTouch that it would give better rates to a
reseller that opts into an optional exclusivity arrangement with the carrier
gives AirTouch unequal bargaining power, he says.

"And having such exclusive deals are still the same whether they’re
optional or mandatory," Gusky says. "Such deals would be optional only
in a fantasy world, and the small resellers would see they’d have no choice but
to enter into such arrangements."

It’s also a way for the entrenched carriers to lock up resellers, making it
tough for new ones to enter the market, he adds.

Resellers are meeting informally with the FCC’s wireless bureau’s policy
division on AirTouch’s petition, and their renewed lobbying efforts are getting
under way on this issue. They hope to have the FCC ultimately deny AirTouch’s
petition and go off into the wireless resale wild blue yonder.

Kim Sunderland is Washington Bureau Chief for PHONE+ magazine.

Trends in Distribution

Changes in wireless distribution offer a number of opportunities for wireless
resellers, according to the Yankee Group. Its February study shows that the
following have emerged as trends in distribution patterns:

* The move to retail. Unlike wireline services, wireless service can
be sold in a box with a phone inside in a retail environment. If the
instructions are easy enough, this box can be sold anywhere, even at Toys
"R" Us. As prepaid services gain ground in the United States and
pricing plans become simplified by bundling roaming, peak/off-peak and long
distance, wireless will become even more of a retail item. Also, as Americans
become more familiar with wireless services, they will need to spend less time
with a salesperson before making a buying decision. All of these factors suggest
that wireless sales will move toward the retail channels, which are ubiquitous
and easily accessible, and away from more cost-intensive carrier stores and
agents, which are few and far between.

* The Internet. Across most industries, sales are moving to the
Internet. Wireless is no exception. Although Internet sales account for less
than 0.5 percent of all wireless service contracts today, this percentage will
become significant, perhaps reaching 10 percent of all sales by 2002. Almost all
carriers are selling accessories online, and most major carriers have the
ability to sign up new subscribers online without any salesperson interaction.
Also, an increasing number of online agents are selling all carriers’ services
in a "Wireless Mall" environment.

* Distributing data as well as voice. The carrier’s principle assets
are spectrum and network infrastructure. Having invested in these assets, the
carrier’s goal is to maximize its revenues by fully utilizing its capacity.
Traditionally, voice services have accounted for the bulk of the traffic of the
wireless networks, but in the next few years, as wireless networks incorporate
packet-based architectures and speeds increase, data will start filling the
airwaves. Carriers need to develop channels to sell airtime for both voice and
data. The channels for data may be different than they are for voice. Computer
stores are likely to be resellers, or at least agents, of wireless service.
Also, distributors of personal digital assistants (PDAs) can bundle wireless
connectivity in their sales, but first they must act as a reseller of airtime
from a carrier.

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