Alltel: All is well

Back finally to the crowded by lanes of Mumbai and things don't seem too good here. What more can you expect with incessant rains and cancelled trains becoming part of your daily routine. After a small hiatus, I was back tracking the headline makers in the industry and was pleasantly surprised to see Verizon making an offer for Alltel and thereby becoming the No.1 wireless operator in the US. Needless to say that is the story, I'll try and analyze in this post.

Credit crunch. Commodity bubble. Global recession. Peak oil. Global warming. Times like these can make grown men and women weep. The pessimism and despair peddled by businesses and popular media suggest that no industry can prosper in the current economic environment. Yet there are abundant signs that the telecoms industry is weathering this storm well. If ever there was a doubt, just look at these cases in point: France Telecom making an unsuccessful bid for US$40+ Bn for Teliasonera, First Bharti and now Reliance getting ready to for a deal with MTN for a staggering US$ 30+ Bn, Verizon buying out Alltel for a deal that could go up to US$ 28 Bn. So much for the doomongers of the telecom industry. The Verizon deal has all it takes to change the industry dynamics in the volatile North American market. Initially at least, Alltel's subscribers may not be too happy with the deal because this might mean scrapping of some of its popular plans like Mycircle. But micro aspects aside, this deal promises a lot on the macro front.

There are some crucial synergies that Verizon can realize through this deal. First, there is that ever present GSM-CDMA talk. It would massively help Verizon that both Alltel & Verizon follow the same technology evolution. This has some obvious advantages like better scale when ironing out deals with equipment vendors. Alltel with 13mn subscribers is the 5Th largest cellular operator in US. After the buyout by Verizon, the combined entity will have close to 70mn subscribers, a clear lead of around 8mn subscribers over the erstwhile leader AT&T at the top of the US telecom market. What this deal also means is CDMA re-establishes its lead over GSM in its parent North American market. Additionally, Verizon will also get access to some 50 odd markets which it doesn't currently own. Also on Alltel's behalf, not only have Alltel's investors been saved from expensive 4G investments but also (importantly) that never ending confusion about the evolution path to follow to 4G at a time when industry is divided between WiMAX & LTE.

The combined entity however bodes differently to different entities in the ecosystem. On the equipment vendor side, LG can look ahead and consolidate its leadership position in CDMA segment. LG, a favorite with Verizon will additionally get to address the requirements of Alltel thereby gaining access to new markets and subscribers within US. However, the situations isn't that rosy as far as competition is concerned. AT&T which for a long time held the leadership position has to relinquish it with only a distant prospect of recapturing that position again. A gap of 8mn-9mn subscribers is too tough a gap to close in a saturated market like US. This leaves it with only the inorganic route to follow but not many options exist there as well apart from smaller options like Leap Wireless, Metro PCS etc. Again, these options will not come cheap. With this deal, Sprint, the industry's favorite punching bag, moves to a distant third place behind Verizon and AT&T. With continuously falling subscriber numbers and churn, things surely don't look good for Sprint (how many times have I said that ?). One real possibility and the one which i believe will gather real pace after this deal is Sprint being acquired by Deutsche Telecom to consolidate on its industry position and prevent the likes of Verizon and AT&T from taking unassailable lead.

Some industry voices believe that, Verizon must have bought out Vodafone's stake which would have given it a more operational flexibility than actually focussing its resources on the Alltel buyout. But I believe that buying out Vodafone's stake should not be an immediate priority for Verizon. There are millions of dollars of synergy out there to be realized once LTE networks of Vodafone and Verizon go on online-that's when the roaming revenues will come into picture. Verizon has done the right thing by recapturing its leadership position but the challenge will be to consolidate on the leadership position and maintain it at least till the much awaited 4G networks are rolled out.