Brightpoint, Inc.

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Brightpoint, Inc.

6402 Corporate Drive
Indianapolis, Indiana 46278
U.S.A.
(317) 297-6100
Fax: (317) 297-6114
Web site: http://www.brightpoint.com

Public Company
Incorporated: 1989
Employees: 250
Sales: $280 million (1995)
Stock Exchanges: NASDAQ
SICs: 5065 Telephone Equipment, Wholesale

Brightpoint, Inc. is the second-largest independent U.S. distributor of cellular phone and cell phone accessories and in the mid-1990s was among the 50 fastest-growing companies in the United States. It acts as a middleman between the cellular carriers such as GTE, AT&T, and BellSouth—the companies that supply the actual transmission service for cell phone calls; the manufacturers of cell phone equipment and accessories, such as Nokia, Ericsson, and Motorola; and the cell-phone end-user or customer. In 1995, roughly 32 million subscribers used cell phone service in the United States, and Brightpoint’s share of the total cellular equipment distribution market was 9.2 percent, second only to industry leader Cellstar Corporation of Texas.

Besides distributing nine lines of wireless phones, including car, portable, and handheld models (85 percent of its net sales in 1996) as well as 20 lines of wirelesss accessories such as batteries, chargers, and leather cases (15 percent), Brightpoint offers value-added services such as inventory management, same-day shipment, product training, cell phone programming, and custom packaging or “kitting.” All told, its roughly seven to ten thousand customer accounts include agents, dealers, chain stores, resellers, exporters, direct marketers, expediters, and by far the largest single category, cellular service providers. In 1996, Brightpoint distributed cell phones and accessories to customers in all 50 states, and through its international offices in Toronto; Manchester, England; Hong Kong; Sydney; and Johannesburg distributed equipment in 80 foreign countries.

The Birth of an Industry: 1984–89

The first test to determine the commercial feasibility of cellular communication technology was conducted in 1962, fifteen years after AT&T’s Bell Laboratories introduced the idea of cellular transmission of radio communications signals. In 1970 the Federal Communications Commission (FCC) set aside radio frequencies for “land mobile communications,” and by 1977 it had announced the construction of two cellular development systems in Baltimore/Washington and Chicago. As a U.S. cellular phone—or car phone, in its most common application—industry began to emerge in the 1980s, the FCC decided to authorize only two cell phone service carriers for each urban market, a decision that helped to keep the average monthly cost for cell phone service well above that of conventional phone lines for several years. Nevertheless, by 1985 roughly 300,000 U.S. cell phone subscribers were using cell phones throughout the United States.

In 1986, a young Indianapolis entrepreneur named Robert Laikin established a travel agency to cater to the corporate customers he had acquired through his first business enterprise, Tickets Up Front, a ticket agency for corporate clients. When a salesman for the communications firm Arnie Goldberg brought in an early model cell phone, Laikin became intrigued by the technology and agreed to buy one for his on-the-road business calls. He also invited Goldberg to call him if he ever wanted to go into business selling phones. Two weeks later Goldberg reappeared to take Laikin up on his offer and, using $20,000 from his ticket and travel agencies, Laikin and his partners bought a 50 percent share in the new business, Century Car Phones (later renamed Century Cellular Network, Inc.). By charging customers as much as $500 less per unit than his competitors, Goldberg began signing up new accounts in droves, and Century was soon expanding its monthly cell phone orders from one hundred to one thousand. By 1987 the number of cellular phone subscribers in the United States had grown to one million, and the average monthly cell phone subscription had dropped to a modest 50 dollars. Century rode the wave and by 1988 had become Indiana’s leading cellular retailer. As the boom in cellular service grew, cell phone manufacturers struggled to keep up with demand, and retailers in small markets, like Century, found themselves wait-listed while the big urban markets were supplied. Dismayed by the practice, Laikin decided to establish his own low-cost cell phone supplier to buy Century’s phones cheaply through bulk purchases from manufacturers. In partnership with Daniel Koerselman, a salesman for a car phone accessory firm, Laikin founded Wholesale Cellular USA in 1989. When the nation’s cellular service carriers began reducing the commissions they paid local retailers like Century, however, Laikin began to view Wholesale rather than Century as his main chance for success in the cellular industry.

