| New services
New York, Feb. 7 (Reuters): US wireless companies are investing billions of dollars in networks that deliver video and music to cellphones, but some investors worry whether the new services will turn a profit.
Sprint and Verizon Wireless, a venture of Verizon Communications and Vodafone, are spending billions on so-called third generation (3G) networks. These networks allow for wireless data speeds similar to wired high-speed Web access offered by phone companies to consumers.
Some analysts believe the investments will eventually pay off, with services that could command profit margins estimated as high as 60 per cent. But others question when, or if, these services will ever even turn a profit.
'We think 3G will be adopted but we don't think it's going to be a significant financial benefit to the carriers,' said Tim Ghriskey of Solaris Asset Management. Uncertainty around 3G is a main reason his firm does not include operator stocks in the $650 million worth of investments it manages.
Mobile providers are betting advanced services will beef up profits, which have suffered as price wars eroded cellphone call rates by about 20 per cent a year. Since most people already own a cellphone, operators compete on price to retain customers.
'Video streaming creates a very large revenue opportunity. I believe it's quite possible that could offset yield declines should they continue on the voice side,' said Sprint chief financial officer Bob Dellinger. But Charter Equity analyst Ed Snyder says wireless stocks could come under pressure if the companies do not meet profit targets for wireless 3G services and voice prices continue to fall.
'The prospects at this point are poor,' he said.
Sprint, Verizon Wireless and their biggest rival Cingular Wireless, a venture of SBC Communications and BellSouth declined to reveal specific 3G growth targets.
Executives from Verizon and Cingular say they expect strong growth from high-speed data services but note that it will not surpass voice in importance for the foreseeable future. 'I wouldn't tell you that's going to happen any time soon,' said Peter Ritcher, chief financial officer of Cingular, which also plans to build a fast data network.
'Anyone who takes their eye off the voice market has taken their eye off their most important revenue stream,' Verizon Wireless chief executive Denny Strigl said.