Mccaw Cellular Communications, Inc.

Mccaw Cellular Communications, Inc.

5400 Carillon Point
Kirkland, Washington 98033
U.S.A.
(206) 827-4500
Fax: (206) 828-1858

Public Company
Incorporated: 1982
Employees: 4,642
Sales: $1.36 billion
Stock Exchanges: New York

McCaw Cellular Communications is the nation’s largest provider of cellular mobile telephone services, with operations in more than 100 U.S. cities. In addition to telephone services, McCaw is also the nation’s fifth largest radio paging enterprise. McCaw Cellular rose with the rest of the cellular telephone industry in the early 1980s and grew rapidly through acquisitions during the decade, taking on enormous debts to do so. In an effort to build a nationwide mobile telephone service, the company assembled a network of cellular properties, which together were dubbed “Cellular One.” McCaw Cellular traces its origins to 1937, when John Elroy McCaw purchased a radio station in Centralia, Washington. Years later, intent on building a media empire, McCaw added station KYA in San Francisco and a station in New York City which he converted to an innovative rock and roll format. He also branched out into television and cable television, becoming involved in an early effort to bring cable television to New York City. At his sudden death in 1969, he left a wife, four sons, and a business heavily burdened with debt. McCaw’s wife spent the next eight years paying back the money her husband had borrowed. By the time she was done only one small cable system remained of the family’s holdings.

After his father’s death, Craig O. McCaw, assumed responsibility for the business. As a teenager, he and his brothers had worked summers installing cable and selling subscriptions to the company’s services. As a student at Stanford University, he began managing what was left of his family’s holdings.

Upon his graduation in 1973, McCaw turned his full attention to the family enterprise. In the following year he was named president and chief executive officer of McCaw Communications Companies, Inc. McCaw concentrated on expanding the company’s holdings in the cable television industry from its base as a single system with 4,000 subscribers. In 1974 he entered the radio common carrier field, providing paging services to clients.

By the early 1980s, McCaw had 30,000 cable television subscribers in Washington and Alaska. Nevertheless he needed financing for further cable acquisitions and he sold a $12 million stake in his company to Affiliated Publications, Inc., the parent company of the Boston Globe. This move allowed McCaw to snap up a large number of cable properties at relatively low prices.

The technology that would provide McCaw Communications’ most rapid growth, however, was not cable television, but cellular telephone service. This innovation first caught McCaw’s eye in 1981. Based on capabilities originally developed in the 1940s, cellular telephones used a certain portion of the radio spectrum, specially designated by the Federal Communications Commission (FCC) for the purpose of relaying data over nonstationary telephones.

Cellular systems divided a given area into “cells” of varying size, in which a low-power radio transmitter and receiver had been placed. A phone being used in the cell made contact with the transmitter, which conveyed the call— either through microwave transmission or across conventional land telephone lines—to a cellular phone company’s switching station. At the switching station the call was hooked into standard local, long distance, and international phone networks, and also switched automatically to the transmitter in the next cell when the phone left its previous location.

In 1977 the FCC authorized a trial run of this system in Chicago, Illinois, and the Baltimore-Washington, D.C. area. For the purposes of licensing the necessary radio waves, the government also divided the country into 306 Metropolitan Statistical Areas (MSAs) and 428 Rural Service Areas (RSAs). In order to avoid monopolies, the FCC decided to award two licenses to provide cellular phone service in each area. One license, the “wire-line,” would be reserved for the local phone company. The other, the “non-wire-line,” would go to an independent enterprise. If more than one firm wished to provide cellular service in a given area, a hearing would be held to determine who was best suited to win the license.

In these initial stages of the cellular phone industry, McCaw Communications proved successful. After incorporating McCaw Cellular Communications, Inc., in Washington, the company invested a modest $3.5 million to enter the new industry and won all six of its FCC license hearings. Early in 1983, however, the volume of requests for cellular licenses grew so great that the FCC was forced to abandon its system of hearings in favor of a random lottery, introducing an element of chance into the cellular industry.

McCaw began an aggressive effort to gain prominence in the cellular phone industry in 1984. In December, the company purchased another mobil phone operator, Dominion Cellular. The following year, McCaw made a major addition to its cellular holdings when it bought MCI Airsignal for $120 million after a court battle. With both radio paging and cellular phone properties, MCI’s operations gave McCaw a presence in Denver, Pittsburgh, Sacramento, Fresno, and Salt Lake City, as well as part ownership of cellular companies in five other cities. In October 1985, McCaw added licenses to provide cellular phone service in the Colorado cities of Denver and Boulder as well as in Kansas City, Missouri. One month later the company bought the cellular assets of the Knight-Ridder newspaper chain. By the end of the following year McCaw had added two more cellular firms, Maxcell Telecom Plus, for which it paid $70 million, and Charisma Communications, for $85 million.

