The news that Vodafone D2 GmbH, Germany’s biggest mobile operator, will delay the launch of its 3G services from this September until spring 2003 sent the European mobile sector into a spin yesterday.In an interview with German newspaper Die Welt, published Thursday, the head of Vodafone D2, Jürgen von Kuczkowski, attributed the delay to problems with tri-mode GSM/GPRS/UMTS handsets. With commendable frankness he then proceeded to rip into key suppliers, saying: “We are simply not satisfied with various performance features. This is particularly so with handover problems. Our suppliers, Motorola Inc. (NYSE: MOT) and Nokia Corp. (NYSE: NOK), are often not able to keep to agreed timetables and constantly alter the planned characteristics of the terminals." [Ed note: that should do a lot for relations with the world’s two largest handset vendors -- not!].Responding to the ensuing market reaction, Vodafone Group PLC (NYSE: VOD) today issued a statement to "to emphasize that its 3G plans are on track and are not delayed" (see Vodafone Delaying 3G Plans?).According to the statement, “Vodafone intends to open the majority of its 3G networks for service towards the end of this year and will begin to conduct closed user group trials to test its 3G services. Following this trial phase Vodafone will then begin to market 3G based services in 2003, when Vodafone expects appropriate levels of dual mode (GPRS/3G) handsets.”This, says Vodafone, is simply a repeat of guidance given by chief executive Chris Gent at the group's preliminary results presentation in May 2002. But coming just two weeks after Telefónica Móviles SA’s decision to close Quam and endless wrangling at MobilCom AG about who exactly will pay for a new W-CDMA network, some see this as just the latest in a series of setbacks for the German market and the wider European 3G sector (see German 3G Player Folds and MobilCom: The Blade Bounces). Richard Windsor, a communications equipment analyst at Nomura in the U.K., says in a research note that Vodafone’s delay until 2003 confirms “what some of us have long feared -- the data revolution is going to be launched much later than everyone expected and will take much longer to take off.”However, just as Quam’s demise was well flagged by financial analysts (yes, they do get it right from time to time), and just as everyone and his dog are skeptical of MobilCom’s 3G aspirations, this delay from Vodafone does not come entirely as a surprise. It looks more like an attempt-gone-wrong by von Kuczkowski to massage down expectations.Japan’s J-Phone Co. Ltd. was always slated to be the first Vodafone property to launch a commercial W-CDMA network, but its summer launch was recently pushed back until the end of the year, with J-Phone president Darryl Green explaining, "we must do it right because it will have an impact on synergies in the whole group." Elsewhere, Vodafone chief executive Chris Gent has been dropping hints all year that he’d prefer to keep capex in check rather than launch premature services.Vodafone’s main rival in Germany, T-Mobile had already reached this conclusion back in January, when the unit’s head, Rene Obermann, said he saw mid-2003 as a realistic 3G launch date. Obermann cautioned that they wouldn’t commercialize services until the “technology, handset availability and services satisfy our high quality standards.” T-Mobile had originally planned to cover 20 cities by the end of this year.Nevertheless, von Kuczkowski remains upbeat on the 3G business case and expects UMTS to contribute a single-digit percentage to total sales in 2003 and 2004 with accelerating double-digit growth from 2005. And with Quam out of the picture and MobilCom on the ropes, the threat of disruptive price wars in the German market has surely receded.But where does that leave the third- and fourth-placed operators, E-Plus Mobilfunk GmbH and O2 GmbH?For years, these two operators have trailed far behind the leaders and exasperated their owners with their thirst for capital and capacity to run up debt. Fortunately, business seems to be picking up at last.KPN Mobile-owned E-Plus has scored a modest success with its i-mode service (see Euro I-Mode: So Far, So Good). In its first six weeks of operation, that service attracted 40,000 subscribers, of which 16 percent defected from Vodafone D2, according to the company.O2 is also on the rise, having added 200,000 new subscribers in the quarter ended June 30, 2002, with ARPU growing from £195 (US$298) to £203 ($311) and data strongly up from 14.5 percent of revenue to 18.3 percent -- although this is padded somewhat by the inclusion of 1.5 percent of SMS termination revenue that hadn’t been counted in earlier figures. But despite this evidence of improved performance by the third- and fourth-tier players, Vodafone’s von Kuczkowski reaffirmed in the Welt interview that he expects only three UMTS networks to survive: Vodafone's, T-Mobile's, and a network run by a consolidated group of competitors.Others would seem to agree. In a Vodafone research note published August 8, HSBC Holdings PLC analysts argue that some combination of the three junior license holders may well have to merge if they are to achieve critical mass:"Such a process could be seen as a long-term disadvantage to Vodafone and Deutsche Telekom. After all, a credible third competitor could eventually seize more market share than three ineffectual, smaller rivals. However, in the shorter term, a reduction in the number of operators would probably be welcomed as reducing the risk of a price war."But is now the time for KPN Mobile and mmO2 to think the unthinkable and merge their German operations?Probably not. Both have affirmed their determination to retain control of these operations, and there’s a fair chance that Europe’s largest economy can support four profitable network operators in the long term. Although if talks were to get off the ground, at least mmO2 is unencumbered with the corporate baggage associated with its days as unit of British Telecom (BT) (NYSE: BTY)More likely is some combination of E-Plus, MobilCom, and Orange SA (London: OGE). France Telecom SA, a major shareholder in Orange and MobilCom, tried to buy E-Plus back in 1999, only to be outmanœuvered by KPN; the two parties have since held a series of collaborative talks. With Quam off the scene, now could be the time for mmO2 to reconsider a link with Telefónica Móviles [ed note: surely not this again!]. Whatever the combination of operators, the €50 billion ($49 billion) already spent on German UMTS licenses is a problem. And the German regulator, die Regulierungsbehörde für Telekommunikation und Post (RegTP), has so far staunchly resisted calls to allow spectrum trading, despite an openly sympathetic attitude to the issue by the EU.One probable scenario is that MobilCom and Telefónica Móviles will mothball their licenses, while various combinations of the remaining four operators will result in deeper network-sharing agreements and MVNO deals.And despite its outwardly tough stance, the RegTP will likely grant concessions on buildout milestones that were devised when W-CDMA technology was thought to be “just around the corner” -- leaving the door open for Quam/Telefónica Móviles and MobilCom/France Telecom to come back and reevaluate the situation in a few years' time.German operator profiles, excerpted from the current Wireless Oracle report, European Wireless Data: Steady as She Goes, are shown below:Table 1: German Operator Profiles

— Gabriel Brown, Research Analyst, Unstrung
http://www.unstrung.com

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