Seeking scale, defying history

19 Jun 2006

What goes round comes around in the mobile industry. NTT DoCoMo and Hutchison Telecom have just announced a joint venture to offer i-mode services in Hong Kong and Macau.

That was the original intent when DoCoMo bought its stake in the Hutch Hong Kong mobile unit half a dozen years ago. Hutchison execs could not have been less interested.

Now, on terms undisclosed, they will be part of DoCoMo's attempt to turn its domestic Internet business into a global one.

It's important for the Japanese carrier because it needs the global scale to bring down handset prices. It counts 4.5 million i-mode users in 16 countries, which is good going given the cultural barriers Japanese service firms encounter overseas, but is just a patch on the global cellular user base of 2.4 billion.

History also caught up with the Vodafone Group last month when it announced a $28 billion loss, the biggest ever by a European company, as a result of impairment charges, mostly from over-priced assets bought during the bubble years.

The $42 billion writedown was part of guidance, and in any case wasn't really the most interesting thing in the accounts.

By the standards of most industries, Vodafone is in good financial nick: operating profit was up 11% and free cash flow fell by just 2.6%, while it raised its dividend.

But this is the mobile industry, where expectations are large and egos are larger; hence the bitter in-fighting among the board and senior management because the company is not delivering the fat numbers of yesteryear.

Passing reference

While DoCoMo has staked its global business on i-mode, you hear very little about sexy new data services from Vodafone these days. At the annual results announcement execs made only passing reference to Vodafone Live, the data service platform, and HSDPA plans.

What they did disclose was a new metric (at least to Unwired), namely 'revenue from 3G devices'. Presumably that means voice and text over 3G phones. That the accountants dredged up such a meaningless statistic doesn't give much confidence in the company's 3G business. 3G counts for just 10 million out of Vod's 170 million users, admittedly at a higher ARPU, but it is a tiny segment that consumes a lot of resources.

By its deeds, if not its words, the global mobile leader has clearly decided the action is in emerging markets and not smart new services. It's been in M&A mode for the past year, picking up assets in Romania and South Africa, a stake in Bharti in India and a big stake in Turkey's Telsim.

These aren't going to deliver huge returns but they are on striking growth paths that deliver something that 3G can't, and that's scale. Scale businesses are something of a zero-sum game: every customer you sign up is one your competitor doesn't.

But scale is something all ambitious mobile carriers are chasing: Vodafone, DoCoMo, Hutchison. It's also the reason the industry's 800-pound gorilla, China Mobile, is also in the hunt for emerging market business. In its first foray outside China, China Mobile looks ready to acquire the Millicom Group for some $5.3 billion.

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