Hurdles for Cingular/AT&T Wireless union

As expected, consolidation in the wireless service provider market has begun.

Last week Cingular Wireless announced its plans to acquire AT&T Wireless for $41 billion in cash plus the assumption of $6 billion in debt. The joined companies will have 46 million customers with $32 billion in revenue based on each company’s year-end figures.

While the new Cingular will be bigger than its next largest competitor – Verizon Wireless with 37.5 million customers – this initially may be a case where bigger is not better. Yes, Cingular, which says it plans to drop the AT&T Wireless brand after the deal closes, will have assets abound, but it has a lot to do to stay ahead of the game.

Churn is an issue. More customers leave AT&T Wireless and Cingular compared to Nextel, Verizon Wireless, Sprint PCS and T-Mobile.

According to a report published by consulting firm Mobile Competency, Cingular’s quarterly churn rate in 2003 averaged 2.7%. The company lost nearly one-third of its customers last year. AT&T Wireless isn’t far behind with quarterly churn rates averaging 2.6%.

Average churn at Nextel Communications was 1.6% and 1.8% at Verizon Wireless in 2003.

Why are AT&T and Cingular having trouble holding on to customers? Analysts say it’s because of poor customer service, spotty coverage and a difficult transition from one network technology to another.

Combining the companies will only exacerbate those challenges, they say.

As each company operates separately over the next 10 months, they need to address customer service issues in terms of network coverage, service quality and billing. If each has not reduced customer defections before the merger, it will be that much more difficult to do so once the new Cingular integrates services and platforms.

Which gives rise to another challenge: While both AT&T Wireless and Cingular like to focus on their GSM networks, both still operate legacy TDMA networks throughout the U.S. That’s four different networks and even more billing systems that will have to be integrated, a situation that analysts say will be more complex than previous merger attempts undertaken by most carriers.

Despite these obstacles, the joined companies should be able to offer customers stronger geographic coverage. Cingular points out that with AT&T Wireless’ network reach it will have service coverage in 97 of the top 100 markets. It currently has services in 87 of those markets today. The additional spectrum will help improve overall quality of service as it will reduce the likelihood of dropped calls, according to some observers.

One additional bright spot for Cingular and its customers is that AT&T Wireless has a wireless data service in place. Cingular should roll out AT&T Wireless’ mMode service to all of its customers once the deal goes through.

One benefit that may be felt throughout the business user community is continued price reductions before the competitive landscape shifts to fewer and fewer players.