BUSINESSWEEK ONLINE : FEBRUARY 21, 2000 ISSUE
INTERNATIONAL -- EUROPEAN COVER STORY The Race to Rule Mobile (int'l edition) As cell phones and the Net merge in Europe, tech giants are pushing madly for position Up until a couple of years ago, the mobile-phone convention in Cannes was a quiet European affair. Sipping champagne on yachts docked in the Riviera harbor, Swedes, Germans, and Britons would enjoy the winter sun and exchange thoughts about handsets and transmission stations, the nuts and bolts of their business. Those sleepy days are history. As mobile phones have taken Europe by storm, the old regulars at the February Cannes meeting have grown into global megastars. In one teeming booth is Nokia (NOK), continental Europe's most valuable company. Down the aisle is Vodafone AirTouch PLC (VOD). The British phone power is just now closing its $183 billion buyout of German rival Mannesmann (MNNSY), the biggest takeover in history. And it's not just the phone companies jamming the corridors at Cannes. Microsoft (MSFT) runs a big booth, as do Dell (DELL), Cisco (CSCO), and Sony (SNE). The whole tech world is suddenly pushing madly for a place in the cell-phone business. MOUNTAINS OF MONEY. Why such excitement? The marriage of the two hottest tech trends, mobile phones and the Internet, is shaking up Europe. As a global business, it's still in its infancy, with few serious customers outside Japan and Scandinavia. But the dazzling prospect of the Internet untethered--e-mail and e-commerce traveling in a billion pockets, purses, and glove compartments--is intoxicating global markets. It has turned Qualcomm (QCOM) into America's hottest big stock, and NTT DoCoMo, Japan's cellular behemoth, into the richest valuation on the Nikkei. But the epicenter of this revolution is in the Old World. ''It's the biggest market and the test bed for mobile data,'' says Matt Desch, president of wireless services at Nortel Networks Corp. The mountains of money pouring into the mobile Internet are already convulsing Europe's once sleepy telecom industry. Investors continue to bid up the stock of predators like Vodafone Chief Executive Chris Gent, who can now raise $50 billion with a phone call. With his Mannesmann takeover, Gent now runs phone companies in all of Europe's major economies, as well as the U.S. And his growth is likely to force his European rivals, Deutsche Telekom (DT), France Telecom (FTE), and others, to follow suit. ''There are bound to be more deals of the Vodafone-Mannesmann nature,'' says Peter Bonfield, CEO of British Telecommunications PLC. Still, even for titans like Gent, who are reaping the early riches of the mobile Internet, risks abound. The very technology that's causing their stock to soar--the Internet--could in fact undermine them. To stay on top, Europe's phone companies must transform themselves into Net companies. That's a scary prospect, since it's a market they don't know. In truth, no one really understands how far and fast it will develop. Yet somehow, as the mobile Net grows in the next five years, Europe's phone companies must turn their businesses inside out. Over the last few years, many have gotten rich selling pricey talk minutes to a Continent enthralled with mobile gabbing. Now, with growing competition, the tariffs for phone calls are plummeting. That's why Gent and company must not only construct the mobile Internet, but make lots of money from it. ''Mobile data and the Internet will be the strongest driver of growth in our industry,'' Gent says. Where do the Europeans look to bring this cybervision to life? That's where bruising new competition enters the picture. Europe's leaders may know cell phones inside out, but Americans rule the Net. As the two technologies merge, the phone companies and Internet stars such as Yahoo! (YHOO) and America Online Inc. are hunting for niches in the business. All of them hope to skim off the best business for themselves--the ads, for example, and commissions for e-business transactions. They're aiming to relegate the other players' products--the handsets and phone service--to mere commodities, just the connection to the Net. ATTITUDE ADJUSTMENT. This is just the outcome Gent must avoid. With nearly 50 million customers, he will have more than twice as many subscribers as AOL (AOL), the world's largest Internet service provider. He is working with a host of tech companies, from IBM (IBM) to Nokia, to put together a mobile portal by the end of this year. The idea is that Vodafone, unlike American phone companies, will dominate the Internet that runs through its network. But AOL, which has more experience delivering Net services, is also working with Nokia on a similar product. AOL plans to step between the phone companies and their customers, and make off with the rich business. ''It has tremendous potential for us,'' says AOL International President Michael Lynton. Not only AOL is trying this tactic. The entire tech galaxy is descending on Europe. Microsoft Corp. is setting up joint ventures with British Telecom (BTY) in London and Ericsson (ERICY) in Sweden. Intel (INTC) is building memory chips for Web phones in Stockholm. Cisco Systems is scooping up mobile data companies. Nokia Chairman Jorma Ollila sees a dramatic change in the Americans' attitude. For years, he found Americans skeptical about the possibilities of a mobile Net on tiny phone screens. ''Suddenly,'' he says, ''they're all singing our song.'' The movement toward the mobile Net is fueled not only by the truckloads of money pouring into the industry. It's also driven by the basic fear of being left behind. Even the mobile pioneers have reason to shudder. In the frenzy of innovation sure to occur as the mobile Net takes shape, new companies, marketing strategies, and technologies will emerge. Some could rattle giants such as Nokia and Vodafone. ''History has shown us that tech leaders get ambushed,'' says Jack McMaster, CEO of