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ALLTEL Corp.
(501) 905-8000
One Allied Drive
Little Rock, Arkansas 72202
www.alltel.com
Sales
$8
billion
Business Description
ALLTEL Corporation (“ALLTEL” or the “Company”) is a customer-focused
communications company. The Company owns subsidiaries that provide wireless
and wireline local, long-distance, network access and Internet services.
Telecommunications products are warehoused and sold by the Company’s
distribution subsidiary. A subsidiary also publishes telephone directories
for affiliates and other independent telephone companies. In addition, a
subsidiary provides billing, customer care and other data processing and
outsourcing services to telecommunications companies.
During 2003, ALLTEL continued to upgrade it wireless network infrastructure
and invest in state-of-the-art code division multiple access (“CDMA”)
technology, including 1XRTT. Nearly 95 percent of the Company’s wireless
markets operate on digital-based systems. In addition, the Company
supplements its wireless service coverage area through roaming agreements
with other wireless service providers that allow ALLTEL’s customers to
obtain wireless services in those U.S. regions in which ALLTEL does not
maintain a network presence. Through these roaming agreements, the Company
is able to offer its customers wireless services covering approximately 95
percent of the U.S. population. ALLTEL continues to increase its network
capacity and coverage area through new network construction, strategic
acquisitions and affiliations with other wireless service providers.
PRODUCT OFFERINGS AND PRICING
Wireless revenues are derived primarily from monthly access and airtime
charges, roaming and long-distance charges and charges for custom calling
and other enhanced service features. Wireless revenues comprised 58 percent
of ALLTEL’s total operating revenues from business segments in 2003,
compared to 57 percent in both 2002 and 2001. Prices of wireless services
are not regulated by the Federal Communications Commission (“FCC”) or by
state regulatory commissions; however, as more fully discussed under the
caption “Regulation” on page 8, states are permitted to regulate the terms
and conditions of wireless services unrelated to either rates or market
entry.
ALLTEL strives to address the needs of a variety of customer segments,
stimulate usage, increase penetration, and improve customer retention rates
through a diverse product offering and pricing strategy. To accomplish these
objectives, the Company offers competitive local, statewide, and national
service plans. These service plans include packages of daytime, night and
weekend, and mobile-to-mobile minutes. Customers can choose lower monthly
access plans with fewer minutes, while customers needing more minutes can
choose slightly higher access plans with more minutes. Family Freedom – an
offering that gives customers the option to share minutes by adding
additional lines of service at a discounted rate – helps target the growing
number of families that have integrated wireless into their lives. In
addition, the Company offers family-to-family minutes. By allowing the lines
on an account to designate a home telephone number as a wireless phone,
customers are also able to receive the benefit of their mobile-to-mobile
minutes when calling their home phone.
ALLTEL provides several voice features to enhance its wireless calling
plans, including call waiting, call forwarding, caller identification,
three-way calling, no-answer transfer, directory assistance call completion
and voicemail. Depending on the customer’s selection of rate plan, some or
all of these features are included as an extra value to the plan.
The wireless industry has shifted to the use of one-rate pricing plans,
which include roaming and long-distance at no extra charge for a specified
number of minutes. In order to offer one-rate plans on a profitable basis,
the Company has endeavored to negotiate more favorable terms and conditions
under its roaming agreements with other domestic wireless companies. As
previously discussed, these roaming agreements provide ALLTEL’s customers
with the capability to use their wireless telephones while traveling outside
the Company’s service areas. In conjunction with the wireless assets
exchange transaction completed in 2000, ALLTEL and Verizon (formerly Bell
Atlantic and GTE) also signed reciprocal roaming agreements. These
agreements, which expire in January 2010, allow customers of each of the
companies to roam on each other’s networks across a footprint that covers
approximately 95 percent of the U.S. population. As a result of these
roaming agreements, ALLTEL can offer its Total and National Freedom rate
plans to customers profitably. These rate plans provide national wireless
coverage with no long-distance or roaming charges. While these national rate
plans provide the Company the ability to compete effectively for the high
volume, roaming customer, retail roaming revenues will continue to decline
to the extent customers migrate to these national rate plans.
