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Prime/22″/dt1st/mark2nd

By ANN DONAHUE

Staff Reporter

Two years ago, the future looked bright for Prime/Matrix Inc.

The Calabasas-based company was considered one of the three largest independent resellers of wireless communications service in the United States. It had 105 employees and 59,000 customers.

But last month, Prime/Matrix and its affiliates filed for Chapter 11 bankruptcy protection. Prime/Matrix a privately held utility authorized by the California Public Utilities Commission has liabilities of $55 million, according to its attorney. Assets have not yet been determined.

As a Chapter 11 filing, Prime/Matrix customers are not expected to notice any change in their service. “Business will continue as usual,” said President and acting CEO Frank Budetti.

The story behind Prime/Matrix’s sudden cash crunch illustrates the problems that cellular phone companies are having as they fight to attract more customers at a time when revenues from wireless services are falling dramatically.

As a reseller of wireless service, Prime/Matrix buys airtime, cellular phones, Internet hookups and pagers from companies like AirTouch Cellular and Nextel Communications. The company then distributes these products and services to people who have signed up independently as Prime/Matrix customers. By using a variety of vendors, the company is able to offer its customers a large number of service packages, and provides something of a one-stop shop.

It’s a plan that may have put Prime/Matrix at a disadvantage from the start.

“It seems to me that (reselling) is a lot more difficult business model to execute,” said Tom Calcagnini, an analyst at securities firm Dabney Flannigan LLC in West Los Angeles. “It’s not like (they) have a whole bunch of alternatives to get better pricing.”

Especially, he said, given the current state of the industry.

In the early days of the cellular phone business, there were only one or two providers that could offer reliable service. These companies could charge premium rates.

But as the technology became more commonplace and other companies developed the capability to sell wireless communications, service prices took a nosedive. With prices for cellular phone service dropping, profit margins for providers are shrinking so to stay alive, they must concentrate on acquiring a much larger customer base, Calcagnini said.

To counteract this tumble, wireless companies have started using various marketing techniques all of them expensive to get more customers.

Some companies, like Sprint Corp., embarked on extensive advertising campaigns to lure customers. Now, it’s not enough for service providers to have low monthly fees they also have to offer phone plans that come with “some huge number” of free airtime minutes, Calcagnini said.

Digital technology has also made it hard for companies offering analog service to compete, particularly resellers.

When cellular phones were first introduced, they used analog systems that reproduced sound waves as they occurred, frequently resulting in background noise coming through on calls. Digital phones take the sound waves, convert them into computer language and then retranslate them into sound waves. With this process, fuzzy connections are eliminated.

Digital cellular phones, although frequently more expensive, outsold analog phones for the first time in 1998.

Along with the downturn in revenues has come a wave of consolidation in the cellular service industry, as providers seek to get more customers by buying up smaller players.

This was the strategy used by Prime/Matrix. Last year, the reseller gained 25,000 subscribers by acquiring parts of three different companies. The total price tag was $11 million.

But the plan backfired. What the company hadn’t counted on when it developed the strategy, according to Budetti, was the speed with which digital phones would take over the business. Offering digital service is more expensive for providers, but competition for the business is so intense that rates remain low and resellers like Prime/Matrix began finding it nearly impossible to make money.

“Here we are buying subscribers while the average revenue is coming down and whole groups of people are now demanding a new digital phone to replace their analog phone,” Budetti said. “That created the cash crisis.”

The company’s attorney, Lee Bogdanoff of Stutman, Treister & Glatt Professional Corp., said he has dealt with several telecommunication companies filing Chapter 11 over the past few years. But Prime/Matrix’s case is the first one that couldn’t be settled out of court, he said.

Among Prime/Matrix’s largest creditors with uninsured claims are AirTouch Cellular, with $6.5 million, and AT & T; Wireless (formerly L.A. Cellular) with $4.3 million, according to initial court records.

“We hope they make it through bankruptcy, because they’ve been a good customer,” said AT & T; spokesman Steve Crosby.

The Chapter 11 filing was prompted when one of Prime/Matrix’s carriers threatened to cut off its access to wireless service. “Had we not filed, we ran the risk of losing a substantial portion of our subscribers,” Bogdanoff said.

With the Chapter 11 filing, Prime/Matrix was able to remain up and running without service interruptions, Budetti said.

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