Big Telecom Merger Wave Coming, Between 2014 and 2016, CSS Insights Predicts

By one estimate, there have been 161 merger or acquisition deals announced or completed in Europe, so far in 2013. And Deutsche Telekom CEO Rene Obermann says it is necessary for European telecom companies to get bigger, to compete globally.

A major wave of industry restructuring will happen between 2014 and 2016, CSS Insight predicts, with a merger of Orange (France Telecom) and Deutsche Telekom among the deals predicted to happen in 2015.

A precursor would be the sale of T-Mobile US to Dish Network, CSS Insight predicts.

Telecom mergers tend to happen in waves, so it is not to hard to predict that many mergers and acquisitions will happen over the next couple of years, completing a merger wave that was stalled, temporarily it now seems, by the global Great Recession of 2008.

As with past waves of mergers, industry shocks will provide the impetus for the merger wave. Typically, those shocks are economic, regulatory or technological. The issue, some might argue, is whether sufficient capital liquidity will be available to underpin the mergers, as such liquidity is necessary, even when there are industry shocks.

Since the late 1990s, when there was a major wave of mergers, a second wave built in the few years leading up to 2007, after which the Great Recession seemed to slow down dealmaking.

But the U.S. mobile business has seen a big uptick in 2013, and many believe it is a sign of more coming activity globally.

In most telecom markets, at least in developed markets, a “rule of three” will hold, as that offer enough revenue and profit to support a stable cast of providers. But at the recent International Telecommunications Union “Telecom World,” even executives from Southeast Asian countries agreed that was about the number that is sustainable in many markets in that region.

Telecom Malaysia Revenue Grows, Fixed Broadband Helps

It is commonplace these days to note that Internet access revenues are driving growth in developed market telecom markets, especially in the mobile realm, but also in the fixed network segment.

As it turns out, that sometimes also is the case in “developing” markets as well, especially those with high penetration of mobile voice.

Telekom Malaysia pre-tax profit increased 11.1 percent to RM264.9 million in the third quarter of 2013, up from RM238.5 million in the third quarter of 2012.

Revenue grew 9.9 percent year-on-year growth to RM2.6 billion from RM2.4 billion previously, on the back of higher revenue contribution from Internet and data services, with net profit at RM240.9 million in the current quarter.

Significantly, a sizable portion of the revenue increase came from fixed network high-speed Internet access services.

Group Chief Executive Officer Tan Sri Zamzamzairani Mohd Isa said Telecom Malaysia has reached fixed network broadband coverage to 1.462 million premises, covering 103 exchanges nationwide, as of end-September 2013.

"We closed the quarter with more than 607,000 UniFi customers, that translates to a take-up rate of about 42 percent,” Isa said.

Total broadband customers increased 7.7 percent to 2.18 million.

Total Internet access and multimedia services revenue growth was 14.1 percent higher, year over year, while data services recorded a 17 percent increase to RM635.0 million.

U.K. Looks for 650 MHz More Wi-Fi and Mobile Spectrum

U.K. communications regulator Ofcom is investigating ways to free up up more mobile broadband and Wi-Fi spectrum over the next decade or two. Some think the effort could add up to 650 MHz of new Internet access spectrum.

Real Wireless thinks the spectrum effort could free up 300MHz of additional cellular spectrum, and 350 MHz for Wi-Fi. Some of that spectrum should be commercially available by 2020.

If so, Ofcom will make available perhaps seven times as much spectrum as was awarded as part of the recent Long Term Evolution 4G auctions, with initial thinking that all of the additional spectrum could be made available over about a 20 year period.

Ofcom estimates that this new spectrum could boost mobile data capacity by more than 25 times between now and 2030, when used in conjunction with more advanced mobile networks,

Among the candidates for redeployment are the 2.3 and 3.4 GHz bands. Currently licensed for use by the Ministry of Defense, Ofcom is working to make that spectrum available for auction between  2015 and 2016.

That shift of spectrum from public sector to private use is important since public entities use just over half of all U.K. spectrum.

Also being evaluated are some portions of  the 700 MHz band, used for digital TV broadcasting. Ofcom believes at least some of that spectrum could be released for mobile broadband use sometime after 2018.

The TV white spaces spectrum also is under investigation.

In addition, the 2.7 GHz radar band potentially could represent up to 100 MHz of spectrum.

