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Demand for fast networks forces telcos to team up

Source: Reuters - Thu 5th Nov 2009

Telecom operators, once bitter rivals for customers, are finding that they need to team up to pay for expensive networks as demand for better and faster mobile connections goes through the roof.

Such alliances, which could also spark new M&A activity in Europe, are required for the expensive rollout of mobile connections that allow users to access social networking sites, email and other data-heavy applications.

"You're going to see more consolidation, you're going to see more mergers and acquisitions, you're going to see less operators in three years' time" said Margaret Rice-Jones, chief executive of Aircom, an independent provider of network management tools and services.

Many incumbent telecom groups, who in the past spent billions to buy 3G licenses, are not ready to serve customers with high-speed mobile data technology, needed by a growing number of users of smartphones and 3G cards or sticks that allow people to get online via the mobile network from anywhere.


Telecom groups have so far not seen the need to invest heavily in capacity because their business models are still generating cash.

The mobile Internet market has boomed since the 2007 introduction of Apple Inc's iPhone and data traffic over the internet is doubling every six months globally and growing even more rapidly in some countries.

While market research firm iSuppli estimates global annual shipments of smartphone handsets are projected to increase to 450 million in 2013 from nearly 200 million in 2009, mobile data traffic at the moment is already putting unprecedented stress on networks. 

Telecom operators will have to spend billions of euros for network expansion and the rollout of new technologies such as High Speed Downlink Packet Access (HSPA) and Long Term Evolution (LTE).

LTE is the fourth generation of mobile broadband, which utilises HSPA mobile broadband infrastructure currently being rolled out.

According to Aircom, a carrier in the United States has to invest about $1.8 billion in the first year to roll out LTE, while a European competitor will have to spend about $880 million.

To ramp it up quickly telecom groups will have to join forces, which may give some urgency to merger and acquisition activity.

Arndt Rautenberg and Ewan Parry at management consultant firm OC&C said groups that have already established leading positions, such as Vodafone, T-Mobile, France Telecom and Telefonica have an advantage as possible consolidators as they can benefit from large international synergies.

Analysts at Goldman Sachs said in a client note KPN and TeliaSonera are considered most likely prey should M&A activity in Europe pick up.


In the meantime, new initiatives are being explored. In North America for instance Telus and Bell Canada are upgrading their 3G network together in a 50-50 joint venture and their consumers can use the networks no matter where they are.

The initiative is seen as the first networks sharing strategy based on building a network from the ground up. 

"I think that is a model that we are going to see more and more, particularly in a market where there is a clear underlying demand for high bandwidth and all of the operators have the ability to address it at once" said technology director at the GSM Association, Dan Warren.

Still, the hunt for partnerships will force telecom operators to take a hard look at their comfortable old business models if they want to keep up with shifts in technology and consumer demand.

"It is very hard for operators to change their DNA but they must if they want to compete" said analyst Chetan Sharma of Chetan Sharma Consulting.

Especially incumbent telecom operators whose entire management and business model is based on voice revenue growth are finding it hard to accept that this model is obsolete.

"There is one thing you have to realise, the wondrous multiplication of connections of the past has come to an end but what those connections can enable will continue to develop" said Swisscom Chief Executive Carsten Schloter recently.

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