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Q: What are the three most important things that wireless carrier CEOs feel they must have?
A: The iPhone, the iPhone, and the iPhone.
According to Alaska Communications Systems (Nasdaq: ALSK ) CEO Anand Vadapalli, if his company had not been able to provide the iPhone to its customers last April, there would have been much more red ink in ACS’ second-quarter earnings release, one showing a net loss of $787 million. In Monday's earnings conference call, Mr. Vadapalli said:
While [the iPhone launch] was not without its short-term financial implications, not only did we add more new customers, but our existing customer base excessively showed up to renew their contracts and buy an iPhone. Our net subscriber adds of about 2,900 was the highest subscriber growth we’ve had in four years.
Well, whoop dee doo, some might say to a subscriber growth of less than 3,000 -- Verizon (NYSE: VZ ) , for example, added 1.18 million net wireless customers in the quarter. But they may be singing a different tune if they realized that the population of the whole state was only about 710,000, and ACS’ share of wireless customers had been steadily shrinking over the last five years, significantly losing ground to its rival, Alaskan telecom General Communication (Nasdaq: GNCMA ) . GCI went from 32,700 wireless customers in 2007 to 140,200 by the first quarter of 2011, while ACS’s wireless base dropped from 137,500 to 116,200 during that same period.
Now, GCI has the iPhone, too, which it acquired around the same time as ACS did. But those carriers didn’t succumb to Apple’s (Nasdaq: AAPL ) iPhone subsidy penalty just to one up each other. They both had to protect themselves from a common deep-pocketed enemy: AT&T (NYSE: T ) . That major national carrier decided to ignore the difficulties of providing telecom services to a small population spread over vast distances when it obtained Dobson Communications in 2007. That was the event that changed everything for ACS, dropping it down to third place in the tundra telecom hierarchy, behind GCI and AT&T.
The enemy of my enemy is my friend
Maybe if AT&T was the only major carrier with imperialistic plans for Alaska, GCI might never have considered joining forces with ACS to help keep Alaska serviced by homegrown Alaskan telecoms. But the news of Verizon’s plans to follow AT&T up north made ACS and GCI decide to hook their wagons together to prepare a common defense against the carpetbaggers.
This past June, Alaskan Communications Systems signed an agreement with General Communication to create the Alaska Wireless Network, or AWN. With the required approval of the Federal Communications Commission, the meeting of certain other regulatory hurdles, and the acquisition of union waivers, the AWN will be able to, in the words of CEO Vadapalli, “… cover 95% of Alaska with the most advanced and extensive coverage, unmatched by any national provider.” (Italicized emphasis added)
GCI will be the majority owner of the AWN, with two-thirds of the network, and ACS will own the rest. Both members of the alliance will contribute wireless assets, which will include spectrum licenses, cell sites, backhaul facilities, and switching systems, among other resources.
ACS expects consummation of the AWN to occur in the second quarter of 2013.
But what if either party gets an offer they feel they can’t refuse from either of the major telecoms? A provision has been made for that possibility. If, as stated in Alaska Communications’ 10-Q, “ACS terminates to accept a superior proposal, ACS would be required to pay GCI a $20.0 million fee, and if GCI terminates to accept a superior proposal, GCI would be required to pay ACS a $40.0 million fee.”
Those fees pale in comparison to the multi-billion dollar penalty that AT&T had to pay T-Mobile USA for the failure of their merger last year. And that makes me wonder if those AWN termination fees are set high enough to dissuade tempting offers to come forth from the major carriers.
If the AWN can survive everything that the economy and the national carriers can throw at it, maybe ACS and GCI can again be on a strong enough footing to return to throwing everything they can at each other.
The company that the iPhone is really helping, of course, is that amazing company, Apple. To get the full scoop on one of the pre-eminent names in technology today, just click here to grab your copy of the Fool's new premium report on Apple.