Additional spectrum could be found in the 3.6 GHz band, which is currently used for satellite links. Mobile services might be able to share the band with existing satellite users.

There are any number of implications beyond the immediate matter of creating more potential mobile broadband spectrum. Making some of that new spectrum available necessarily will involve new ways of sharing spectrum.

And U.K. precedents should have implications for other regulatory authorities as well.

Above-Average Economic Growth in "Developing" Regions Will Drive Communications Growth as Well

Generally speaking, consumption of communications products and services tracks gross domestic product. So it makes a great deal of difference, to people and service and product or app suppliers when GDP grows, especially in emerging for developing economies. 

Whatever concern might exist in equity or bond markets related to frontier, emerging or developing markets, growth seems to be in the offing for the next two years. After that, predictions are for steady growth at about a 3.5 percent annual rate. 



According to the Internatiional Monetary Fund, overall global growth might see roughly similar growth rates.



Euopean nations might grow about at slower rates through 2017. 



U.S. GDP growth forecasts (albeit adjusted for inflation) are constrained at less than two percent annual rates. Non-adjusted rates are about two percent annually.

To the extent that more-robust growth is beneficial for communications service providers, the generally sluggish growth rates will mean tougher growth prospects.

Above-average growth rates will register throughout the "less developed" regions of the world. 

How Widely Could Small Cells Substitute for Fiber to Home?

Just five years since its inception, does the strategic plan for the Australian National Broadband Network need significant revision, and if so, what sort of revision? Already, there is discussion about where to use fiber to the home and where to use fiber to the neighborhood.

But are other changes, relying more on mobile access, also needed? A position paper created by the McKell Institute, and funded by Vodafone Australia, raises even more questions.

The McKell Institute paper makes the case that the Australian National Broadband Network, intended to build a new fiber access infrastructure for Australia, also can be used to support enhanced mobile Internet access, using fiber backhaul to support new arrays of small cells, and should do so, according to study author Michael Gordon-Smith.

The position paper, funded by Vodafone Australia, argues that It argues that small

mobile base stations, able to be placed on lampposts, and using the NBN for backhaul,  could significantly increase and improve mobile coverage in both urban and regional Australia.

The implications are unclear. If Vodafone Australia wishes to secure backhaul from the NBN, it is allowed to do so. The McKell position paper argues only that the NBN should be recrafted to add support for backhaul to small cell sites.

In and of itself, that is not so surprising. The minimalist change is that some potential small cell sites, such as lamp posts, could become terminating access locations.

But there also is another potential complication, namely the possibility that mobile Internet access, supported by such a network, could emerge as a stronger competitor to the planned fixed line access network.

And that eventuality could emerge based on the extent of the backhaul network for small cells. What if, instead of a “thin” deployment, small cell backhaul connections were widely deployed?

“Changes in the environment are sufficiently large that policymakers and NBN Co

should consider whether strategic decisions made five years ago need any modification,” said Gordon-Smith.

The key word is “strategic,” not merely “tactical.” And one might argue that allowing a mobile service provider to buy backhaul at urban backhaul locations is fairly tactical, requiring only that the NBN be willing to install drops for a paying customer.

It is subtle, but that very statement suggests mobile Internet access could become a more-important part of the access infrastructure enabled by the NBN. The reason is simple: mobile carriers always would have had the ability to buy services from NBN, to deploy in support of small cell networks, if they chose to do so.

The position paper, in suggesting markets and end user demand have shifted in the direction of mobile, invites further shifts in NBN architecture that seemingly have implications beyond allowing mobile service providers to become customers of the backhaul network.

“The NBN was not a single decision,” but a series of  choices about architecture, the priorities for rollout, and the services it will offer,” the paper suggests.

In other words, perhaps “affordable mobile broadband” is among the objectives the NBN could further, the paper suggests.

For obvious reasons, Vodafone Australia CEO John Morrow says “it is important to understand that mobile services are not a competitor to the NBN; they are in fact an ideal complement.”

Since Vodafone needs government cooperation to make such a use of the NBN possible, it is understandable that Vodafone Australia argues that adding this option would cost very little, but lead to “a broader range of compelling and exciting outcomes” for both fixed and mobile telecommunications.

