Employees at T-Mobile's headquarters in Bonn, Germany, hadn't seen their boss, Hamid Akhavan, look this relaxed in a long time. Last Wednesday Akhavan, an Iranian by birth, was seen strolling through the building, cracking jokes and clearly in a good mood, holding a little bone of contention in his hand: California-based computer maker Apple's small, black-and-silver, cult-status iPhone.
The reason behind his good mood was a ruling handed down the day before by a disrtict court in Hamburg, one that was even met with great interest by the European Union Commission in Brussels. The judges had categorically awarded German telecommunications giant Deutsche Telekom's T-Mobile unit the exclusive rights to sell the iPhone. "It's the first victory," said Akhavan, smiling broadly.
The spectacular decision in favor of Telekom was completely unexpected. Less than three weeks earlier, the same court had issued an injunction in response to a case filed by rival and industry giant Vodafone, temporarily barring T-Mobile from selling the popular iPhone exclusively in a locked version with a minimum 24-month contract. In their almost 50-page brief, Vodafone attorneys had argued that T-Mobile was engaging in "illegal customer commitment" as well as the "unfair obstruction of other competitors."
The court's surprising about-face is more than a defeat for Vodafone and for countless Apple fans, who had hoped to be able to buy the device that's so popular, it's earned the nickname "Jesus Phone," from Deutsche Telekom without having to sign the bothersome two-year contract. Symbolically, at least, the ruling also marks a turning point in the development of wireless telephony and could represent the beginning of deep-seated changes in the multi-billion-euro industry.
A number of megatrends, some still in their infancy, serve as the background for the current spat over the supposed miracle device. However, all strategic analyses currently making the rounds in the industry have one conclusion in common and it's making executives increasingly nervous: The golden days of mobile wireless are over, for now at least, while the role network operators will play in the future is highly uncertain.
Mobile wireless companies, accustomed to success, have come under pressure from all sides. The market is saturated, prices are plummeting, new offers fail to deliver what they promise, and powerful corporations like Apple and Nokia, as well as Internet giants like Google, are forcing their way into a business controlled almost exclusively until now by companies like Vodafone and T-Mobile.
Telecommunications experts predict that the once-untouchable network operators could even end up being downgraded to virtual shipping companies -- little more than suppliers of bits and bytes. According to Roman Friedrich of the corporate consulting firm Booz Allen Hamilton, this is "no longer a theoretical risk," but is now "a highly likely scenario."
The Party is Over
Of course, that's still a long way off. Besides, the telephone giants, with their transmission towers built at a cost of billions, will hardly give up without a fight. Nevertheless, executives at the corporate headquarters of companies like Telekom, Vodafone, E-Plus and O2 are still puzzling over what the business model of the future will look like, and how they will manage to preserve what until now have been overabundant sources of profits. Even T-Mobile CEO Akhavan concedes that one thing is clear: "The entire industry is on the verge of radical change."
Mobile Market Leaders
The mobile wireless business has been relatively straightforward until now. Critics say that the license to operate a wireless network is practically a license to print money. Since the mid-1990s, when mobile phones began becoming ubiquitous, there has been no lack of demand. At the best of times, companies managed to achieve profit margins of up to 50 percent of their constantly growing revenues.
Even costly failed investments, like the early development of the rapid UMTS data network, could not stop the boom. In those days, says Stan Miller, head of the European Union operations of low-cost provider BASE, companies didn't even need decent managers to make money. All they had to do was emulate everyone else. Given that degree of harmony in the business, it wasn't surprising that Germans sometimes found themselves paying extremely high mobile phone bills compared with their European neighbors.
But now the party is over. After years of rapid growth, a saturation level has finally been reached. Today, close to 100 million mobile wireless cards are in service in Germany alone.
The only way to secure significant market share is to take it away from competitors. Not only is this difficult, because a majority of customers are tied to contracts, but it's also very costly. Because the industry, despite its claims to the contrary, refuses to distance itself from the system of subsidized mobile phones, each new customer costs providers about €200 ($293.46).
Out of pure necessity, E-Plus decided two years ago to drop out of the expensive race to recruit new customers. To fully utilize its networks, the company introduced, for the first time, additional brands at lower rates, ultimately landing discount giant Aldi as a powerful distribution partner.
In doing so, E-Plus triggered an unstoppable avalanche. Within a year, usage rates dropped to record low levels. One minute of mobile telephone use, which went for the standard rate of about €0.25 ($0.37) only a year ago, now costs less than €0.10 ($0.15).
As positive as E-Plus's move was for consumers, it was painful for the rest of the industry. For the first time, corporations accustomed to success were faced with significant declines in profits and sales this year.
In Austria, lower prices resulting from extremely tough competition led to customers using their mobile phones more often and for longer calls. In Germany, however, the drop in prices has not prompted customers to change their habits as significantly. As a result, average monthly revenues per mobile phone customer have dropped by up to 18 percent in 2007 compared with 2006.
Although this downward trend has slowed down, an end is not in sight. This is partly the reason behind a new strategy with which companies hope to win over the last mobile phone ascetics.
