flagship firms, consolidation and changing market structures within the mobile communications market

Telecommunications Policy 28 (2004) 161–175

Flagship firms, consolidation and changing market structureswithin the mobile communications market

Jason Whalley*

Department of Management Science, Strathclyde Business School, Graham Hills Building, 40 George Street,

Glasgow G1 1QE, UK

Abstract

The structure and character of the European Union (EU) mobile telecommunications market arechanging. Consolidation, scale economies and the far-reaching repercussions of 3G have given rise to aseries of ‘flagship firms’ that have sought to co-ordinate the 2G and 3G licences held. In this paper, the co-ordination strategies of two flagship firms, Vodafone and Hutchison Whampoa, are examined. The paperconcludes that competitive enhancing co-ordination strategies can be identified in six different areas,though these have not been uniformly adopted by the two flagship firms examined.r 2004 Elsevier Ltd. All rights reserved.

Keywords: 3G; Market structure; Flagship firms; Hutchison Whampoa; Vodafone

1. Introduction

Over the course of the last 2 years or so a relentless tide of headlines has testified to how muchthe mobile telecommunications market has changed. The early euphoria of 3G licensing has givenway to pessimism and anxiety. The seemingly unstoppable rise of share prices has been reversed tosuch an extent that companies are worth just a fraction of their former value, and serious doubtshave been expressed by a range of commentators as to whether 3G will ever be deployed. Theunderlying premise of this paper is that as sentiment has moved against the mobiletelecommunications industry, and especially against those with a significant exposure to 3G,those companies with multiple 3G licences will seek to enhance their competitiveness through avariety of co-ordination strategies. Such strategies facilitate a reduction in the cost of networkdevelopment, shorten the time to launch and generate revenue through encouraging roaming andthe uptake of new services.

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*Tel.: +44-141-548-4546; fax: +44-141-552-6686.

E-mail address: [email protected] (J. Whalley).

0308-5961/$ - see front matter r 2004 Elsevier Ltd. All rights reserved.

doi:10.1016/j.telpol.2003.12.005

With this in mind, this paper is structured as follows. The first main section describes the mobiletelecommunications landscape, focusing primarily on the aftermath of the 3G licensing process.This is then followed by a description of the ‘flagship firms’ model, which is used to identify areasof co-ordination by Vodafone and Hutchison Whampoa. The final section of the paper discussesthe co-ordination strategies identified.

2. The European Union 3G landscape

The European mobile communications industry can be divided chronologically into twoperiods—the period leading up to the UK and German 3G auctions in mid-2000 and the periodafter these auctions. Prior to these auctions the industry witnessed unprecedented growth, withmobile phones becoming ubiquitous and penetration rates of more than 60% being notuncommon. Rising penetration rates fuelled increases in the stock market capitalisation of mobilephone companies, with Vodafone becoming for a while the most valuable company in Europe.Minges, Mannisto, and Kelly (1999) were not alone in arguing that the future of thetelecommunications industry belonged to mobile and not fixed telephony.

The UK and German auctions mark the pinnacle of enthusiasm towards mobile communica-tions. Not only were the sums raised considerably more than that anticipated, but also as part ofthe bidding process the auction drew attention to the wide array of products that companies wereintending to launch onto the market. However, the large amounts paid for licences in the UK($35.36bn) and German ($46.11bn) led to some questioning the underlying assumptions of thesuccessful licence bidders. In particular, were the services proposed by the successful biddersappropriate? Secondly, would these services generate a sufficient return on investment? Thirdly,would the technology work as anticipated? Fourthly, would customers migrate from existingtechnologies to 3G? Taken together these questions began to undermine confidence in the sector,with much of the debate focusing on the level of debts incurred by successful bidders and whetheror not sufficiently attractive services are available to entice customers onto the network.

It is clear that participating in the 3G licensing process has been costly. Across the EU, theprocess has raised more than h110bn for the governments of Member States. This is, however,only the headline figure, as it does not include the cost of either the network infrastructure orservices. The cost of entering the 3G market can be seen in the level of debts incurred, withlicences accounting for a third of the total debts of BT and KPN and almost all of Telefonica’s(The Economist, 2001, p. 71). Concern over the level of debt carried by telecommunicationscompanies has expressed itself in two related ways. Firstly, the credit ratings of the majorEuropean telecommunications companies have been downgraded by the likes of Standard andPoor’s. Declining credit ratings have in turn influenced the strategies of mobile telecommunica-tions companies in the post-licensing period; companies have scaled back their investmentprogrammes as well as sought to raise capital through asset sales.

Secondly, share prices have declined across the sector. Vodafone’s declining share price isparticularly illustrative. The price has dropped from over d4 in March 2000 to around d1.20 inMay 2003. This decline has been driven by the belief of some that slowing subscriber growth andstable average revenue per user (ARPU) figures are turning Vodafone from a growth into a utilitystock, and that new data services that offer the possibility of additional high margin revenues are

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J. Whalley / Telecommunications Policy 28 (2004) 161–175162

still some way off. Moreover, as new data services require substantial capital investment thisplaces further pressure on Vodafone, not only to develop attractive and hopefully lucrativeservices, but also to bring these to the market on time. The failure of Vodafone to develop high-speed data services in the late 1990s, which Budden (2002) notes, provides an unwelcomeprecedent.