But make no mistake, allowing use of NBN to create a widespread backhaul network for mobile small cells would represent a distinct competitor to the fixed access network. On the other hand, mobile networks would then become customers of the NBN as well..

“The NBN project commenced in 2009 as a means to upgrade Australia’s fixed telecommunications infrastructure,” Gordon-Smith said. “Since then mobile broadband,

smart phones and tablets have recreated the broadband landscape.”

Gordon-Smith argues that a “national broadband network that endeavors to benefit both the fixed-line and mobile broadband networks would...transform Australia’s telecommunications landscape.” And so it might.

The position paper only argues that the NBN infrastructure is well placed to deploy more “micro

cells” that increase capacity in areas where data traffic is high, especially shopping centers, schools, cafes, universities and public spaces.

Even in such a spot deployment, offload of traffic to the small cell network makes the rest of the mobile network more capable as a substitute for fixed Internet access.

Of Australian Internet subscribers in 2012, 47 percent accessed the Internet using a mobile phone, while 23 percent accessed the Internet via a mobile broadband device, the paper notes.

Just how big a change Vofafone Australia contemplates is unknown. 

Adding fiber to small cell locations might, as the paper suggests, be a slight change. But it is a small step to contemplate how extensive such a backhaul effort ought to be.

Conducted extensively enough, a small cell network, originally envisioned as an augmentation network to add more capacity or coverage in high-traffic areas, might also deliver more capacity even in some residential areas.

That would be a strategic change, indeed.

NAB, DoD Agreement Clears Way for Auction of 50 MHz of Mobile Spectrum

The National Association of Broadcasters and the Pentagon have come to an agreement which will enable the Federal Communications Commission to free up the 1755 MHz 1780 MHz band as part of the planned auction of former TV broadcast spectrum, the most significant opportunity for U.S. mobile operators to increase their licensed spectrum capacity in many years.

The new agreement is part of an auction of spectrum in the 2155-to-2180 megahertz band, collectively referred to as AWS-3 (advanced wireless services), and will allow mobile service providers to bid on 50 MHz of spectrum.

The government technology and spectrum body, the National Telecommunications and Information Administration, sent a letter to the FCC detailing the deal, under which the DoD has agreed to move its operations out of the 1755 MHz to 1780 MHz band to the 2025 MHz to 2110 MHz band.

That move is enabled by a spectrum sharing pact with the broadcasters, which currently use the 2025 MHz to 2110 MHz band for remote news gathering.

The importance of the deal extends beyond the matter of freeing up about 50 MHz of spectrum for mobile communications.

The move reflects a broader embrace of more-flexible approaches to spectrum allocation. Though this auction affects only spectrum in the United States, the notion of sharing formerly allocated government spectrum for commercial purposes will be noted internationally, and likely will spur similar efforts elsewhere.

In principle, that could mean many new blocks of spectrum could be made available in many other markets, vastly expanding the amount of spectrum Internet and communications service providers can use.

Fixed Network Revenue Already Walks on Two Legs: Will Mobile Follow?

One need not agree that the cable TV industry is imploding to agree that the industry’s revenue sources are changing in fundamental ways. 

In fact, the cable industry and the rival telephone industry seem to be converging on a similar revenue foundation, at least in the fixed networks business, in the consumer segment.

Consider Google Fiber, which offers two services, namely Internet access and video entertainment. And look at total subscribers in the U.S. video and fixed network business.

Already, the number of high-speed Internet access customers is closing on parity with the number of people buying video subscription services, in the U.S. fixed networks business.

It will take some time for the mobile business to reach the same revenue source pattern we are seeing in the fixed networks business in developed markets. The contribution of voice services to total EMEA service revenue, for example,  will decline from 47 percent to 39 percent through 2017, according to Analysys Mason.

Likewise, a disproportionate share of global revenue growth will be driven by the Asia Pacific region, where non-messaging mobile data will contribute almost 82 percent of the overall increase in worldwide service revenue, according to Analysys Mason.

APAC telecom revenue will grow at a four percent CAGR, with mobile data revenue equaling mobile voice revenue in the APAC region by 2017.

The reasons are quite simple: voice revenue is plunging, while Internet spending is growing, as is video entertainment.

Tablets Top Long Forrm Viewing on Connected Devices

It once was the accepted wisdom in the television industry that people really would not want to watch video on small screens. For the most part, most video still gets watched on PCs and TVs, rather than tablets and smart phones.

