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The Grab For A Wireless Future (Int'l Edition)


International -- Int'l Business: Telecom

The Grab for a Wireless Future (int'l edition)

Mobile Web players are gambling billions to stay in the game

MobilCom seemed to have a knack for spotting the next big thing. The German upstart swept into mobile telephony in 1992 just as the market was taking off. Five years later it was among the first companies to list on the Neuer Markt. MobilCom's shares rocketed in value, turning founder Gerhard Schmid into a billionaire. And last summer, when Germany auctioned off coveted high-speed wireless licenses, Schmid and partner France Telecom landed one. The cost? A mind-blowing $7.5 billion--more than three times the company's 2000 revenues. And where is the stock today? Quick, look it up on your WAP.

Just kidding. The fact is that most Europeans have already given up on the primitive first stage of the mobile Net. Their disappointment with WAP, or Wireless Access Protocol, has fueled a run on phone stocks and stoked investor fears about mounting debt. MobilCom's stock was under siege until Dec. 7, when creditor banks assured investors that the company had the $4 billion in bank financing needed to pay for its share of the 3G license. Even so, its stock has sunk to one-fifth of its 12-month high, while bigger rivals such as Deutsche Telekom are trading at one-third of their prebust prices. Meanwhile, prospects for France Telecom's initial public offering of shares in British mobile-phone operator Orange, planned for next year, are growing dimmer.

Blame it on the rush to the mobile Net. From Britain's Vodafone Group to Finland's Sonera, European telcos have shelled out billions of dollars for licenses to operate third-generation wireless technology, or 3G. They can't afford to walk away now. The current voice system, known as GSM, is running out of capacity and will have to be phased out, most likely by the end of this decade. "If you don't have a 3G license, and one of your competitors does, you've lost your business model," says Nokia Chairman Jorma Ollila.

The choice is simple: Make huge investments in 3G or drop out of the business. Europe's phone powers, still convinced that the wireless Net will yield treasure, are borrowing heavily to stay in the game. A few are shedding assets: Sonera has sold off phone businesses in the U.S. and Turkey to raise more than $5 billion for its 3G expansion across Europe. And some small players, like France's Bouygues Telecom, are casting about for deep-pocketed partners. They'll certainly need them. The cost--some $125 billion for licenses and a similar sum for the networks the new system will run on--means that an industry that raked in money in the 1990s will likely see its profits squeezed during the first half of this decade.UPHILL TREK. To speed the payback on these massive investments, phone companies are racing to build new 3G networks. Spain's Airtel Movil is planning to launch its 3G service in the second half of this year. Asian telecom operators may beat the Europeans to the punch, however, thanks to the fact that most are paying less for their licenses (box).

So what once looked like an easy jaunt to a wireless El Dorado is turning into an uphill trek. Europe's mobile leaders must prove that they can make big money from data. Otherwise, they risk falling back into the voice business. That would be catastrophic, as talking minutes keep getting cheaper--by an average of 15% each year.

Yet despite the current dismay over WAP, which has proven to be too slow and pricey to win over the masses, the wireless market still brims with potential. Within five years, some 75% of Europeans are expected to own mobile phones. And a vast majority of those handsets will be connected to the Internet. Pyramid Research Inc., based in Cambridge, Mass., predicts that Europe's mobile revenues, which now total $90 billion, will double in the next decade, with every bit of that growth coming from data.HIGH-SPEED CONNECTIONS. Trouble is, most European carriers are angling for the same top-level clients, especially business travelers. Yet none can say for sure what services their customers will be willing to pay for. "All of us are speaking enthusiastically about [3G], but we are not able, really, to describe what the usage will be," admits France Telecom Chairman Michel Bon.

Bon and his competitors will have a chance to test the waters this year with the roll-out of the so-called 2.5 generation system. Unlike WAP phones, which required a slow dial-in connection to a server, the 2.5G system--like the popular i-mode service that is offered by Japan's NTT DoCoMo Inc.--is always on. So users of the system will be able to receive their sports scores, e-mail, or driving directions without even making a call. And connection speeds should be four times faster than they are on WAP. British Telecommunications PLC is already testing 2.5G in the south of England. And Sonera launched its own service on Dec. 10. Yet with applications for 2.5G still in their infancy and handsets in short supply right now, Sonera is barely advertising its offering--a stark contrast to the WAP euphoria of just a year ago.

For now, promotions will not be enough to get most Europeans to sign up for mobile Web service. What they're looking for are quick and simple applications that work. These are elusive. But if the phone companies come up with a few, they'll be on their way to lighting up 3G--and paying for it.By Stephen Baker, with Carol Matlack in Paris, and Katharine A. Schmidt in StuttgartReturn to top


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