CHAPTER 5

The 21st century

‘We are all now connected by the internet, like neurons in a giant brain.’

– Stephen Hawking, 2014

At the start of the new millennium the European mobile industry had a new challenge to face. The era of the mobile internet, driven by the development of revolutionary third-generation (3G) mobile technology, was about to begin. This, it was claimed, would allow operators to provide an almost limitless array of new services over a network that for the first time would be genuinely universal. Varying standards would be a thing of the past and a single phone would work anywhere on the planet.

In the UK, the auction of the universal mobile telephone service (UMTS) licences was thrown open to all comers. The available spectrum – 160MHz of paired frequencies, plus a further 25MHz of unpaired, in the 2.3GHz band – was split it into five parcels, two of which were larger than the other three. The largest and most attractive – the A block – was reserved for a new entrant, thereby ensuring that only one of the two market leaders – Vodafone and Cellnet – could get as much spectrum as it needed.

On 6 March 2000 the world’s first 3G auction began. After numerous rounds of bidding, the A block was bought by a consortium led by Telesystems International Wireless (TIW), which turned out to be effectively a flag of convenience for Hutchison Whampoa, which owned all but 9.1% of the consortium, called 3 Group. In the weeks that followed, Hutch bought out TIW, and formed a new alliance with NTT DoCoMo and KPN. Over the next year it acquired five more European licences: in Italy (with Tiscali), two in Austria, in Sweden and Denmark, and in Ireland.

Vodafone (which in 1999 had bought AirTouch, creating a giant with a presence in 23 countries and with 29 million customers, making it the world’s sixth-largest telecommunications company and the largest mobile operator) got the large B-block licence that it wanted, but at an astronomical price – £5,964 million. And the three smaller licences went to Orange, Cellnet and one2one.

The government greeted the result as a triumph – it netted more than £22 billion, or ‘enough money to build 400 new hospitals’.6 The industry, however, was appalled at the price it had had to pay and saw the process as a form of legalised extortion. They recognised they had an obligation to their shareholders to get it back as fast as they could, even if that meant reducing their investment in mobile infrastructure.

Fortunately, after the UK auction, a fair bit of the hype surrounding 3G evaporated and none of the other markets managed to reach the same prices. Germany netted more (just over €50 billion), but then it had a population 30% higher than the UK’s. In Italy the government raised only €12.6 billion for its five licences. The auctions in Austria, Switzerland, Norway, Portugal, Sweden and Belgium failed to attract many outside bidders, so generally the licences fetched little more than their reserve prices.

Finally, in France – one of the most attractive markets, with only three competitors and the lowest level of penetration anywhere in Western Europe – the only interest came from the three incumbents, who made it clear to the government that they wouldn’t pay the €4.95-billion price tag for a 3G licence. After a year or more of prevarication, the government agreed to cut the fee by 80%.

Although it would be overstating the case to say that the 3G auctions were the reason for the burst of the dot.com bubble – a period of excessive speculation from around 1994 to 2000, coinciding with a period of extreme growth in the use and adoption of the internet – it’s a fact that stock markets around the world started to lose their enthusiasm for tech and telecom stocks on 27 April 2000, the final day of the UK’s 3G auction.

The situation in Europe was exacerbated by events in the US, where valuations placed on telecoms stocks on Wall Street had been steadily rising throughout the mid-1990s, and spectacularly towards the end of the millennium as the internet hype took a grip on investors. Not wishing to miss the chance of a lifetime, companies began making ever-larger investments in telecoms infrastructure, laying down millions of kilometres of fibre in the hope of capturing a share of the new, exploding telecoms market. Investment bankers, fearful of missing the investment bonanza, became less fastidious when assessing opportunities.

Eventually, however, it became clear that the dot.com party was over. Today, almost 20 years on, these businesses and their valuations still haven’t fully recovered.

The European PTTs were in a slightly different position: they knew they would still have the support of their national governments, come what may, and they weren’t unduly worried if the share price took a bit of a hit.

During this period, Vodafone’s growth was continuing at an unprecedented rate. In the UK, the company’s total customer base increased from 7.94 million at the end of 1999 to 11.66 million a year later – the 3.7 million new customers equated to more than 6% of the UK population. In Italy, it added almost 5 million people, or 8% of the population, to its base, and in Germany, nearly 10 million or more than 12%.

