Sponsored By

Dead End for German 3G Dodos

Group 3G and MobilCom are up against the wall, and France Telecom, which will decide MobilCom's fate, has likely noticed

September 11, 2002

5 Min Read
Dead End for German 3G Dodos

When Torbjorn Nilsson, head of marketing and strategy at Ericsson AB (Nasdaq: ERICY), told the Financial Times that he didn't think more than four 3G players could survive in any one country, was he thinking particularly of Germany? Perhaps he was rubbing salt in the wounds of Nokia Corp. (NYSE: NOK), which yesterday announced it would write off its vendor financing exposure to one of Germany's likely dodos, MobilCom AG (see Held Up By Its Handsets).

It has been said for some time by many in the wireless sector that the German market could not house six 3G players, and although Group 3G still says it is focusing on its UMTS license, it is effectively dead in the water and has been written down to zero by its parents Sonera Corp. (Nasdaq: SNRA) and Telefónica Móviles SA (see German 3G Player Folds).

Fellow struggler MobilCom is to have its fate decided by Thursday's France Telecom SA board meeting (see MobilCom Checks Into 3G's ER and France Telecom Delays Results). Rumors abound, naturally, including those suggestions that this meeting will be the last with Michel Bon at the head of the table. He could well be calling former Deutsche Telekom AG (NYSE: DT) CEO Ron Sommer for some gardening tips shortly.

By Friday at the latest, we will know what the French telco, owner of international mobile player Orange, has decided to do with MobilCom, in which it holds a 28.3 percent stake. It will either invest further in the operator or let it wither on the vine and go bankrupt. MobilCom has nearly 5 million GSM subscribers (running on the E-Plus Mobilfunk GmbH network through a roaming agreement) and some 3G equipment in place. It also has some very unflattering financials (see MobilCom to Restructure).

What are the options for these two desperate cases? The prognosis for Group 3G is not good. According to Unstrung's sources, Sonera is hoping to get some cash back from its disastrous German foray "big time," and has even tried offloading assets to T-Mobile. Group 3G spokespeople say it is cutting down to the bare minimum staff, from about 900 in July "to double figures only," with those left focusing on what to do with the license and how to deal with the regulator, die Regulierungsbehörde für Telekommunikation und Post (RegTP) (just plain Reg to its mates).

Although Sonera has not yet replied to requests for details, it was flogging a dead horse if it was trying to sell Group 3G's license. The kind folk at RegTP confirmed to Unstrung that the licenses to use 3G spectrum cannot be traded. If a company goes out of business or cannot meet the terms of the license, the rights to use the allocated spectrum revert to the German state.

This leaves Group 3G with four options:

  • It hands back the license (which cost about $8.4 billion in August 2000) and loses everything. Distinctly possible.

  • It continues to build out the 3G network to meet license conditions and launches service. Well, it has no money and both parents have said they are no longer investing any cash in the venture. So that's out.

  • It manages to get dispensation from the regulator to work around its license terms, maybe pushing out coverage timescales and/or network sharing with other players. Highly unlikely. RegTP would be bombarded with lawyers' letters from the other license holders and those that were unsuccessful first time around.

  • Sonera and Telefónica sell the joint venture lock, stock, barrel, and license to a third party. Given the strength of Germany's leading mobile players (both T-Mobile and D2 Vodafone have more than 23 million customers), the PR damage the company and its brand (Quam) has suffered recently, and Group 3G's paltry 200,000 GSM subscribers (also using E-Plus's network), it would not appear to be an investment magnet at present.

    The options for MobilCom are a little simpler. Analysts expect France Telecom to honor MobilCom's €4.7 billion ($4.5 billion) debt to its banks, but it is by no means certain it will fund the mobile service provider further. If it doesn't, MobilCom will go under, and its biggest single asset, the license for which it paid about $7.6 billion at auction, will be repossessed.

    That could be seen as the easy way out. Alternatively, France Telecom could decide to invest and build a 3G business off the back of its existing customer base, thus giving Orange a foothold in Germany to go with its other key European territories, France and the U.K.

    But would that make sense? Not really, says Christian von Kleist, a senior associate at Spectrum Strategy Consultants. "Orange is very consumer-focused, unlike Vodafone Group plc (NYSE: VOD), which has a greater focus on business users and travelers, and therefore sees global reach as a key element of its strategy. For an operator that is catering for general consumers the synergies of international coverage are more limited, though there are savings to be made from spreading service development and infrastructure investment costs," says von Kleist.

    "I would be very surprised if Orange saw Germany as a key market to be in now. Maybe it would have in 2000, but not in 2002. Significant investment would be required," as MobilCom does not have the advantage of already owning a 2G physical infrastructure, he adds.

    Any significant investment would not help France Telecom's debt situation at present. The board is currently in the throes of deciding how to reduce its €70 billion overdraft. The signs don't look good for a MobilCom rescue package.

    Unless, of course, France Telecom were to find a partner that would invest in MobilCom (though this ranks down with the other unlikely scenarios). One that had previously shown interest in the German 3G market, was making a name for itself as a global 3G player, and that had the funds and telecom experience to take on such a task. Who mentioned Hutchison Whampoa Ltd.?

    — Ray Le Maistre, European Editor, Unstrung
    Additional reporting by Ouida Taaffe

Subscribe and receive the latest news from the industry.
Join 62,000+ members. Yes it's completely free.

You May Also Like