The North American market had a particularly quiet quarter, with fewer than 6m new customers in all on a net basis. In this kind of environment, it is most unlikely that there would be any changes in the list of the largest operators, but the unlikely did in fact happen, with Bell Mobility dropping one place down the rankings from seventh to eighth. This was hardly a major change: it lost five thousand customers in the quarter and US Cellular, which had been breathing down its neck, added 16,000, to move ahead of its Canadian counterpart for the first time. The chart below shows the new pecking order, which is unchanged in all other respects.

Since the end of the quarter, AT&T has acquired Dobson Cellular, the twelfth largest North American operator with 1.68m customers. This will help stretch its lead over second placed Verizon Wireless back to more than three million. However, if it is to stave off the challenge from the number two, it will have to accelerate its process of customer acquisition, as Verizon has added more new customers than AT&T in each of the last eight quarters. Dobson's customers are mostly connected to GSM systems, which explains why AT&T chose this to be its target, rather than some of the other, larger independent entities, such as Leap Wireless, MetroPCS and US Cellular, all of which have gone down the CDMA route. These companies are the eleventh, tenth and seventh largest North American businesses respectively, with a combined total of nearly 12m customers. Were Verizon to acquire any or all of these, it would be hard for AT&T to sustain its lead, even with the benign effects the iPhone is meant to bring.

The chart of the fastest growing businesses is inevitably dominated by the four big US operators and apart from T-Mobile punching well above its weight to take third place from Sprint, there is little that is remarkable here. The central portion of the chart is where the interest lies, with two of the aforementioned independents taking fifth and sixth place on the growth table, ahead of the much larger Alltel Wireless which has now been bought by private equity. US companies take the first eight places on this table, with only two of Canada's main operators featuring, following the poor quarter at Bell.

We have suggested that further rationalisation of the North American and particularly, the US market is likely and possibly also desirable. In this context, it is interesting to note the various noises coming out of Efficient Capital Structures, the obscure shareholder activists who are looking to impose some ill-considered changes on Vodafone. ECS has, it seems, gained an ally in the shape of Glass, Lewis an American financial institution. Glass, Lewis agrees with ECS that Vodafone ought to sell its stake in Verizon Wireless, but rather different reasons to those advanced by the Mayo-led ginger group. According to Glass, Vodafone is "riding on the coattails" of Verizon's success and this it sees as somehow inappropriate. It suggests that as Vodafone doesn't manage the business, it ought to allow Verizon Communications to reap the full rewards of its endeavours by selling its 45% minority stake.

This argument doesn't have much to commend it and seems to be based on nationalism rather than logic. It has to be pointed out that Vodafone is absolutely central to the business: Verizon Wireless wouldn't be the success it is without Vodafone for the simple reason that it wouldn't exist. A little history might be helpful for those who might want to add their contributions to the debate. Following Vodafone's success in the bid battle for AirTouch Communications, Bell Atlantic announced that it was abandoning its Prime PCS alliance with the Californian company and would look to go it alone. Vodafone persuaded Bell Atlantic's management to reverse this decision and, later that year, the two businesses merged with each other and with GTE's wireless business to form Verizon Wireless. Without the AirTouch components, Verizon would not have national presence and would be a poor number two to Vodafone USA - because clearly, without the Verizon tie-in, the UK company would have succeeded in acquiring AT&T Wireless.

A vigorous rebuttal of Glass, Lewis' suggestion could go on to suggest that had Vodafone had more of a say in the running of the business, it might be even more of a success than it is today: had the UK company managed to persuade Verizon to use GSM technology, rather than CDMA, it might have had a better range of handsets to sell its customers and would also attract more of the highly lucrative international roaming traffic that is currently shared between AT&T and T-Mobile.

Glass, Lewis' knowledge of history is clearly sketchy, but just because the basis of its argument is inappropriate and its bedfellow tainted by earlier calamitous failure, its suggestion should not necessarily be dismissed out of hand. Vodafone might be right to sell this stake if the price is right. If Verizon Communications really wants full control of Verizon Wireless, the one sure way to achieve this is to offer Vodafone such a premium for its stake that is just too attractive to ignore. ECS's proposal that Vodafone just spin off the stake into some tracking stock wouldn't realise this premium and therefore wouldn't achieve ECS's stated aim of maximising returns to shareholders. But then, this is hardly a surprise given the track record of the man: Mayo didn't intend his time at Marconi to end in the compete collapse of that business, but it did - and there is little doubt that the ECS proposals, were they to be passed as next week's Vodafone AGM, would also result in an outcome equally far removed from the stated goal.

Meanwhile, if rumours are to be believed, Vodafone is heading in an entirely different direction to that demanded by Mayo et al. The latest suggestion is that Vodafone is preparing a bid for the whole of Verizon Communications, after which it will spin off the wireline business to private equity investors. Such a manoeuvre clearly depends upon the active support of shareholders, but to our way of thinking, it is better to own more, rather than less of this huge growth industry. And who knows, if Vodafone catches the right wave and can sell off Communications at the right price, it could end up with full ownership of Wireless at a bargain price. All it then has to do is roll out GSM and W-CDMA and it will have restored itself to the same pre-eminent position it enjoyed back in 2000/2001. Mayo said that Arun Sarin could "become a hero" by gearing up the company and giving the capital that liberated to shareholders. Perhaps... but we think he would be rather more deserving of the term "hero" if he were to do something genuinely creative rather than just hamstring his company with more debt. Meanwhile, Vodafone has put out a press release to quell these rumours, but that is what one might expect.

Posted to the site on 19th July 2007

Posted to: www.cellular-news.com/story/25005.php