Kate Bulkley, Media Analyst.

Profile: Ivan Seidenberg, co-CEO Verizon Communications

By Kate Bulkley

The Independent

Dec 20, 2000

Seidenberg, says that size does matter. The company is the largest wireless provider in the US and its partnership with world leader Vodafone gives it a foothold in the UK and Europe

When Ivan Seidenberg took a job as a lowly cable splicer for New York Telephone more than 30 years ago, he could not have imagined the size of the company he runs today. Now, sitting at the top of a business worth some $70bn (48bn), the co-chief executive officer of Verizon Communications can appreciate the size of the operation that has emerged over the last five years, during what has arguably been the most exciting time in telecommunications since a certain Mr Bell invented the telephone.

One of Mr Seidenberg's favourite words is scale. It's a mantra that the thoughtful New Yorker has been fond of expounding from his offices in downtown Manhattan, as he helped build this one-time regional phone company into the dominant US wire and wireless communications provider. This philosophy also helped drive Verizon to take its US wireless business to the next stage by linking up with the world's biggest wireless company Vodafone. The desire to be big is central to Mr Seidenberg's strategy. "As we look at the US market, we've been focused on growing into a super-regional player," he says. "We don't feel we can win customers and business in the European market or the Latin American market or the Asian market unless we're a more important player in the North American market. This is because our strategy is to leverage our networks and our customers."

In the US the "bigger is better" strategy has so far worked well: Verizon Communications is the largest provider of both wireline and wireless services. But there are challenges, not least of which will come from the changing shape of the business. About 65 per cent of Verizon's revenues come from its traditional wired services, but looking ahead three to four years this will be turned on its head with 60 to 65 per cent of all revenues coming from the faster-growing businesses of mobile and data networks and services. This shift in where the growth and value of the business lies puts pressure on all traditional telecoms players to, in Mr Seidenberg's words, "go from being a local telecommunications company to being a global player".

This is not news to the telecoms sector, where companies from BT in the UK to NTT Communications in Japan and AT&T and MCI Worldcom in the US are all struggling to adjust their business models. But the shift could prove problematic for the relationship between Verizon and Vodafone. It's been a little over a year since Verizon and Vodafone agreed to co-operate in the US in Verizon Wireless, but there are growing questions marks over just how they will expand this partnership, both in America and internationally. For example, both companies are developing data portals that will eventually carry multi-media services to their mobile subscribers for a fee. Vodafone has a portal partnership with France's Vivendi Universal Ð Vizzavi Ð but Verizon Wireless has its own mobile portal business with its own brand name. Vodafone's global-branding strategy is also difficult to square with the US brand Verizon Wireless. And what about Verizon's international portfolio of both wireless and wireline assets? Will they be integrated into Vodafone's international portfolio?

"If you look at Europe, the most important player is Vodafone and they are our partner," says Mr Seidenberg, who turned 54 this month. "We have a similar view of the market. Vodafone realised early on that if they wanted to become a regional player in the US they had to do a deal with us. Together we have focused on commercial relationships, on driving new products, working harder with the hardware manufacturers to drive new architecture, to drive standards and to get better handset pricing and dual-mode handsets."

The Verizon story is one of merger and acquisition, first triggered by the passage of the 1996 US Telecommunications Act. For the first time since the break-up of the AT&T Bell system into seven regional companies in 1984, the new legislation allowed the so-called Baby Bells to start competing with their former parent. The rule change precipitated a wave of consolidation in the US telecommunications market that has only recently come up against the twin obstacles of a tightening regulatory regime and an unfriendly stock market. Originally designed to spur competition, the Bells, including NYNEX Corp, where Mr Seidenberg was chief executive, argued that before they could stand up to AT&T and other national carriers like MCI and Sprint they had to get bigger. So in 1997 Mr Seidenberg struck a $25bn deal to merge NYNEX Corp, the regional Bell that included New York Telephone, with Bell Atlantic. Mr Seidenberg became chief operating officer and vice-chairman alongside Ray Smith, Bell Atlantic's chief executive.

Other Bell companies were also busy buying one another: SBC of Texas purchased West Coast Bell Pacific Telesis and then went after Chicago's Ameritech. But Mr Seidenberg and Mr Smith weren't finished: less than a year after absorbing NYNEX, Bell Atlantic made another bold move, this time agreeing to a $53bn stock swap for GTE, a non-Bell company that had assets spanning wireless to long-distance internet networks.

While Mr Seidenberg and his Bell colleagues were busy gobbling each other up in the US, wireless communications started to become a global industry, led by Europe and its popular GSM technology standard that allowed customers to use their phones across Europe. The growth of the US mobile business had by contrast been crippled by competing technologies and rules that made offering a truly coast-to-coast service unwieldy. In early 1999, Bell Atlantic approached America's largest independent wireless operator, Airtouch Communications, with an offer to acquire it for a reported $45bn in shares. The two companies already had a five-year-old joint venture to help route mobile calls across the US, but a few days after Bell Atlantic made its bid, UK mobile heavyweight Vodafone countered with a higher offer of $55bn. After some haggling over price, Vodafone won, eventually paying $62bn for Airtouch.

