Come Together
By Dan Briody, Thu Feb 21 00:00:00 GMT 2002

The time for consolidation in the wireless industry is closer than you think.


When surveying the wireless landscape over the next year, one might be reminded of some prescient song lyrics John Lennon once crooned: “Come together, right now, over me.” Okay, so maybe the Beatles didn’t have wireless consolidation in mind when they wrote that particular tune. But that doesn’t change the fact that the wireless market is expected to come together in a hurry, and on a global scale.

To get a grip on what lies ahead, it’s best to fully understand what is already behind us. There are several reasons why the wireless market is expected to consolidate in the next year, the most important of which is money. Who can forget the $100 billion European wireless carriers spent on 3G spectrum last year? Or the massive debt loads and miserable financial performances of nearly all of the U.S. carriers?

The combination of these factors is enough to shrink any market to half its original size, and the wireless market is no different. But add to that the fact that many carriers believe that in order to be truly successful and profitable, they need to obtain a global market, thereby achieving the economies of scale befitting a market with razor-thin margins. Hold on to your cell phones people, because big changes are on the horizon.

Early indicators


As the costs and complexities of building massive next-generation wireless networks mount, carriers are already starting to understand that they can’t go it alone. In what can only be seen as a precursor to mergers, network operators are entering into once-unthinkable network sharing agreements, in an effort to defray the costs of building global networks alone.

British Telecom’s deal with Deutsche Telekom to share the costs and infrastructure of their 3G networks across Europe is paving the way for various other telecommunications giants to do the same. Even mighty AT&T Wireless recently agreed to share network building duties with Cingular, to help both companies cover the sprawling rural markets.

“The joint ventures are just laying the groundwork,” explains Mike Doherty, an analyst at Ovum. “This year everyone’s going to be testing the waters, seeing who is compatible. You’re starting to see them flirt with each other.”

The Big Boys


Some truly international companies have of course been paring down their global holdings, like British Telecom, which divested itself from several of its foreign investments in an effort to pay down its enormous debt. But others continue to expand their global holdings. Japan’s NTT DoCoMo has long held to a strategy of claiming minority stakes in a variety of international carriers, like AT&T Wireless. Deutsche Telekom made its intentions known two years ago when it picked up a majority stake in the U.S.’s Voicestream. And of course Vodafone, which has more than 120 million subscribers in dozens of countries, recent investments in Japan’s J-Phone and China Mobile, and a deal with Verizon Wireless that gives it access to the lucrative U.S. markets.

“Vodafone is the first truly global carrier,” says Martin Dunsby, analyst at Deloitte Consulting. In fact, the only competition on a global scale that Vodafone sees on the horizon comes from DoCoMo, Spain’s Telefonica, Deutsche Telekom and Orange. But even those carriers are not as far along as Vodafone. In 1999 and 2000, Vodafone announced deals totaling $271 billion, which made the wireless giant the most acquisitive company on the planet. It provides service in 28 countries, but has paid dearly for each of its 120 million customers. When it bought Germany’s Mannesman, it paid approximately $14,740 for each customer. Some deals were cheaper than others though. Vodafone paid only $3,232 per customer when it bought Eircell, Ireland’s wireless business.

Most analysts believe that the European market will eventually shrink to just four carriers, most likely Vodafone, Orange, Deutsche Telekom’s T-Mobil, and Telefonica. Those are the four wireless carriers currently believed to still be bidding for majority stakes in Eastern European wireless companies like the Czech Republic’s Cesky Telecom. Telefonica has been on an international tear of its own of late, investing heavily in South America, even acquiring stakes in Cantv, a Venezuelan TV monopoly. But Telefonica’s ambitions have waned slightly in the new year. The company suspended it’s takeover bid for share it did not already own in Celular CRT in Brazil in September of 2001, and has said it may freeze its expansion on Brazil because of macro-economic conditions.

Far East forays


In Asia, things are a lot more confusing. China has seen its first actual competition in the wireless telecommunications market in the last decade with the introduction of China Unicom to challenge the incumbent monopoly of China Telecom. China Mobile has made some headway in the coastal regions as well, but none of the Chinese providers seem to have the global aspirations of their overseas brethren. “The Chinese market is likely to stay the way it is, because revenues per user are so tiny and the cost to build infrastructure is so high,” explains Dunsby. “It’s a very large market, but the economics just don’t work.”

But just across the sea is Japan, where revenues per user are significantly higher and NTT DoCoMo has found the trick to expanding its global reach. Because DoCoMo’s iMode technology is unique, it has spent its time establishing smaller stakes in companies like AT&T Wireless and Dutch operator KPN. The idea is to establish a presence on these companies’ boards and influence the technology decisions, paving the way for iMode elsewhere in the world. It works. After accepting a 16 percent stake, DoCoMo successfully convinced AT&T Wireless to abandon its plans for TDMA, and switch to GSM, then ultimately W-CDMA.

