Goliath vs. Goliath (int'l edition)
In the battle for Europe's mobile Web, the small may not last

When it comes to the wireless Internet, Europe is the Land of the Giants. But it wasn't always that way. When the first Internet phones hit the market in Europe last September, executives at Sonera--a phone company rarely noticed outside its native Finland--couldn't issue enough stock to meet demand. On a road show from Frankfurt to London, the Finns were welcomed as emissaries from the wireless future, the leading experts on the mobile Internet.

Sonera executives, of course, did nothing to dispel the notion. They told of their exploits in Finland, home of Nokia and the most wireless society in the world. This was a place where Sonera subscribers could pay for amusement park rides by dialing a number on a cell phone, where teenagers typed and fired off short messages as effortlessly as they chewed gum. ''We told the story of the mobile network,'' says Jari Jaakkola, an executive vice-president, and in the next four months, Sonera stock nearly quadrupled in value.

But while they smiled on Sonera, many of the same investors rained money on the Finns' towering rivals, from Britain's Vodafone AirTouch to Deutsche Telekom. No doubt Sonera and its fellow Scandinavians were a couple of steps ahead on the mobile Internet. But wireless is now exploding with even grander pyrotechnics in Europe's jumbo economies to the south. And with takeover wars raging, big companies look far more likely to be the conquerors.

If investors need proof, they have only to look at Britain's April auction for five spectrum licenses for third-generation, or ''3G'' cell phones--the futuristic gizmos that will one day be the workhorses of the wireless Internet. In these auctions, Vodafone, DT, and three others bid an average of $7 billion per license. Little Sonera dropped out when the bidding passed $2 billion, its annual revenue. And its stock has lost nearly half its $69 billion market capitalization in eight weeks.

ANTENNAS. Europe's cell-phone industry, the world's richest, is in the land-grab phase. And the big are busy getting bigger. The epochal event was Vodafone's $163 billion takeover in March of Germany's Mannesmann, the largest corporate buyout ever. Now a continent of national giants is following Vodafone's lead. They're earmarking stupendous fortunes for cross-border acquisitions, lining up financing for pricey 3G licenses, and planning to dot the Continent with thousands of high-speed transmission stations. ''The whole area's going to be covered with antennas,'' says John Hughes, European president of Lucent Technologies Inc.'s wireless division.

It may well be a race that only giants can afford--and even for them it's a gamble. Fact is, Europe's telephone kings are betting their future on the mobile Internet, a technology that has yet to make serious money outside of Japan. If they succeed, the Europeans could conceivably leapfrog the U.S. on the Net--an idea that would have been dismissed as preposterous only two years ago. But there's also a chance that the Europeans, after spending billions on the new phone systems, will look on, horror-struck, as Net-savvy Americans cruise in and skim off the fattest profits from the mobile Net. ''That's the vision that gives [phone companies] cold sweats,'' says one investment banker close to Vodafone.

Europe is at a critical juncture. The Continent has built an entire industry on the strength of a common cellular platform called GSM--precisely what has been missing in the U.S. But the Europeans, while old hands with voice, are new to the Net. Now they're hoping that mastery over phones will give them the keys to the mobile Internet. As the Internet grows wheels, success in Europe could spell global dominance for Nokia and Ericsson, for chipmaker STMicroelectronics, and for mighty Vodafone.

The biggest battle will rage right at the richest intersection in cyberspace: where the mobile technology reaches the consumer and sells things. With high-speed networks, mobile moguls will be selling instant chat, opera tickets, stock trades on the run, and downloaded MP3 music. Millions of subscribers may ask for 5 cents messages every time a goal is scored in a Manchester United-Barcelona soccer match. International Data Corp. predicts that mobile commerce in Europe will reach $37 billion by 2004.

The question in Europe is whether the phone companies can corral that commerce. After all, in America's Internet market, it is top-ranked portal-cum-commerce outfits such as America Online Inc. and Yahoo! Inc. that make big money on the Net. The lowly phone companies simply shuttle the bits of data. And while the Europeans have proved to be masters at transmitting voice, Internet applications are still the domain of U.S. Web powers. ''Europeans know a lot about phones, but we're the experts in data,'' says David Weilmuenster, the Silicon Valley-based director for strategy and planning at Palm Inc.

And these outsiders are determined to break the operators' hammerlock on the tiny telephone screen--the main window onto the wireless Web. This is precious real estate, for whoever wins space on the screen is in a prime position to sell services and collect commissions from e-businesses, or from the 200 million (and counting) cell-phone users in Europe. The phone companies, following AOL's model, are working to create ''closed gardens''--meaning portals that offer a host of proprietary Net services. Naturally, they want to discourage customers from wandering outside the garden.

But raiders are busy tunneling under the garden wall. In a suburb of Stockholm, Microsoft Corp. is working with Ericsson to put its microbrowser on Ericsson phones. Yahoo is working with Siemens. Such deals make it likely that European customers will click straight out of the operators' control, surfing for better deals and zippier applications.

Phone companies still hold a trump card. Unlike the Internet companies, they know where their customers are, and can sell them a host of local services. If a traveler in Paris, for example, asks how to get to the Louvre, the phone company, knowing where he is, can say simply: ''Walk up to Rue de Rivoli and take a left.'' Internet companies may have to settle for sending mini-maps of the neighborhood--a tough read on a small screen.

Other outsiders, from banks to record dealers, will soon be plowing into Europe's phone systems, grabbing even the keys to location technology. These are the so-called virtual operators, companies that don't build networks, but simply lease radio frequency from others and start selling phone service. This could turn the phone business on its head: Instead of a phone company selling banking services, banks could ride 3G technology right into the phone business. Richard Branson's Virgin Mobile started the virtual trend late last year in Britain and promptly won hundreds of thousands of subscribers. Others are jumping in. ''Providing phone service is the best way to keep my customers faithful,'' says Dominique Velter, president of Capitol, a Parisian online brokerage that plans to offer mobile-phone service by late this year.

LAST TICKET. And how does a small phone company like Sonera carve out a strategy in this topsy-turvy market? For starters, the Finns angle for 3G licenses in markets where their expertise weighs heavier than their wallets. In so-called beauty contests in Finland and Spain, where companies are judged on their plans and abilities to build high-speed networks, Sonera's teams have won licenses. Meantime, Sonera is working on mobile Net applications in Japan with NTT DoCoMo. The rich Japanese leader, anxious to break into Europe, just announced plans to pay about 5 billion euros, or about $4.5 billion, for a 15% stake in KPN Mobile of Holland. But it could conceivably team up with the Finns as well. The next prize on the block is fast-growing British star Orange. Vodafone picked it up in the Mannesmann deal, but now it's being forced by regulators to divest it. This last ticket to Britain's 3G party could fetch $50 billion.

But perhaps a safer path for Sonera is simply to hurry straight into the mobile portal business. In a London office, the Finns are putting together a Web service called Zed. If they have their way, this Zed, with its links to weather, traffic, and stocks, will become the Yahoo of the mobile phone--assuming Yahoo doesn't beat Sonera to it. One way or another, it's through this tiny window that Sonera, along with virtually everyone else in Europe, hopes to reap a mobile bonanza.

By Stephen Baker in Paris

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