Wholesale Growth: 1989–93

Laikin’s strategy for growing Wholesale Cellular read like a primer on successful business startups: The company’s Midwest location capitalized on a trend afoot in the cell phone manufacturing industry, where firms were now beginning to look for new markets outside the major urban areas. Wholesale was strategically positioned to supply cell phones not only to Century but for agents in several Midwest states. Laikin also made sure to pay manufacturers promptly for all orders and was rewarded with first priority whenever manufacturers had to dole out cell phones during periods of short supply. Finally, Laikin kept Wholesale’s costs to a minimum. With little real capital or collateral and a desk piled high with banks’ loan rejections, Laikin was forced to operate with a low overhead and minimal inventory. To keep Wholesale’s cash flow strong and steady, he made sure customers got their phones right away. Within a year of its birth, Wholesale had ceased to be merely a vehicle for Century’s growth and was amassing sales of $12 million.

As the wireless industry expanded, the cellular service providers began reducing the number of operations they involved themselves in in order to concentrate on selling “minutes of use” rather than storing and, more often than not, essentially giving away expensive handsets to attract customers, who often discontinued service after only a few months. Hundreds of small third-party distributors like Wholesale began to occupy a larger segment of the middle market between the buying public and the cellular service carriers and phone manufacturers. Besides buying the cell phones from the manufacturers, these small, low-capital, usually privately owned distributors gradually began to take on the “hardware” functions of the cellular service carriers. They maintained and managed their phone equipment inventory, programmed the cell phones for the individual markets they were destined to be used in, executed the delivery of the cell phone to customers, and sometimes activated the customers’ cellular phone signal. As the price of cell phones dropped and the number of subscribers grew, competition among the industry’s scattered distributors heated up, and low-cost firms like Wholesale could grab larger wedges of market share by buying phones in enormous volume, undercutting their competitors’ prices. The wireless distribution industry began to consolidate rapidly, a trend that was only exacerbated when, in an economizing move, the cellular service carriers cut the number of suppliers they worked with. In an industry driven by rapid technological change, cutthroat competition, constantly falling prices, and hairline profit margins, only the distributors with the best management, the most financial resources, and the greatest flexibility stood any chance of surviving.

Wholesale Cellular was quickly establishing itself as that kind of company. By 1991, it had five hundred customers and sales of $32 million. By 1992, the number of cellular phone users in the United States had grown from zero only nine years before to ten million, and no fewer than 1,500 cellular systems were up and running across the country. With the adoption of wireless technology growing faster than virtually any previous technology—including color television, VCRs, and personal computers—at least one industry analyst anointed wireless technology “the product of the century.” In 1992 Wholesale’s sales leaped 50 percent to $48 million and then in 1993 another 60 percent to $77 million. As profits broke the $2 million mark, Laikin stepped down as president of Century in 1993 and in June entered the potentially gargantuan international wireless market by launching a Wholesale presence in Brazil.

“People Don’t Like Wires”: 1994–95

With net sales closing in on $169 million, Laikin took Wholesale public in April 1994 with an initial public offering (IPO) of common stock that raised $13.5 million. Like most IPOs, the decision to yield part ownership to public shareholders was driven by Laikin’s desperate need for capital to keep his five-year-old juggernaut rolling. Laikin plowed part of the year’s cash influx into the continuation of Wholesale’s international expansion. The Chilean market was opened up in January, followed by Argentina in July, Columbia and Mexico in November, and Israel in December. In October Wholesale established an office and warehouse facility in Miami to serve its burgeoning Latin American customers. Moreover, Laikin was also pursuing a joint venture with the Indian information technology giant Pertech Computers Ltd. to distribute cellular equipment to the vast Indian middle class. In less than two years in the global marketplace, Wholesale’s international business had grown to 10 percent of total sales.

Company Perspectives:

Brightpoint’s business mission is to distribute wireless communication equipment and related products globally and to provide related services including inventory management, fulfillment, and programming. Private label capacity and custom packaging are important services as well. The company’s primary mission is to always be the most efficient channel of distribution for vendors and the low cost/high service provider to customers, thereby the best total cost provider in terms of price, time, and reliability.