During this time McCaw had begun concentrating efforts on cellular telephone service to the exclusion of its other operations. The budding telecommunications giant sold some radio paging properties to Mobil Communications for $54 million and also began to sell off its cable television holdings. In November 1986, the company announced that all of the cable operations were up for sale; McCaw’s holdings in this field had grown to become the 20th largest system in the country with over 450,000 subscribers in 42 markets. The entire cable operation was subsequently taken over by entrepreneur Jack Kent Cooke for $755 million in January 1987. McCaw netted $165 million from the sale after taxes and debt payments on its cellular and radio paging operations.

By mid-July of that year, McCaw had assembled cellular operations in 17 cities. The company augmented this tally by purchasing the Florida Telephone Company for $240 million from the Washington Post Company. Offering services in the Miami-Fort Lauderdale area, the Florida company maintained an area with a large number of commuters who spent a lot of time in their cars—making the region a promising market for mobil phone services.

Seeking funds for continued expansion, Craig McCaw sold stock in his company to the public in August 1987. More than 15 million shares, representing 13 percent of the company, were sold to the public for $309 million. At these rates the McCaw brothers’ holdings in the company shot to $1.26 billion, earning them the honor of inclusion on the Forbes Four Hundred list of the richest Americans.

Despite the infusion of cash yielded from the stock offering, McCaw needed more capital to buy other properties. In November 1987, Affiliated Publications provided further funds to the company, bringing its investment to $82 million and giving it 45 percent ownership of McCaw. Four months later McCaw Cellular received a further financial boost when a corporate restructuring put the assets of parent company McCaw Communications’ profitable radio paging activities at the cellular units’ disposal.

By the end of 1987, McCaw Cellular had acquired licenses for 94 markets with a combined total of 37 million potential customers, making the enterprise the largest U.S. cellular phone operator. Craig McCaw was well on his way to his dream of a nationwide linked cellular network. However, McCaw’s string of acquisitions, financed through heavy borrowing and the issuance of junk bonds, had left the company with a staggering load of debt. In addition, the company was plagued by high start-up costs for network installation and marketing to attract customers; McCaw Cellular had yet to turn a profit. Although 1987 revenues increased dramatically as a result of the company’s aggressive acquisitions, moving from $26 million in 1986 to $150.1 million one year later, earnings lagged behind. The company reported a $ 134 million net loss on the year, with $64 million in negative cash flow. Although the stock offer had brought McCaw’s family and his investors Affiliated Publications great wealth on paper, skeptics began to question the ultimate value of the company.

Dismissing such fears, McCaw embarked on the company’s largest purchase to date in the following year, attempting to take over Lin Broadcasting. With cellular networks based primarily in smaller cities, McCaw badly needed a foothold in the major urban areas of the United States if it was to remain a serious player in the cellular industry. Lin, with operations in New York, Los Angeles, Philadelphia, Dallas, and Houston, represented the perfect opportunity to acquire these much-needed metropolitan properties. In mid-April 1988, McCaw opened a bid for Lin by purchasing 5.4 percent of the company’s stock. Within a month the company raised its ownership level to 6.49 percent. By July the percentage grew to 7.64 percent. Five months later, McCaw’s interest in Lin had reached 9.8 percent, and the stage was set for the company’s eventual takeover of its competitor.

By the end of 1988, McCaw owned 127 franchises, covering 47 million potential customers. The company’s difficulties in raising earnings were demonstrated by the fact that it spent $61 million on marketing in efforts to garner customers, but only brought in 100,000 new users. Altogether Craig McCaw had spent more than $1 billion in his quest for additional cellular licenses. The company was losing over $250 million a year, and its $1.8 billion debt represented nearly 90 percent of its capital.

By early 1989 McCaw’s partners, Affiliated Publications, had become dismayed at the negative impact of McCaw’s continuous losses on their company’s stock price. To protect its own value Affiliated decided to pull back from involvement with McCaw and concentrate more exclusively on media holdings. In January Affiliated announced that its holdings in McCaw would be relinquished to shareholders.

One month later McCaw took steps to lighten its financial load, selling 22 percent of McCaw Communications to British Telecommunications PLC for $1.3 billion. Through access to McCaw’s marketing experience, the British firm gained entry to the high-potential U.S. market, and McCaw got some ballast for its bottom line.