Today Mr Seidenberg says he and Chris Gent, Vodafone's chief executive officer, talk "all the time" and have similar perspectives on the business. When they are together, Mr Seidenberg is probably the more contemplative, letting Mr Gent and Chuck Lee, Verizon's gregarious co-chief executive (who had been running GTE), lead the discussion. But Mr Seidenberg is no wall flower. He has an uncanny ability to focus and a penetrating gaze. "Our relationship with Chris has been perfect. It's been a home run," enthused Mr Seidenberg on a recent trip to London. "The companies are compatible in their strategies and the people are compatible in the way they see the market."

But the corporate relationship got off to a rocky start. In the wake of Vodafone's bid for Airtouch, Bell Atlantic started legal action against its former partner. Meanwhile, Mr Gent and his advisers believed buying Airtouch gave Vodafone a foothold in the US market, but was not enough to make it a viable national carrier. Mr Seidenberg took a call shortly after the Vodafone Airtouch deal from Mr Gent, who made an offer to be partners rather than opponents. It was pragmatism that allowed them to combine their American mobile assets into a new joint wireless company with 20 million mobile subscribers. Vodafone traded control in what became Verizon Wireless, in exchange for recognition of the premium the UK company had paid originally to outbid Bell Atlantic for Airtouch in the first place. So even though Vodafone contributed only 40 per cent of the subscribers, Bell Atlantic gave the UK firm a 45 per cent stake in Verizon Wireless. At the time Mr Gent said he agreed to cede control of the new company's management "because it makes more sense to be a shareholder in a national entity than in control of a regional player".

The compromise has paid off. Adding in the wireless subscribers from Verizon's merger with GTE, at the end of October Verizon Wireless boasted 26.3 million subscribers, and a national footprint with the potential to reach 90 per cent of the US population, making it the biggest US wireless operator. "We want to dominate in wireless," says Mr Seidenberg. The pragmatic deal with Verizon allowed Mr Gent to focus on integrating Airtouch's international wireless properties with Vodafone's own, as well as to target other mobile assets including what turned out to be the long and nasty, but eventually successful, fight to buy Germany's Mannesmann.

But Verizon Wireless hasn't been all smooth sailing and there could be more clouds on the horizon. An initial public offering (IPO) of the company was hinted at, then scaled back and finally postponed in the last few weeks in the face of an increasingly sceptical public market. The IPO is important to Vodafone because it will put a market value on its US business, making up partly for Vodafone's lack of control in the venture. Verizon Wireless makes up almost 25 per cent of Vodafone's total net income. Mr Seidenberg says Verizon has a strong balance sheet and can borrow what it needs to pay for new frequency licences in the US Auctions begun earlier this month for spectrum that will allow operators to fill in gaps in their networks and improve service in congested markets.

But the US is not going to hold a full-scale auction of spectrum for third-generation, high-speed wireless services for nearly two years because of conflicts with local television signals. This will slow down the launch of new multi-media mobile services that so many wireless operators are betting on to cover the high costs of third generation or 3G licences. Add to this increasing competition in the US market, with Germany's Deutsche Telekom buying VoiceStream Communications and NTT DoCoMo of Japan agreeing to buy a stake in AT&T Wireless. Some analysts say that DoCoMo's highly successful i-mode mobile internet service in Japan could give AT&T a significant head start on launching similar services in the US. But Mr Seidenberg says: "When you look at the combined customer base of our two companies we have somewhere north of 110 million subscribers [actually 116 million]. Setting aside the issue of who's in charge in the US, I mean why would AT&T and DoCoMo do its deal if they weren't worried about Vodafone and Verizon? I don't even worry about that. Chris is doing a good job and he will continue to grow and he's suffering also [in the stock market] but I think when we get these spectrum auctions done and all that settles down we'll see wireless [stocks] pick up again."

The stock market jitters have also taken a toll on Verizon Communication's growth strategy. An $800m deal to buy Northpoint Communications, a specialist in broadband services, was shelved after Northpoint had to re-state its financial targets. Mr Seidenberg says that in the long term the company's plans to build out broadband or digital subscriber line (DSL) networks will cost less, even though it might take more time. Verizon expects to have 500,000 DSL lines by the end of the year and in the wake of the Northpoint deal flop Verizon pleased the financial analysts by increasing its 2001 earnings-per-share target growth to approximately 8 per cent, up from a target of 5 to 6 percent.

Verizon Communications' capital expenditure will reach an estimated $18.5bn by 2001, but Mr Seidenberg believes even though the company has debt of $51.7bn, which gives it a debt-to-equity ratio of 60, that it is much better positioned than its rivals. He says Verizon is on course to generate $25 to $30bn in cash flow this year. "If you look at our total debt we are in the same vicinity as AT&T, but we have a future with a lot of cash-flow opportunities. The difference for us is we've invested heavily in our core businesses to generate new products and services." This focus on the new, faster-growing businesses of wireless and data is going to be key to a sustainable business model in the fast-changing and increasingly competitive world of telecommunications. Mr Seidenberg knows this, but he also really likes size. Focusing on scale has served Mr Seidenberg well so far, but it could also turn on him. Just look at the trouble MCI Worldcom and AT&T have got into with their aggressive expansion plans. After working so hard to get bigger, both companies are now busy splitting their businesses up. But then maybe Mr Seidenberg, the one-time cable splicer, has just the right skills to understand the pitfalls and so will be able to avoid them.

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