In just three years, Vodafone had changed profoundly. Its 1998 Annual Report reported a base of 5.8 million customers and about 10,000 employees, most of both in the UK. The 2001 version showed a customer base of some 83 million and 53,000 employees, most in the US, Germany or somewhere other than the UK. The board had changed too, with the addition of six Americans and five Germans. The culture that had taken it to global leadership was beginning to change.

By the end of the 2003 financial year, Vodafone’s ‘partner markets’ programme included 13 countries, including Denmark, Finland, Austria, Croatia, Cyprus, Iceland, Lithuania, Luxembourg and Slovenia. Today there are Vodafone-branded services available in 40 countries outside the group’s controlled markets operated through alliances with 28 separate groups, including MTS, Rogers Canada, SFR and SoftBank.

In January 2004 AT&T Wireless put itself up for sale. Cingular Wireless, the SBC–BellSouth joint venture, made an offer which, if successful, would result in a merger that would create a new market leader, overtaking Verizon. Three days later Vodafone made a bid, even though it already owned a 45% stake in Verizon Wireless. Barely 24 hours later, while Vodafone and the rest of Europe were still asleep, Cingular counter-offered and Vodafone woke to the news that they’d lost.

It had taken 23 years from the first mobile network launch to reach the billion mark worldwide: in April 2002 the mobile industry connected its billionth subscriber. Four months later, there were more mobile connections in the world than there were fixed.

The second billion came rather more quickly, just three and a half years later, in early September 2005. By this stage, the old analogue networks had almost disappeared (there were fewer than seven million such connections). The European GSM had become the global standard, with nearly 1.6 billion of the 2 billion total. 3G networks were only just beginning to make a mark: together, W-CDMA and the American CDMA-2000 1X-EVDO standards had a combined base of fewer than 60 million users.

Less than two years later there were over three billion connections, and just 17 months after that, in early February 2009, four billion.

At the same time, the imbalances in the market seen in earlier years were beginning to disappear – overall penetration in the world’s emerging markets was just 50%, not far short of the global average of 60%. However, 80% of all mobile customers still used GSM.

Up until the arrival of digital mobile phones and, in particular, the GSM system, mobile phones provided just one service – voice communications. But digital phones could offer rather more. Voicemail was one option, caller identification another. Then there were call barring, call forwarding, three-way or conference calling … everything an advanced office PABX offered in the palm of your hand.

And then GSM came up with something PABXs couldn’t do. Vodafone’s 1995 Annual Report announced the launch of ‘a new range of two way data services for subscribers to Vodafone’s digital network including Telenote [a short-message service] which allows alpha numeric messages of up to 160 characters to be sent to and from GSM digital mobile phones.’

Texting opened up a whole new world and by the end of the decade, operators found that they had a vast new revenue stream. And better than that, it was a revenue stream that had almost no cost attached to it – the service was (and is) carried over the GSM network’s signalling channel, so it was almost entirely free to carry, and therefore the revenue from texting was almost pure profit.

The advent of Apple’s iPhone in 2007 changed the way consumers used their mobile handset, which in turn changed the whole mobile market, shifting the balance of power away from the operators towards the equipment manufacturers and, later, the application providers. Value that had previously fallen to the networks would increasingly be captured by other businesses.

At the time Apple launched its first 3G version of the iPhone, there were some 3.78 billion mobile connections worldwide. Of these, fewer than 300 million used the W-CDMA standard while only about 10% were capable of accessing a 3G network of any kind. A year later, at the end of 2009, 3G phones accounted for about 30% of all net additions, while the total in use had doubled. And by the beginning of 2011 there were more than a billion 3G phones in the world and Apple had sold the best part of 125 million iPhones, the vast majority of which were based on one or other 3G standard.

Smartphones rapidly expanded the capabilities of the mobile phone beyond voice and text messaging. An entirely new industry grew up, developing customised applications – apps – that could be downloaded on to the device. Users now had access to word-processing software, spreadsheets and databases. The camera – or cameras – could be turned into document scanners. The phone’s microphone was capable of recording, while voice-recognition software gave users another way to access the internet. Location data from the GPS system could be displayed on moving maps, while a synchronised, synthesised voice provided navigation assistance.

