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Verizon-Alltel Merger To Affect All Industry Players, Consumers

6/06/2008 08:57:00 PM Eastern

Basking Ridge, N.J. — Subscribers, handset vendors, competing carriers and retailers will feel the effects of the proposed Alltel-Verizon Wireless merger, which will create the nation’s largest wireless carrier with a combined subscriber base of 80.2 million people, analysts said.

  Verizon is the nation’s second largest carrier by subscriber count, and Alltel is the fifth largest. Combined, they will have more subscribers than AT&T Mobility, the current top dog with more than 71 million subscribers.

 The merged entity will have greater leverage in negotiations with handset and infrastructure vendors, who will compete for the business of one less major customer, analysts said. The combination will also have greater leverage over retailers, particularly those who currently sell both carriers’ handsets and services. And given significant overlap in the two carriers’ footprints, consumers in many markets will have one less carrier to choose. Verizon operates its network in all 50 states, and Alltel operates its network in 35 states.

Despite the combined entity’s growing influence in an industry buffeted by multiple carrier mergers in the past few years, some analysts believe the merger will get regulatory approval, at least during the Bush administration. Nonetheless, the merged entity might have to sell off spectrum to other carriers in select markets where regulators might deem the number of post-merger carrier choices is too low. The same would  be true in a market where the company is deemed to own too much spectrum compared to competitors, they said.

In many major and rural markets where both carriers operate, consumers will still have multiple carrier choices after a merger, said Ken Hyers, an analyst with Technology Business Research. “The Verizon Wireless-Alltel deal faces regulatory hurdles,” he said. “It is likely that Verizon Wireless will need to sell licenses in markets where the DOJ [Department of Justice] determines it has too much spectrum.” Nonetheless, he said, “the regulatory process is likely to be relatively smooth given the complementary nature of Verizon Wireless’ and Alltel’s networks.”

Verizon, he noted, operates in all of the top 100 markets, whereas Alltel operates in far fewer of those markets. In addition, Alltel’s footprint is largely in smaller markets, including rural areas. In fact, one of the main reasons cited by Verizon for buying Alltel is to reduce roaming costs by taking ownership of 57 rural Alltel markets in which Verizon lacks its own network.

“It would be tough to argue that with four national operators and a host of tier two and three operators that there is not a good amount of competition,” particularly with the per-minute price of voice calls continuing to drop, Hyers said.

“The acquisition makes sense from both a financial and strategic standpoint,” he said. “Alltel offers coverage in 34 states in the U.S., with significant coverage in secondary and rural markets where Verizon Wireless currently has limited coverage.”

Alltel subscribers converting to Verizon service, he added, will be able to access a far greater range of data services than Alltel currently provides.

Hyers and other analysts called the merger a good fit. "Verizon and Alltel both use CDMA network technologies and have EV-DO networks,” said ABI Research analyst Dan Shey. “Customers should not experience any change in service since Verizon and Alltel have roaming relationships, and migration of Alltel customers will only require simple OTA [over-the-air] handset updates and billing integration."

 The combined entity will benefit from increased scale, reduced operating expenses and a reduction in roaming costs, Hyers said. Verizon itself said the acquisition will cut about $1 billion in operating expenses in the first two years– including roaming fees paid to Alltel. Also, the combined companies will reduce the amount of future capital expenditures by about $9 billion compared to what they would have been if the two companies remained separate, a Verizon spokesman said. Those costs include the costs to Verizon of building its own network in Alltel markets where Verizon lacks its own foorptint.

“The stars were aligned,” Hyers said, noting that with net new subscriber growth falling, acquisitions and data services have become two key ways for carriers to drive up revenue and profit. “Verizon Wireless is successful in keeping subscribers and migrating them to data services to increase ARPU [average revenue per user],” he said. It’s also a good time to strike, he said, because the regulatory environment could change under a new administration.

Under the merger agreement, Verizon will pay Alltel’s owners $5.9 billion and assume the rural carrier’s $22.2 billion debt.

 Alltel customers will eventually be able to take advantage of Verizon’s Open Development initiative, which will allow third-party devices to use the Verizon network. And Alltel subscribers will eventually be able to use the high data speeds promised by LTE technology that Verizon plans to deploy in the future.

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