Part 2: Earlier Visions Have Turned Out to Be Illusions
According to E-Plus CEO Thorsten Dirks, "customers will soon experience completely new rates, distribution and business models." Using the tabloid newspaper Bild as a model, music companies, brand-name manufacturers, financial service providers and other companies in businesses that are in fact unrelated to the mobile sector will create their own brands -- with the full-fledged support of network operators. Mobile operators are even developing cheaper rates or free-of-charge use for customers who agree to accept advertising messages sent to their phones.
All of this frenzied activity, which has even taken hold at global market leader Vodafone, serves only one underlying purpose: To increase traffic -- at whatever cost -- on mobile phone networks that are still far from fully utilized. This is the consequence of a bitter realization.
The visions, once prevalent within the industry, of the mobile phone serving as a central switchboard in the lives of consumers, as an all-purpose device with which customers would not only make calls, but would also surf the Web, listen to music, watch movies and pay for their groceries, have all proved to be little more than an illusion -- or at least they are still light years behind those futuristic predictions.
Granted, growth rates for mobile Internet sales are enormous. But seven years after the launch of UMTS technology, which was pushed at a cost of billions, the lion's share of all mobile data services still falls to the conventional text-messaging (SMS) technology. And it will likely take years before business with the new services will make up for losses in revenues resulting from price declines.
The wrangling over the distribution rights for the iPhone highlights the level of despair within the industry. Some business executives expect true miracles from the mini-computer -- or at least a powerful push for mobile Internet use. This is why all major network operators in Europe sought to obtain the license from Apple. And like Telekom CEO René Obermann, many others were apparently even prepared to break with their ironclad principles.
In addition to setting price and distribution channels on which telephone companies are permitted to sell its supposed miracle mobile phone, the California-based computer maker collects up to 30 percent of the fee revenues that network operators earn in connection with the iPhone. Apple CEO Steve Jobs even managed to defend his company's interests when it comes to music. Although Telekom's Musicload is the leading online music downloading service in Germany, iPhone users will still be required to buy their songs from Apple's own iTunes service.
T-Mobile CEO Akhavan nevertheless manages to put a positive spin on the issue. To justify his company's deal with Apple, Akhavan says that "to gain excellent partners," one simply has to "enter into unconventional business models." Critics, on the other hand, believe that accepting Apple's conditions could mark the beginning of the end for mobile wireless operators.
Outsiders Moving In
The US computer maker is no longer the only corporation hoping to break the omnipotence of the network operators. Search engine provider Google, for example, has just formed an alliance of more than 30 companies to develop a new, open-source operating system that would allow mobile phone users to gain access to the entire Internet for free. The all-purpose system, scheduled to be introduced next year, would not only undermine the Internet services offered by network operators. It would also enable Google founders Sergey Brin and Larry Page to seamlessly expand their search engine, heavily funded with advertising money, to make it available to mobile phone Internet users.
Sending Data by Mobile Phone
Finnish mobile phone giant Nokia, whose factories produce close to 40 percent of the more than one billion mobile phones sold this year, also has a large foot in the door when it comes to network operators' fee revenues. "We want to be number one internationally when it comes to bringing the Internet onto mobile devices," Nokia CEO Olli-Pekka Kallasvuo says unambiguously.
The electronics group has been developing its own Internet portal for mobile services for some time. The project is called Ovi, Finnish for "door," and it emphasizes music, navigation and games. To be able to offer attractive services, the Finns have not shied away from investing billions in the project. For instance, they are currently in the process of acquiring the US company Navteq, one of the world's two largest manufacturers of digital maps.
Last week Kallasvuo reemphasized how determined Nokia's executives are to achieve their goal. In 2008, he said, the group plans to introduce mobile phones that will include a subscription to all songs in music giant Universal Music's library.
If Nokia manages, as planned, to sign similar agreements with other music companies, the online services developed by network operators would suddenly lose their allure. The Finns could even rattle the worldwide dominance of Apple's iTunes service.
Industry analysts see Nokia's move as a far greater risk to the telephone companies than the wildly popular iPhone. Besides, whether the trendy device will meet high expectations remains to be seen. Competing models like the Qbowl, made by South Korean manufacturer Samsung and marketed by Vodafone, could end up performing just as well. At any rate, sceptics believe that there are already signs that, despite an enormous nationwide TV ad campaign in the United States, not everything is going as Apple had planned.
Unlike fans in the US, Germans were unwilling to camp out in front of stores to score a new iPhone. Telekom sold only 10,000 of the devices on the first day of sales. In France, where the iPhone came on the market in late November, only 30,000 were sold in the first five days.
And just as Apple reduced its price for the iPhone by $200 shortly after its introduction, Telekom has also found a way to bring down prices. iPhone users who pay a flat rate of between €49 and €89 ($72 and $131) a month now qualify for free calls all weekend long.
This is something, says a Vodafone manager derisively, that one doesn't do when business is booming. But T-Mobile CEO Akhavan will have none of that, and is even optimistic: "We are very pleased with sales."
Translated from the German by Christopher Sultan