This brief list merely scratches the surface. The range and variety of apps that are currently available is little short of astonishing – a world of possibilities available at the click of a button through an elegant metal box at a cost of a few hundred dollars. And the capabilities of these devices just keep on improving, at a rate that seems to be accelerating.

Apple took a huge bite out of the handset market but in 2005 a new competitor emerged when American technology company Google bought a small software start-up called Android. Android was a free open-source mobile software platform that allowed developers to create applications for mobile devices. Google launched the technology in 2006, giving the world ‘a new mobile operating system that would allow open interoperation across carriers and manufacturers’. ‘Anyone is free to use it and modify it,’ they said.

With over 20,000 applications, Android made possible for users an ‘open, internet-enabled computer in their pocket that is as good as a laptop from a couple of years ago, [which] has no trouble playing music … over their car stereo, interrupting to read street names and display a map … driving directions that prompt you, just like a real navigation system … updated traffic and even a photo … of your destination.’7

Cable companies were also starting to make an impact on the telecoms market. As these networks were generally capable of delivering higher-speed data than traditional copper fixed lines, a growing number of consumers started using them for internet access, rather than relying on dial-up connections.

Phone companies were in an unenviable position: they had to either accept the demise of the traditional network and manage the decline to the best of their ability or face the enormous cost of rebuilding the entire network with modern fibre-optic components. Neither option was remotely attractive.

Fortunately, a third option materialised. Technology was working to improve mobile services, but it could also be used to improve the fixed network. In the early 1980s Bell Labs had begun work on a concept called Digital Subscriber Line (DSL), which divides the bandwidth on a copper pair of lines into three unequal parts, one of which carries the traditional voice signal while the other two are used for data. In the most common variant of the technology, Asymmetric DSL (ADSL), the available bandwidth is split unevenly in favour of the download path. The speed at which data can be transmitted over such a connection is typically about 6Mbps but it is determined by several factors, including the distance between the exchange and the subscriber’s premises, the age and quality of the copper, and the whim of the network operator. (There are now several versions of DSL, including VDSL or Very High-Speed DSL, which can allow transmissions of 50Mbps or even more over short distances.)

Deutsche Telekom was a very early adopter, beginning to enhance its local loop (the connections between the local exchange and its customers) with the ADSL variant in 1996. BT followed soon after, with several of the Bell companies and France Telecom following suit in 1998, after which it became increasingly widely utilised.

DSL offered fixed-line operators a way of enhancing the speed and overall utility of their networks without the massive cost of replacing copper with fibre. However, it’s generally seen as something of a stop-gap ahead of the wholesale deployment of fibre, which is invariably referred to as ‘future proof’ by its proponents.

Mobile technology also continues to improve. The first 4G network was brought into service in Europe at the end of 2009, and today it’s the industry’s dominant technology, accounting for nearly 4 billion of the world’s total mobile connections. Although not often achieved in practice, 4G networks can theoretically support download speeds of 300Mbps, or just under two minutes of ultra-high-definition video every second.

And now the first 5G networks are being deployed. In the laboratory, such networks have achieved speeds of 3Gbps, or 10 times the speed of 4G, while the first commercial networks in the US are currently achieving speeds of over 1.3Gbps. Ultimately, 5G is expected to reach 10Gbps.

At the start of the millennium, in the USA, there wasn’t a lot left of the business that had been the world number one for so long: AT&T had spun off AT&T Wireless and Liberty Media, and had sold AT&T Broadband to Comcast, creating a new market leader in cable.

In 2005 SBC bid for AT&T, its former parent. It bought the business for a relatively modest outlay and got control of both the long-distance business and, of course, the name – it dropped ‘SBC’ like a hot potato and emerged as AT&T. The ‘new’ AT&T now owned three of the seven regional Bell companies, its former parent, the long-distance company, and a 60% share of the largest mobile business in the US.

In 2006 it acquired yet another of its sister companies, BellSouth, giving it 100% ownership of the mobile business, plus 20 million more access lines, which generated annual revenues of over $20 billion.

