The gold rush

The gold rushWhen it comes to playing in the global telecoms market the stakes are high….but the rewards are even higher. Vodafone’s $62bn takeover of US firm AirTouch has followed the likes of BT, AT&T, Cable & Wireless and MCI and others are desperate to join in. Richard Wilson reports
Vodafone’s $62bn takeover of US mobile communications operator AirTouch confirms one thing about today’s telecommunications sector. Big is very clearly seen to be beautiful in the world of telephone services.
That UK mobile phone operator Vodafone, which had operating profits of just ?816m in the last 12 months, can commit itself to a ?37.5bn takeover of AirTouch without scarring the pants off its investors says something about the money-making reputation of global mobile phone markets.
Vodafone chief executive Chris Gent confidently predicts that the new merged business, which will have over 40 million customers, will generate 20 per cent yearly growth in operating profits. Words of magic which prompted an immediate 15 per cent rise in the Vodafone share price.
The stakes may be high in the global telephone game, but the rewards can be even higher. Which is why where Vodafone has staked its future on an international merger, the likes of BT and AT&T, Cable &Wireless and MCI have gone before. And others are queueing up to follow.
Telephone operators, both mobile and fixed-line, for the first 80 years of their existence, were content to rely upon their parochial home market for most of their income. That all changed with the appearance of multi-national companies and with the introduction of long-distance telephone technologies like satellites and then optical fibres.
Where technology started the trend, the moves towards de-regulated telephone markets, where all operators are welcome to do business, and most importantly the Internet has finished the job. Today’s telephone operators must have more than international telephone lines, they must have a global business strategy. As one city analyst described the situation after BT’s long running but eventually doomed attempt to team up with USoperator MCIlast year.” The deal was part of BT’s strategy for a number of years. It now has two major holes in its strategy – in North America and the Asia Pacific region. It is beginning to look like a very European company and until BT announces something it will be seen as a weakness,” he said.
Little wonder then that within months, last summer, BThad entered into $10bn global alliance with the world’s biggest telephone company AT&T.
And what did investors think of the deal? “BT was on the rebound from the failure of the MCI deal and needed a North American arm,” said one analyst. “This is good news for BT but it will be interesting to see how the City takes it – they have never responded positively to BT’s oversees ventures.”
This time they were impressed and BT’s share price has gone higher and higher since the deal.
So what is behind this fascination with telephone partners from other continents? BT’s chief executive Sir Peter Bonfield provides at least part of the answer. “With such a powerful partner this new venture significantly builds on the world leading position created by BT… as it moves into the next generation of Internet protocol-based networks,” said Bonfield last July.
Behind all the hyperbole there is one key phrase – ‘Internet protocol-based networks’.
Like all telephone operators, BT, AT&T, even MCI and Cable &Wireless for that matter, are facing a new threat to their multi-billion dollar businesses. That threat is the Internet, or more specifically the Internet service providers, ISPs for short.
The problem facing telephone operators like BT is that the growth of Internet services – today simply data services, but tomorrow voice, video and who knows what else – is turning the traditional world communications market on its head. The appearance of a whole new type of service provider like the ISPs will result in more operators chasing the growing levels of telecommunications business.
“Technology enables people to attack niches and make the big operators change,” said Paul Rees, partner at Coopers and Lybrand. “It will bring in new people who will come in and bite.” Another problem the telephone companies have is that the new boys are bringing a new level of aggressive marketing and network technology investment to the market. Most ISPs have their background in data communications rather than telecommunications businesses. One aspect of this is that they are much quicker than corporations like BT to react to market trends. As one industry observer says: “when it comes to network investment, ISPs think in months whereas the telecos think in years”.
“No other industry is going through the same level of change as ours is today,” adds Rees.
Such is the allure of the Internet that UK telephone operator Cable & Wireless paid $625m for the Internet service of US operator MCI. The deal will give Britain’s second biggest telecoms company a leading Internet business in and out of Europe.
“This catapults us into the lead in the global internet business,” commented Cable and Wireless’s CEO Dick Brown at the time of the purchase.
Energis, formerly the telecoms arm of the National Grid, is emerging as not only the UK’s third force for telecoms and, like its bigger rivals, it too has global aspirations. It has teamed up with Deutsche Telekom and France Telecom. Only last week some city analysts were suggesting Energis as a merger partner for European or US operators.
Telecoms stocks may be riding high, Energis for example saw its share price rocket to ?16 last week just ten years after the company was formed, but there is still a high level of insecurity amongst the big telephone companies.
Perhaps the biggest threat comes from the spiralling level of Internet traffic. Just like the wagon trains in an old western, the telephone operators are forming themselves into defensive groups and preparing themselves for the attack.

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