In response to increasing demand, the Company also offers various data
solutions to its customers. In 2003, ALLTEL launched a brand name, Axcess,
for its suite of data services and introduced many new products, including
1XRTT high-speed data, which was implemented in markets covering
approximately 23 percent of ALLTEL’s POPs. Simultaneous with the
introduction of the Axcess brand name, the Company introduced downloadable
wireless applications that allow customers to download games, entertainment
content, weather applications and office applications. The Company also
introduced several downloadable applications targeting the small to medium
enterprise market segment. Workforce, a work order management and dispatch
tool, and Business E-mail, a remote electronic mail access program, are two
examples of applications targeting this segment. Axcess Picture messaging, a
data service that allows customers to take pictures with their phones and
then send those pictures electronically, launched late in 2003 as well.
Other initiatives, such as expanding text messaging to allow ALLTEL
customers to send text messages to other carriers’ customers, helped drive
growth in existing data services in 2003.
ALLTEL also offers several prepaid alternatives. One alternative,
“Pay-As-You-Go”, is a traditional prepaid service in which the customer
purchases a set amount of airtime to be used as needed. Through a
distribution agreement with Wal-Mart, the Company also offers prepaid
service under the “Simple Freedom” trademark. Simple Freedom offers
nationwide calling, a flat rate per minute and does not require a deposit or
service contract. Prepaid package plans present customers with slightly
different prepaid solutions by offering monthly access for buckets of
anytime and night and weekend minutes. This solution targets new market
segments that desire monthly access and buckets of minutes but choose
prepaid to control expenses. Several voice and data feature enhancements are
available with prepaid offerings as well. As of December 31, 2003, prepaid
customers represented approximately 10 percent of ALLTEL’s wireless customer
base.
Primarily as a result of the increased sales of the Company’s higher-yield
local, regional and national calling plans and increased sales of data
services, average revenue per customer per month increased to $47.51 in
2003, compared to $46.97 in 2002 and $47.09 in 2001. The increase in average
revenue per customer per month in 2003 was partially offset by decreased
wholesale roaming rates, which also contributed to the decrease in average
revenue per customer per month in 2002 as compared to 2001.
Maintaining low postpay customer churn rates (average monthly rate of
customer disconnects) is a primary goal of the Company, particularly as
customer growth rates slow due to increased competition and higher
penetration levels occur in the marketplace. ALLTEL experienced an average
monthly postpay customer churn rate in its wireless service areas of 2.09
percent, 2.23 percent and 2.34 percent for the years ended December 31,
2003, 2002 and 2001, respectively. To improve customer retention, the
Company offers competitively priced rate plans, proactively analyzes
customer usage patterns and migrates customers to newer digital handsets.
ALLTEL also continues to upgrade its telecommunications network in order to
offer expanded network coverage and quality and to provide enhanced service
offerings to its customers. The Company believes that its improvements in
customer service levels, proactive retention efforts, and digital network
expansion contributed to the decrease in postpay customer churn in 2003.
DISTRIBUTION
ALLTEL utilizes four methods of distributing its wireless products and
services in each of its markets: Company retail stores, Company retail
kiosks, dealers and direct sales representatives. Using multiple
distribution channels in each of its markets enables the Company to provide
effective and extensive marketing of ALLTEL’s products and services and to
reduce its reliance on any single distribution channel. Dealer and direct
sales channels remain important components of the Company’s overall
distribution strategy, with the primary objective for all channels being to
produce the best combination of lower customer acquisition costs and higher
customer retention rates.
ALLTEL currently conducts its retail operations in approximately 1,100
locations strategically located in neighborhood retail centers and shopping
malls to capitalize on favorable demographics and retail traffic patterns.
The Company’s retail focus is to attract new customers through competitive
service offerings and an efficient sales process. For ALLTEL, the
incremental cost of obtaining a customer through a Company retail store is
the lowest of any distribution channel.
ALLTEL also contracts with large national retail stores to sell wireless
products and services directly through its own kiosks. The Company utilizes
retail sales representatives at kiosks in large retailers to take advantage
of high traffic generated by the retailers, to reduce the cost of the sale,
and to ensure customers receive proper training in the use of wireless
equipment and services. Existing customers can purchase wireless telephone
accessories, pay bills or inquire about ALLTEL’s services and features while
in retail stores or at kiosks. Through dedicated customer service at its
retail stores and kiosks, the Company’s goal is to build customer loyalty
and increase the retention rate of new and existing customers.