KPN Qwest, a new Europewide phone company. VIRGIN INVASION. The first unsettling innovations are already popping up: While Europeans lead in phones, Asians are kings of consumer electronics. As the mobile Internet advances into live video and stereo, Sony, Matsushita (MC), and Samsung are likely to unleash an avalanche of multimedia phones. Most of them will be test-marketed first in Japan, home of the world's most advanced mobile Net. Meanwhile, Silicon Valley powers are turning personal digital assistants into phones. Branded marketers are jumping into the mobile business, too. Richard Branson, chairman of Britain's Virgin Group, has plunged into the cell-phone business without even building one transmission tower. Branson simply purchased idle cell-phone capacity from a British also-ran and launched his own phone service, Virgin Telecom. He has picked up 150,000 customers in the six weeks since he launched the service. Other ''virtual'' phone companies are sure to follow Branson's lead. In the next year, look for banks, department stores, and even car companies to offer subsidized phone services: A bank might give customers a free phone that connects to its brokerage service. It helps attract customers, and steals business from incumbents like Vodafone. Other challenges could come from innovations to the phones themselves. Newcomers such as Intel Corp. are plowing their resources into mobile telephony. If they can produce chips that are smart enough, they could turn phones into commodities--just as they have with today's personal computers. Even smart-card makers are turning tiny chips into valuable tools. France's Gemplus is working on a $10 chip that can be installed in any cell phone in Europe--and turn it into a basic Web-surfer. Customers won't have to save $500 for Nokia's zippy new 7110 Web phone. Even as Europe's phone companies navigate the technology maze, they must also confront the new giant in their midst. Vodafone has key advantages over its smaller competitors. First, it can offer bargains on international roaming charges--the extra fees when cell-phone users call outside their home territories. That's a big plus for business travelers. Vodafone's size should also help get it the best deals on phones and transmission stations from suppliers like Nokia. Already, Vodafone's size is prompting competitors in Europe to bulk up. Spain's Telefonica or Telecom Italia could become takeover targets for the likes of France Telecom, Deutsche Telekom, or any other company determined to survive the shakeout. But in a market awash with easy money, even venerable powers like British Telecom could find themselves under attack. For additional muscle, the Europeans may team up with America's Baby Bells, all anxious to develop expertise on the mobile Net. For now, the next golden opportunity likely to come on the market is Orange (ORNGY), Britain's third-largest mobile-phone company. Mannesmann CEO Klaus Esser scooped it up for $33 billion in October, hoping it would protect him from Vodafone's advances. That backfired and pushed Gent to make his mammoth bid. Now, Gent's preparing to unload Orange, and in today's frenetic market, he could land as much as $45 billion. The Netherlands' KPN, perhaps allied with BellSouth (BLS), may go after Orange. A long shot is Japan's DoCoMo. But the most likely bet is France Telecom, which is keen to bulk up in Britain. SIZE DOESN'T MATTER. Despite Vodafone's size advantage, Gent still must battle market by market in Europe. Here the company's size counts for less. In Spain, for instance, Gent is fighting joint-venture partner BT for control of the No. 2 player, Airtel. But Airtel is a distant challenger to kingpin Telefonica, which boasts nearly twice Airtel's market share. Further, Telefonica is a far bigger Internet player than Vodafone. Late last year, Telefonica spun off a minority stake in its Spanish-Latin American Net business, Terra Networks. Overnight, it became Europe's hottest Net stock. At $30 billion, Terra has a market cap the size of Amazon.com. To protect themselves in a market where $50 billion deals have become commonplace, Europe's phone companies are likely to follow Telefonica's lead. By spinning off minority stakes of Internet divisions, and perhaps even their mobile-phone businesses, they hope to raise billions. At the same time, their stakes in these hot companies help drive up their own market caps. Already, Deutsche Telecom has announced plans to spin off T-Online, the biggest Internet service provider in Germany, and France Telecom is expected to follow with its ISP, Wanadoo. Meantime, telcos, looking to boost their Net offerings, will be gobbling up tech companies, from local country ISPs to startups crafting software for the mobile Net. And just as Time Warner Inc. capitulated to AOL, Europe's media outfits may find themselves negotiating with phone companies that look at $1 billion as small change. How long will this gorging last? As long as investors trust that Europe's phone companies hold keys to the mobile Net, they'll pump stock prices sky high. That should provide the winners with more takeover currency to use against their rivals. It may only be a matter of months before this select bunch begins to cross the Atlantic to prepare for the next phase of the mobile Net, in America. For Europe's new cyberwarriors, those days of lolling on the Riviera are a distant memory. By Stephen Baker in Cannes, with Kerry Capell in London, and bureau reports _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The Race to Rule Mobile (int'l edition) EUROPEAN COVER IMAGE: Why Europe Loves Mobile TABLE: Three Titans Face Off What's a Cell-Phone User Worth? (int'l edition) The Wizards of Telecom (int'l edition) TABLE: Telecom Gold Commentary: Auf Wiedersehen, Germany Inc. (int'l edition) TABLE: A Deal with Impact INTERACT E-Mail to Business Week Online

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