Following a year of steady activity, the year 2001 will see the formation of further alliances in the mobile cellular communications sector in Asia alliances, primarily driven by the move toward UMTS Third Generation (3G) Internet over mobile services. Many of the alliances will take the form of mergers or takeovers as companies endeavour to spread the risk and cost of 3G services.
In the eyes of many, Internet over mobile (3G) has the long term potential to eclipse Internet over fixed line. This is because the three largest Asian markets by population - China, India and Indonesia - currently have low PC penetration. By coinciding with the launch of 3G services, as these markets develop they have the opportunity to largely bypass the legacy of PC based access, with mobile devices instead becoming the main Internet access device. Also, the large land areas of these markets, especially archipelago Indonesia, may find mobile a more suitable Internet access solution than fixed line access. This may seem ambitious, but already in Japan the largest ISP is not fixed-line, but NTT DoCoMo's mobile 'i-mode' service. This article looks at the main reasons that 3G alliances are being formed and then identifies and analyses the strategies of several main Asia players across key markets, whilst also picking out other potential supporting actors in 3G alliances. The Determinants of 3G Alliances Beneath we have identified the four main reasons that alliances for 3G mobile are formed. All 3G alliances seek to combine one or more of these qualities. Partners in mobile alliances often bring one characteristic and seek a partner who brings one or more of the others. Risk Sharing Third generation services are surrounded by risk, something the markets and operators are only too aware of. The whole 3G product remains a largely vague and, as yet, undefined quantity. Will it be a corporate or mass-market product? What will people use them for: email? video? gaming? All these questions add up to significant risk for operators and investors, albeit with the potential for large long-term financial rewards if 3G proves highly successful. Also, in some markets there is added risk due to protectionist tendencies and illiberal regulation. Cost Arguably a component of overall risk, 3G services are going to be very costly. In many European markets lucrative frequency auctions have added billions to the cost of 3G even before networks are rolled out. Indeed many Asia markets have excluded auctions in favour of beauty contests because of this reason. The second main cost component is the extensive upgrading from existing digital 2G networks to 3G. The third cost will be the marketing of the finished service. Technical Expertise Experience of supplying Internet over mobile to mass users is a valuable commodity amongst mobile operators. Those with technical expertise will be sought after by those without. In Asia, Japan's NTT DoCoMo is an example of an operator with great technical know-how with its popular 'i-mode' service. To a large extent though, technical expertise will be bought through vendors such as Ericsson and Nokia, who are also busy securing equipment alliances with operators. Market Knowledge/Access Local market knowledge: how mobiles and Internet are bought, by whom and for how much in any particular market are factors that local established players are intimate with. External operators looking to access markets can tap into this knowledge through alliances with local national cellular operators. PCCW and Telstra Alliance Following the initially surprising acquisition of Hong Kong fixed line operator Cable & Wireless HKT by upstart Internet start-up Pacific Century Cyberworks (PCCW), PCCW went on to form a series of pan-regional alliances with the ever more expansionist Australian fixed line giant Telstra. The US$3bn Telstra PCCW tie-up first unveiled in April 2000, includes at its centre a regional mobile alliance that will spread the substantial costs and risks of 3G. Even the other IP and data ventures are relevant for the deployment of 3G services because 3G involves a fairly substantial amount of advanced fixed line infrastructure. The alliance also gives Telstra a seat in Hong Kong's mobile phone sector and for PCCW, itself a new e-business, a deal with an established telco such as Telstra would shore up somewhat shaky market faith in its merger with C&W HKT. However, following initial contentment with the PCCW Telstra deal, the markets have been very uncertain about the stability of the deal forged. In October 2000, falling PCCW share prices, and domestic pressure gave Telstra the jitters and it reduced its financial commitment to the venture from US$1.5bn to US$1bn. It remains to be seen if the alliance can bear sustained pressure of market skepticism. Unlike Telstra, PCCW's HKT's cellular operations are not number one in its local Hong Kong market, that position is held by Hutchison. For both telcos the venture is mainly a risk and cost saving exercise, with each operator providing respective market access to each other. PCCW in particular is interested in the cost-saving aspect as it seeks to reduce its debts following the HKT takeover. It seems likely that partnerships with local cellular operators will be agreed in due course, but ahead of that PCCW is likely to secure the C&W HKT stake in no.2 Singapore cellular operator, M1. Singapore: SingTel Leading local telco, SingTel, PCCW's vanquished opponent in the tussle over Cable & Wireless HKT, and with Time in Malaysia, will expect a better 2001, with a more alliance-focused strategy. Indeed, like PCCW it has already unveiled plans to form a pan-regional 3G network. SingTel is planning to build the network through joint ventures with local cellular operators, participating in 3G contests in Hong Kong, Taiwan, Malaysia, Indonesia