The higher than anticipated cost of 3G licences in turn led to questions being raised as to thenature of the services to be offered over 3G networks. Quite simply, would the proposed servicesgenerate sufficient returns to justify the investments in 3G networks? It is not possible to makesuch a judgement, primarily because the delivery of 3G services to date is limited. Having saidthis, Vodafone has warned that the range of services offered by its 3G networks will be limited andthat the network will be too slow for entertainment services such as live video or music (Roberts,2001, p. 1). Thus, the services offered will at least initially be comparable to those presentlydelivered over existing networks, with the consequence that enticing customers onto the newnetwork will be correspondingly more difficult.

What has been the effect of the higher than anticipated cost of participating in 3G and oftechnological and service doubts? Whilst it is clear that the mobile communications industry hasbegun to restructure itself, no clear pattern has emerged as to how companies are reacting to thechanged circumstances in which they find themselves. Some companies have exited markets, eithervoluntarily or out of necessity to repay debt. Telenor is an example of the first type of company,and BT the second. In contrast, Vodafone has used the precarious financial state of othercompanies to strengthen its position as a leading European operator. Telecommunicationscompanies have sought to resolve the problems that they face through implementing structuralsolutions, with divestments, joint ventures, IPOs (initial public offerings) and mergers beingvariously resorted to. For example, in late 2001 BT spun off mmO2 with the result that it not onlyexited the UK cellular market but also most of its remaining international markets as well. InSweden, Germany and the UK 3G infrastructure, sharing agreements have been announced.Whilst these agreements have primarily been driven by the need to reduce the cost of constructing3G networks, the agreement between Telia and Tele2 in Sweden allowed the former company toovercome its failure to win a licence in the Swedish 3G beauty contest. Financially weakened bythe burden of 3G licences across Europe, Sonera agreed to a h18bn merger with Telia in March2002.

As telecommunications companies have sought structural remedies to their problems, thenature of the mobile telecommunications market has begun to change. In particular, the markethas begun to change with respect to the organisational form through which companies participatein the market and the number of countries in which they have a presence. The patchwork quilt ofjoint ventures, majority and full ownership that companies employed to participate in markets hasbeen replaced by a greater reliance on majority and full ownership of subsidiaries. This has beendriven by the desire for companies to have a greater say over the strategies adopted and enactedby their subsidiaries.

From Whalley (2002) it can be seen that the operational scope of multiple 3G licence winnersdiffers. Companies fall into one of two categories—the larger-scale operators on the one hand andthe smaller-scale, sometimes regionally focused, operators on the other. The larger operators,namely, Vodafone and Orange, are present in the majority of EU Member States. In addition, thetwo largest operators have a greater presence in the five main EU markets (France, Germany,

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J. Whalley / Telecommunications Policy 28 (2004) 161–175 163

Italy, Spain and the United Kingdom). Vodafone is present in all five of these markets, whilstOrange lacks a presence in Spain. In contrast, smaller operators such as mmO2 have less of apresence in these five key markets. KPN, mmO2 and T-Mobile are all present in Germany and theUK, whilst Telefonica is present in Germany, Spain and the UK.

As the scale of operators has changed and debt pressures become acute, co-ordination issueshave come to the fore. Although co-ordinating one or two investments is not without its own setof problems, these pale into insignificance when compared to the task of co-ordinatinginvestments across six or more countries. The difficulty of the task has been compounded by theintroduction of a new technology, 3G. It is in the area of co-ordination that the remainder of thispaper will focus. More specifically, the paper will focus on two elements of co-ordination bycompanies holding multiple licences. Firstly, the extent to which successful winners of multiple 3Glicences are co-ordinating these networks through common network development andconstruction strategies. Secondly, the degree to which multiple licence holders are co-ordinatingtheir investments in other areas. Are, for example, common services being developed? The nextsection will outline the notion of flagship firms before describing the strategies of two such firms,Vodafone and Hutchison Whampoa. The final section of the paper highlights issues raised by thedescription of the two flagship firms and makes concluding comments.

3. Flagship firms

What are flagship firms? Flagship firms are multinational enterprises that co-ordinate theinvestment and operational activities of other companies within their business network. Thebusiness network that surrounds the flagship firms is comprised of four elements: suppliers,customers, non-business infrastructure and selected competitors (for a detailed description of eachsee Rugman & D’Cruz, 2000, pp. 19–25). The flagship firm possesses ‘vision and resources to leadthe network in a successful global strategy. It defines the products and markets in which itsnetwork partners operate, selects the course of action they will use to develop necessarycompetencies, and largely determines their capital investment programmes’ (Rugman & D’Cruz,2000, p. 8f).