Verizon Wireless (the company that had been created by the merger of its mobile business with Vodafone AirTouch), in the meantime, was generating more than half of Verizon group’s profits and most of its available cash flow. Verizon wanted to be rid of its British partner but Vodafone was in no hurry to sell.

At the same time, two of Verizon’s competitors in the mobile market, Sprint PCS and Nextel, joined forces in 2006, creating Sprint-Nextel, a clear number three in the US mobile market, which continued to grow strongly. At the end of 2003 there had been 157 million connections; by the end of 2005 the total had reached 208 million. AT&T still led, with 54 million, but Verizon was creeping closer, with 51 million, while Sprint-Nextel was closing in on that with 47.6 million. T-Mobile was a distant fourth with 21.7 million, and Alltel, a specialist in rural and suburban markets, accounted for another 10.7 million. The rest were scattered between countless small independent operators.

Subscriber numbers continue to build throughout 2006 and 2007, during which time AT&T bought Dobson Communications, one of the larger independents, to extend its lead over Verizon. Verizon responded by taking out Rural Cellular then, in 2008, it edged ahead, acquiring Alltel. Verizon now had 91 million mobile customers, 11 million more than AT&T and 9 million more than the combined total of Sprint-Nextel and T-Mobile US.

By 2011 Verizon had passed the 100-million mark. To get back on level terms AT&T needed the best part of 20 million additional subscribers, and to this end it announced that it had reached an agreement with Deutsche Telekom to acquire the whole of T-Mobile US. But the FCC deemed the deal uncompetitive, and AT&T ended up paying Deutsche Telekom a hefty break-up fee for the failure of the deal.

Vodafone was now focusing on Europe and a few other markets such as India and South Africa. In July 2012 it acquired the remnants of its one-time predator, Cable & Wireless Communications, in a deal that gave it access to a 20,500-kilometre (12,700-mile) fibre network and a number of international customers.

In 2013 Vodafone acquired a controlling stake in Kabel Deutschland, a publicly listed company that operated the largest cable-TV network in Germany. Vodafone was no stranger to Germany, owning the second-largest mobile operator in the country and also a fixed network. In 2014 Vodafone finally sold its 45% stake in Verizon Wireless to its partner, Verizon. It soon became clear that Vodafone was leaving America and had no plans to re-enter the market in any way. Instead, it bought another European cable company, Spain’s Grupo Ono.

On the other side of the Atlantic, Sprint announced that it had reached an agreement with SoftBank whereby the Japanese company would invest $20.1 billion in Sprint, $8 billion of which would be used to strengthen the company’s financial position. Sprint suffered losses, however, in the next five financial years.

In 2015 AT&T bought DirecTV, the larger of the two DTH (direct-to-home) satellite broadcasting companies in the US. And in 2018 it acquired Time Warner, one of the world’s largest media companies. The AT&T–Time Warner combination was the world’s largest pay-TV company and one of the world’s largest telecommunications and internet businesses, and also owned a huge amount of content that it could distribute over its fixed, mobile and video networks. It could charge consumers for the content and then again for the cost of transmission, while also receiving additional revenues from advertisers.

In the meantime, Verizon continued to build up its digital-services side, and most recently, in 2017, it acquired Yahoo!, the one-time undisputed leader in the internet search business. Yahoo! was merged with Verizon’s other media assets in a new division branded Oath.

Most recently, in 2018 Vodafone announced that it had reached an agreement with Liberty Global to acquire the US company’s cable-TV operations in Germany, the Czech Republic, Hungary and Romania. This put Vodafone in a position to offer quad-play packages (cable TV, internet, fixed telephony and mobile) in all four markets and, through a separate deal, in Spain.

Demand for mobile communications has continued to grow throughout the second decade of the 21st century in all parts of the world, to the point that today, as we near the beginning of the third decade, everyone in the developed world who wants a mobile phone has one. Many in the developing world are also connected. Most of us now use our mobile devices to access the internet.

But behind the scenes all is not well. In many markets, regulators now control the prices the industry can charge for its services – and this is despite high levels of competition in every major telecoms market in the world. The European Commission also controls companies’ abilities to restructure and reshape themselves.