Since Wholesale’s inception, Laikin had been working double time to juggle the company’s growing operations while visiting potential foreign markets and anticipating the latest developments in the wireless industry and cell phone technology. “I wanted to delegate,” Laikin told the Indianapolis Business Journal, “I just had no time to delegate.” On a friend’s recommendation, he began exploring the possibility of bringing J. Mark Howell, the chief accountant of the automobile auction firm Adesa Corporation, on board to manage Wholesale’s finances. Howell initially resisted, but Laikin was persistent and in July 1994 Howell was named executive vice-president in charge of Wholesale’s financial operations, administration, information services, and human resources.

By 1994, Wholesale’s market-winning strategy had become clear. The cellular service providers who comprised the bulk of its customers paid Wholesale a flat dollar amount for each phone sold, and Wholesale negotiated directly for distribution rights with roughly 45 phone manufacturers—virtually all the major brands—to guarantee inventories of cell phone products, which were selected on the basis of quality, price, customer demand, product availability, and brand recognition. Wholesale’s staff placed daily orders for equipment by phone or fax with the manufacturer, who then shipped them directly to Wholesale’s warehouses in Indianapolis and Miami, where Wholesale’s proprietary order fulfillment system shipped them in bulk to large buyers or singly to individual customers. By carefully avoiding dependence on any single supplier and by offering phones for every cellular transmission standard, Laikin could essentially eliminate the risk of being stuck with a product suddenly out of favor in the marketplace. Moreover, by resisting a contractual obligation to a single manufacturer (such as Cellstar’s relationship with Motorola), Wholesale could market itself to manufacturers, service providers, and end users alike as a truly independent supplier.

Wholesale also assiduously expanded its order fulfillment services to encompass not only traditional product handling and warehousing but custom phone labeling, branding, and packaging; phone warranty and repair services; and overnight, “just-in-time” delivery. Laikin’s quip that the cell phone industry’s growth was being driven in part by the simple fact that “people don’t like wires” was proven true when truly portable “walk-and-talk” cell phones began to become as common as the traditional car-mounted mobile phone. A whole new range of accessories became available for the new nonautomotive cell phone market, from antennas and carrying cases to batteries, rechargers, and “hands-free” kits, and all were integrated into Wholesale’s distribution system. Because such accessories could normally be priced for a much greater profit margin than cell phones, Wholesale gained a welcome jolt of income, and by 1994 accessories were accounting for 12 percent of company sales.

In 1995 Wholesale also announced a five-year agreement with cellular service provider BellSouth Cellular Corporation and HSN Direct, the “infomercial” division of Home Shopping Network, Inc. to sell cellular phones and service. Under the plan, HSN Direct would initially produce 30-minute infomercials marketing BellSouth’s “Mobile America” cellular service and products through an 800 number, with Wholesale fulfilling the orders.

In 1995 Wholesale also formed a joint venture, Wholesale Cellular Latina, with consumer electronics distributor German Garrido to distribute cell phones and accessories in Argentina, Bolivia, Chile, Ecuador, Paraguay, Peru, and Uruguay while expanding its warehousing facilities in Miami to absorb the additional traffic. As mid-year sales showed Wholesale on a course to break the $269 million mark for the year, Laikin announced that a new $4 million headquarters, warehouse, and distribution complex would be constructed in Indianapolis, a few miles from its existing site.

Brightpoint, Inc.: 1995–97

As Wholesale’s business continued to expand far beyond phone distribution, Laikin began to search for a new name to reflect the company’s growing scope and potential. In September 1995, Wholesale Cellular USA was officially renamed Brightpoint, Inc. because, as Laikin’s right-hand man, J. Mark Howell, explained, “we wanted a name that was not limiting in any way. We’re just trying to get away from the perception of the company being a box-moving distributor.” By August, Brightpoint had agreed to form a joint venture with India’s Pertech Computers to begin distributing cell phones, pagers, and accessories in India in late 1995 and early 1996.

As Brightpoint expanded, it accumulated debt and a pressing need for additional growth capital. In October 1995, Laikin made a second stock offering to the public, this one for about $34 million, which resulted in increased equity of $59 million and the wherewithal to pay down its debt, fund the move to its new 90,000-square-foot office and distribution facility, and install a new management information system. In November it established a presence in mainland China and Hong Kong and expanded its Miami facility further. In December Brightpoint entered the Philippine, Malaysian, Singapore, and Taiwan markets for the first time. As the year drew to a close, Brightpoint announced the acquisition of the British firm Technology Resources International Ltd., which became part of a new operation, Brightpoint International Ltd. Headquartered in Manchester, England, it would conduct all Brightpoint’s sales and marketing activities outside North and South America.

