Reaching Out to Grab Customers : More Companies Are Competing for a Piece of Lucrative Cellular Phone Market in Los Angeles

Hollywood public relations agent Pat Tobin recently was berated for being a little bit too mobile with her telephone: “Get that thing out of your ear,” her hairdresser cried in mid-shampoo. “You’re going to get electrocuted.”

Tobin put her portable cellular telephone away. But like many other Southern California professionals, she has come to depend on the car phone and, to a lesser degree, the portable phone, to keep her busy firm in high gear. And people like Tobin have companies ranging from Pacific Telephone to Leo’s Stereo drooling.

The booming Los Angeles cellular telephone market is so valuable that gaining a piece of it is said to be a key factor behind McCaw Communications’ proposed $5.8-billion bid for Lin Broadcasting. Lin holds a 35% stake in Los Angeles Cellular Telephone Co., which, along with PacTel Cellular, provides mobile phone service in the 10,000-square-mile greater Los Angeles franchise area.

Cellular service--so called because it uses a technology in which phone signals are transmitted and received over radio frequencies within small geographical “cells” and handed off from cell to cell as the car moves--is growing explosively all over the United States. In 1988 alone, the number of cellular telephone subscribers nearly doubled to 2 million, according to the Cellular Telecommunications Industry Assn., and compound annual growth rates of 30% to 50% are expected for at least the next few years.

No market holds more promise than Los Angeles. The reason? Traffic jams, or, as the phone industry would have it, a very high MTBP--mean time between phones. “The MTBP is one of the best--over an hour in the morning and even higher in the evening among our target market,” said C. Lee Cox, president and chief executive of PacTel Corp. In San Diego, he noted, the MTBP is lower, and thus, the phone usage per customer is lower.

Neither PacTel nor L.A. Cellular will release figures showing exactly how many customers they have. Cox would say only that PacTel has “over 120,000,” and L.A. Cellular President Michael D. Heil, on the job only since last week, declined to be interviewed.

High Prices, Quality Problems

But Herschel Shosteck, a cellular telephone analyst based in Silver Spring, Md., said the Los Angeles-Orange County area now has about 250,000 mobile phone customers. PacTel, which had an 18-month head start in setting up its system, enjoys a 2-to-1 edge in market share, Shosteck said. Though the figures show PacTel’s local network to be the largest single cellular phone system in the country, they reveal a penetration rate, or percentage of residents who have the service, of 1.8%, slightly below the national average.

High prices and persistent quality problems may explain the penetration lag. Shosteck called Los Angeles “the armpit of the cellular industry” because of the abundance of “dead spots” and “hot cells” that interfere with calling. Dead spots, caused by mountainous terrain or large buildings, are places where a signal is lost, in the same way that an FM radio signal can come and go as the car moves along. “Hot cells” are areas, such as West Los Angles or major freeway interchanges, where an excess of car phones can tie up all available frequencies and make it impossible to get through.

Shosteck said service in Los Angeles “has always been bad and isn’t getting worse.” Cox, while conceding some problems, said the situation has improved as more and more cell sites are brought on line. “People do complain,” said Gary Maeba, technical support manager at Best Communications, a telephone equipment dealer in downtown Los Angeles. “And they complain to the person who sold them their unit.”

At the standard price of $45 per month for the service plus 45 cents per minute for calls during the business day, some of the highest rates in the country, it’s no wonder people complain if the service isn’t up to par. Tobin said she was able to keep her bills under $300 per month only by avoiding all superfluous chatting, and bills of up to $1,000 a month are common. The average customer spends an estimated $140 a month, and even though the Public Utilities Commission is expected to order price cuts later this year, rates will remain very high compared to those for standard phone service.

Phone Prices Dropped

The growth of cellular has been driven by a huge drop in the price of the phones, from the $2,000 range two years ago to $300 to $500 today. Many phones are actually sold at a loss by dealers who make their money on commissions they receive for signing up customers for service. Most retailers get a flat payment of $150 to $200 per customer, but some large ones also get a percentage of the customers’ bills. Leo’s Stereo, which sells 1,200 car phones a month in Los Angeles, receives a 10-year “residual” as an agent for L.A. Cellular, according to the company’s chief executive, Paul Cohen.

Some dealers, such as Best Communications, also act as resellers, buying blocks of phone numbers from PacTel and L.A. Cellular and then reselling them to customers (though always at the same regulated price). Cohen said reselling can be more profitable--Leo’s is a reseller in Sacramento and San Diego and soon may be in Los Angeles--but is far more complex than a straight agency arrangement because the reseller must handle the billing.

If prices will, for the moment, prevent cellular phones from spreading much beyond the current market of professionals and self-employed entrepreneurs such as Tobin, that hardly dims the industry’s long-term prospects. Futurists like to point out that the advent of high-quality pocket phones, just now becoming available at reasonable prices, eventually will revolutionize the concept of the phone number, linking it to a person rather than a place.

New Services Will Help

In the shorter term, a shift to digital cellular transmission in the early 1990s will increase system capacity by four to eight times, and phones will start to become standard, factory-installed equipment in many cars. Industries such as trucking will, as Shosteck pointed out, increasingly use cellular phones to track their fleets and improve efficiency. And new services such as voice mail and data transmission will further increase the number of possible uses for mobile telephones.

It’s no wonder, then, that McCaw Communications is willing to pay nearly $300 for each potential customer in Los Angeles. Kenneth M. Leon, an investment analyst with Bear, Stearns & Co. in New York, said cellular properties in Los Angeles are valued on the assumption that 5% of the people will have car phones within five to 10 years, that they will average 225 minutes of use per month, and, thus, customers will pay more than $100 a month for service. Cellular phone companies aren’t making much money now. But profits should soon flow just as fast as the freeway traffic is slow.

THE GROWTH OF CELLULAR PHONES

Nationwide, cellular telephone subscribers spend $140 a month on average for the service.

Source: Cellular Telecommunications Industry Assn.