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Game theory in the popular press.

Who Will Blink First in German Telecoms Poker?

BusinessWorld Online

3 January 2002
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LONDON -- Six top telecoms players will need to decide this year whether to show their hand in Germany, Europe's largest telecoms market, in what is becoming the highest stake poker game on the continent.

Having gambled $46 billion on new-generation mobile licences last year and seen share prices crash, executives admit they risk throwing good money after bad.

But the German market is governed by game theory, where strategies hinge partly on predictions about the behavior of rivals.

The key protagonists are Vodafone Group Plc., Deutsche Telekom, KPN Telecom, BT's wireless demerger MM02, French-owned Orange and the Telefonica Moviles-Sonera joint venture.

Despite mounting calls from analysts and investors for some of the smaller operators to shut up shop and head for home, all six insist they are on track to launch a third generation (3G) of high-speed mobile phone services around 2003.

"Many analysts say we should pull out," says one European executive with a German business. "And we have to look at shareholders' interests. But it is also a competition game and we don't want to help our rivals (by eliminating competition). "If we pull out now, we won't get the best out of assets we already have. We have to defend the value of the licence."

Under German third-generation (3G) licence rules, operators only have to build networks covering 25% of the population by the end of 2003. But the first volume deliveries of new, 3G Internet mobile phones will fire the starting gun for a race to avoid losing out to market leader Vodafone.

"Everyone has to start investing heavily to meet their own deadlines for rolling out next generation services soon," says one corporate banker. "That will be the time by which everyone either has to blink or go ahead."

Industry experts and company insiders have long predicted a shake-out among the four smaller German operators, which are backed by Dutch, British, French and Spanish groups. They account for just 20% of a market dominated by the twin might of Deutsche Telekom and Vodafone, and their businesses are not deemed big enough to ensure a lucrative future.

"Everything turns on what will happen in the mobile market," says one industry source close to a German operator. "And the trigger could be Germany. It's clear there will be not six, five or four (3G) German networks. There will probably be three."

The costs of E-Plus, the number three German group, helped prompt its Dutch parent KPN to launch a rescue equity issue. British-owned Viag Interkom, the number four, is under review as it hemorrhages cash. French-backed MobilCom and Spanish-led fledgling Group 3G may have ambitious parents, but they have yet to build networks.

Analysts warn that despite the projections of groups such as Spain's Telefonica Moviles, which has slashed 10-year investment targets in Germany to 2.4 billion euros from 6.2 billion euros, German start-up costs are likely to be "phenomenal".

In the meantime, partly because of the technological uncertainties over 3G services, analysts value some German assets at less than zero.

"Everyone has a problem in Germany, so consolidation does seem logical," says John Tysoe, telecoms analyst at WestLB Panmure. "But Vodafone and Deutsche Telekom are just going to sit and watch. They are not in the business of putting anyone out of their misery. That is for one of the other four to do."

Analysts warn that operators cannot afford to be sentimental in their approach to Germany. Despite a small recovery since September, telecoms shares have fallen 32% this year and underperformed the pan-European blue-chip FTSE Eurotop 3000 by 14.5%.

BT Group's newly-listed mobile phone business, MM02, has said it will evaluate its German arm Viag and cut it loose if it fails to perform. KPN officially wants to hang on to E-Plus, but some investors believe the diminutive, debt-laden Dutch group can no longer afford its costly German foray.

Telefonica, however, has a weak German position, relatively strong balance sheet and a close, former relationship with BT. And the Spanish group has long been tipped as a possible bidder for Viag.

But with an eye on E-Plus, Telefonica also discussed a mobile merger with KPN last year. That may bring it face-to-face with France Telecom's Orange.

Orange, which has just a 28.5% stake in reseller MobilCom, has also eyed up E-Plus in the past -- and its French parent has flirted more recently with KPN.

Much depends on the German regulator, who is blamed for hampering consolidation by insisting that there will be no 3G licence refund in the event of a merger and that bidders will not be able to offset this 8.4-billion euro cost by selling the spectrum, or network capacity, of acquired rivals.

Regulator Matthias Kurth fears that allowing spectrum trading may open up the market to speculators and not guarantee its efficient use. Operators are allowed to share part of the cost of building networks, but some are still hoping for more.

"The German regulator should be more proactive in finding some form of reallocation of spectrum," notes one German operator. "It will be better for Germany, the operators, the clients and allow companies to better plan their resource needs.

"We think this will happen. But it will take time."

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