and China. This is an ambitious strategy, very much taking on PCCW and Telstra, but if successful in securing 3G licences across the markets it promises to significantly spread the cost and risk, as well as simultaneously securing market access. However, negotiations with multiple local operators in different markets may prove taxing, especially if SingTel is to avoid any conflict of interests in an ever more complicated web of cross-market cellular activity in Asia. Japan: NTT DoCoMo The year 2000 saw cellular giant NTT DoCoMo emerging from its shell to pursue an uncharacteristically expansionist series of West Europe 3G alliances in Holland and the UK with Hutchison of Hong Kong and Dutch cellular operator KPN. The missing pieces in the puzzle, and soon to be found, are a tie-up with a US cellular operator, and movement in Asia. DoCoMo's overseas focus seems a sound one, as despite rapid growth in its mobile Internet 'i-mode' service, local mobile data competition is heating up. If anything DoCoMo's 3G strategy could afford to be a lot more ambitious, taking on more risk and cost. As it stands it is a very rich cellular operator merely providing its world-class mobile Internet technical expertise in return for, as yet, limited market access. Its intra Asia 3G moves have so far been non-existent but this is likely to change in 2001 - indeed, as this article was being written it was circling Australia's number two cellular Operator Optus. An Asia mobile partnership with Hutchison seems likely and would be formidable. China: Vodafone and China Mobile (HK) And so to China. As 2000 closes it still remains the Promised Land into which many will strive to forge a mobile alliance in 2001. Upcoming WTO accession will see the market slowly unfold over coming years. A breakthrough of sorts came in October 2000, when the UK's Vodafone Airtouch unveiled an US$2.5bn alliance with China Mobile (Hong Kong), the listed cellular flagship of China Mobile. Although the deal sees Vodafone take only a 2% stake, it remains a significant strike for a western company. First come is not always first served, but Vodafone has assured it is sitting at the table ahead of WTO, whilst its rivals wait outside. The deal remains firmly weighted towards China Mobile (HK), which gets the technical expertise and cost assistance of Vodafone. For its part, Vodafone gets the prospect of privileged access to the Chinese mobile market. Another China target does exist for alliance seekers in the form of number two operator China Unicom, which will surely be next in forming at least a token international alliance - especially if it is to fund its ambitious expansion plans. However, 2001 is likely to show that China will remain a hard market to enter, that is unless your name is Li or you are based in Hong Kong. If market skepticism finally scuppers the ambitions of Richard Li's PCCW, his father's Hutchison seems an ever safer bet. Lai Ka-shing's Hutchison has its fingers in lots of pies: Western Europe, India and China. And yet it is still a discriminating telecoms investor - it surrendered its 3G licence in Germany when it gauged market competition exceeded the asking price. For many companies not close to either PCCW or Hutchinson however, China will remain out of reach. In the past China has taken on foreign operators very much on its own terms: the Unicom CCF agreements that were scrapped in 1999 with scant notice were an example of that, and burnt many foreign investors. India: Cellular consolidation India's summer/autumn acceleration in liberalisation restored many of the disillusioned believers that India could overtake China as Asia's main telecommunications market. However, it is hard to see major mobile alliances being formed in the immediate future. The newly corpor-atised Bharat Sanchar Nigam Ltd (BSNL) or Indian Communications Corp. formed from the state-owned Department of Telecommunication Services (DTS), is unlikely to be open to foreign alliances immediately, especially with current overstaffing and union relations. However, eventual privatisation may attract significant overseas interest if the government can keep up the heat of liberalisation. However, the sceptics will maintain that India remains a country of too many rival states and too many cellular operators -around 20 to China's two. In short, 2001 will be a year of catch-up for India with continuing consolidation of cellular operators. Li Ka-shing's Hutchison, NTT's partner in West Europe 3G alliances, is doing much of the running in cellular through its Hutchison Max operation that has been buying up significant metropolitan markets. Along with Bharti Cellular, Hutchison will be a cellular operator to watch in what is a potentially very exciting market still in its infancy. India has great potential, but in terms of 3G it is still early days. Conclusion More than ever in mobile, 3G mobile will make alliances of some sort a necessity. Balancing the determinants of 3G, which themselves are not fixed and will vary over coming years, will be the challenge of dealmakers in 2001. As the product matures, associated risks will fall. Economies of scale in equipment production will ensure falling costs, and technical expertise and market knowledge will become more readily available. However, by then the 3G market will have been tapped, and only those who enter now at the ground floor stand a chance of being at the top of the market in ten years time. In Asia this balancing of risks versus massive potential future reward will be especially critical. What is sure is that 2001 will see more 3G investment opportunities open up across Asia. For operators the main strategic decision will be with who, where, and how to forge alliances. Forging sound alliances now in the right markets will be the key to future success.