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The Shoeshine Column: Mobile minnow Telecom no match for DoCoMo

Friday 11th August 2000

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Perhaps it's only natural the market got all excited this week over reports Telecom was talking to Japan's NTT DoCoMo.

After all, isn't this the world's biggest mobile network operator, a legend in its own lunchtime? Aren't its revenues equivalent to 60% of New Zealand's gross domestic product?

It was only a whisper - the Australian newspaper quoted an anonymous source quoting Telecom's Theresa Gattung saying "me too" after Australia's Cable & Wireless Optus confirmed DoCoMo talks. And Telecom has sensibly enough been keeping mum since.

But it was enough to drive the share price up 19c on Monday and a further 4c on Tuesday, a welcome rise for shareholders like Shoeshine.

Helping fuel the fire were the comments of various analysts who reckoned an alliance would add a lot of value to Telecom. Nobody, it seems, thought to ask them why.

Sure, DoCoMo is a wily and innovative player. The mobile arm of Nippon Telephone and Telegraph or "Telecom Japan," it has 30 million mobile customers in its home country.

March-year net earnings were ¥252 billion ($5.04 billion), about half the level of the previous year, on revenues of ¥3 trillion ($60 billion).

Its web-enabled i-Mode service has been fabulously successful. Launched in February last year, it passed the 10 million subscriber mark on August 6, only 532 days later. And it has been pushing aggressively into Asian and European markets.

It owns 19% of Hong Kong's Hutchison Telephone Co and is trialling services in Singapore with SingTel.

Last month it signed a strategic co-operation pact with Hutchison and Holland's KPN Mobile to develop third-generation (3G) mobile services in the UK, Germany, France and Belgium, spending $8 billion on a 15% stake in KPN.

DoCoMo and KPN are buying stakes in the slab of 3G spectrum Hutchison bought at great expense in the British auctions earlier this year and the trio will pool resources to bid for spectrum in the other target markets' upcoming auctions.

Local investors are apparently excited about the prospect of a similar alliance with Telecom in Asian markets.

Telecom has hinted on various occasions it wants to expand north.

And this is not the first time it's come to DoCoMo's attention. The two signed a memorandum of understanding in July 1998, agreeing to "promote mutual co-operation including development of a third-generation mobile communications system."

The rationale for mobile players to band together to take on big foreign markets is certainly strong.

The European alliance cites time-to-market advantages, economies of scale in product development, network procurement, and construction, and shared content and other supplier relationships.

On the negotiation table are common branding across markets, joint procurement of infrastructure equipment and handsets, joint R&D projects and applications development, shared customer service centres and, importantly, 3G roaming across each others' networks.

Sound good for Telecom? Sure, but Shoeshine finds it hard to see such an alliance happening, for a variety of reasons.

DoCoMo's strategy to date has been to take minority stakes in its alliance partners through which it can push the technologies it favours.

In fact, few of the synergies it touts for the European alliance could be realised unless its partners use the same technology.

But Telecom, through the Kiwi Share, has a 10% cap on the stake any one player can hold without government approval, which might be hard to get in the current political climate.

And it's pushing ahead deploying code division multiple access (CDMA) technology, taking it down the opposite path to DoCoMo.

In the battle to become the 3G world standard, Qualcomm's CDMA is pitted against the European GSM standard. In its 3G version CDMA is set to transmute into CDMA 2000. DoCoMo is supporting GSM, which becomes wideband CDMA (W-CDMA) in 3G form.

Thirdly, as a partner for an Asian mobile alliance Telecom looks a poor prospect beside some of its fellow carriers. With total assets of $5.2 billion, it is dwarfed by the likes of Telstra at $35 billion.

If DoCoMo is indeed looking for an alliance in this part of the world either Telstra or Vodafone look far more likely suspects.

Hutchison is linked to Austar, which, with Telstra, owns half of the local Telstra Saturn joint venture. So DoCoMo's natural ally by corporate connection is Telstra.

Telstra is likely to end up with 3G spectrum on both sides of the Tasman. Like Telecom it is going heavily with CDMA in Australia but it also operates a national GSM network.

Interestingly, Hutchison entered the Australian 3G auction just before the DoCoMo talk came out. Even more interestingly, it turned up on Wednesday as a registered bidder in our own snail's pace 2G and 3G auction.

Vodafone has backed GSM all along and is also likely to end up with transtasman 3G spectrum. In other parts of the world, however, it is pitted against DoCoMo and its allies.

Worldwide, observers reckon, the 3G tide is beginning to turn in favour of GSM and W-CDMA. It won't matter for another few years but time will tell whether Telecom is backing the wrong horse.

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