In the last years of the 20th century, the mobile industry was the darling of the financial markets. Now it’s largely unloved. Earnings growth slowed, then stopped, then went into reverse, drawn down by regulatory constraints, excessive licence fees, excessive competition and rising capital requirements.

A number of operators concluded that disposing of some of their businesses could help improve overall returns. For other companies, the answer has been to keep moving into new or underserved markets where mobile penetration was still at a low level. A third group of companies decided to double up, integrating their mobile services with fixed and internet offerings, and sometimes TV or some other form of entertainment. And some operators have concluded that it isn’t enough to offer multi-play services – they also have to own some of the content carried over the network.

All this matters because at the moment the mobile industry isn’t really being properly compensated for its efforts – and if it isn’t allowed to earn an adequate return on investment, it may stop investing.

It’s not as if there’s a huge concentration of power – only AT&T comes close to a 10% share of total revenues and it’s nearly half as large again as the industry’s number two, Verizon Communications; and neither is anywhere near as large as Apple. Taken together, the industry’s 10 largest operators account for only 52% of total industry revenues. No other major industry is quite so fragmented as telecommunications, and few others have to cope with the same level of regulatory interference.

Recognising this, a small number of operators are now looking to pursue an entirely different approach, through diversification into new industries, such as financial services, e-commerce, remote learning, domestic surveillance and the myriad other services that get grouped together under the digital flag of convenience. Some of these areas have greater potential than others. E-commerce is a vast market, for example, but tech companies such as Amazon and Alibaba are already well entrenched and won’t be easily shifted.

At the time of writing, Facebook had announced its intention to dive into the murky waters of the cryptocurrency scene with Libra, its own digital currency – and this has served to highlight the potential for mobile financial services, which is, for the moment at least, wide open and there for the taking. And the market is huge. Figures floated about in the press suggest that there are at least 1.7 billion people in the developing world without access to banking of any kind, who are therefore unable to avail themselves of the internet’s digital bazaars. Facebook aims to change that and suggests its new Libra service will provide a low-cost, simple mechanism that bypasses traditional banking systems, a mechanism that has already attracted the support of eBay, Vodafone, Spotify, Uber and 20 more big hitters. (Visa, Mastercard and PayPal were originally signed up, but dropped out before Libra’s October 2019 official launch.)

Some of the industry’s current problems are in part self-inflicted. After the first 3G phones began to appear, new entrants into the market, with no legacy voice business to protect, began offering data at prices that made it attractive to use VoIP over mobile networks. This allowed third parties to offer voice services that were, in many instances, cheaper to use than the subscriber’s normal mobile voice service – the cost of the data used to make the call was less than the cost of a voice call of the same duration. This was especially true of international calls.

An example of this is WhatsApp, which was founded in 2009 by two former Yahoo! employees, Brian Acton and Jan Koum. It began life as a messaging service but after less than a year acquired the ability to transmit photographs, and its user base began to climb rapidly. By early 2013 the company claimed 200 million active users for the app; this had doubled by the end of that year, helped along by the introduction of a voice-messaging service.

In February 2014 Facebook bought the business for $19 billion. At the time it seemed like an astonishing amount of money but as the WhatsApp base continued to grow, the price began to look less extreme. By August there were 600 million users; in January 2015 the number hit 700 million; and by April the total was 800 million – double the number at the time of the acquisition just 11 months earlier. The billionth user signed up in February 2016, while the last number published by the company, in December 2017, quoted a total of 1.5 billion.

It’s remarkable that a handful of the world’s leading internet companies are now valued more highly than the entire telecommunications industry: the so-called BATFAANG group – Facebook, Amazon, Apple, Netflix and Google; plus the three Chinese giants, Alibaba, Baidu and Tencent. These internet businesses couldn’t function without the telecoms operators on whose terrestrial networks they piggyback. They rely on the competition between operators and, of course, the intervention of regulators who oblige mobile companies to carry this traffic at near-zero rates. This reliance is the one weakness in their business model, and in consequence several of the BATFAANG group are actively involved in the construction of an alternative to terrestrial networks.

