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Special Report: Rumble In The Mobile Jungle - Telecom vs Vodafone

By Perry Williams, ShareChat Wellington Correspondent

Friday 15th December 2000

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Perry Williams looks at the battle between Telecom and fast-growing Vodafone for the lucrative mobile market and asks whether the two companies could co-operate in the near future.

The evidence is fairly compelling. Last month Telecom announced its financial result for the September 2000 quarter amidst much fanfare. The numbers it quoted for its mobile service, however, must have been a huge wake-up call for Telecom management. They certainly showed how important the battle for mobile market share has become.

Telecom, long thought to be falling behind a more savvy and street-smart Vodafone, knew it was in trouble but has had difficulty admitting it. However the writing was on the slide at Telecom HQ that day as a sombre-looking mobile general manager, Mohan Jesudason, announced revenues in his division had declined 1.5 percent for the quarter and were not expected to grow for the remainder of the year.

That is a big worry, particularly as figures supplied by Mr Jesudason just a few moments later underlined how critical the mobile business is to the company's future. Telecom expects data transmitted through a mobile network to make up one third of its total revenues in about four years and 80 percent in ten years.

Vodafone is similarly obsessed with a hawk eye toward mobile and its Internet capability. In two years, Vodafone expects there will be more users of mobile phones in New Zealand than landlines, and in three years it forecasts mobile Internet will overtake the wired Internet.

So who's better placed to take advantage of New Zealanders' keen interest in all things cellular and net-based?

"Both players are actually looking quite strong", says one analyst who does not wish to be named. "Consumers are differentiating less between companies and brands and more toward products and services."

Telecom is the incumbent and is therefore strongly placed to continue winning mobile customers, but can't afford to rest on its laurels.

Its mobile service has just passed the one million customer mark, but the ARPU (average revenue per user) has fallen from $58 per month in the first quarter last year to just under $40 per month for Q1 2001. In September the 'churn rate' - the number of people changing from Telecom to another service - rose above 22%, the first time it has been that high since October last year. Customer share fell from 77% last year to 70%.

Telecom's loss has, of course, been Vodafone's gain, and at the end of September it was fast catching up on the market leader with around 640,000 customers. But Telecom's secret weapon - it hopes - is the rollout early next year of a new $200 million CDMA (code division multiple access) network. Much hyped overseas, it allows a generation of hi-tech Internet links to cellphones. It's a hugely important step for Telecom users to catch up with the digital GSM (global system for mobile communications) network which Vodafone operates.

While Telecom will continue to support its analogue and digital mobile networks for the next five years, it's clear any substantial mobile growth will come from CDMA.

At first glance it does appear to be the superior product. Telecom's network will allow a simple migration to third generation (3G) technology for its customers, allowing greater bandwidth for data and image capacity. Overseas, the trend has been toward the GSM network in Europe while the US has a mix of analogue, digital AMPS and, more recently, CDMA.

"The future looks to be combining some or all of these for mobile carriers but for the next few years we're likely to see stiff competition between GSM and CDMA," an analyst said.

Looking further afield, the move toward CDMA also ties in nicely with Telecom's confirmation that it is interested in Australian company, Cable & Wireless Optus, and its huge mobile assets.

Optus' mobile business has 3.1 million customers and income heading for $2 billion in the March 2001 year. Compare that with Telecom's mobile revenues of about $546 million for the June 2000 year and a fairly flat forecast for the year to June, 2001.

Telecom is reportedly making its Optus play through a consortium including Japan's NTT DoCoMo, however it will only say that it has a "number of alternatives for structuring and financing any Telecom involvement".

Telecom's newly acquired Australian business, AAPT, has also announced the installation of CDMA. The possibility of alliances abound in Australia but will that let Vodafone win through in New Zealand?

A tough call. This week Vodafone announced a new global Internet portal, Vizzavi, providing customers with continuous mobile Internet access and information, but whether a mish-mash of assorted weather reports, horoscopes and news headlines will capture the attention of the masses remains to be seen.

Although Telecom has been quick to talk about the potential of CDMA the market has remained unconvinced and concerns over its mobile business have no doubt been partly responsible for a poorly-performing share price this year.

Presumably the market wants more proof that CDMA will revive the company's lagging growth and reassurance that it won't continue sacrificing profitability by fighting for market share on price alone. Mobile prices have fallen by about 20 percent since the middle of the year which has helped reverse a declining market share (from 67% in Q4 2000 to 70% in Q1 2001) but has dropped revenue overall and seen margins cut by more than 10%.

For all the cut-throat competition, there is still talk between the two companies about bridging their two networks for text, the fastest growing type of traffic.

Mr Jesudason has previously said carriers who allowed text messaging between networks gained significant increases in income.

Vodafone has agreed it is an option to be looked at.

It's also generally agreed Telecom's CDMA network offers a two-year technology advantage because it has a greater data capacity than Vodafone. Eventually, it's expected both networks will migrate to wideband CDMA.

Currently, there's no uniformity between 3G systems, with two vying to be the standard - W-CDMA and CDMA2000.

In the meantime, one analyst Sharechat spoke to says he expects the swing toward Vodafone to continue.

"CDMA is obviously a fairly attractive package but it really only works to its full capability on WAP (wireless application protocol) phones and the final price of these could be double or triple the price of current phones."

"While the public is increasingly moving toward things Internet, they might not catch on as fast as Telecom expects. It could be a little bit of wait and see and that will work in Vodafone's favour."

The implications of that, and the current trend toward pre-pay rather than package deals, is sure to see the battle heating up in the next year.

CDMA customer trials begin in April next year while Vodafone's Vizzavi is available now.

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