As a consequence of the other parts of the business network being unable to enjoy the samedegree of influence and control over the flagship firms, relationships between the five elements ofthe business network are asymmetrical. Within the business network, not all suppliers andcustomers play the same role, as some are designated ‘key’ by the flagship firms. Key suppliers arethose companies that provide inputs critical to the development of competitive advantage,whereas key customers, through their ceding of strategic control to the flagship firms, providethese with valuable insight into market developments (D’Cruz & Rugman, 1994, p. 277f; Rugman& D’Cruz, 2000, p. 9f).

Within the mobile telecommunications market a series of flagship firms can be identified. Theyoperate across the EU through a series of investments and have actively sought to co-ordinatethese investments, and the inputs that they rely on, to enhance their competitiveness. Given theaforementioned characteristics of flagship firms it is possible to argue that the larger of themultiple licence holders can be described as flagship firms. The focus here, however, will be limitedto two companies, namely, Vodafone and Hutchison Whampoa. These companies have been

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chosen because they highlight different aspects of the debate as to the extent and success of co-ordination by mobile telecommunications companies.

The data that underpin the descriptions of Vodafone and Hutchison Whampoa are drawn froma variety of sources such as annual reports, websites, consultancy reports, academic journals andthe popular business press. Through drawing on a broad range of sources it was possible totriangulate the data to ensure not only that the descriptions are as accurate as possible but thatthey also provide a longitudinal perspective. After the accuracy and chronological order ofdevelopments were ascertained, the flagship firm framework was used to structure thedescriptions. The first of the sub-sections below describes the co-ordination activities of Vodafoneand the second details those of Hutchison Whampoa.

3.1. Vodafone

Since the early 1990s Vodafone has expanded internationally to become arguably the world’slargest mobile telecommunications company. As the company has expanded internationally, it hascome to operate networks in 28 countries. Within the European Union, Vodafone has a presencein 11 out of the 15 Member States. This section will examine how Vodafone has sought to co-ordinate its business network within these 11 countries.

The first way in which Vodafone has co-ordinated its presence in the 11 Member States isthrough the harmonisation of its brands. In a two-staged process, Vodafone replaced nationalbrands. Initially Vodafone joined the national brand, so that, for example, in Spain Airtel becameAirtel Vodafone. In addition, Vodafone engaged in a marketing campaign that aimed to heightenawareness of the Vodafone brand as well as the existence of the wider network of Vodafonecompanies. In the second phase of its re-branding exercise, Vodafone has moved to the use of asingle brand by its national subsidiaries. Thus, in the above example Airtel has been removed,leaving Vodafone as the new single brand of the company in Spain. To date, Vodafone hasbecome the single brand in all of the company’s EU subsidiaries with the exception of Italy.

The motives behind this brand transition are clearly alluded to by David Haines (Global BrandDirector, Vodafone), who stated that

A seamless, consistent Vodafone brand across Europe initially, will help drive our customers’usage of Vodafone products and services when roaming or while in their home country. Thiswill enhance ARPU as well as creating cost and revenue synergies (Vodafone, 2001b).

In other words, the adoption of a single brand across Europe will encourage subscribers to usethe services provided by Vodafone when abroad. To this end, the company has begun introducingservices that aim to demonstrate the benefit of Vodafone’s geographical reach and an individual’smembership of this network. Subscribers to seven of the company’s European networks canaccess their domestic services—such as voicemail, directory enquiries and customer services—bydialling a short access code when abroad (Vodafone, 2001a). When coupled with Eurocall,Vodafone’s European flat rate tariff, the expectation is, according to Thomas Geitner (ChiefExecutive Group Products & Services), that this new service will increase roaming usage andrevenue growth particularly in the business market (Vodafone, 2001a).

Identifying other ways in which Vodafone has sought to co-ordinate its activities across the EUis more difficult, not least because the information necessary for identifying tangible signs of such

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co-ordination is hard to obtain. Having said this, the business network that surrounds the flagshipfirms enables a second area of possible co-ordination to be identified, namely, between thebusiness network and its suppliers. For Vodafone there are two types of key suppliers, thoseproviding the network infrastructure and those providing services. Table 1 above illustrates therange of 3G network contracts that Vodafone has entered into since mid-2001. From the table itcan be seen that the contracts have mainly been awarded to Ericsson, Nokia and Nortel.Given the strengths of the companies, and their position within the equipment manufacturingpart of the telecommunications industry, it is not surprising that these three companiespredominate.