The Company enters into dealer agreements with electronics retailers and
discounters in its markets. These local dealers may offer other wireless
services like paging. In exchange for a commission payment, these dealers
solicit customers for the Company’s wireless service. The commission payment
is subject to charge-back provisions if the customer fails to maintain
service for a specified period of time. This arrangement increases store
traffic and sales volume for the dealers and provides a valuable source of
new customers for the Company. ALLTEL actively supports its dealers with
regular training and promotional support.
ALLTEL’s direct sales force focuses its efforts on business customers with
high wireless telephone usage and multiple lines of service. This channel
produces the lowest churn compared with any other distribution channel.
COMPETITION
Substantial and increasing competition exists within the wireless
communications industry. Cellular, PCS and Enhanced Specialized Mobile Radio
service providers may operate in the same geographic area, along with any
number of resellers that buy bulk wireless services from one of the wireless
providers and resell it to their customers. PCS services generally consist
of wireless two-way communications services for voice, data and other
transmissions employing digital technology. The entry of multiple
competitors, including PCS providers, within the Company’s wireless markets
has made it increasingly difficult to attract new customers and retain
existing ones. Competition for customers among wireless service providers is
based primarily on the types of services and features offered, call quality,
customer service, system coverage and price. ALLTEL has responded to this
growing competitive environment by capitalizing on its position as an
incumbent wireless service provider by providing high capacity networks,
strong distribution channels and superior customer service and by developing
innovative rate plans and offering new products and services. ALLTEL’s
ability to compete successfully in the future will depend upon the Company’s
ability to anticipate and respond to changes in technology, customer
preferences, new service offerings, demographic trends, economic conditions
and competitors’ pricing strategies.
In the current wireless market, ALLTEL’s ability to compete also depends on
its ability to offer regional and national calling plans to its customers.
As previously noted, the Company depends on roaming agreements with other
wireless carriers to provide roaming capabilities in areas not covered by
ALLTEL’s network. These agreements are subject to renewal and termination if
certain events occur, including if network quality standards are not
maintained. If the Company were unable to maintain or renew these
agreements, ALLTEL’s ability to continue to provide competitive regional and
nationwide wireless service to its customers could be impaired, which, in
turn, would have an adverse effect on its wireless operations.
TECHNOLOGY
Since inception, mobile wireless technologies have seen significant
improvements in both speed and reliability. The first generation of wireless
technology was analog, while second generation technologies employ digital
signal transmission technologies. Third generation technologies, which are
just beginning to be deployed in the U.S., provide even greater data
transmission rates and allow the provision of enhanced data services.
Although ALLTEL will maintain its first generation analog services until it
is no longer required by the FCC, the Company offers quality second
generation voice and circuit switch data in markets covering 95 percent of
its POPs with its CDMA digital systems. Second generation digital systems in
the U. S. compress voice or data signals enabling a single radio channel to
simultaneously carry multiple signal transmissions. CDMA digital technology
provides expanded channel capacity and the ability to offer advanced
services and functionality. In addition, digital technology improves call
quality and offers improved customer call privacy.
Third generation digital wireless technologies increase voice capacity,
allow high-speed wireless packet data services and are capable of addressing
more complex data applications. The Company will continue to expand its
offerings of high speed wireless data services with continued investment in
its third generation voice and data networks based on the CDMA 2000 1X
technology, including high speed packet data service offerings already in
place in strategic markets. ALLTEL is also reviewing future generations of
broadband technologies to provide even higher data rate access. Through its
investment in these systems, ALLTEL will be able to deploy innovative
technologies and applications, including Multimedia Messaging Services. The
Company recently launched “Touch2Talk”, a digital two-way calling service
offering that, once fully deployed by the end of the first quarter of 2004,
will provide customers with service coverage over ALLTEL’s entire digital
wireless network.
WIRELINE OPERATIONS
As previously noted, the Company’s wireline segment consists of ALLTEL’s
ILEC, CLEC and Internet access operations. The Company’s wireline
subsidiaries provide local telephone service to nearly 3.1 million customers
primarily located in rural areas in 15 states. The wireline subsidiaries
also offer facilities for private line, data transmission and other
communications services. Wireline revenues, which consist of local service,
network access and long-distance and miscellaneous revenues, comprised 30
percent of ALLTEL’s total operating revenues from business segments in both
2003 and 2002, compared to 29 percent in 2001.
