Hung Up In D.C.

Sommer is feeling less warmly welcome this time. For months he has been seeking a foothold for Deutsche Telekom in the United States, trying to buy the biggest American wireless company he can find. But even before he announced last week an agreement to buy VoiceStream Wireless for more than $50 billion in stock and cash, a group of conservative senators was rushing to block him. Led by Ernest Hollings of South Carolina, they argue that a former state monopoly like DT represents a threat to competition and national security. To Germans, the suggestion that their phone company is a den of meddling bureaucrats and spies is an almost laughable cold war caricature. Under Sommer since 1995, DT has rapidly shed workers and sold down the government’s stake. Germany and the European Union quickly threatened trade retaliation if Hollings’s blocking tactics succeed. The White House distanced itself from the Senate maneuvers. But largely lost in the brouhaha was the real difference between Sommer’s play for VoiceStream and dozens of other deals now reshaping the wireless world.

It has nothing to do with German government owners or spies. DT-VoiceStream would be the first deal to unite the United States and the rest of the world on one mobile-phone platform. That, analysts say, could speed the arrival of a true “world phone” and the U.S. introduction of wireless service powerful enough to deliver a fast Internet connection. No wonder American wireless leaders are widely believed to be secretly lobbying to stop DT’s purchase of VoiceStream. AT&T, Sprint and Verizon have publicly denied the rumors. But if the Americans are not worried, they should be.

Here’s why. Throughout Europe and much of the world, the dominant wireless platform is the Global System for Mobile Communication, or GSM. According to Cahners In-Stat, a Massachusetts research firm, GSM carriers serve 43 percent of the 460 million mobile-phone users worldwide, and that share likely will grow to 57 percent of 1.87 billion users by 2003. The gaping exception is the United States, which has a hodgepodge of competing platforms; VoiceStream is the only national carrier that uses GSM. Deutsche Telekom and VoiceStream is the first pairing of GSM carriers in Europe and the United States, and could be the first to offer customers seamless service on either side of the Atlantic–or the Pacific. “The fact that we share the GSM platform is huge,” says VoiceStream CEO John Stanton. “It is huge to Deutsche Telekom.”

The advantage may be only temporary. The coming superfast third-generation wireless services are expected to be compatible across all platforms. But before the 3G era arrives, carriers are making the simpler move to “2.5G”–a standard that raises wireless data transmission speeds to 56 kilobits per second, just fast enough to make wireless Internet service practical. And GSM carriers are a step ahead of rival platforms in the race to launch 2.5G. Deutsche Telekom and VoiceStream claim that together they could be first to introduce to the United States not only fast wireless Internet but other mobile services already catching on in Europe–like buying sodas from vending machines or getting directions to the nearest Japanese restaurant. “Typically, Europe is a year or more ahead of the United States in wireless technology,” says Wireless Week editor Rikki Lee. “This deal could close the gap.”

The problem for GSM is that there are still large holes in its U.S. coverage, including the Southeast and California. Few Americans are going to want a phone that roams more broadly in Europe than at home. Stanton says his main aim in courting DT was to raise cash to plug these gaps. DT will provide $5 billion cash upfront so VoiceStream can better compete in the next U.S. government auction of rights to radio airwaves. “We were the weakest bidder in the auction. Now we’re among the strongest,” says Stanton. “That’s what our rivals are afraid of.”

That’s not what they’re saying in Washington. U.S. law bans any company that is more than 25 percent owned by a foreign government from buying a U.S. telecom firm, unless the Federal Communications Commission rules the sale is in the public interest. Hollings wants to block that loophole, but many analysts ridicule his view that such sales are “never in the public interest.” The idea that DT poses a threat to competition or national security is “a red herring,” says Gartner Group analyst Bryan Prohm. “Congress is filled with guys from the World War II generation, and they may have a reaction just because it’s Germany coming in.”

Sommer deployed a fleet of Washington lobbyists last week to attack the perception that DT is still a state monopoly. The German government stake has fallen from 100 percent to 58 percent since 1996, and will fall further if DT buys VoiceStream and other possible targets (reportedly including Cable and Wireless of Spain and a U.S. regional GSM carrier, Powertel). Sommer stayed out of Washington, apparently to avoid whipping up anti-German sentiment. A source close to Sommer says he did place a “friendly call” to William Kennard, head of the FCC, who has promised to scrutinize the deal closely. The smart money says Kennard won’t block a deal that appears to hasten the arrival of a wireless world.