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Wireless Number Portability To Change Biz

New York – Wireless carriers are not looking forward to the long-delayed implementation of wireless local number portability (LNP). But retailers generally are.

Under the Federal Communication Commission’s (FCC’s) wireless LNP mandate, consumers will be able to transfer (port) their existing cellphone number to a phone activated on a competing wireless network. Consumers will also be able to port their landline phone number to a cellphone.

For wireless carriers, wireless LNP will mean a higher churn rate that increases their cost of acquiring and holding onto subscribers, most analysts said. For retailers, the mandate could initially confuse customers, tying up the sales floor as salespeople try to answer questions with answers that could vary by carrier.

Nonetheless, wireless LNP means a pickup in retail traffic because consumers will feel less constrained to switch wireless carriers to obtain better call quality, better network coverage or a better rate plan. The increased traffic, in turn, will increase the potential to sell more step-up services and — of key importance to retailers — more handsets that are eligible for a full-activation commission, dealers and analysts told TWICE.

In a wireless LNP environment, some analysts and retailers speculate that carriers will increase the financial incentives for dealers to replace or upgrade an existing subscriber’s handset without churning the subscriber to another network. Today, dealers get a full-activation commission if a subscriber switches from one wireless network to another, but dealer compensation shrinks when a new handset is sold to a subscriber who doesn’t switch networks.

LNP’s initial impact at retail will be felt beginning Nov. 24, when the FCC requires carriers to implement wireless LNP. The initial impact will depend on how many carriers meet the deadline, the number of markets in which they meet the deadline, and how long it takes salespeople to explain these and other wireless LNP caveats (see stories on this page and page xx).

Adam Guy, Yankee Group senior analyst, expects most major carriers to meet the November goal, as do analysts Mark Lowenstein of M Ecosystem and Albert Lin of American Technology Research. They don’t believe that carriers will risk a competitive disadvantage, possible political backlash and FCC fines.

Even if most of the six national carriers initiate wireless LNP by Nov. 24, they might not achieve it in every one of their licensed areas in the top 100 markets, creating a porting patchwork that will initially confuse consumers, said Lin.

The interoperability mosaic will be further muddled by smaller carriers that are likely to miss the deadline. By early July, ‘smaller second- and third-tier carriers haven’t even started [to install wireless LNP capability],’ said Chris Ambrosio of Strategy Analytics.

While carriers install LNP capabilities, analysts debate the magnitude of LNP’s longer-term impact on churn. Some of the highest churn estimates come from the Yankee Group and InStat/MDR, owned by TWICE parent Reed Business Information.

The Yankee Group forecasts the annual churn rate as a percent of the subscriber base (140.8 million in 2002) to rise from the current 30 percent or 32 percent to 36 percent or 37 percent in 2004 and 2005, said analyst John Jackson.

In-Stat/MDR expects an even bigger leap, with the annual rate in 2004 hitting 33.7 percent without LNP, but reaching 49.9 percent with LNP. The number of churning subscribers would thus hit 82.5 million with LNP and only 60.3 million without LNP, said analyst Ken Hyer.

Lowenstein, however, doesn’t expect increases of the sizes estimated by either In-Stat or Yankee. Lowenstein expects a churn-rate increase of perhaps as little as 2.4 percentage points per year.

Although some countries experienced major churn-rate increases after LNP was implemented, Lowenstein explained, the U.S. market is different. For one thing, he said, U.S. network technologies are fragmented. CDMA subscribers can’t switch to a GSM network without paying for a new phone, and a Sprint CDMA subscriber might not be able to use his phone on Verizon’s CDMA network ‘due to the various permutations of incompatible phones and networks,’ he said.

In addition, other countries have more prepaid customers, who can switch carriers freely without paying an early termination fee for breaking one- or two-year contracts, which are the norm in the United States, Lowenstein said. Also, in countries where GSM predominates, consumers need only buy a new SIM card, not a complete new phone. ‘Hence the barrier to switching is a lot lower,’ he said.

In the Australian market, which bears some similarities to the U.S. market, the impact on churn was ‘relatively low,’ Lowenstein said. ‘Both markets have a high percentage of post-paid customers, and contracts [in return for a significant handset subsidy] are prevalent.’

No major country has initiated landline-to-wireless number portability, analysts noted.

ATC’s Lin expects a churn increase similar to Yankee’s estimates, but he expects the increase to last only 18 to 24 months. He forecasts a churn-rate rise from the current 2.5 percent to 2.6 percent a month to close to 3 percent, but after 18 to 24 months, it will taper off to around 2.5 percent. On an annual basis, the churn rate will rise to 36 percent of the subscriber from a current 30-31 percent.

Lin doesn’t expect the U.S. churn rate to double during the first few years as it did in Hong Kong, where he attributed the jump to the lack of service contracts. He also doesn’t expect LNP to be the ‘yawn’ that it is in the United Kingdom, where carriers charge a fee for porting, where competition is lower because fewer carriers compete per market, and where differences in service quality among carriers are minor. ‘Almost all carriers use the same technology, GSM, and almost all use the same government-owned towers, so they’re nearly identical in performance,’ Lin said.

In addition, Europe’s porting intervals last up to a month, but in Hong Kong, it’s five days, he said.

Whatever the churn increase, most retailers are looking forward to increased profit potential, at least in the short term if not in the long term.

All things considered, said Car Toys wireless director Shelly Fuller, LNP is ‘definitely positive for retailers.’

A spokesman for the P.C. Richard chain agreed, although he said the benefits would vary by retailer depending on the carriers they offer.

Wireless Retail marketing VP Chris Cagle also saw advantages for retailers. ‘The only people it’s not a plus for are the carriers,’ said the marketer whose company operates 675 wireless stores and kiosks.. ‘It’s a plus for consumers and, intuitively, for retailers.’

For his part, Best Buy wireless team leader Lance Rusco pointed to ‘an opportunity to gain and lose in this new environment,’ at least in the initial months of LNP. Customers coming in to consider a change of carriers ‘will also look at new technologies and services’ that potentially increase profits, he said.

Initially, however, LNP will generate ‘a lot of consumer questions,’ potentially tying up salespeople during the bust Christmas selling season, he warned.