Deutsche Telekom’s recent acquisition of U.S.-based GSM operator VoiceStream Wireless Corp. again showed the ever-shrinking nature of the wireless industry. Including United Kingdom-based Vodafone Group plc’s partial ownership stake in Verizon Wireless and Japan’s NTT DoCoMo’s interest in AT&T Wireless Services Inc., international telecommunications companies have a hand in some of the largest U.S. operators.
The globalization of the wireless industry has been noted for some time. While the Internet brought the world closer together at the end of the 20th century, the wireless communications industry is set to carry on the legacy through the first decade of the 21st century.
According to a recent study by market and technology research company Telecompetition Inc., worldwide subscribers are predicted to reach 2.2 billion by 2010. That will mean one in three people around the world will subscribe to wireless services by the end of the decade. For companies involved in the wireless industry, Telecompetition expects that subscriber explosion to push revenues from $331 billion this year to $752 billion by 2010.
With such potential, continued consolidation in the industry is sure to happen.
“The wireless market is becoming more of a global market with Vodafone and NTT DoCoMo pushing their weight around,” said Dominic Endicott, head of North American wireless practice for telecommunications consulting firm DiamondCluster International North America Inc.
Endicott noted U.S. carriers might look very tempting to international operators because of the lower penetration rate in the United States and side business deals U.S. carriers have with such companies as Palm Inc. and Microsoft Corp.
“The U.S. market is still an emerging one. There is still a lot of upswing potential,” said Jake Saunders, wireless analyst for the Strategis Group U.K. “Europe’s customer base is fairly saturated, with penetration rates over 70 percent in some markets, so carriers here can’t just go out and get new subscribers.”
The temptation proved to strong for DT, which originally launched its takeover bid for VoiceStream last summer. The move was seen as DT’s chance to keep up with Vodafone, which controls interests in wireless operations around the world.
“Deutsche Telekom’s deal is looked on with a lot of respect,” Saunders said. “DT had been late to the party, but was able to lock down a deal with a GSM carrier that allows for a global footprint. They now have to try and capitalize on the deal.”
Vodafone recently reported more than 83 million proportionate subscribers worldwide compared with DT’s 38 million proportionate customers.
“Vodafone has become global and has had interests in a number of markets for some time,” Endicott explained. “They have played their cards well. If Vodafone can demonstrate the benefits of a global presence, it will raise the stakes for other carriers.”
While Vodafone maintains a minority interest in Verizon Wireless, some analysts have noted it might make sense for Vodafone to acquire a majority interest in Verizon Wireless to steer the carrier down Vodafone’s 3G path to wideband CDMA technology. But, for that to happen, Verizon Wireless would have to swap its current CDMA network to GSM and then proceed to 3G, a costly proposition. Verizon Wireless has said it plans to stick with CDMA and begin introducing next-generation services later this year.
“I think they are pushing that idea, but it has to be a financially viable decision for Vodafone,” Saunders said. “I think if they leave it for too long, they might be in danger of reaching the point of no return.”
DoCoMo also is playing in the international market. The carrier’s $10 billion investment in AT&T Wireless last year was seen by many as a feeling out process for DoCoMo. AT&T Wireless is expected to be spun off from AT&T Corp. later this year, opening up the potential for further investment from DoCoMo. In addition, AT&T is switching its network to GSM, with plans to migrate to W-CDMA, the same technology DoCoMo uses.
While a larger piece of AT&T Wireless might make sense for DoCoMo, there is some concern whether the Japanese market’s rapid adoption of DoCoMo’s i-mode service will translate into other markets.
“DoCoMo has not demonstrated the ability to break out of its core market in Japan,” Endicott explained.
With VoiceStream being gobbled up, analysts have tipped Nextel Communications Inc. and Sprint PCS as the next possible target for international or domestic companies looking to expand their presence in the United States.
Sprint Corp. was almost snatched up by WorldCom Inc. last year before international regulators stepped in. The move was seen as WorldCom’s way to increase its wireless presence from a reseller to a full-blown carrier. Sprint also was rumored to be in talks with BellSouth Corp. earlier this year, with BellSouth most interested in Sprint PCS, although that deal was convoluted by BellSouth’s partnership with SBC Communications Inc. in Cingular Wireless.
While Sprint PCS’ leading industry position could be appealing for a takeover, Nextel’s lock on the lucrative business market may prove to be even more tempting. Nextel’s customer base of business users has resulted in higher than average revenue per user and a lower than average churn rate. Nextel has also been saddled lately with a stock price nearly half of target prices set by many analysts.
“You always have to look out for what makes sense for your shareholders,” said Jim Mooney, chief operating officer for Nextel. “Acquirers are always looking for great assets that are undervalued.”
But, acquirers also have to be careful of investor concerns. DT’s deal with VoiceStream was originally valued at more than $50 billion, before losing nearly half of the value along with DT’s stock price. Some called for DT Chief Executive Ron Sommer’s ouster, noting the deal was dragging down DT’s stock price. VoiceStream investors also had to be placated with additional DT shares to compensate for their dwindling return.
The companies also had to jump the deal through government hoops because of the German government’s stake in DT. But with its eventual approval, the deal may pave the way for easier governmental approval of acquisitions in the future.
While the DT/VoiceStream deal was eventually approved by all parties involved, Endicott warned additional acquisitions may have to wait for equity markets to recover from their current slump.
“Now is not the time, though it is going to happen,” Endicott said. “Markets right now will allow it. A few years from now, there will be less restraint on investment.”
Endicott also said the industry should not be surprised if U.S.-based carriers looking for a foreign presence instigate the next round of acquisitions.
“Europe has had a significant decrease in ARPU and needs to fix that before moving on to U.S. carriers, which have done a good job at keeping those numbers steady,” Endicott said. “Over the next few years, you have to watch for U.S. carriers maybe making a play for an international presence. But, I don’t think it will happen for some time.”