Following this stabilizing move, McCaw embarked in earnest on his quest for Lin Broadcasting. After attempting to raise his company’s stake in its competitor to 15 percent in January, McCaw made a bid to buy the whole company in June 1989, offering $6.5 billion. Lin rejected this offer as too small. After a complicated series of maneuvers, however, McCaw succeeded in buying roughly half of the company’s shares at a cost of $3.38 billion. With this purchase, McCaw had in place the key pieces of a national cellular network. This accomplishment came at a price, and Craig McCaw conceded to the New York Times that annual losses at his highly leveraged company might exceed $1 billion for the next few years.

In an effort to diminish this possibility by paying off some of McCaw Cellular’s debt, the company sold its cellular telephone properties in the Southeast United States to Contel Cellular, Inc. for $1.3 billion. The sale, completed in February 1990, included 13 separate holdings in Kentucky, Alabama, and Tennessee, representing roughly 6.1 million potential customers.

Although hampered by high interest payments on its obligations, McCaw turned its attention to promoting Cellular One, the company’s network of cellular phone systems across the country. Hoping to attract corporate clients with offices in different areas, McCaw launched an aggressive marketing push to win customers for his independent cellular operations. In October 1990, the company took another step in that direction when it announced its adoption of a single standard for switching devices in all its cellular operations. In this way, McCaw hoped to foster the development of interlocking, compatible cellular operations across the country.

Furthermore, the company made a commitment to digital technology, representing an advance over the analog equipment in place in many areas. This move was estimated to cost McCaw $170 million for new switching equipment. Despite these encouraging steps toward McCaw’s long-intended goal, the company’s stock dropped sharply during this time, as buyers became more and more wary of Mc-Caw’s astronomical level of deficit.

Progress toward Cellular One continued in 1991, and McCaw announced a joint venture with the Southwestern Bell Corporation to establish the trade name as a national symbol for independent, or non-wire-line, cellular service. The two companies planned to produce a manual of standards and practices for cellular operators and also began work on a national advertising campaign to bolster awareness of the advantages of Cellular One.

In August 1991, McCaw again moved closer to a nationwide network, announcing an agreement with the third largest cellular operator in the country, the PacTel Corporation. The two companies planned to join forces in several large urban areas, including San Francisco, Dallas, and Kansas City. In a 50-50 joint venture, McCaw agreed to contribute 500 million potential subscribers while PacTel chipped in 4.5 million possible customers and $100 million. This move increased McCaw’s sphere of influence without adding to the $5.4 billion debt.

Two months later, McCaw debuted the installation of a software program that allowed customers to receive calls outside of their home areas without the use of a customary series of access codes. With this capability, McCaw created a “North American Cellular Network,” in which four separate areas of the continent were linked by computerized exchanges. In the first phase of the plan, callers in New York, New Jersey, Florida, Nevada, Pittsburgh, the Pacific Northwest, and Canada received the extended services. Eventually, McCaw hoped to convince other independent cellular operators to join the system. “What follows next is persuading partners, not acquiring them,” McCaw told the New York Times. “It’s politics, not finance,” he stated, encapsulating his company’s new business philosophy.

More technological developments came in April 1992, when McCaw revealed a liaison with the International Business Machines Corporation (IBM) and eight other cellular operators to help make transmission of documents and other electronic data by the cellular telephone network possible. Wireless data transfer represented a large new potential market for cellular phone services, and thus, a lucrative source of potential revenue.

McCaw enhanced its customer base in June 1992, by unveiling new Cellular One service television commercials designed to convince potential customers that mobil phones were for everybody, not just businessmen. The company had switched its ad agency in February, but retained its slogan, “imagine no limits.”

Whether McCaw’s enormous gamble on cellular telephone operations would pay off in limitless returns remained to be seen. The company’s earnings, were significantly hampered by its debts, and it had yet to turn a profit after ten years in business. Built by a visionary with a taste for risk, McCaw Cellular has faced anything but smooth sailing.

Principal Subsidiaries

Lin Broadcasting Corporation; MCI Signal, Inc.

Further Reading

Rudnitsky, Howard, “Great Expectation,” Forbes, April 18, 1988; Keller, John J., “Craig Mc-Caw Goes Establishment,” Business Week, February 6, 1989; Fisher, Lawrence M., “McCaw Risks Debt for Dominance,” New York Times, July 6, 1989; Fabrikant, Geraldine, “Craig McCaw’s High-Risk Phone Bet,” New York Times, May 6, 1990; Hof, Robert D., “Step One for Craig McCaw’s National Cellular Network,” Business Week, October 22, 1990.

—Elizabeth Rourke