By Richard McCaffery (TMF Gibson)
April 5, 2000

Wireless investors are staring down the barrels of two mammoth initial public offerings this year: AT&T's (NYSE: T) wireless unit, and the new Bell Atlantic(NYSE: BEL)/Vodafone (NYSE: VOD) joint venture called Verizon.

AT&T's late-April IPO is expected to raise as much as $13.2 billion, giving it a market value of $74 billion. Officials at Verizon, who expect to take the company public before year-end, value their company at a figure north of $100 billion. It's frightening, but they could be right.

Enough number-dropping. What's important for investors isn't IPOs or market values. It's getting a handle on what's happening in the consolidating, fast-moving U.S. wireless phone industry.

In the space of seven months, the number of carriers with a national footprint has jumped from four to six, thanks to consolidation and asset swaps. It's also interesting to note how the big brand-name companies have really stepped in to tip the scales, perhaps leaving smaller companies vulnerable.

At the end of last summer, there were four wireless companies with a national footprint: VoiceStream Wireless (Nasdaq: VSTR), Nextel (Nasdaq: NXTL), Sprint PCS (NYSE: PCS), and AT&T (NYSE: T).

Then Bell Atlantic and Vodafone got together, forming Verizon, a company with national reach and about 23 million subscribers. It's by far the largest wireless company in the U.S.

Also left out of the mix at the time were SBC Communications (NYSE: SBC), the country's largest local phone company, and BellSouth (NYSE: BLS). Both had a major wireless presence but lacked national reach. This morning the companies announced plans to merge their U.S. wireless assets, forming a player with 16.2 million subscribers and a national reach -- except in the Northeast and Northwest. (Investors can expect an IPO at some point.)

Here's what the new picture looks like, along with the technology standards each company has chosen:

Bell Atlantic/Vodafone:  23 million subscribers*, CDMA
SBC/BellSouth:           16.2 million, TDMA and GSM
AT&T:                    12 million, TDMA
Sprint PCS:              5.9 million, CDMA 
Nextel:                  4.5 million, iDEN 
VoiceStream Wireless:    Over 2 million**, GSM

* Includes GTE (NYSE: GTE) subscribers
  (Bell is buying GTE)

** Includes Omnipoint and Aerial (Nasdaq: AERL)

In addition to consolidation by carriers filling gaps in their national networks, there are a couple of trends investors should watch. (Don't sweat the consolidation. Nobody knows how it will shake out -- or which companies will overpay in today's superheated market and doom shareholders for years. The Wise may encourage investors to buy takeover candidates, but Fools don't. Rather, investors should focus on the national carriers with the best economics.)

Two things to watch: In May, the Federal Communications Commission will auction off 12 new wireless licenses in 700 MHz range. Spectrum is extremely rare, coveted, and expensive. Industry experts guess the FCC could net between $5 billion and $20 billion from the auctions. (In July, the FCC will also auction off bankrupt NextWave's cellular licenses.) National carriers and other competing players will have to pony up a lot of cash to secure additional frequencies. Many investors view the auctions as extremely critical for Nextel, which has roughly 15 MHz of spectrum, about half that of some of its peers.

The frequencies are vital for all involved, however, since spectrum is like prime real estate -- you can never have too much. It will be especially important as wireless data services are ready to explode. Lehman Brothers predicts that by 2007, 18% of cellular revenue and 21% of PCS revenue will come from wireless data, up from virtually nothing last year.

The other issue worth watching is the transition from second-generation wireless technology to third-generation technology. Since the early 1990s, wireless technology has evolved. First-generation protocols used analog technology, which was nice as a starting point but ate up a lot of bandwidth. Carriers then evolved to second-generation standards, digital networks that utilized one of the four standards used in the U.S. today: GSM, TDMA, CDMA, and iDEN.

These four standards aren't compatible with one another, and though third-generation (3G) technologies seem to be moving a bit closer to compatibility, there's no guarantee. This is a wildcard for investors, who need to understand what technologies companies have committed to, how they plan to migrate to 3G, and how much it will cost.

The advantages of 3G networks are many. The data rates offered will be much higher, which will enable new services such as broadband data and graphical applications.

The stakes are high. It will be critical that shareholders align their interests with companies that know how to create value, especially with the enormous costs involved in acquiring spectrum, building and upgrading networks, and advertising to a national audience. Verizon expects to spend $3.1 billion this year alone to build out its network.

With these kinds of costs come heavy debt. Any investor thinking a chunk of spectrum is the key to fabulous returns is dead wrong. In the wrong hands, it's fool's gold -- just ask NextWave. It takes a lot more than attractive assets to build a company that rewards shareholders year in and year out.

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