Mallinson: The future for multinational wireless operators

Keith Mallinson

It is quite common for companies, in various industry sectors, to expand abroad when economic conditions are buoyant, business performance at home is strong, apparent bargains are to be had elsewhere and spare cash burns holes in corporate pockets. On the other hand, as witnessed in grocery retailing by the recent withdrawal of Tesco from the United States, corporations will retrench when businesses underperform at both home and abroad.  Widely differing performance and other circumstances among mobile operators worldwide in tricky economic conditions is prompting a new phase of merger and acquisition activity, including cashing-out to repair balance sheets and finance acquisitive consolidation or growth in currently-owned operators, or new foreign forays to deploy surplus cash and maintain growth.

Home or away?

Leading shares in the large U.S. cellular market have been very rewarding. Verizon Wireless is among the best long-term financial performers worldwide. Its management has been resolutely focused on the U.S., with minimal distraction from foreign operations. Verizon Wireless significantly out-performs its UK-based parent with its numerous foreign interests. Vodafone, with 45 per cent stake in Verizon Wireless, owns and operates networks in more than 30 countries and has partner networks in more than 40 additional countries. Similarly, AT&T has focused on the U.S. in cellular since 2004. Bell South's sale of its many Latin American cellular properties helped it finance Cingular's acquisition of AT&T Wireless that year, while SBC sold cellular shareholdings in Europe. Cingular was owned 40 per cent by Bell South and 60 per cent by SBC. This transaction was followed by further consolidation of fixed and wireless assets and renaming to form today's AT&T in the U.S.

These two American operators are expanding about as much as they can in their home market. Both have invested aggressively in broadband fixed networks and are now working to complete their national LTE deployments. The proposed merger of AT&T and T-Mobile USA was blocked one year ago by American regulators.

What else can these cellular market leaders do with their surplus cash flows to maintain growth? Recent word from AT&T CEO Randall Stephenson, is that overseas expansion is "inevitable." This might complement international wireline operations servicing businesses. In Europe, for example, the company serves multinational corporations with six Internet data centers in the UK, Germany, the Netherlands and France. Overall, the Europe, Middle East and Africa (EMEA) region contributes almost 60 percent of AT&T's international business sales. However, the value of such synergy is unproven. Rumoured acquisition targets include EE, which is the UK's largest mobile operator. Verizon Communications recently reiterated that it is not in talks with Vodafone about taking full ownership of Verizon Wireless, despite market speculation that such a deal could happen soon.

Other strong mobile operators are also seeking to invest in weaker players in other regions worldwide. After acquiring Vodafone's Japanese cellular subsidiary in 2006 and then transforming it with remarkable growth, Softbank is pursuing a $20 billion strategic investment for around 70 per cent of struggling U.S. operator Sprint Nextel, which in turn is seeking to acquire the half of Clearwire it does not already own.  América Móvil, with a dominant position in its home Mexican market and strong positions in many other Latin American nations, has taken advantage of low prices arising from poor financial performance to acquire 28 per cent of KPN in the Netherlands and 23 per cent of Telekom Austria in the last year.

Cellular economics and competition are predominantly national

Whereas mobile phones have always been able to make international calls, and international roaming has been possible since the introduction of GSM from 1992, economics and competition in cellular are predominantly national. Multinational branding and purchasing scale in network equipment and handsets can help but cannot overcome the disadvantages that come with being relatively small nationally in network, marketing, distribution and subscriber share. It's no wonder then, with poor profitability and cash constraints through recession, flat consumer spending, hefty smartphone subsidies, LTE spectrum and equipment investments, fierce domestic competition and price regulation for lucrative call termination and data roaming that European operators have been much less enthusiastic about calls from the European Commission to increase cross-border consolidation than their own desire for more national consolidation.

What sprawling multinationals including Vodafone, Telefónica (including O2), Orange and T-Mobile need most is to bulk up in selected nations where they already have market leadership and exit where market shares are relatively small. It is far better to be No. 1 or 2 in a few places than No. 3 or worse in many places.

Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. WiseHarbor publishes an Extended Mobile Broadband Forecast. This includes network equipment, devices and carrier services to 2025. Further details are available at: Find WiseHarbor on Twitter @WiseHarbor.