UK Telecom Market On Verge of Major Consolidation

After BT began moving towards an acquisition of either Telefonica SA’s O2 or EE, the wireless carrier co-owned by Orange SA and Deutsche Telekom AG, a Vodafone reaction was virtually certain.

Vodafone arguably cannot allow BT to amass that much revenue scale and bundling capability without the ability to match future BT offers and market share, as the U.K. telecommunications market would lurch towards a two-tier structure with BT possibly able to climb up to the top of the market share standings on the basis of new product bundles, while the other providers are left to compete with product offers less broad.

The example is the U.S. market, where most consumers buy a bundle of services including high speed access, voice and video entertainment, while some also add mobile service quadruple plays. The standard market offer, in that case, becomes the bundle itself, and less the discrete product components.

Bundling also deters customer churn, a key value in zero-sum markets where one service provider gains an account mostly at the expense of another provider.

The other important driver is a change from scale to scope in the consumer services business. In the past, networks tended to support a single lead app: broadcast TV, broadcast radio, voice, multi-channel TV, paging or mobile voice. These days, Internet protocol means any network potentially can deliver any media type.

But there are several other very good reasons service providers sell bundles of services. Very simply, in a competitive market no single service drives enough revenue to justify building and operating the network.

In a competitive market, where any single service sold by any single provider might only reach share of about 20 percent to 30 percent, an expensive access network can be justified, and remain financially viable, only when the network owner can sell multiple services.

In other words, selling a single customer three or four services at $30 a month, with household share between 25 percent to 33 percent, produces about the same amount of revenue as selling a single service to 95 percent of households.

There are other reasons for bundling. Service providers have found that bundling reduces customer churn. In some cases, a triple play or quadruple play customer exhibits churn as much as 2.6 times lower than single service customers.

Still, beyond any grand strategic considerations, such as gaining a facilities-based platform for competition in new markets, in-market consolidation is driven by a simple and growing problem.

It is becoming increasingly difficult for any service provider to make reasonable profits in its classic lines of business, virtually all of which face competition from new suppliers and new product substitutes. 

So integrating fixed and mobile services is less about synergies between the services and networks--though some synergies undeniably exist--and more about the sheer need to replace lost revenues with new replacement sources.

EC Wants to Raise $393 Billion Investment Fund for Instructure, Including High Speed Access

How much leverage can the European Commission gain from a €21 billion loan fund for infrastructure projects? The answer to that question is the key to a new proposal by EC President Jean-Claudaine Juncker to spark total investment of about €315 billion ($393 billion) in an effort to ignite economic growth.

At its heart is a new €21 billion fund that would give the European Investment Bank the ability to loan a multiple of that amount.

The new European Fund for Strategic Investments (EFSI) would be a partnership with the European Investment Bank, receiving € 16 billion from the EU budget, combined with € 5 billion committed by the EIB.

Key to the claim of an eventual lending capability of $393 billion is a multiplier effect of 15 on the initial funding. In other words, the availability of the “seed funds” backed by the EC would encourage other private lenders to contribute up to €252 billion in private loans.

The effort will strike some as reminiscent of the search for “shovel ready” projects touted by the U.S. White House when it launched its “stimulus” program in 2009.

The problem was that the $830 billion stimulus plan simply did not find such “shovel ready” infrastructure projects able to begin actual construction immediately.  The new EC plan likewise expects to generate all the new investment within three years.

The Fund will finance strategic projects across the EU in infrastructure such as broadband, energy and transport; education, research and innovation; renewable energy and energy efficiency.

To be sure, pumping that much money into an economy will have some effect. How much is the issue.

A 2014 study by the U.S. Congressional Budget Office found the “American Recovery Act”  raised real (inflation-adjusted) gross domestic product by between 0.1 percent and 0.4 percent.

The ARA lowered the unemployment rate by an amount between a small fraction of a percentage point and 0.3 percentage points.

The stimulus plan  increased the number of people employed by between 0.1 million and 0.5 million and increased the number of full-time-equivalent jobs by 0.1 million to 0.5 million.

According to European Commission estimates, the  investment plan has the potential to

add € 330 to € 410 billion to the EU's GDP and create one to 1.3 million new jobs in the coming

three years.

