Synchronoss Highly Dependent on Creation of New Alternative Service Providers

Implications: 1. With its heavy reliance on AT&T business, Synchronoss is highly vulnerable in terms of pricing. 2. There does not yet appear to be a compelling reason for European wireless carriers moving to the iPhone to take advantage of the Synchronoss solution because they already have order entry systems in place. 3. The types of winners of the 700-MHz auction might help determine its future success.

Analysis: The tremendous achievement of Synchronoss has been essentially based on an aberration – two RBOCs running a joint venture. In general, there was mutual distrust between SBC and BellSouth that seemingly moved them in a direction of outsourcing order entry for Cingular. In order to avoid finger-pointing, they were willing to pay as much as three times the cost of doing this function internally. One of the apparent regrets of Ed Whitacre was in even starting Cingular with BellSouth. The crowning moment came when he bought the RBOC and put the large wireless company under his total control.

In replacing a fixed software development cost with the per-transaction fees, AT&T is in effect using OPEX instead of what otherwise would require CAPEX. However, for any large wireless carrier, the incremental capital expenditures are not compelling enough to avoid doing order entry in-house – especially at a time when activations represent a lower percentage of their overall subscriber base. The economics are not justified because these operators have already bought activation systems that are still being depreciated. It really only makes sense to farm out this service by customers that lack the infrastructure including Clearwire, Vonage, and partially with Cablevision’s voice provisioning.

Still, AT&T is not exactly in a position to totally dictate terms on its next contract with Synchronoss. With all of the high costs of integrating three large entities, shifting to an internal order entry process is probably not a big priority. The transition would likely take about 18 months anyway in order to conduct the testing, etc. Yet, these short, 12-month agreements are hardly an endorsement for AT&T indefinitely farming this service out to Synchronoss.

Synchronoss does make some good points. Order entry is not a clean process and remains very manual in nature – creating the potential for lots of errors. Undoubtedly, Synchronoss has made great strides in improving upon this function. But it is still the case that cutting over a cell phone from one carrier to another is simply not looked upon as a major operational headache.

The potential for greater customer diversity for Synchronoss will be based on the number of new service providers that are established, partially as a result of the upcoming spectrum auction. Historically, order entry is a big problem for many startups because they do not think ahead of time to put the systems in place to handle it. In addition, the MSOs, Google or any other established firms entering the wireless space might be inclined to take advantage of Synchronoss’ capabilities.

Penetration by the iPhone in Europe automatically leading to business for Synchronoss seems to be a stretch. Just as with any other handset vendor, Apple is not really involved with provisioning – and the European carriers already have the back office in place to take care of the order entries.