But the amount of video consumed on small screens keeps growing. One indication of changing preferences is the amount of long-form video viewed on mobile phones and tablets, compared to PCs and connected TVs.

Global Telecom Revenue Will Grow 2.7% Annually, Through 2017

Worldwide telecom revenue will grow at a 2.7 percent compound annual growth rate between 2012 and 2017, according to Analysys Mason, representing movement from US$1.9 trillion in

2012 to US$2.1 trillion in 2017.

In developed markets, growth will come from mobile non-messaging data services and new services, since mobile voice and mobile messaging services will become commoditized.

In emerging markets, service providers will grow by adding significant numbers of new customers, Analysys Mason argues.

Total telecom revenue in the Europe, Middle East and Africa  region is forecast to grow at a 1.2 percent CAGR from 2012 to 2017, driven largely by revenue growth in the Middle East and Africa.

The contribution of voice services to total EMEA service revenue will decline from 47 percent to 39 percent through 2017.

Non-mobile video services will see a 5.8 percent CAGR, while region capital investment grows

at a 0.5 percent CAGR.

A disproportionate share of global revenue growth will be driven by the Asia Pacific region, where

non-messaging mobile data will contribute almost 82 percent of the overall increase in worldwide service revenue.

Telecom capital investment will grow at a CAGR of 1.7 percent globally between 2012 to

2017, Analysys Mason says.

Capex growth will be strongest in the Asia-Pacific and Latin American regions, but Asia-Pacific and EMEA will account for 66 percent of the total spending through 2017.

APAC telecom revenue will grow at a four percent CAGR, with mobile data revenue equaling mobile voice revenue in the APAC region by 2017.

Capex will grow at a 2.5 percent CAGR in APAC, mainly driven by mobile network deployments.

Revenue in North America will grow at a 2.3 percent CAGR between 2012 and 2017, with growth driven by the mobile segment.

Capex in North America will grow at a 1.8 percent  CAGR.

Telecom revenue in the LATAM region will grow at a 4.9 percent CAGR, lead by mobile service revenue. The number of subscribers in the LATAM region will grow at a 4.6 percent CAGR.

Carrier Voice and Messaging: Should Service Providers Harvest or Invest?

What strategy should fixed line telcos and mobile service providers take towards their legacy voice and messaging revenues? Should they invest more and add features to revamp the products, or essentially harvest them?

In fact, some might say the problem is stark: can anything be done to arrest the decline of voice and messaging revenues?

The question is far from academic, and far from new.

The same questions could have been asked about long distance revenues in the decades following 1984, in the U.S. market, when a long and persistent decline in voice revenue began.

One might argue that the same fundamental question was relevant: what can or should be done to enrich and remake long distance service to reverse the revenue decline? Can “long distance” be recreated to produce new products?

In many ways, the problem was even simpler than faced by service providers today. There were no convenient or usable alternative communication modes. There was no way to substitute email or instant messaging, text messaging, Google Hangouts or IP voice for long distance calling.

The challenge service providers face today is far worse. There are viable substitutes, including substitutes that arguably already incorporate multi-mode features (image, voice, text, image, video). Most of those substitutes are available to use for no incremental cost.

Nor, in the two decades following 1984, had mobile communications become a widespread, affordable alternative for voice communications.

Though it provides only one historical point of reference, the lesson is that virtually nothing could be done to halt the decline in long distance gross revenues or profit margin.

“Long distance” as a product simply reached a point of maturity, and began to decline, in part because monopoly supply was replaced by competitive supply, and then affected even more by the emergence of viable product substitutes.

To be sure, suppliers can attempt, and advisors can recommend, that any number of things be done to upgrade and reshape the value proposition for carrier voice and messaging. That is the essence of the “don’t be a dumb pipe” advice.

For example, Telco 2.0 analysts argue that telcos could salvage about $80 billion of potentially lost voice and messaging revenue globally by taking a new approach to retail prices and bundles, service enablement, use of WebRTC and VoLTE, creative approaches to own brand OTT services, and a greater focus on enterprise communications.

Those efforts could slow the decline of voice and messaging revenues and allow telcos to build new communications services for both consumer and enterprise customers, many will argue.