Meanwhile, the cellular phone industry was changing almost as rapidly as Brightpoint’s efforts to keep up with it. New lightweight phone designs and the introduction of a new generation of digital cellular technology called PCS (personal cellular service) were beginning to fuel a booming phone replacement market as consumers began to substitute their older phones for the latest technology. New battery-less plug-in phones and long-life lithium ion batteries were giving Brightpoint new products to add to its line of accessories, and as cell phone service and equipment prices fell the consumer cell phone user was replacing the “power user” as the typical buyer, unleashing new demand for new phone styles, colors, features, and accessories. By the end of 1995, Brightpoint’s sales had surpassed $260 million, and international customers in thirty-five countries were now accounting-for 27 percent of its sales. Of Brightpoint’s 6,000 customers, Nokia, BellSouth Cellular Corporation, Motorola, and AT&T Wireless Services were now accounting for 58 percent of its product purchases. On the strength of Brightpoint’s 91 percent return on equity, Forbes magazine ranked it among the top three “Best Small Companies in America” in 1995.

The year 1996 was Brightpoint’s best ever. Distributors were handling 30 percent of the cell phones and accessories being sold by the industry, with the remaining 70 percent shipped by the phone manufacturer to the service carrier or directly to retail stores like Radio Shack and Office Depot. Laikin wanted a piece of the retail pie too and announced in March that Brightpoint would be performing the repackaging and preprogramming of the “Cellular to Go” phone products marketed by U.S. Communications, Inc. in such mass retail outlets as Target, Kmart, and CompUSA. Brightpoint also announced that its own branded line of cell phone accessories named Brightlink would be sold in mass market retail outlets around the United States. Moreover, in 1996 Brightpoint agreed to provide the inventory management, order fulfillment, and packaging and telemarketing services for a new joint venture named Wireless LLC formed with paging service provider Metrocall Inc. and wireless developer America Unplugged of South Carolina. Finally, in late 1995 Brightpoint expanded its participation in the “Cellular to Go” venture by adding the Michigan chain Meijer, Inc. to its growing list of retail customers.

The year’s biggest move, however, was the acquisition in early June of Allied Communications, Inc., the fourth-largest cell phone distributor in the United States and one of Brightpoint’s sharpest competitors. In exchange for $42 million of Brightpoint stock, Allied added $150 million in sales to Brightpoint’s kitty and vastly expanded its U.S. and Latin American presence. As Howell explained, the acquisition—which transformed Brightpoint from the third-largest to the second-largest U.S. cell phone distributor—gave the company more “purchasing power and financial stability, as well as more infrastructure.” It also fit neatly with Brightpoint’s new focus on retail sales, which Allied had specialized in. Now, Howell continued, “we can offer dealers one-stop shopping and speed of delivery.” Of the hundreds of distributors that once crowded the wireless equipment distribution market, only five remained.

The feverish growth continued as the year wore on. Brightpoint secured a beachhead in the new PCS digital cellular technology standard by becoming the sole distributor of PCS phone equipment for BellSouth Mobility DCS in three southern states and won a contract with Omnipoint Communications Inc., the fifth-largest PCS operator in the United States, to provide phone packaging, inventory management, and order fulfillment services for Omnipoint’s market of 40 million potential PCS customers. Finally, Brightpoint further consolidated its international strategy by acquiring distributor Hatadicorp Pty. Ltd. of Sydney, Australia, to form Brightpoint Australia Pty. Ltd. and increasing its ownership of Brightpoint International Ltd. to 100 percent.

Despite rapid growth, by 1997 the best days for Brightpoint and the cell phone industry at large seemed to lie ahead. The growth in U.S. cellular use was expected to continue at 20 percent annually, and the percentage of the U.S. population with cellular phones was expected to grow from 15 to at least 40 percent by 2002. Less than 1 percent of the potential international cellular market had been tapped by 1996, and the number of international subscribers was expected to top 180 million by the year 2000. By moving toward a fifty-fifty mix of international and domestic business, Brightpoint was poised to reap the benefits of this global growth, and analysts were predicting that its sales would break $1 billion by the end of the century.