Keeping up with the Joneses never sounded so expensive.
As the telecommunications market began to digest the enormity of AT&Ts massive $64 billion bid to buy out rival BellSouth, one of the issues rising to the top of the evolving competitive landscape is the notion that the proposed merger could persuade Verizon Wireless to attempt to buy out Vodafones 45 percent minority stake in its business.
Its little secret that Verizon has considered making such a move for some time, and that Vodafone shareholders have periodically questioned the firms interests in sticking with the investment, which clearly concedes much of the power of running the wireless carrier to its partner that shares the ventures name.
Verizon Wireless has been a joint venture since its inception in 1999 when Vodafone and Bell Atlantic first introduced the $70 billion enterprise to the world. The company was initially made up of the two partners existing U.S. wireless operations.
Parent company Verizon Communications has done little to discourage the idea of a new deal with Vodafone, with a late January report in the United Kingdoms Financial Times quoting Chief Executive Ivan Seidenberg as saying that his company would like to increase its stake in Verizon Wireless, with the executive not ruling out the potential for an outright buyout.
Vodafone has also done little to hide its openness to potentially parting with the investment in Verizon Wireless, which experts say has benefited both parent companies but also remains something of a conundrum based on the two firms commitments to different underlying wireless technologies.
In 2004, Vodafones board conceded that it was considering a bid for AT&T Wireless, a plan that very likely would have involved the company selling off its stake in Verizon Wireless in order to pony up enough cash to do such a deal. AT&T Wireless was eventually purchased by rival Cingular Wireless for roughly $41 billion. Notably, Cingular is a joint venture controlled by AT&T and BellSouth.
Vodafone has also moved away from some of its non-European interests in recent days, with Chief Executive Arun Sarin saying the week of Feb. 27 that the firm is actively working to sell a majority stake of its Japanese business unit.
Reached for comment, Vodafone spokespeople said nothing has changed regarding the carriers view of its Verizon Wireless investment, calling the operation a “great asset in a high-growth market” that has greatly benefited the firm.
Verizon representatives didnt immediately return calls seeking comment on the matter.
A Verizon Wireless spokesperson deferred comment on any ownership issues to firms parent companies, but said the carrier does not plan to change anything about its business based on the proposed AT&T-BellSouth union that will consolidate control of Cingular if completed.
Experts said, however, that the AT&T deal undoubtedly puts some pressure on Verizon to make a move and take over full control of the wireless firm. Kitty Weldon, analyst with researchers Current Analysis, in San Diego, said Verizon and Verizon Wireless will need to come up with some sort of response to AT&T-BellSouth to stay competitive.
Verizons Options and Advantages
In addition to potential buyout of Vodafones share, she said parent Verizon could make a bid for rival Qwest Communications, and also predicted that Verizon Wireless may try to acquire competitors including Alltel or U.S. Cellular.
In either case, Weldon said, it is “imperative” that Verizon figure out a way to become more tightly aligned with its wireless subsidiary.
“The integration between Verizon corporate and Verizon Wireless is still very hands-off and I dont think they can afford to continue to do that in the current world of convergence,” Weldon said.
“The [incumbent local exchange carriers] are finally realizing that the notion of wireless substitution isnt as threatening and that they have to live with it, so these companies need to figure out how to take better advantage of their wireless assets.”
The idea that telecommunications convergence has gone from a mere concept to business reality is the lesson to be taken from the AT&T deal, and Verizon will need address that in some manner, whether through pulling Verizon Wireless closer back into its operations or by some other means, the analyst said.
The only downside Weldon could see in a move by Verizon to buy Vodafones stake could be the loss of some international reach, but she said the benefit to customers offered by a more integrated Verizon and Verizon Wireless would probably outweigh those considerations.
Lisa Pierce, analyst with Forrester Research, based in Cambridge, Mass., said the AT&T deal is sure to speed up talk among other players on the U.S. wireless market that could lead to more consolidation. Cingular being owned by one company based on the AT&T-BellSouth merger, she said, ups the ante for Verizon specifically.
“Business customers love the idea of tighter synergy between fixed and mobile,” Pierce said. “Sprint has this down already, while Verizon [Communications] has never focused as much on wireless; Cingular is no longer going to be in this weird place theyve been in, and legacy AT&T customers get a lot more wireless expertise.”
According to Andy Belt, a consultant with Boston-based telecommunications research specialists Adventis, Verizon has not been put in what he would describe as a tough position by the AT&T-BellSouth deal, but he said the companys relation to its wireless joint venture is something of a “market anomaly.”
Belt said that rather, the AT&T deal simplifies any questions about Cingulars management, which could force Verizon to do some housework of its own to manage customers perceptions of how the two firms stack up competitively.
“The deal throws a little bit more pressure on Verizon to clean up its messy model with Verizon Wireless, but its certainly not a disastrous situation,” he said. “Unlike Cingular, Verizon Wireless does not have major constraints on its day-to-day decision-making based on its ownership, but ultimately Vodafone does have a major say in key strategic initiatives, and the change in Cingulars situation may throw all of that into more of a focus going forward.”