Apple's iPhone Dominance Leaves Phone Companies with Utility Rating

Tensions between Apple and Google and phone operators in Europe are mounting over concerns about being relegated to becoming "dumb pipes"

(Bloomberg) — Apple Inc. won't attend the MobileWorld Congress in Barcelona next week. Yet the iPhone maker will dominate discussions at the four-day, tapas-fuelled gathering.

Apple and Google Inc. are increasing their lead in the industry, leaving France Telecom SA and Telefonica SA to bemoan their utility-like status. Europe's five largest carriers represent about 1 million jobs, 1.2 billion customers, 300 billion euros ($408 billion) in revenue and 50 billion euros in annual investment, France Telecom Chief Executive Officer Stephane Richard said.

"That's the combined economic weight," he said this week in Paris. "And the combined market capitalization of these five companies today is less than that of Apple."

France Telecom, Telefonica and Telecom Italia SpA, all former state phone monopolies, are struggling to convince investors they are more than "dumb pipes" that facilitate the surging demand for data-hungry mobile devices. They are lobbying to have Apple and Google share the burden of upgrading networks.

The battle won't be easy, said Adam Daum, an analyst at market researcher Canalys. "The question of being a dumb pipe hangs on the mobile apps debate," he said. "If you are browsing the mobile Internet, it's very difficult for the operators to avoid being a dumb pipe."

Utility Valuation

Operators' shares have performed accordingly. In the past year, Apple shares have advanced 84 percent. France Telecom declined 1.6 percent, Deutsche Telekom rose 5.3 percent and Spain's Telefonica SA gained 8.3 percent.

Investors are valuing European telecommunications stocks at the same level as European utilities, according to Bloomberg data. The dividend yield of 5.81 percent is the same for both the Bloomberg European Telecommunications Services Index as well as the European Utilities Index.

"It's a pity, but it's true that telcos aren't seen as growth stocks," said Boris Boehm, who helps manage about 1.1 billion euros at Aramea Asset Management in Hamburg.

Revenue growth also shows why investors have shunned mobile operators. Apple's first-half sales rose 39 percent and Google's 23 percent. Vodafone Group Plc's first-half organic revenue increased 1.8 percent, France Telecom's slipped 1.2 percent.

Mobile Money, Health

Clawing back ground is becoming a preoccupation for operators, who are demanding a piece of the revenue gained by the likes of Apple and Google as fees for network use, while also trying to push services from mobile money to mobile health.

Mobile-data connections in Europe are set to rise by an average of 15 percent a year to 270 million in 2014, according to market researcher IDC. At the Barcelona conference, which takes off on Feb. 13, squeezing more revenue from this expanding pie will be key piece of the debate for phone operators.

France Telecom's Richard, along with his counterparts at Telecom Italia SpA and Telefonica, has called for a system of compensation for operators by companies that generate large amounts of traffic, arguing they get a free ride on mobile broadband networks as operators are left carrying the costs.

Apple's iOS and Google's Android—and their associated application stores—accounted for 53.3 percent of smartphone sales last year, according to Gartner Inc. Operators currently get almost none of the revenue within what consultancy Booz & Co. estimates will be a $40 billion market for mobile games, entertainment, and workplace tools by 2014.

Demanding Payback

"The operators can't sustain passing content through their network without some degree of payback," said Stuart Orr, the head of Accenture Plc's European communications practice. Yet without ownership of that content, "what rights do the operators have to force the content providers to release some of that money? I don't see an easy resolution."

Finding a way to extract revenue from content that flows over networks may depend on government regulation. That effort got a boost in December when French industry minister Eric Besson said he would seek to ensure that "services that occupy the largest part of our networks contribute to the deployment and maintenance of those networks."

U.K. culture minister Ed Vaizey has also said he's open to operators charging content providers for access.

Tensions between operators and technology companies are also mounting because of efforts by Apple and Google to extend their reach further into the telecommunications world.

Cupertino, California-based Apple has experimented with software that would allow mobile customers to switch operators on the fly, possibly using its iTunes program, drastically lowering the barriers to changing providers.

Service Standards

Phone companies "will not respond well to a consumer savvy, technology savvy player like Apple aiming to develop an app that dis-intermediates them from the consumer," said Saeed Baradar, a telecommunications sales specialist at Societe Generale in London.

With Apple beginning to offer its iPhone on multiple U.S. carriers, the time may be ripe for the introduction of such technology, he added.

Meanwhile, operators are making their own efforts to develop technological standards for services such as mobile payments, which both Google and Apple are also targeting for new generations of smartphones.

Either set could eventually manage the payment systems, gaining access to lucrative transaction fees.

Operators' best shot at increasing their role in the digital economy may be through these so-called near-field payments, which would allow mobile users to pay for retail transactions or subway rides with a swipe of their phone.

Large mobile operators have information about customers and have shown they can use it in a trustworthy way, said Patrik Karrberg, a researcher in the London School of Economics' Department of Management.

"If you look at the legislation on a lot of privacy issues, it's very national, and the operators are very attuned to working with that kind of national legislation," he said. "It's an opportunity."

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