The idea of building a constellation of satellites isn’t especially new – in 1990 Motorola announced its plans to launch a new space-based communications network with a design that called for a constellation of 66 low Earth orbit (LEO) satellites some 780 kilometres (485 miles) above the Earth’s surface. However, even though it was possible to launch as many as seven satellites from a single rocket, this process of positioning all 66 took from 1997 until 2002.

The technology has moved on since then and systems of this kind are now far cheaper and easier to build and deploy. The bandwidth of any one of this new generation of LEOs is also far larger – measured in gigabits, not megabits. Other advantages of LEO constellations include the fact that it doesn’t rain in space, that there’s plenty of room, that it’s very cold (so air-conditioning isn’t needed) and that radio waves and light travel faster in free space than in a fibre-optic cable.

At the time of writing, the US FCC was considering several proposals to launch constellations of LEO satellites to provide internet connectivity over the entire surface area of the globe. Many of these are backed by giant enterprises.

In May 2019 Elon Musk’s SpaceX company launched the first 60 Starlink broadband satellites and plans to add a further 11,840. The mild-mannered South African-born billionaire has also filed an application with the FCC for permission to build as many as a million Earth stations to support the Starlink constellation. If all goes well, he plans to have the whole thing up and running by the middle of the 2020s and intends to use the revenues from the venture to fund his plans to build a city on Mars.

Jeff Bezos, the Amazon founder and CEO, has a similar plan for an orbiting broadband network, though his Project Kuiper involves a rather more modest 3,236 satellites to ‘provide low-latency, high-speed broadband connectivity to unserved and underserved communities around the world’8 – and, of course, to everybody else, and especially those of us with enough money to buy stuff from Amazon. Although nothing has yet been confirmed, the Kuiper constellation is likely to be placed in orbit by rockets manufactured by another of Bezos’s ventures, Blue Origin, which announced in 2017 that it would be providing launch services for OneWeb, a third LEO venture backed by Airbus Industries, SoftBank, Virgin and Qualcomm, among others. OneWeb has plans to initially launch and operate a constellation of 650 small satellites although the fleet could eventually run to several thousand.

The Canadian company TeleSat is planning a similar venture, as is LeoSat, a consortium backed by Japan’s SKY Perfect and the Spanish satellite operator Hispasat. The Luxembourg-based SES is also involved, through its ownership of O3B, one of the first of ventures to address this opportunity. Other names that have been mentioned in this context include Facebook, Apple and Boeing – heavyweights all.

The history of telecommunications has been marked by revolutions, each of which has been defined by a radical improvement in the speed, quality and reach, and lowering of the cost, of transmitting information.

The first revolution was the invention of the telegraph, which resulted in the formation of one of the giant corporations of the 19th century, Western Union.

Then came the telephone. When its inventor, Alexander Graham Bell, offered Western Union the patent for his new device for $100,000 and was refused, he instead established his own telecommunications company, which eventually became AT&T – for a time during the 20th century, the biggest corporation in the world.

Another major revolution was the mobile web, brought to life by the advent of the iPhone by Steve Jobs. In the 21st century Apple became the most valuable company in the world.

While the arrival of new technologies do always kill some companies – the Pony Express, for example, lasted only 30 days after the first telegraph had been laid across America – telecommunications revolutions have always been net-positive for the economy. And the added benefit to customers of cheaper and speedier communications far outweigh any losses, so the world’s economy is positively tied to the advancement of telecommunications. The faster information can move, the faster an economy can grow.

Of course, each revolution also brings negatives. Facebook, for example, has made it possible for fascists to spread their story and for the proliferation of often damaging ‘fake news’. But does that mean you ban Facebook?

No. You can’t hold back the future. All you can do is try to ride that horse without being bucked. And whomever does that best will be the biggest corporation of the 22nd century.

6 The biggest auction ever: The sale of the British 3G telecom licences’ by Ken Binmore and Paul Klemperer, in The Economic Journal, Blackwell Publishers, March 2002. The hospitals weren’t built, but the payments extorted from the industry added over £400 – or £20 per annum for 20 years – to the cost of communicating for everyone in the country.

7 Larry Page and Sergey Brin, ‘Founders’ Letter’, Google 2008 10-K.

8 ‘Amazon will launch thousands of satellites to provide internet around the world’ on The Verge, 4 April 2019.