But DoCoMo’s got enough competition on its own island, with J-Phone’s emergence as an operator to be reckoned with. Owned mostly by Vodafone, Japan is beginning to look like the battleground over which two of the world’s globally ambitious wireless providers wage war. It’s Godzilla versus King Kong all over again.

America’s island


In the U.S., there is likely to be another wave of consolidation, independent of the global shrinkage, at the end of this calendar year. In December, Federal Communications Commission Chairman Michael Powell lifted the much-reviled spectrum cap, which mandated that no wireless carrier would own more than 45 MHz of spectrum in any given market. The cap was raised to 55 MHz, and will be eliminated altogether by January of 2003. That means that the spectrum-strapped American carriers will move to acquire more spectrum by acquiring the spectrum holders, their competition. It is expected to wipe out the regional carriers altogether and reduce the U.S. market to only four major national carriers. That fact that these carriers are willing to purchase entire companies, simply to gain access to the additional spectrum, gives you some idea of how dire the spectrum situation in America is.

The most attractive acquisition target anywhere right now is Nextel. With its customer base of business professionals, Nextel represents the market demographic that just about everyone wants right now. Nextel brings the highly coveted high ARPU, or average revenue per user, because its user base is made up of mostly business people that rely on mobile technology to do their jobs. And with Nextel’s recent flirtation with the CDMA market, they would make a compelling target for Verizon, which uses CDMA and needs spectrum badly. Nextel brings 10 MHz of contiguous spectrum to the table, and that’s something that a lot of carriers, not just Verizon, would love to get their hands on.

American carriers have been slow to invest abroad, given their own financial woes. And experts expect most U.S. companies to continue to focus on their domestic service for at least the next year, before any of them really start taking globalization of their operations seriously. In short, they have enough problems right here at home, so why go looking for trouble overseas?

Roadblocks?


Standing in the way of consolidation is a series of regulatory hurdles that could put a serious crimp in any carrier’s plans for world domination. The European Union has already signaled its unwillingness to let the forces of capitalism sweep through the continent unabated when the European Commission declined to approve the mergers of Telia/Telenor, Telecom Italia/Deutsche Telekom and Belgacom/KPN. “The E.U. is in a very difficult spot,” says Dunsby. “ They want to promote competition and protect the market, but they also have extracted these huge license fees for spectrum, and now the only way the carriers can remain solvent is to consolidate.”

Meanwhile in the U.S., Federal Trade Commission made life very difficult for Deutsche Telekom in its takeover bid for Voicestream. American law requires that any foreign telecommunications concern interested in purchasing or taking a stake in a U.S. carrier must not be majority owned by the government of the foreign state.

The law forced the German government to sell some of its stake in Deutsche Telekom, and it underscores some of the security concerns governments will have when telecommunications truly becomes global. Call it Cold War hangover if you want, but letting a foreign government tap into the telecommunications infrastructure of your country is a legitimate cause for concern. Much of it, experts say, is just political posturing however. “Regulators seem less concerned about actual network ownership as they are about the appearances of the deals.”

And some experts question the real need for consolidation, when there are plenty of smaller markets that are still underserved. “So what if markets can’t support 6 carriers, what is the harm in retreating into your local market?” asks Ovum’s Mike Doherty. “Being global is not the only way to go.”

No stopping it


Others think it is still premature to be talking about the next wave of acquisitions. As Ovum analyst Mike Doherty says, “We haven’t even ironed out the first wave of mergers yet, and here we are talking about a second wave already.” But you can be certain that the wireless carriers involved are way ahead of that, sizing up the competitions and looking for possible fits. The early favorites for world domination are Vodafone, NTT DoCoMo, and Deutsche Telekom. But you can’t forget about dark horses like Verizon, or even AT&T.

Economists will tell you that fewer competitors mean less competition, which results in higher prices and poorer service. That is something that no wireless subscriber wants to hear of course. But if the major markets can sustain at least three or four major providers of service, prices should remain relatively stable. If things shrink any more than that, which would be a surprise, markets could lose competitiveness and could potentially start to look more like the local phone monopolies most of us have learned to live with.

But more than the possible impacts on competitiveness and pricing, major mergers and acquisitions can have deleterious effects on quality of service. Customers, especially large business customers with global offices and global contracts, can expect things to get bumpy. At least temporarily, service can be spotty and inconsistent, as the companies divert that resources to either gaining regulatory approval of a merger, or actually integrating the disparate companies.

That said, globalization seems inevitable at this point, and many, if not all, of the mergers are likely to go through, one way or another. And the results will vary widely. Like any maturation, its painful to experience but the end results are often worth the pain.

After failing miserably at every attempt to become the next great American author, Dan Briody settled in San Francisco and started writing about the technology revolution in the mid-90s. Today he is the author of Red Herring's Wireless Watch column, and he is still trying to write the great American novel.