THE END OF WIRELESS GLOBALIZATION

Vodafone announced a $19.7 billion loss last week, primarily due to write-downs of extravagant acquisitions. The move is a sign that European — and, to a lesser extent, Japanese — “wireless miracles” were fueled as much by overspending and outsized expansion ambitions as they were by marketing successes.

Shares of Deutsche Telekom, Europe's biggest carrier, hit an all-time low last week amid weak earnings and a credit downgrade by Moody's. Investors are angry about the company's $3 billion 2001 loss, which it posted after buying VoiceStream Wireless and investing heavily in third-generation licenses across Europe. Deutsche Telecom's debt, which is 100% of its market capitalization, has even become an issue in Germany's current elections.

The debt load of France Telecom, the owner of global wireless operator Orange, is 160% of its market cap. KPN NV of the Netherlands took a massive $11.6 billion write-down on E-Plus, the German mobile unit it acquired in 1999, and the carrier is floating in a sea of debt that is 156% of its market cap.

Japan's NTT DoCoMo, long held as a model of 3G success, wrote down $105 billion on foreign investments earlier this year. The news brought renewed criticism of DoCoMo's overseas strategy of taking minority investments in other carriers to move its i-mode mobile portal brand outside of Japan.

The mood for global wireless expansion is markedly changed from two years ago. Throughout 2000, everything Vodafone Group CEO Chris Gent touched turned to gold. His company brokered the biggest corporate merger in history, using its high-flying stock as currency to create a mobile services colossus with Germany's Mannesmann, and it set the tone for the globalization of telecommunications.

“[Operators] had a big party, and now they have this horrendous hangover,” said Herschel Shosteck, president and chairman of The Shosteck Group.

The pain is worse for operators that spent billions of dollars on European 3G licenses to gain pan-Continental footprints. Many are under pressure to take write-downs on the licenses, which aren't expected to generate significant revenues until 2007. Others are waiting and hoping that regulatory changes would allow them to sell or trade these licenses.

Globalization of the wireless business as previously envisioned clearly is on hiatus.

“There's financial pressure on well-established companies that have a lot of investment stakes and debt burdens,” said Charlie Davies, wireless analyst with Ovum. “These companies have to re-evaluate their presence in other markets and how much they are losing internationally.”

Those carriers must quantify the value of being a global player, said Phil Kendall, director of the global wireless practice of Strategy Analytics.

Just three years ago, financiers welcomed blind consolidation for the sake of growth. Now they're worried about damage control. Growth prospects are dimmer with the delay of 3G network offerings. Vodafone, the benchmark for European carriers, said it doesn't plan to promote 3G services until the second half of 2003 because it is waiting for dual-mode handsets. The carrier also is forecasting customer growth at just below 10% for 2002 and 2003, and reducing estimates for mobile data's revenue impact in the coming years.

“Everyone is asking the question, ‘Are these companies now closer to being true old economy, like slow-growth utility companies, or is it still a high-growth sector?’” said Declan Lonergan, director of The Yankee Group's wireless/mobile practice in Europe.

Still, Vodafone is starting to experience the benefits of being the world's largest wireless operator. Despite lowered revenue expectations, analysts were happy with its lower-than-expected capital expenditure that resulted from operational efficiencies and falling equipment prices.

“Vodafone is beginning to generate economies of scale,” Lonergan said. “There is fundamentally nothing wrong with its approach, but when it made its moves they cost a lot.”

Vodafone will likely continue to be the industry's consolidator, although the company's moves will be considerably smaller because its equity doesn't carry nearly the same weight as it did two years ago.

The carrier also has $17.5 billion in debt against a market capitalization of $105.4 billion, which makes it one of the strongest carriers in Europe. In a conference call with investors last week, Gent said Vodafone won't significantly increase its 23¢-per-share dividend or buy back shares for a few years to conserve cash and pick up cheap wireless properties. It's also likely to increase its stakes in some of its minority-owned properties.

“They are the only player that has firm global aspirations,” Kendall said. “They do believe that despite the valuations long term, they can get profitable end to end. For the other players, it is less clear. Consolidation has been a pretty slow process if you ignore what Vodafone has done.”

Analysts say it will take about two years for many of these major operators with global aspirations to clear up their debt problems, which means they will focus on controlling expenses such as marketing and handset subsidies.

“There is plenty of cash coming in from these carriers' subscriber bases,” Shosteck said. “Network operators won't be as hysterical to grow. There will be slower and more rational growth, and far greater constraints on expenditures.”

Indeed, globalization could take on a new meaning. With the disastrous effect of high-priced mergers and acquisitions combined with an economic downturn, carriers may begin to rely more on strategic alliances.

“It is feasible to be a global company and offer global services to a specific business sector,” Davies said. “Companies don't necessarily have to be operating in all countries to be global. The term ‘globalization’ is being questioned in a number of economic areas. This is a sign of the times.”

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With additional reporting by Kelly Carroll in Chicago.