Up to a point, that advice might produce results. But history is a stern taskmaster. Virtually nothing, in a far-easier competitive environment, “saved” long distance. Instead, the business simply was harvested.

That, in fact, is largely what service providers now do for international long distance. In some markets, such as within the boundaries of the United States, “long distance” has disappeared as a product, and is simply a feature of calling.

Some might argue that is, in the end, what will happen with carrier voice and messaging. In fact, some carriers already have moved to price the features that way. Verizon Wireless and AT&T Mobility, as part of their shared data plans, simply make unlimited domestic voice and text messaging a basic, unlimited-use feature of network access.

That doesn’t mean the end of what any service provider might do to create new products or services incorporating voice or messaging, or making those features available to third parties, for a fee.

The issue, strategically, is the balance of harvesting and investing. Some might argue a firm faced with a mature product, in decline, should invest in growing new lines of business and creating new sources of revenue, rather than “overinvesting” in a product whose revenue prospects are challenged.

It’s an eminently practical issue. Globally, telcos could lose up to $172 billion from voice and messaging revenues in five years, according to researchers at Telco 2.0.

“We expect a total decline in voice revenues between -25 percent and -46 percent on a $375 billion base between 2012 and 2018,” Telco 2.0 says.

 

To be sure, mobile voice and messaging remain growth markets in developing countries and regions.

The issue is how much can be done in developed markets, in any of the legacy markets.

Few would argue that product life cycles exist, even in telecommunications, and that new revenue sources have to be developed and created.

The issue is whether “voice and messaging” are mature products to be harvested, or can be changed into new growth products.

We should get some indications of carrier thinking as the composition of capital investment evolves over the coming decade. For the moment, the notable changes are that although service providers will spend more on most equipment segments in 2013, the exceptions are voice, broadband aggregation, and video infrastructure, according to Infonetics Research.

That does not offer definitive proof about service provider strategies, as most efforts to add value to voice and messaging are software matters, not issues of hardware investment.

Global telecom capital investment is set to grow between 2012 and 2017 in absolute terms, though remaining relatively constant in percentage terms, according to the latest forecast by Infonetics Research.

To be sure, the visible changes are at a rather fundamental level, such as decisions to invest more in mobile infrastructure than fixed infrastructure, for example.

China Telecom, for example, the largest provider of fixed-line broadband access to the Internet in China, is likely to reduce its 2014 capital investment for fixed-line broadband Internet access infrastructure by 50 percent.

The reason is a need to shift investment to new Long Term Evolution 4G networks, to catch competitor China Mobile. China Unicom might have to consider such a shift as well.

Also, investment in developing region networks will make sense, because that is where the revenue growth exists.

Global telecom carrier capex is forecast by Infonetics to grow at a two percent compound annual growth rate from 2012 to 2017, reaching US$355 billion.

Much of the spending will be driven by mobile service providers through 2017, though spending by fixed network providers might shrink, a rather direct reflection of the fact that revenue growth is coming from the mobile segment.

Asia Pacific will remain the region with the highest capex spending through at least 2017.

To be sure, global telecom capital investment generally has risen since 1984, even excluding important mobile service provider spending on spectrum assets. That would not be surprising, given the vast acceleration of telecom services globally, especially since the 1990s.

Generally speaking, overall levels of capital investment will not necessarily offer clues about where service providers are investing to revamp core voice and messaging services. In fact, capital investment might not be the key indicator.

Verizon Wireless and AT&T Mobility, in their domestic U.S. operations, already have moved to make unlimited domestic voice and text messaging an unlimited use feature of access to the mobile network. That’s a “harvest” strategy.

None of that prevents either carrier from working on other growth initiatives involving voice and messaging, though.

But the challenge remains: how much effort and investment should be put into recreating voice and text messaging?

That is a different matter than whether mobile service providers should partner with over the top app providers, work on enterprise verticals, roll out voice that works natively on LTE, or further tweak retail packaging of voice and messaging.

Realistically, it might be quite difficult to recreate carrier voice and messaging in ways that can dramatically arrest the revenue slide. At this point in time, over the top alternatives might work well enough, for their intended purposes, to permanently limit further growth of carrier services.

There still are instances where carrier voice and messaging are superior alternatives, and people will use carrier voice and messaging in those instances. What is not clear is why most people would prefer carrier versions of over the top apps, which in any case would still be “zero incremental revenue” services.