12/06/99 - Vodafone's Bid Speaks Volumes -- Gent's All-Wireless Strategy Called Into Question
Dec. 05, 1999 (LTH - CMP via COMTEX) -- No matter how it plays out, the days of independence for Europe's largest new entrant are clearly numbered. Triggered by its own European expansion and corporate restructuring plans, Germany's Mannesmann AG (Dusseldorf) and its tasty wireless holdings have become a prey of choice for some of the world's largest service providers. None other than Vodafone AirTouch PLC (London), its major European partner, has emerged as the hungriest predator through a hostile takeover bid that's pushing $130 billion.
Other formal suitors may emerge, and Mannesmann could fight off the offer. But most of the good money remains on Vodafone. Whether that's ultimately the right move for the burgeoning wireless service provider is another question. Gobbling up Mannesmann would create a formidable company that, with 42 million subscribers, could claim to be the world's largest wireless carrier. That alone could annoy European regulators, who have to judge whether an enlarged Vodafone would promote or inhibit greater competition in Europe's freshly liberalized telecom sector. Regulators probably won't block the move in any event. Still, many analysts and competitors question Vodafone's fundamental strategy of concentrating almost exclusively on wireless. After all, they note, the communications industry as a whole is obsessed with converging services.
There's certainly no denying the competitive spirit of Vodafone CEO Christopher Gent, who is determined to make his company the world's premiere cross-border wireless carrier. A Mannesmann takeover would give the group control of 10 European networks. Linking mobile networks across Europe-as Gent has already done in the United States through his acquisition of AirTouch Communications Inc. (San Francisco) and a wireless merger with Bell Atlantic Corp.-will help reduce pricey roaming fees through cross-border, flat-rate tariff schemes. The additional bulk would also help Vodafone achieve economies of scale to strike better infrastructure and handset deals, which could lead to cheaper prices for users. Regulators and users can't help but support those consequences.
What Gent clearly opposes, though, are any sideline activities that dilute his resources and divert his attention from developing wireless services, which he believes offer the market's great potential return. His commitment to wireless is based on three basic tenets: Most simple voice telephony will be wireless in the future; new high-speed technologies will soon bring Internet to the cell phone; and wireless networks are easier to string together than fixed networks.
All this may be sound thinking, but here's where Gent runs into a conflict with Mannesmann. The German company that Gent is so eager to acquire is one of Europe's largest alternative fixed network operators. Mannesmann owns 74.9 percent of Germany's Mannesmann Arcor AG (Frankfurt), 100 percent of Italy's Infostrada SpA (Milan) and 15 percent of Cegetel Entreprises S.A. (Paris). It is also one of Europe's biggest investors in competitive local networks to serve both business and residential customers, having led and won a tough battle for unbundled access in Germany as well as achieving concessions in Italy and Austria.
Gent's post-acquisition strategy calls for spinning off Mannesmann's fixed-line operations into separate units that can focus on the big-spending corporate sector. Building local networks in the less lucrative mass market is just too expensive, especially in Europe. Installing a main distribution frame in a major German city like Cologne costs between DM300,000 and DM400,000 (US$160,000 to US$210,000), says Gerd Eickers, president of the local access provider QS Communications AG (QSC, Cologne). "To provide citywide coverage, you'll need to install at least 50 distribution frames," he says. "Do that in 40 big German cities, and the costs add up fast."
The plan is nothing less than an exodus from the costly business of running a nationwide local exchange business, which has some European industry officials worried. "That's the last thing we want," says Jurgen Grutzner, manager of the German competitive service provider association Verband der Anbieter von Telekommunikations und Mehrwertdiensten e.V. (VATM, Cologne). "We need all the players we can get to break the grip of the incumbent in the local loop."
Some big service providers are looking beyond the impact of Gent's plan on competition. They're questioning the wisdom of his all-wireless approach. There's little argument that voice telephony will be largely wireless in the future, but many say nothing will beat fiber optic networks for delivering super high-speed data services. "Fiber will always be a notch faster, a notch better than wireless because of frequency limitations," says Michael Storey, CEO of the satellite company Inmarsat (London) and the former president of MCI WorldCom Inc.'s European operations.
Support for this notion exists in Mannesmann as well. Over the last few weeks, CEO Klaus Esser has repeatedly told his supervisory board, shareholders, investment analysts and the media that the future is in integrated wireless and wireline offerings for voice and Internet services. He's not the only one: The CEOs of BT, Deutsche Telekom AG and France Telecom S.A. have announced their intention to spend billions of dollars in the next several months to acquire or build fixed and mobile networks across Europe. The integrated strategy is also seen in ongoing moves by AT&T and in MCI WorldCom's recent $118 billion bid for Sprint Corp.
If the pundits are right, Gent will win his struggle, although possibly at an even larger price: Some observers believe he may have to up his bid to $135 billion. Regardless of whether Gent can make it pay out, though, the looming convergence of Internet and wireless services will undoubtedly draw more deep-pocketed outsiders into the market in the next few years. Think Microsoft Corp. and NTT Mobile Communications Network Inc. (NTT DoCoMo, Tokyo). That could lead to increased wireless competition that may ultimately make Gent's bid for Mannesmann seem like a bargain.
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By: John Blau
Copyright 1999 CMP Media Inc.
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