Local service operations provide lines from telephone exchange offices to
customer premises for the origination and termination of telecommunications
services including basic dial-tone service and dedicated private line
facilities for the transport of data and video. ALLTEL also offers various
enhanced service features including call waiting, call forwarding, caller
identification, three-way calling, no-answer transfer and voicemail.
Additional local service revenues are derived from charges for equipment
rentals, equipment maintenance contracts, information and directory
assistance and public payphone services.
Network access and interconnection services are provided by ALLTEL by
connecting the equipment and facilities of its customers to the
communications networks of long-distance carriers, CLECs, competitive
switched and special access providers, and wireless service providers. These
companies pay access and network usage charges to the Company’s local
exchange subsidiaries for the use of their local networks to originate and
terminate their voice and data transmissions. Network access revenues also
include amounts derived from high-speed data transport services (digital
subscriber line or “DSL”). Miscellaneous revenues primarily consist of
revenues derived from the Company’s Internet access services, charges for
billing and collections services provided to long-distance companies,
customer premise equipment sales and directory advertising services.
COMPETITION
Some of the Company’s ILEC operations have begun to experience competition
in their local service areas. Sources of competition to ALLTEL’s local
exchange business include, but are not limited to, resellers of local
exchange services, interexchange carriers, satellite transmission services,
wireless communications providers, cable television companies, and
competitive access service providers including those utilizing Unbundled
Network Elements-Platform (“UNE-P”). Through December 31, 2003, this
competition has not had a material adverse effect on the results of
operations of ALLTEL’s wireline operations, although competition has
adversely affected the Company’s access line growth rates. Customer access
lines decreased two percent during the twelve months ended December 31,
2003. The Company lost approximately 72,000 lines during 2003, primarily as
a result of the effects of wireless and broadband substitution for the
Company’s wireline services. The Company expects the number of access lines
served by its wireline operations to continue to be adversely affected by
wireless and broadband substitution in 2004.
To address competition, ALLTEL is focusing its efforts on marketing and
selling additional products and services to its customers by bundling
together and offering at competitive rates its various product offerings,
including long-distance, Internet and DSL services. Deployment of DSL
service is an important strategic initiative for ALLTEL. Currently, DSL
service is available to approximately 2.0 million, or 64 percent, of the
Company’s wireline customers. During 2003, the Company added approximately
83,000 DSL customers, continuing a two year-long trend of strong growth in
this service offering. For the twelve months ended December 31, 2003, the
number of DSL customers more than doubled to approximately 153,000
customers, or 8 percent of the Company’s addressable access lines. During
2003, the growth rate in the Company’s DSL customers outpaced the rate of
decline in customer access lines discussed above. In addition to its
marketing efforts, ALLTEL remains focused on providing improved customer
service, increasing operating efficiencies and maintaining the quality of
its network. As with its wireless business, the Company has focused its
wireline advertising on promoting ALLTEL’s brand name and promise of
“getting communications right, every day,” through the Company’s “You got
that right” advertising campaign. Wireline advertising is designed to
integrate the Company’s overall brand message while communicating the
benefits of product bundling and price offerings.
Although DSL services have been a source of revenue and access line growth
for the Company in 2003 and 2002, that service offering experiences
competition from other broadband service providers, including cable
television and satellite transmission service providers. Under the FCC’s
recent decision in its Triennial Review proceeding, as further discussed
below under the caption “Local Service - Regulation” on page 13, it appears
that the Company’s provisioning of broadband DSL services will be largely
deregulated. In addition, a number of carriers have begun offering voice
telecommunications services utilizing the Internet as the means of
transmitting those calls. This service, commonly know as
voice-over-Internet-protocol (“VoIP”) telephony, is challenging existing
regulatory definitions. As further discussed below under the caption
“Network Access - Regulation” on page 18, on February 12, 2004, the FCC
adopted a Notice of Proposed Rulemaking that will consider the appropriate
regulatory treatment of Internet-enabled communications services and address
which regulatory requirements, for example, those relating to E-911,
disability accessibility, access charges, and universal service, should be
extended to Internet-enabled services. The results of the FCC’s proceedings
related to VoIP could have a significant effect on the Company’s wireline
operations.
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