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Zuckerberg Dines With Phone Frenemies Fretting Over Profits

By Marie Mawad and Amy Thomson
February 26, 2014 2:45 PM EST 50 Comments
Facebook CEO Mark Zuckerberg
Facebook CEO Mark Zuckerberg

Call it a dinner between frenemies.

At a Barcelona apartment on the night of Feb. 24, Facebook Inc. (FB)’s Mark Zuckerberg hosted about 20 executives, many from the top phone companies, said people familiar with the matter, who asked not to be named because the gathering was private. Adding to the ambiance was Facebook’s $19 billion agreement to buy messaging service WhatsApp Inc. -- a deal that underscores the rising tension between carriers and providers of popular Internet services such as video streaming and music downloads.

Vodafone Group Plc (VOD) Chief Executive Officer Vittorio Colao and Orange SA (ORA) CEO Stephane Richard, both attendees at the dinner, have been vocal about the need to level the playing field between the two industries. As Facebook benefits from soaring mobile-advertising revenue and WhatsApp gains messaging users, wireless carriers, which have spent billions of dollars building and running the networks that enable the so-called over-the-top services, say they aren’t getting their fair share.

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“The risk for us is being excluded from the world of services,” Richard said in an interview this week at the Mobile World Congress in Barcelona. “If that happens, we’ll be downgraded to simple pipes.”

‘Facebook-Centric’

Facebook reported a 55 percent jump in sales last year to $7.9 billion, led by growth in mobile advertising. Its market value has ballooned to $180 billion, more than that of Vodafone, Orange and Telecom Italia SpA (TIT) combined, as the carriers have reported shrinking sales.

At the Barcelona dinner, Zuckerberg and industry executives discussed Facebook’s plan to team up with wireless operators to help connect more people to the Internet for free in emerging markets. The proposal, while showing that Zuckerberg is reaching a friendly hand out to operators, isn’t likely to generate a consensus, said Eden Zoller, an analyst at research firm Ovum.

“Zuckerberg’s proposal is Facebook-centric, with the social network and OTT players reaping the immediate benefits,” Zoller said in a note. “The direct monetization prospects for telcos are thin -- the question remains as to whether this will be enough to counter the negative impact OTT services are having on operators.”

Jonathan Thaw, a Facebook spokesman, declined to comment on the dinner or the company’s relationship with phone carriers.

Vodafone shares fell 0.7 percent to close at 245.25 pence in London as Orange lost 3.4 percent to 9.31 euros in Paris. Facebook, which more than doubled last year, dropped 0.9 percent to $69.20 at 2:43 p.m. in New York.

Siphoning Revenue

While carriers need Facebook, Twitter and YouTube to lure subscribers to data plans, their services have begun to collect a greater share of the pool of money that mobile-device users spend. When someone buys an online game, the money goes to the game’s creator and the operator of the app store, such as Apple Inc. Ad revenue goes to Google Inc. (GOOG)’s search engine and Facebook’s social network.

What’s more, over-the-top services such as WhatsApp and Microsoft Corp.’s Skype eat into the core source of mobile-phone companies’ revenue -- voice and text messaging. Free social-messaging applications like WhatsApp cost phone providers $32.5 billion in texting fees in 2013, according to Ovum Ltd. That figure is projected to reach $54 billion by 2016.

Pressuring Regulators

European carriers, meanwhile, with their unlimited-data plans, are seeing limited benefit from the rising popularity of the new services. A monthly subscription can cost less than $20 in Europe -- and competition constantly threatens to push that lower. All while rising data traffic forces them to make new investments.

“Over-the-top operators have no intentions of investing in fiber networks,” Telecom Italia CEO Marco Patuano said in an interview this week. “The Facebook-WhatsApp deal teaches us that with $19 billion Facebook could have built new fiber networks in both Italy and France.”

As the balance of power tilts in favor of Web content providers, carriers have put pressure on regulators to take new Internet companies better into account, while making their own services more attractive and expanding into new ones.

In Barcelona, Vodafone CEO Colao said regulation needs to adapt to include global Web companies in its scope. While regulators are scrutinizing deals such as Hutchison Whampoa Ltd.’s $1.1 billion acquisition of an Irish carrier, Facebook’s WhatsApp deal is seen facing little resistance from watchdogs.

Net Neutrality

“Facebook’s is the first biggest inorganic deal -- a 1.2 billion-customer company acquiring another with 450 million clients. And you’re asking me whether Ireland will go through?” Colao said. “The world is clearly changing and old regulation doesn’t fit this world anymore.”

Carriers are asking the European Union to allow more cross-border mergers. The region has dozens of isolated markets, each one with multiple network operators, heightening competition and limiting the companies’ ability to boost prices and invest.

They also want more freedom over what to charge for different levels of service and speeds. The EU, meanwhile, is seeking to ensure so-called “net neutrality,” or the same level of service, for Internet users.

“A fair net-neutrality framework should not compromise the possibility to offer different levels of speed connections for special services like on-demand videos or tele-medicine,” Telecom Italia’s Patuano said. “I am against filtering but it’s normal to prioritize some services.”

Mobile Banking

The GSMA and ETNO, two major industry groups for carriers, sent a two-page letter to European Commission Vice President Neelie Kroes on Feb. 20, complaining that net-neutrality proposals go too far in preventing carriers from managing their networks and offering new services, a document seen by Bloomberg showed. Kroes acknowledged that she got the letter, saying in an interview this week that she also received others in support of the proposals.

The new initiatives that carriers bet will boost revenue include so-called machine-to-machine connections and mobile banking. Orange said yesterday it joined operators including China Mobile Ltd. and Ooredoo QSC to back a universal digital passport for paying, logging on and everything else on the go.

Some carriers didn’t waste time to ride on the attention the WhatsApp deal has garnered. Royal KPN NV (KPN) of the Netherlands said its German E-Plus unit agreed to introduce a WhatsApp offer this spring and Germany’s Deutsche Telekom AG (DTE) said it is considering an alliance with the messaging service.

“A service like WhatsApp, to be honest, that’s something we could’ve and should’ve come up with before,” said Orange’s Richard. “We’re well decided to catch up.”

To contact the reporters on this story: Marie Mawad in Barcelona at mmawad1@bloomberg.net; Amy Thomson in Barcelona at athomson6@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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