As Shares Slump, MobilCom Looks to Fiber Optics to Solve Its Problems

The German telecom company hopes that building its own network can keep costs down -- and boost its stock price.
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It's amazing how a falling share price can refocus the mind.

Gerhard Schmid

, the flamboyant chairman of upstart German telecom firm

MobilCom

, once scoffed at rivals who were sinking vast sums of cash into building their own fiber-optic infrastructures. But after watching MobilCom's market capitalization -- and his own personal wealth -- roughly halve in about three months, Schmid is now rethinking his company's technology strategy.

Once content to run MobilCom's phone calls through

Deutsche Telekom's

network, Schmid has proposed spending as much as 500 million marks to buy or lease a fiber-optic network. Analysts say that's a move Schmid, who owns 60% of MobilCom and occasionally appears as a guest on late-night television talk shows, has to make if he wants to avoid falling victim to the same strategy he used against the former state-run giant.

Instead of spending time and money building infrastructure, MobilCom chose to pay for access to DT's network and then proceeded to undercut its host's prices. MobilCom also used an easy-to-remember prefix to offer its 19-pfennig-a-minute (about 10-cent) calls. Adopting the flat rate also appealed to customers, most of whom couldn't calculate Telekom's arcane pricing without an abacus.

The strategy, however, wasn't without pitfalls. As the price war continued, Schmid and his colleagues didn't recognize that the fickle customers they lured from DT would happily jilt MobilCom if a better offer came along.

The offers did come, and customers left. And shortly thereafter, MobilCom's share price became as much of a casualty as Deutsche Telekom's market share. On Monday, MobilCom shares closed at 234.80 euros on Germany's

Neuer Markt

, half its high of 467 on Jan. 26.

The share price tumult has prompted MobilCom to remake itself. Phone rates were cut to 12 pfennig per minute -- the lowest around. And it boosted efforts to the number of customers who preselect MobilCom as their default phone carrier.

But Schmid now apparently thinks that being the price leader alone is not enough, prompting him to look at the quality fiber-optic networks can provide.

Just a month ago, it looked like MobilCom might try to snap up competitor

o.tel.o

and its fiber-optic network. But when O.tel.o was purchased by

Mannesmann Arcor

for 1.1 billion euros ($1.2 billion), the market slammed MobilCom.

"The old method of arbitrage without having greater control of the transmission costs is probably over," says Iain Johnston, an analyst for

J.P. Morgan Securities

in London. "The way they'll try to recoup operating margins is by lowering network cost and that means they want to put in more of their own infrastructure instead of being dependent on someone else." J.P. Morgan does not have an investment banking relationship with MobilCom.

Last week, Schmid mounted a new offensive. Besides announcing he would splash out half a billion marks on leasing or buying a network, Schmid stepped up his feisty self-promotion by appearing on the

Harald Schmidt Show

, Germany's answer to

David Letterman

. The day after the appearance, MobilCom's shares rose 1.4%.

While cynics might find it easy to write a Top Ten list concerning Schmid's newfound interest in owning a network, it seems undeniable the scrappy chairman will push his company forward. Of course, as the majority shareholder, he has the most to lose if MobilCom doesn't make the leap.