Two aspects of the table require further comment. Firstly, that the overwhelming majority ofcontracts appear to be country-specific. Although global contracts have been awarded, theywould appear to be the exception rather than the rule. Moreover, those global contracts that havebeen signed are for services and software and not equipment. Siemens has been contracted tosupply servers to facilitate location-based services, whilst Ericsson is to deliver multimediamessaging services (Vodafone, 2001c, d). Both of these contracts correspond to areas that havebeen singled out as being lucrative and vital to the success of 3G. Secondly, across the range ofcontracts awarded, no one supplier predominates. Vodafone may have been motivated by the fear

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Table 1

Illustrative Vodafone 3G network contracts (28 January 2003)

Company awarding the

contract

Supplier

Proximus (Belgium) Nokia—January 2001, to supply complete radio access and packet core network

Siemens—February 2001, unspecified

Cegetel SFR (France) Alcatel—Feb 2001, unspecified

Nokia—July 2001, to supply 3G packet core network including Paris base stations

NEC & Siemens—July 2001, to supply a complete UMTS solution for the greater Lille

region

Nortel—Feb 2001, letter of intent to supply UMTS network infrastructure, equipment

& services

Vodafone Omnitel (Italy) Nokia—July 2001, to supply the complete 3G mobility core network and related

support services

Nortel—July 2001, to supply radio infrastructure for deployment in UMTS network

Vodafone (Netherlands) Ericsson—April 2001, 3G contract including hardware, software and services for roll-

out of UMTS network

Vodafone (Portugal) Nortel—July 2001, to supply end-to-end UMTS solutions based on wireless access

and packet core solutions

Vodafone (Spain) Nortel—September 2001, unspecified

Vodafone (Sweden) Ericsson—Aug 2001, to supply transmission nodes for 3G network in Stockholm,

Gothenburg, Karlskrona & Malmo

Nokia—Aug 2001, systems supplier for core network and radio access in Stockholm,

Gothenburg, Karlskrona & Malmo

Vodafone (UK) Ericsson—May 2002, principal supplier

Source: Cellular News, available online at http://www.cellular-news.com, and various press releases of Vodafone,

available online at http://www.vodafone.com. Both sites were visited on 28 January 2003.


http://www.cellular-news.com

http://www.vodafone.com

of being overly reliant on any one supplier, or sought to reduce costs through making each of thecontracts a competitive tendering process.

Content or service suppliers can be categorised as either ‘key’ or ‘other service’. The primarydistinction between the two is how these services are organised and delivered. Key services aresupplied through a new entity established expressly for this purpose. In contrast, suppliers of‘other services’ co-operate with Vodafone without establishing a new entity. Vizzavi and Terencifall into the former category. Established as a 50/50 joint venture with Vivendi Universal in May2002, Vizzavi stated that its intention was ‘to be the leading mobile portal and become the leadingprovider of shared entertainment content’ (Vizzavi, 2002). Significantly, these services were to beavailable over a range of technologies and devices such as WAP and PDAs. Initially launched inthe United Kingdom and France in late 2001, Vizzavi subsequently expanded to cover Germany,Italy, Greece, The Netherlands, Spain and Portugal. In each of these countries, the localVodafone and Vivendi companies owned 20% of the operating company with the remainderbeing owned by Vizzavi.

At its launch the content available through Vizzavi was provided by a series of partnercompanies such as Reuters (news), Google (search engine) and flipside.com (games). The first twoof these are external to the two parent companies, whilst the third is a Vivendi Universalsubsidiary. Over time it was expected that Vizzavi would draw more on third parties for itscontent. Although Vizzavi has managed to acquire 6.3m customers by the end of 2001, the portalwas judged to be unsuccessful on two grounds. Firstly, the service fared poorly when compared toi-mode with its greater emphasis on visual and faster services. Secondly, some questioned whetherthe portal would break even and recoup the considerable investment made by the two parentcompanies.

Beginning in early 2002 Vodafone sought to address the criticisms voiced. It announced itsintention to add new content suppliers to Vizzavi’s existing range of suppliers, though details werenot forthcoming at the time. More solidly, the sharing of revenue between Vizzavi and its partnerswas altered so that it would receive 80% of revenues from premium services (ringtones,downloads, etc.) and 5% of the operator airtime access revenues. The intention here wasto shift emphasis towards those services provided by the two parent companies at the expense ofthose provided by third parties. In other words, revenue maximisation was the intention. InAugust 2002, Vodafone acquired Vivendi Universal’s 50% in Vizzavi for h142:7 m: As a result ofthis acquisition, Vodafone owned 100% of the Vizzavi companies across the EU with the exceptionof France where Vivendi Universal took outright control of Vizzavi France (Vodafone, 2002b).

This acquisition enabled Vodafone to alter Vizzavi’s strategy in two ways. Firstly, Vodafoneintegrated Vizzavi with its Global Products and Services division with the stated aim being that itwould ‘act as a central content broker providing a single Group focus point for sourcing andimplementing leading content and information services for Vodafone live’ (Vodafone, 2002c).Secondly, Vodafone was able to re-brand Vizzavi. In October 2002, Vodafone launched two newservices, Vodafone live! and Vodafone Mobile Office. With a consumer focus, Vodafone live! offersmany of the same services that Vizzavi, though the emphasis is solely on mobile phones.Interestingly, the re-branded Vizzavi and Vodafone live! appear to co-exist; the Vizzavi websitesremain active and provide a link to Vodafone live! However, Vodafone live! is the principal vehiclethrough which consumers are being targeted by Vodafone. In contrast, businesses are the targetedaudience of Vodafone Mobile Office, with the launch service being remote LAN access.

