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TDC, Vodafone or Clearwire?

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The promise of convergence of wired, wireless and mobile services has shifted the perceptions of the main telecoms players, especially in Europe, radically in recent times - though as so often, the telecoms investment community has been slow to recognize the trend. It should have been obvious far earlier that operators with only one type of network would become exposed, yet this fact did little to dull the shine on Vodafone, nor to cast a more favorable light on the multi-network giants, such as France Telecom and Deutsche Telekom.

Now it is clear at last that single network companies will need strong partnerships to fill in the holes in their infrastructure, and that everyone will need access to extensive fiber backbone to support a wealth of new services. Both of these trends will set some of the telcos on to the acquisition path, and one European player that would fulfil many requirements of a convergence strategy is Europe-wide fiber provider Colt Telecom.

Takeover speculation regularly surrounds the financially turbulent Colt - currently valued at around $1.5bn - and this has started up again in recent days, with highly traditional predators such as the US' General Electric named alongside telcos seeking, as outlined above, to strengthen their convergence hand against France Telecom/Orange/Wanadoo and Deutsche Telekom / TMobile / T-Com. The telco most prominent in the speculation is Denmark's incumbent TDC, which is seeking to create a wider European wired / wireless platform through acquisition. But the operator that should be taking a serious look at Colt must be Vodafone, increasingly exposed by its former greatest asset, its lack of wireline infrastructure. And as a wild card, what about Clearwire, seeking to create a pan-European broadband wireless network by stealth, but with its own risks surrounding access to backhaul at reasonable cost and quality?

Vodafone's pressures

With Vodafone's long term risks obscured in the shadow cast by its aggressive and successful global cellular-only strategy, and the long term assets of the incumbents masked by their debt burdens and sluggishness, it is only recently that opinions on the roles of the big names are starting to change. But fears about Vodafone's lack of wireline assets started to be voiced when its sold off the wired element of its Japanese acquisition. Perhaps, the iconoclasts whispered secretly, Vodafone would be prospering better in Japan if it could deliver a converged service?

The example of the US makes the case clear. All the major operators - cable, DSL and wireless - are positioning themselves for the mobilized triple play, delivering voice, video/television and data services over a variety of media to a range of devices, including mobile ones.

This has sent the regional Bell operators hurrying to buy up long lines owners to improve their enterprise services and their fiber backhaul infrastructure, and driven the cablecos into the arms of Sprint as they adopt the virtual network approach as their quickest route to mobility.

Vodafone has the potential to take the Sprint role in Europe and elsewhere, with its huge network and high capacity, and it is already engaged in an MVNO (Mobile Virtual Network Operator) pact with British Telecom (a good example of a company shunned until recently for being a wireline-only dinosaur, but now seen as a strong rider of the convergence wave). But this will require a significant shift of strategy, away from insisting on creating a powerful global brand for itself and its Live! content portal.

More importantly, it still confines the world's largest cellco to just one delivery medium (with some limited concessions to Wi-Fi). As we move to a world where users receive the same services interchangeably on different devices from set-tops to handsets to PCs, where is the advantage in controlling only one of these?

Colt would not fill all Vodafone's gaps of course, but it would bring some of the same benefits that Qwest and Verizon are fighting over with MCI - an infrastructure to deliver converged services to enterprises; strong backhaul to support high bandwidth access devices, with the cost savings, as the value of fiber starts to rise again, of owning the network oneself; and the opportunity to do what Colt itself is starting to do - use technologies such as WiMAX to extend the reach of the fiber into smaller companies and, potentially, high value residential bases, directly or through partners.

Clearwire

The most disruptive buyer for Colt would be Clearwire. Just as Colt defied the odds - albeit sometimes shakily - in surviving the late 1990s race to create cross-border fiber networks in Europe, so Clearwire seeks to disprove the wisdom, gained from the broadband wireless bubble of the same era, that there will never be a pan-European wireless network outside of Vodafone.

It is in its early stages but already its ambitions are becoming clear - to work as stealthily as possible, in order not to drive spectrum prices up, to buy broadband wireless licenses in every country where they come up for sale, and where the operator restrictions are not too heavy (as they were in Austria, an auction from which the company withdrew). These licenses - whether gained from auctions, spectrum trading, or acquisition or joint venture deals with other holders - will be used to create an international 3.5GHz broadband network for fixed and mobile access (regulators permitting) - a mobilized triple play without wires. Where Clearwire cannot avoid the wire, though, is in the backbone. It needs high performance middle mile technology and access to fiber at a reasonable cost to make its services as price competitive as they will need to be in Europe, where broadband prices are spiralling downwards. Just as the Craig McCaw -led start-up was negotiating a deal with AT&T in the US (thwarted by SBC's takeover bid) to exchange backhaul for wireless last mile capabilities, so a similar partnership will be important in Europe, and a broadly based player like Colt would bring economies of scale that would not be available from a jigsaw' of locally based agreements.

Colt's future

Back to reality, and the possibility of TDC interest in Colt. TDC, like many smaller incumbents, is under intense pressure in its own market and is aiming to balance this with expansion into other countries, particularly in enterprise services - hence the fit with enterprise provider Colt. TDC's first port of call for building a converged business outside Denmark has been Switzerland, where Colt has strong presence, but where TDC is up against another midrange incumbent demonstrating a creative approach to the multi-network world, Swisscom.

Colt's share price rose almost 10 per cent to 55p when rumors of a bid surfaced last week, although its majority shareholder, Fidelity, has given CEO Jean-Yves Charlier two years to expand the company before considering sale (Charlier has been in office for six months, and has announced various expansion tactics including adoption of WiMAX to boost the reach of the network). Colt is always a potential target, however, because of its list of high value clients, including major financial institutions, its large network - including well regarded assets such as its London metro area fiber - and its £500m in accumulated tax losses.

Its ownership of fiber in some key locations, such as its original home of London, helped Colt survive the shake-out earlier this decade when the value of fiber assets plummeted in the telecoms slump and operators like KPNQwest disappeared amid a wave of over-capacity. KPNQwest, until 2002, had Europe's largest fiber network, carrying 25 per cent of IP traffic plus offering large enterprise services but after its failure, most fiber owners pulled back to their core territories, leaving the multinational market to Colt and to the global players such as Sprint, AT&T and BT. Now, with a new communications boom being driven by convergence, broadband and the prospect of fourth generation wireless, the owners of fiber will become desirable again.

Copyright © 2005, Wireless Watch

Wireless Watch is published by Rethink Research, a London-based IT publishing and consulting firm. This weekly newsletter delivers in-depth analysis and market research of mobile and wireless for business. Subscription details are here.

Related stories

TDC sniffing around Colt - report
BT wants service obligations 'relaxed'
UK telco sector remains in doldrums

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