Sunday Times of London 9/19
Phone deal sparks stampede
NEWS that Ivan Seidenberg, Bell Atlantic's chairman, and Chris Gent, Vodafone AirTouch's chief executive, have buried the hatchet and are negotiating to merge their American mobile operations into a $70 billion-$80 billion company is accelerating a global race in the mobile-phone industry.
On Thursday, as The Sunday Times predicted last month, AT&T and British Telecommunications announced the formation of a global wireless alliance, called Advance, that will enable customers to use the same mobile phones and numbers on both sides of the Atlantic.
MCI/Worldcom is believed to be preparing to make a bid for Nextel, the third-largest American mobile carrier. Half a dozen smaller, independent wireless telephone operators have been discussing the creation of an alliance among themselves.
Andrew Cole of Rennaisance Worldwide, an American consulting firm, says: "The [Bell Atlantic] deal has put pressure on everyone. There is huge price erosion going on in the mobile phone business. Within three to four years call rates will be down to three cents a minute. That presents a big problem for the carriers. They have to generate scale to reduce costs so they can compete."
People with a knowledge of the Bell Atlantic and Vodafone discussions warn that there are still many sticking points in their talks and there is no guarantee they will be successful. But analysts and investors greeted the long rumoured venture positively. Bell Atlantic closed on Friday at $64.50 (up 3% on the week) and Vodafone closed at œ12.53 (up 5%).
George Dellinger of Washington Analysis says: "The deal makes perfect sense."
Bell Atlantic's franchises on the eastern seaboard and Vodafone's in the Midwest and West fit together "like two jigsaw puzzle pieces" says another analyst. The merger will create the largest American wireless network, ahead of AT&T, Sprint and Nextel. Vodafone is already the world's top mobile phone company.
Seidenberg was outraged in January when Gent, using Vodafone's high share rating, outbid him in a two-week battle for AirTouch. Bell Atlantic, based in Philadelphia, had had its eyes on AirTouch, based in San Francisco, for years and had formed a joint venture with it, called Primeco Personal Communications, in 1994 to bid for wireless licences in American towns. After Vodafone and AirTouch merged, Seidenberg terminated Primeco, creating a big hole in Bell Atlantic's plans to create a national cellular network - and robbing Vodafone of a presence in the east.
Although the logic of merging Bell Atlantic's and Vodafone's American cell business was overwhelming, Seidenberg, until recently, was opposed to it, says a friend. He is a tough-minded self-made man, who took the loss of AirTouch personally. But Frederic Salerno, his chief financial officer, and Sam Ginn, AirTouch's former boss and now Vodafone's chairman, eventually persuaded him to meet Gent in July to attempt a deal.
Seidenberg was wary of the cricket-loving Englishman with his pin-striped shirt and red braces. Strictly blue-collar, Seidenberg started work as a cable splicer with New York Telephone - and still proudly keeps the knife, shears and sheath he wore on the job in a desk drawer. He served in Vietnam before returning to the phone company and taking night classes at the City University in New York. A few years later he switched to AT&T and rose through the management ranks. When Ma Bell was broken up by anti-trust regulators in 1984, he found himself an executive at Nynex, the regional Bell company covering New York, and eventually he became chairman. Nynex merged with Bell Atlantic in 1997.
Gent was keen to deal and appears to have been conciliatory from the start of discussions. As soon as he made it clear he would give control of the joint-venture to Seidenberg, the talks progressed rapidly. Bell Atlantic will own 55% of the new venture and Vodafone will get 45%. It has been agreed to float the company within two years so Vodafone can sell its shares if the partnership is not satisfactory. Lawrence Babbio, Bell Atlantic's president, will probably head the venture.
The new company will serve 20m customers, compared with AT&T's 11.5m cellular subscribers (generating sales of $3.36 billion), Sprint's 4m (sales of $1.34 billion) and Nextel's 3.6m (sales of $1.47 billion). But it will complicate Bell Atlantic's merger with GTE, another local phone company, which is awaiting regulatory approval.
GTE has a large cellular business that overlaps AirTouch in several markets, notably California and Texas. Anti-trust regulators may require the new Bell Atlantic-Vodafone venture to sell some big-city franchises to gain approval.
Another problem will be the incompatibility of Bell Atlantic's and AirTouch's technology. Unlike Europe, where one mobile phone standard (GSM) exists and most subscribers can use the same phone wherever they go, America has three incompatible standards.
Andy Sukawaty, chief executive of Sprint PCS, believes bringing together the two companies' different technologies and management and billing operations will be difficult. "They still have their work cut out, and it won't change market share overnight," he told the Wall Street Journal.
Until recently the appeal of mobile phones in America has been limited by the fact that the owner had to pay for calls made to as well as from his phone and usually has to pay expensive "roaming" charges (for calls made outside his local area). But AT&T and Sprint last year pioneered cheap "no-roaming" services and call costs are falling 30% a year.
The number of American users is now rising rapidly and wireless telephony has become the fastest-growing and most profitable business for many companies, including AT&T.
There are now 70m users. That is still only 25% of the population, compared with 40%-50% in most western European countries. But the gap is closing. The Yankee Group in Boston says American mobile phone use will quadruple in five years, rising from 105 billion minutes in 1998 to 554 billion minutes in 2004 - the equivalent of 80m people each making 2.25 hours of calls per week.
With the advent of new technologies providing faster wireless connections (broader bandwidth), analysts expect cellular networks to handle more data and internet traffic and spur an exponential growth in usage.
This booming future market is driving companies into the mobile business and making them pay such high prices. Vodafone paid $62 billion (œ38 billion) for AirTouch.
Whether the rewards will ever justify these prices is debatable. Joao Baptista of Mercer Management says: "The valuations of these companies are currently unsupportable. There is a huge leap of faith around the technology and the customer demand that is just not proven."
NextWave, a start-up phone company currently in bankruptcy proceedings in Washington, agreed to pay the government $5 billion for a block of airwave licences in 1997. The licences gave it America's third-largest cellular footprint but it has been unable to raise the money to build its network or pay the government.
Cole believes there will be only "four to six super-wireless carriers" at the end of the day. "We're not even half done with the consolidation we are going to see," he says.
Although there are fortunes to be made, tumbling charges will drive many smaller operators out of business. Even the biggest carriers may eventually outsource their networks, Cole predicts. "We are seeing new entries, such as America Online, Yahoo! and General Motors all coming into this business. They are going to be giving it away because the whole market is moving towards data and online commerce. The value is shifting away from the network to the customer," he says.
But the problems of providing a seamless global network were underscored last week by AT&T and BT when they said their first attempt at plugging customers in to each other's networks will involve customers having to use different handsets. A single handset may not be ready for 18 months.
Advance is the latest in a string of alliances between AT&T and BT. In July 1998 they agreed to form a $10 billion global joint-venture uniting their traditional wireline networks outside their home countries. Recently they announced $3 billion of joint investments in Japan and Canada.
Analysts believe the two companies are moving closer and closer to a full merger. Who will emerge as the other "super-carriers" remains to be seen.
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