The big mobile-phone reset

The big mobile-phone reset

This week’s two telecoms deals will be followed by others, as the industry undergoes a big rationalisation

Sep 7th 2013 |From the print edition

ONE was a long-expected divorce, the other a much-predicted wedding. On September 2nd America’s Verizon Communications bought Britain’s Vodafone out of Verizon Wireless, the biggest mobile operator in the United States. It will pay a staggering $130 billion in cash, shares and bonds for Vodafone’s 45% stake. The next day Microsoft bought Nokia’s mobile-phone business for €3.8 billion ($5 billion). The American software company will also pay the Finnish firm €1.7 billion to license its patents, and lend it €1.5 billion.Verizon’s purchase is the second-biggest in the industry’s history, beaten only by Vodafone’s own acquisition of Mannesmann, a German firm, in 2000. Nokia, once the world’s biggest maker of mobile phones, is quitting—for less than Microsoft paid for Skype, an internet phone-call company, in 2011. Among the 32,000 employees to be transferred is Stephen Elop, Nokia’s chief executive until this week and a former high-flyer at Microsoft. Having bet Nokia’s future on Microsoft’s Windows operating system two years ago, Mr Elop is now talked of as a likely successor to Steve Ballmer, who is due to step down as Microsoft’s boss within a year. The software giant is betting that it can still do what it has so far failed to do: succeed in mobile computing and turn itself into the “devices and services” company that Mr Ballmer promised in a new corporate plan in July.

Together the transactions make the outlines of the mobile-telecoms industry clearer at three levels. The main makers of mobile-network equipment, the Chinese excepted, have now given up making handsets. The handset-makers have coalesced around three “ecosystems”: Google’s Android, Apple’s iOS and, in distant third place, Microsoft’s Windows. And the operators of mobile networks are preparing for a fresh wave of consolidation.

First, the business of equipment-making. Having bought Germany’s Siemens out of their joint venture in July, Nokia now does little else (though it is keeping its maps division and many patents). With Nokia gone, no big Western equipment-maker will produce mobile phones any more. Ericsson of Sweden quit in 2011, selling to its partner, Sony of Japan. Alcatel of France sold its brand to a Chinese firm. The equipment business is more long-term, says Rajeev Suri, the head of Nokia’s network arm. “It’s less prone to the volatility we’ve seen on the devices side.” Better still, Mr Suri adds, his firm specialises in 4G networks, the latest wave, where it has around one-fifth of the market.

Of the leading equipment-builders, only two Chinese companies, Huawei and ZTE, now both build networks and make phones. They will carry on. Chen Lifang, a member of Huawei’s board, said this week that although “the majority of efforts” will go into equipment, which provides the bulk of the firm’s revenues and profits, “the device is very important”.

Nevertheless, the handset-making business is clearer now that Microsoft has swallowed Nokia, which already makes more than 80% of Windows phones. In smartphones, Windows is far behind Android, used by many manufacturers, and iOS, which runs only on Apple’s own pricey devices (though it is expected to unveil a cheaper iPhone on September 10th). Apart from its Xbox games console, Microsoft’s record with devices has been poor. It is not clear that its own phones, still bearing Nokia’s brand, will narrow the gap.

Microsoft insists that it will not mimic Apple and stop other phonemakers using its operating system. Huawei says Microsoft has been in contact already to reassure it on this. But less healthy manufacturers may feel that in any case, their options are narrowing. HTC, a Taiwanese company whose star has fallen as fast as it rose, said on September 4th that its sales in the first eight months of 2013 were 32% lower than a year before (like Huawei, it makes mainly Android phones, but some with Windows too). BlackBerry of Canada, whose smartphones, like Nokia’s, were once wildly popular but these days have been overtaken even by Windows devices, recently put itself up for sale. Asked whether Huawei might be interested in buying either, Ms Chen told journalists: “No. We haven’t considered that.”

Among network operators, the lines are also tidier, at least in America, where Verizon and AT&T dominate, though mergers may make the smaller fry stronger. Verizon has got what it sought for years: full control of its juiciest asset, which has revenues of $76 billion a year—much more than its fixed-line business—and accounts for almost all of its operating profit. Though it must service and repay the debt it will raise to buy Vodafone, it will no longer have to earmark almost half of its earnings for its British shareholder. Since January 2012 it has paid Vodafone more than $11 billion in dividends. It will be better placed to sell combined broadband and mobile deals, as well as services, over its networks.

More investment, more dealmaking

Vodafone itself will have plenty of money to spend, even after passing $84 billion to its shareholders ($23.9 billion in cash, plus all the shares in Verizon). It plans to invest an extra £6 billion ($9.4 billion) on, among other things, 4G networks, in which Europe lags far behind America. By 2017, it says, 90% of the five countries it serves will be covered by 4G. Faster networks should help it to attract and keep customers—and to charge them more, as Verizon and AT&T are already doing in America.

Vodafone will also have the means to buy others. Recently it bought Kabel Deutschland, Germany’s biggest cable-television company, for €7.7 billion. It may want to spread itself beyond mobile in other countries, such as Spain and Italy, to battle broadband and cable companies that are treading on its turf by offering cheap mobile deals as part of multi-service bundles. Vodafone might even be bought itself: AT&T has had its eye on Europe and would find buying Vodafone less complicated now it is no longer mixed up with Verizon.

Other operators are doing their bit to consolidate Europe’s fragmented markets. In June Telefónica of Spain sold its business in Ireland to Three, owned by Hutchison Whampoa of Hong Kong. Last month it agreed to buy e-Plus, the German arm of KPN, a Dutch operator. Regulators are joining in too. On September 11th Neelie Kroes, the European Union’s digital commissioner, is expected to publish proposals that may encourage cross-border competition and alliances. This has been a big week for telecoms deals. But it looks like there will be more to come.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: