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Vodafone looks to reverse mobile-only strategy

Arcor key pawn in cellco's convergence play

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It seems increasingly likely that Vodafone Germany's wireline unit, Arcor, is no longer up for sale but will instead be incorporated into the giant cellco's first major experiment with fixed mobile convergence (FMC) - one that could be a blueprint for other territories.

Vodafone, in its recent reorganisation, made it clear that it must join the FMC race to sustain its margins over time and avoid being sidelined into a large but increasingly pressurised mobile-only niche. It is now said to be keen to buy the minority stake it does not already hold in Arcor, Germany's number two fixed line operator.

It has various options in terms of technology - hope that HSxPA, on its own or combined with other wireless networks such as WiMAX, can deliver an effective wireless-only quad play, with strong fixed as well as mobile broadband; partner with a fixed network owner, as it has - to a limited extent - with British Telecom in the UK; or acquire wireline broadband units of its own.

The last option would not be popular with Vodafone's acquisition-shy shareholders, but would, in Europe at least, have to be adopted quickly, as the scramble to acquire the best broadband independents has already begun.

Vodafone has already been linked with various potential targets, notably the international provider Tiscali.

With the exception of its US joint venture Verizon Wireless, Vodafone Germany is the only subsidiary with its own wireline arm, Arcor, which until recently was due to be sold off. However, combining the two units would be a valuable testing ground for converged services for the world's number one cellco, as well as enabling it to remain competitive in one of the world's toughest markets.

In Germany, Vodafone has already introduced "homezone" services with VoIP-style flat rate voice calls within reach of the subscriber's home, in order to fight off the VoIP pure plays and the converged operators, by using the efficiency of 3G spectrum to slash cellular voice costs. But it faces an ambitious convergence plan from incumbent Deutsche Telekom, with its T-Mobile, TOnline and T-Com units, plus an all-wireless FMC strategy from O2 Germany, now part of Telefonica.

In this situation, sell-off of Arcor would be a very short term gain. Integration of the unit's DSL business would create a powerful number two challenger to Deutsche Telekom, and the only one with both fixed and mobile services. A fully integrated company would have revenues of about €10bn on 2005 figures, with almost 30m mobile subscribers, 1.4m ISDN and 1.2m DSL customers.

Arcor has enjoyed triple digit customer growth in the past year, with DSL customer numbers up by 166 per cent and ISDN by 103 per cent. It has an unbundled broadband offering in 300 cities and by the end of this year plans to cover 45 per cent of the population.

This would clearly offer a major upselling opportunity for fixed-mobile bundles as well as a realistic alternative to T-Com/T-Mobile/T-Online. Arcor has planned an FMC service, called Dual-Phone, which - like BT's Fusion - will allow users to use the cellphone to make calls from the home DSL connection via a Wi-Fi router.

Unlike the upcoming similar offering from T-One, this will allow users to roam, when outside their home zone, to all Wi-Fi hotspots (T-One will support only the T-Mobile cellular network and hotspots).

There are obstacles to this path, not least cultural contrasts between the two companies, the fact they have not cooperated on any projects before, and a slowdown of investment in Arcor because of the assumption it would be sold off.

Also, Vodafone will have to spend about €600m to buy out minority stakeholders, notably railway Deutsche Bahn and Deutsche Bank. Coming shortly after Vodafone announced writedowns of about €34bn, mainly down to overvaluation of its German arm (originally acquired with Mannesmann), shareholders are unlikely to be happy.

However, even the disgruntled and over-cautious Vodafone investors must realise that the company needs a convergence play, which could allow it to sustain its margins and market share in key markets, and even to enhance its ability to challenge incumbents in countries such as Germany.

Arcor would provide a convenient and relatively low cost route to create a convergence offering.

Copyright © 2006, 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.

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