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The second new entity that Vodafone has formed to provide a key service, Terenci, is lessprominent and more restricted in its operational remit. Terenci was established as a joint venturewith Cap Gemini Ernst & Young in December 2000 to provide mobile solutions such as logisticsand remote monitoring to businesses in Germany and the UK. Although there is limitedinformation available to evaluate the success or otherwise of Terenci, we can say that itsownership structure has changed as Vodafone took outright control of the company at the start of2002. In addition, the operational remit of Terenci appears to have been broadened to include awider range of wireless technologies than initially envisaged.

In addition to the two key ventures of Vizzavi and Terenci that Vodafone has established, it hasalso entered into a wide range of supplier relationships with other companies. These contractsprovide Vodafone with inputs necessary to the provision of its services. Three different types ofinputs can be distinguished: applications, content and services. Although three different types ofinputs can be identified, they are not separate from one another. Applications facilitate thedelivery of content and services to subscribers, whilst content and services attract and then retainsubscribers.

Vodafone has also sought to expand its network scale through establishing co-operativeagreements. Vodafone is present in the largest 11 of the EU’s 15 markets, with those markets thatit is absent from being Austria, Denmark, Finland and Luxembourg. In three of these markets,Austria, Denmark and Finland, Vodafone has signed what it terms ‘Partner NetworkAgreements’ with established mobile operators. The first of these agreements was signed inDecember 2001 and the most recent in January 2003. There are three components to theagreements. Firstly, Vodafone and its partners will jointly develop and market roaming productsand services. Secondly, services will be co-branded so that, for instance, the services will be knownas ‘TDC Mobil Vodafone’ in Denmark. Thirdly, Vodafone customers will be able to access theirservices whilst roaming in Austria, Denmark and Finland—and TDC, mobilkom austria andRadiolinja customers will be able to access Vodafone services when roaming (Vodafone, 2001e,2002a, 2003).

What advantages does Vodafone gain from these agreements? Vodafone explicitly mentionsthree advantages that it gains from signing these agreements—the expansion of the services andproducts offered to their customers roaming in these markets, further leverage of the brand andincreased inbound roaming traffic on Vodafone networks elsewhere (Vodafone, 2002a). Thus,through these agreements Vodafone is able to expand geographically into new markets andprovide services to a lucrative segment of its existing customer base—international travellers andcorporate customers—without having to resort to the more costly alternatives of acquiring anexisting operator or 3G licence. In turn, mobikom austria, TDC Mobil and Radiolinja benefitfrom being part of Vodafone’s business network through additional roaming customers.

3.2. Hutchison Whampoa

Although Hutchison Whampoa has a long-standing involvement in the European telecommu-nications industry, through being a founding shareholder of Orange, its present involvement islimited to a series of greenfield 3G investments. The present range of European investments can befound in the table below (Table 2). Across all of these investments a common brand, 3, wasadopted in October 2002.

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The focus here is on two of the European investments of Hutchison Whampoa: Hutchison 3GUK Ltd. and Hi3G Access. Of the six European investments that Hutchison Whampoa has made,there is sufficient information to detail the business network that surrounds these two companies.Hutchison 3G UK Ltd. holds the largest of the five licences auctioned by the UK government andis a joint venture between Hutchison Whampoa, which is the majority shareholder with 65% ofthe equity and KPN Mobile (15%) and NTT DoCoMo (20%). Hutchison 3G UK has enteredinto a wide range of contracts across the whole spectrum of equipment, infrastructure, contentand software. These contracts have been signed by both itself and its parent company, HutchisonWhampoa. Moreover, a significant number of the software contracts signed may be expanded at alater date to include the other EU markets where Hutchison Whampoa operates.

Hutchison 3G UK has signed a range of contracts with equipment and infrastructure suppliers,with a key factor in the choice of suppliers being their ability to ensure that the company is able tospeedily enter the market. The supply of the radio access network has been shared between NECand Nokia, with NEC covering the north and Nokia the south of the country. In addition, Nokiais to provide the core network across the entire country. At the time the contracts wereannounced, Colin Tucker (Managing Director, Hutchison 3G UK) stated:

After a very thorough process, I believe we have chosen the best network suppliers forHutchison 3G UK. They offer the necessary expertise, which will be so vital in the roll-out ofour network over the next three years. Nokia brings us the IP ability and network experiencevital to building a brand new network, while NEC offers us the guarantee of speed to marketvital to Hutchison 3G (Hutchison 3G UK, 2001a).

