Mobilcom goes byebye - the second German UMTS license holder leaves the market before it started
Past September 13, 2002, was a black Friday for German MVNO
(Mobile Virtual Network Operator) and UMTS licensee
Mobilcom.
France Télécom,
with 28,5 percent its biggest minority shareholder, decided to
stop pouring any more money in its German investment. This is already
the second KO of overambitious UMTS license holders that will never
use the air they rented for €8.5bn for a period of 20 years in the
insane summer of 2000. This editorial casts light on the underlying
reasons and consequences of the Mobilcom desaster.
The Mobilcom story turns out to be an interesting case study if you
analyse it with a sober mind that does not try to end burning cash
in a foreign market with 4 stronger competitors, i.e. France Télécom
and its mobile subsidiary Orange, save a personal fortune and fight a
public PR war against your shareholder, i.e. Mobilcom's founder and
main owner Gerhard Schmid, or win a general election by generously
spending tax payers' money, i.e. the current German SPD-ruled
government led by Chancellor Gerhard Schröder.
France Télécom's heavy debt and Mobilcom's bad strategic positioning are responsible
Six months have passed since I commented on mobiliser.org that
France Télécom
would buy Mobilcom to gain full operative control of their German
subsidiary and expand the international footprint and reach of its mobile
brand Orange. The financial reality has proven me wrong. But more
importantly, it caused France Télécom, the main spender in the
Mobilcom story, to redefine its strategy on the German market and close
the money tab.
In 2002 and for many years to come, all European state-run telcos
that also run the leading cellco in their country are suffering from a
heavy debt burden. Their main task will be to reduce it by retreating from
foreign markets and selling off diversified assets. France Télécom's debt
amounts to an unbelievable €69.7bn and it announced a record loss of €12.2bn in the first six months of 2002, enough to have forced its CEO, Michel Bon, to resign. Like Germany's Deutsche Telekom the French telco now looks for a new CEO with less hunger for world domination and more ability to run a company that is in good financial health and contributes corporate profit tax to the state kitten instead of consuming rescue packages financed by the individual tax payer.
When it comes to the strategic positioning in the current and future German
mobile market Mobilcom definitely faces a huge task that even with a lot of money might not be manageable. Currently, Mobilcom still is an MVNO reselling network capacity of T-Mobile, Vodafone and E-Plus to roughly 5 million subscribers. O2 (former Viag Interkom) does not use resellers and sells directly to its customers. To become a full-scale UMTS network operator Mobilcom first planned to migrate its customer base to the E-Plus network with more internalised network operations functions. Then they wanted to build their own UMTS network infrastructure and eventually migrate all their customers to it. The big challenge in this process is to switch from reseller mode to operator mode. It means that you tell your customers to suddenly give up the good technical voice and data service from their current network providers
that you sold so convincingly before. On top of that, it means that you stop being the friend of your former partners but rather start stealing their customers by competing on price and quality. I guess it is quite easy to imagine that this is a formidable challenge even for the best managers on this planet.
Being in the middle of such a crazy financial and business situation I can
understand perfectly well that France Télécom reconsiders all their engagements
in all the markets. This is what managers are doing when trying to turn around a company from the red to the black. With the same reasoning Spanish Telefónica Móviles and Finnish Sonera had no choice but to stop the operations of their joint venture Quam in July 2002.
Gerhard Schmid's ambition and leadership style made matters worse
Mobilcom's founder and main shareholder Gerhard Schmid thinks differently
because he used to be a billionaire and now he isn't. Mobilcom once was the
first German company to IPO on the Neuer Markt in Frankfurt and now it is close
to being delisted from the market as company number 80. Gerhard Schmid once
wanted to be the first operator to offer commercial UMTS services in Germany and
hired consultants costing €40mn per month to help him do it. And Gerhard Schmid
once was a good friend of his shareholder France Télécom that provided all the money to finance this UMTS adventure so far.
Kicked out by France Télécom Schmid now can only try to extract some of his
lost fortune by hiring good lawyers and pleading for breach of contract.
I doubt that France Télécom will loose the fight in the courts as they
terminated their contract with Mobilcom having good business and financial
reasons to do so. If the French loose and have to pay for damages then
the money will come too late to rescue Mobilcom which is already about to
file for insolvency. The appointed insolvency manager then will try to divide
Mobilcom into assets that can be sold on the market to save as many
jobs of the 5.500 employees as possible.
Finally, Schmid called France Télécom a company that is guided by the paradigm
of colonialism and focused only on national interests. This rhetoric does not show that Schmid understands the fierce but standard reality of the global economy in which companies enter and leave foreign markets driven by fast changing economic environments and incumbents' defence measures against new entrants.
The government's premature greed for UMTS money is guilty, too
Enter the German government. Back in summer 2000, together with England and Italy the German government auctioned off their spectrum to earn a lot of money in advance from a market that did not serve a single customer yet. The input of more than €50bn into the budget of Germany's finance minister Hans Eichel enabled the SPD government to reduce a looming budget deficit. The German government's greed for UMTS money is most probably one of the main reasons for the Mobilcom desaster.
Driving the 6 UMTS licensees into paying an extra tax of €8.5bn is smart in the short term but rather stupid in the long term as most economists would argue. It is simply not wise to charge an extra tax from participants in a new market that is only forecasted but not yet proven to generate huge revenues and profits. As in all other markets the government should charge a dynamic tax for corporate profits ex-post and not ex-ante. This was the first severe mistake by Schröder's government which will not see any corporate profit taxes from mobile network operators for a long time but rather a lot of new people applying for unemployment subsidies.
This policy is even made worse by the tough existing German UMTS license rules:
A license holder going out of business or unable to match the requirement of
covering 25% of the German population by the end of 2003 will be forced to
give back their UMTS license for free to the German government. The trading
of UMTS licenses between current license holders is not allowed either. This makes mergers among the 6 licensees impossible while they would make a lot of sense from a business point of view. Not changing the UMTS license rules is the second severe mistake of Schröder's government.
1 week before the general election in Germany chancellor Schröder gets nervous
and tries to play the role of the generous man offering to save Mobilcom with
a €200mn government grant which will not solve the problem but only postpone it. This move will also attract the criticism of the remaining 5 UMTS license holders as they will demand equal treatment for everybody suffering from the debt burden.
The 4 current network operators will enjoy the reduced competition
Independent of how much of Mobilcom's assets and employees will survive it
is almost certain that Germany will see the market entry of only 4 UMTS network operators in 2003. And they will happily take over the customers churning from the sinking ship under the Mobilcom flag. I doubt that this outcome can be prevented by the existing or new German government as market forces are known to be stronger in the end.