Thus, the choice of vendor was determined not only by the technology and expertise that theyoffered but also by their ability to swiftly introduce the technology into the market. Hutchison 3GUK has repeatedly stated that it intends to be the first company to launch 3G services in the UK.Consequently, speed has been a key factor in the decision to choose one supplier over another.However, Hutchison 3G UK delayed the launch of its services, pushing back the launch date from

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Table 2

Hutchison Whampoa’s European investments

Investment Country Partners Licence cost

65% Hutchison 3G UK

Limited

UK 20% NTT DoCoMo, 15% KPN

Mobile

$6.9bn

60% Hi3G Access Sweden 40% Investor $10,700

Hi3G Denmark ApS1 Denmark – $118m

100% Hutchison 3G (Austria) Austria – $99m

88.22% H3G Italy 5.6% S. Paolo IMI, 2.3% BMI, 1.8%

CINTEL, 1.1% HOP, 0.6% Gemini,

0.4% Tiscali

$2.01bn

100% Hutchison 3G Ireland

Limited

Ireland – $26m

Notes: 1—A wholly owned subsidiary of Hi3G Access. Source: various Hutchison Whampoa press releases, available

online at http://www.hutchison-whampoa.com, site visited on 28 January 2003.


http://www.hutchison-whampoa.com

late 2002 to early 2003. Whilst no specific explanation for the delay was given, the company hasalluded to technical problems as being the cause of the delay.

Whilst the majority of the equipment and infrastructure contracts have been awarded byHutchison 3G UK, two of the contracts have been between Hutchison Whampoa and the vendor.In July 2001, Hutchison Whampoa signed a 3-year contract worth an estimated $700 m withMotorola for the supply of wireless devices (Hutchison 3G UK, 2001b). An important motivationfor awarding Motorola a global contract was to ensure that Hutchison Whampoa would have inplace wireless devices across all its subsidiaries at the same time. A similar agreement was alsosigned between NEC and Hutchison Whampoa in August 2001 (Hutchison 3G UK, 2001d). Thephones provided by both Motorola and NEC are dual mode, which enables users to seamlesslymove between 2G, 2.5G and 3G systems. In both Sweden and the UK, national roamingagreements with Vodafone Sweden and mmO2, respectively, have been signed that allow Hi3GAccess and Hutchison 3G UK customers to use the 2G networks of Vodafone Sweden and mmO2

wherever Hi3G Access and Hutchison 3G UK lack coverage.The contracts signed with software suppliers fall into one of two categories. On the one hand,

the suppliers are providing Hutchison 3G UK with software necessary for the integration ofdifferent parts of the business. This type of software is particularly important given thatHutchison 3G UK is utilising both hardware and software from a wide variety of differentcompanies. One example of such software includes Autonomy’s content retrieval software thatallows customised services, compiled from multiple suppliers, to be provided to customers(Hutchison 3G UK, 2002a).

On the other hand, software contracts have also been signed with companies whose productsare essential for the smooth, efficient and commercial operation of the company. Contracts havebeen signed with, for example, vendors whose products collate information from across thecompany so that informed management decisions can be taken (e.g., TTI Telecom) or withvendors whose products enable customers to use their mobile phones to buy goods and services(e.g., Network 365). Within many, but not all, of the software contracts signed there is apossibility that the scale of the contract may be extended to cover those other markets whereHutchison Whampoa operates. Thus, the UK contract can be seen as a trial that will determinewhether it is adopted elsewhere.

Hutchison 3G UK has entered into content-related contracts as well. Although 17 contractshave been signed, that nine of them are with games development companies clearly indicate thestrategic importance of games to Hutchison 3G UK. In addition, contracts have been signed withEMAP, the FA Premier League and Reuters to provide music and entertainment, sports and newscontent, respectively. The importance of these contracts is that they provide Hutchison 3G UKwith branded content that is widely recognisable, and thus a way of attracting subscribers to itsnetwork. EMAP will provide content from magazines such as Q, Smash Hits and Empire whilstthe FA Premier League will provide a wide range of football-related content such as clips ofmatches, match results and selected footage (Hutchison 3G UK, 2001c, 2002b). It is worth notingthat whilst the agreement with the FA Premier League provides Hutchison 3G UK with exclusivecontent it is not necessarily the case that the same applies true for EMAP. The press release doesnot mention exclusivity. Both of the contracts explicitly state that the contract is for a limitedperiod. The EMAP contract is for 2 years, whilst the contract with the FA Premier League expiresin July 2004. There is, therefore, a degree of urgency in the development of the network, which has

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to be in place a sufficient period before the expiry of these contracts to ensure that the content isable to attract subscribers to the network. Hence Hutchison 3G UK’s stress on speed to market inits equipment and infrastructure contracts.

The business network surrounding Hi3G Access is much less developed than that aroundHutchison 3G UK. What development there has been is focused towards equipment andinfrastructure rather than content or software. In addition, Hi3G Access has entered into anetwork sharing agreement with Vodafone Sweden and Orange Sverige. None of the otherEuropean investments of Hutchison Whampoa have entered into such an agreement, and of theEuropean countries where such agreements have been suggested this one appears to be among themost advanced. Finally, no other Hutchison Whampoa subsidiary has established its ownsubsidiaries to enter neighbouring markets.

The equipment and infrastructure contracts that have been signed occur on three levels: theparent company (Hutchison Whampoa), the operating company (Hi3G Access) and the networkinfrastructure joint venture (3GIS). As we have already seen, Hutchison Whampoa, on behalf ofits various subsidiaries around the globe, has placed a variety of orders primarily for terminalequipment. These group-wide contracts have been complemented by contracts limited in theirfocus to Sweden. Contracts have been signed directly between Hi3G and, for example, NCC forthe construction of 500 base stations (Hi3G, 2001) and with Ericsson to be the principalsupplier of UMTS equipment (Ericsson, 2001). Whilst the geographical scope of these contracts isnot clear, it is assumed that they are focused towards the construction and roll-out of thenetwork in those parts of the country not covered by 3GIS, that is, Stockholm, Gothenburg andMalm .o.

To date, all of the contracts with content suppliers (such as with ISPR and SvenskaHockeyligen) have been signed by Hi3G Access and not the parent companies. That onlya handful of service and content contracts can be identified would seem to suggest thatthe development of the business in these areas has not been as important for Hi3G Accessas the development of its network infrastructure. However, this is somewhat misleading, asHi3G Access has signed two prominent sports content contracts with the hockey and footballleagues.

As intimated above, Hi3G Access has joined with other 3G licence holders to form a networkinfrastructure sharing company, 3GIS. Initially, 3GIS brought together Hi3G Access andVodafone Sweden, reducing the cost of constructing the network by around 40% (George, 2001,p. 34). The scope for further cost reductions was increased when Orange Sverige becamethe third partner in 3GIS, though the subsequent decision of Orange Sverige to exitthe Swedish market in December 2002 negated this possibility. Notwithstanding the savingsaccruing from the sharing of infrastructure, because this agreement excludes the key metropolitanmarkets of Stockholm, Gothenburg and Malm .o, the scope for savings is likely to be limited.Within these three markets, the companies are required to build their own networks. Thus, whilst3GIS brings Vodafone Sweden and Hi3G Access into perhaps unprecedented contact with oneanother they will also remain competitors. As this state of affairs is highly likely to lead to tensionbetween the partners, they have sought to reduce the likelihood of tension arising from theirinteraction with third parties. In May 2002 they signed an agreement, comprised of 9 rules,which will govern their interaction with third parties with respect to masts and infrastructure(Hi3G, 2002).

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4. Discussion and conclusions

As we have shown above, 3G licensing represents an epoch in the development of the mobilecommunications industry in the EU. The bullishness and enthusiasm that characterised the UKand German auctions have been replaced by pessimism, doubt and debt. Mobile operators haveadopted structural and organisational strategies as they seek to adjust to the new environment inwhich they find themselves. As they have done so, co-ordination issues have come to the fore.

The rubric of the flagship firm model allows areas where companies have sought to implementco-ordination strategies to enhance their competitiveness to be identified. It is clear that there aresimilarities as well as differences between the co-ordination strategies of Vodafone, Hutchison 3GUK and Hi3G Access. The use of the model draws attention to several issues that appear to becentral to the competitiveness of the company. These are:

* The establishment of contracts with suppliers on different organisational levels, that is, at thelevels of the parent company, of the national operating company and of its subsidiary.

* The de facto role of some national operating companies as a ‘test bed’ of products, services,software and so forth before their introduction elsewhere.

* The multi-faceted role of global contracts. Global contracts have contributed to enhancing thecompetitiveness of the flagship firm through equipment standardisation, reducing costs andquickening the pace of market entry.

* The asymmetrical nature of the relationship that exists between the flagship firm, its subsidiaries,and their suppliers.

* The use of exclusive contracts by the flagship firm in its dealings with its suppliers.* The re-branding of national subsidiaries by the flagship firm to create a common pan-EU

brand.

Whilst all of the above have been employed to enhance competitiveness, it is not the case thatthey are of equal importance or have been equally resorted to by Vodafone, Hutchison 3G UKand Hi3G Access. As a consequence, the competitive enhancing co-ordination strategies adoptedby the three companies are different. Vodafone has concentrated on re-branding its variousnational subsidiaries and expanding its geographical reach across the EU. Through re-brandingVodafone has attempted to create a single European network, recognisable wherever itssubscribers are. Notwithstanding the emphasis placed on Vizzavi, until recently services haveplayed a less prominent role in this integration. This has, however, begun to change with thelaunch of services that demonstrate the benefits that subscribers can derive from using theVodafone network when abroad as well as the launch of Vodafone live! and Vodafone MobileOffice.

In contrast, the co-ordination strategies adopted by Hutchison Whampoa have sought toreduce the time to market, as well as to minimise the cost of participating in the market. Globalcontracts play a role in both of these strategies, whilst a key feature of the UK contracts has beenspeed to market. Significantly, this has implications for both the UK and the other markets whereHutchison Whampoa is present. Speed to market is important in the UK because Hutchison 3GUK has publicly stated its intention to be the first to launch its services in the market. If the UKlaunch is successful, it will provide a template that can be copied elsewhere. In doing so, the timeto market in these markets could be reduced. Furthermore, learning from the UK experience will

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also reduce costs. At present the co-ordination strategy of Hutchison Whampoa has not stretchedto co-ordinating the content and services offered across Europe. Instead the local subsidiarieshave been responsible for content and services. Having said this, sports content featuresprominently in the strategies of both Hutchison 3G UK and Hi3G Access though the content hasbeen tailored to the needs of the local market.

Although Vodafone has signed contracts at both the parent company and operating subsidiarylevel, this trait is clearly more associated with Hutchison Whampoa. Those global contracts thathave been signed will not only ensure the standardisation of equipment, but will also contribute tothe speedy and cost-effective roll-out of both technology and services across the group. Intimatelyrelated to the use of global contracts is the ‘test bed’ nature of Hutchison 3G UK, with the rangeand nature of contracts signed suggesting that it is the principal ‘test bed’ for HutchisonWhampoa in Europe. A wide range of contracts have been signed, and whilst a few of these areexplicitly global in scope the majority could be expanded if they prove to be satisfactory in theUK. Thus, the increase in global contracts is largely dependent on the success of Hutchison 3GUK.

Whilst there is strong evidence to suggest that Hutchison 3G UK is playing the ‘test bed’ rolewithin the European investments of Hutchison Whampoa, a degree of caution is necessary. Itdoes not follow that the contracts signed within the UK will be expanded to become globalcontracts. For whatever reason, it may not be possible to exactly replicate the UK network modelin the other European markets of Hutchison Whampoa. The resulting differences may offset anyof the speed and cost savings gained from the UK test bed. Of course, the contracts will not beexpanded to become global if Hutchison Whampoa decides to award the contracts for its otherEU 3G networks to different suppliers. Such a strategy may be intentional or unintentional.Moreover, interpreting the strategic intentions of companies from their press releases is animprecise art, not least because their announcements may not match their subsequent actions. Astatement of intent in the form of a press release does not necessarily mean that it will happen inpractice.

Although the ‘flagship firm’ model has been able to identify a series of areas where co-ordination strategies have been implemented, the mobile telecommunications industry has alsohighlighted three areas where further research is required. The first of these is that the modelimplies a static categorisation of suppliers that does not take into account the dynamicpresent within the mobile telecommunications industry. Those companies designated keysuppliers will change as the priorities of the flagship firm change. More particularly, as the 3Gnetwork is built out and services are launched, the key suppliers will move from beingequipment companies to those providing the content and services necessary for theattraction and then retention of subscribers. This is not to say that equipment suppliers are ofno importance once the network has been launched, but rather that the principal source ofcompetitiveness will migrate to being derived from the content and services offered. Of course, thetwo are closely intertwined: the technology used within the network shapes the services deliveredto subscribers, and the services to be delivered affect the choice of network technology. Thus,research is required to understand how this dynamic will affect the business network thatsurrounds the flagship firm.

The second area where further research is required is in understanding the relationship betweenthe flagship firm on the one hand and its subsidiaries on the other hand. The example of

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Hutchison Whampoa demonstrates that co-ordination occurs not only at the global level but alsoat the subsidiary level. Whilst co-ordination at the global level is motivated by standardisationand cost-effectiveness, that at the subsidiary (local) level is more concerned with the constructionand roll-out of the network and development of services appropriate to its market. Implicit withinthe model is the assumption that relationships between the two are asymmetrical, with the flagshipfirm being in a position of unquestioned authority over its subsidiaries. This is, however,misleading. In practice the relationship may not be as asymmetrical as the model suggests. Thepresence of other shareholders could impair the ability of the flagship firm to act as it sees fit, asthe implementation of any strategies will be subject to a negotiation process with all that thisentails. In addition, the subsidiary may not adopt the strategies as effectively and wholeheartedlyas the flagship firm wants because its understanding of the local markets leads it to conclude thatthey are inappropriate. Finally, the local subsidiary may not be able for regulatory reasons tocomply with the strategies dictated by the flagship firm. One consequence of this may be that co-ordination strategies are adopted piecemeal across the network, whilst another is that the flagshipfirm may exit those markets where it cannot implement its strategies as it feels the cost of notimplementing outweigh the advantages of remaining in the market. The degree to whichregulation affects the relationship between the flagship firm and the subsidiary needs to beexplored further.

Although the co-ordination strategies identified have not been universally implemented byVodafone and Hutchison Whampoa, common to both of these companies has been their desire toimprove their competitive position in the market vis-"a-vis their rivals. A third area of furtherresearch would therefore seek to ascertain whether the implementation of these strategies by theflagship firms impacts on the nature and level of competition in mobile telecommunicationsmarkets. In other words, are the strategies pro- or anti-competitive? The expansion of Vodafoneinto the smaller European markets through the use of partnership agreements forecloses thepossibility of customers in these markets benefiting from its independent entry into themarketplace. Whilst the customers of Vodafone and its partners may benefit from roaming andthe availability of new services, do the agreements stifle competition within the smaller mobiletelecommunication markets? It is also necessary to ask whether customers will benefit from theimplementation of co-ordination strategies. The benefits accruing from the strategies appear tolargely favour the flagship firms. Will consumer welfare be enhanced through the passing of someor all of the benefits onto subscribers, or will the flagship firms use this opportunity to bolster theirearnings and position within the market?

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flagship firms, consolidation and changing market structures within the mobile communications market

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