U.S. experience suggests those goals will not be met.

Hard to Say Whether LTE Boosts Revenue for Mobile Operators

Long Term Evolution, in some cases, is boosting mobile service provider revenues in a direct way, as was hoped. In many other cases, LTE provides indirect revenue value, even when 4G prices are not formally higher than 3G data access prices.

Bharti Airtel, for example, now has started offering an LTE data plan which is even cheaper than the equivalent 3G plan.

But South Korean operators are generating significantly increased revenue from their 4G customers. EE, in the United Kingdom, likewise seems to be generating incremental recurring revenue from 4G services.

In France, Free Mobile introduced a 4G offering at no additional charge to its existing 3G service, forcing rivals to lower their 4G tariffs.

3UK is allowing customers to migrate to 4G without switching from their 3G contracts and will continue to offer unlimited data allowances. Telefonica Movistar in Spain also is offering 4G at the same price as 3G.

Of 65 LTE mobile operators surveyed by GSMA, almost half of them have used the deployment of LTE as an opportunity to introduce a new form of pricing for mobile broadband services.

For many of those mobile operators, differentiation drives the incremental revenue. That is particularly the case when unlimited data plans are replaced by new offers where speed tiers as well as volume-based data allowances are available for purchase.

The speed-based tariffs are most common in Europe, where 90 percent of operators surveyed offer them. Such tariffs are less popular across the Middle East, Asia Pacific and Africa, and least prevalent in North and Latin America where they are yet to emerge.

Bharti Airtel’s move suggests there will be pricing pressure in the Indian market. As elsewhere, though, one indirect benefit and advantage of encouraging LTE usage is that the cost of supplying Internet access is lower with 4G than 3G. For that reason, Bharti Airtel gains benefits when shifting its heaviest users to 4G, and off the 3G network.

Some might ask how 4G deployment will affect the financial return from new 3G networks still being built in India, as both networks represent new mobile Internet access services, and 4G might not be priced higher than 3G.

How Long Term Evolution affects use of Wi-Fi is not completely clear, either. Some studies suggest LTE users reduce use of Wi-Fi while other studies suggest use of Wi-Fi increases. Say

EU Reconsiders Network Neutrality

One of the problems with  “network neutrality” continues to  be that nobody agrees about what we are talking about. Now there is a potential change in European Union policies regarding “network neutrality” that essentially recognizes that it cannot be defined in a way that all 28 EU members would accept.

A new document issued by the EU president in fact suggests the “removal of the definitions of ‘net neutrality’ and ‘specialized services’” from any future policy documents.

The proposal suggests that, instead of defining network neutrality, policies only point to the objectives of net neutrality. It isn’t clear how a government agency can create or enforce a policy about a practice that is not defined, some might argue.

The inherent difficulty of the subject is further illustrated by the handling of traffic management principles--which always mean the potential for managing traffic flows to protect overall network performance under conditions of congestion. “Clear principles for traffic management in general” are required, the document argues.

That is all well and good, with the obvious caveat that clear policies will be hard, but not impossible, to craft. Especially contentious will be proposed rules about Internet service providers being required to “maintain sufficient network capacity for the Internet access service regardless of other services also delivered over the same access.”

The example given in the document is sufficient bandwidth to handle simultaneous use of email by one user while another watches streaming video.

In principle, that sounds simple enough, but requires assumptions about what apps, with what bandwidth and latency characteristics, are used at any location, by what number of devices and users, at any particular time, in an environment where end user demand changes continually.

The problem is that best effort Internet access is, by definition, conditional, a matter of  statistics, since the service is shared by many users.

And that means Internet service providers essentially have to guess at peak hour demand, in the same way that voice providers had to estimate peak demand. Maintaining sufficient network capacity” therefore requires quantifying estimated demand at peak hour. Sometimes planners are going to guess wrong.

Also, the document allows for transparent, non-discriminatory and proportionate traffic management that is not anti-competitive. Some might argue that is among the fundamental problems with network neutrality: networks have to be managed, which means sometimes it is necessary to groom (“throttle or block”) traffic, or simply let it all slow down.

Of course that should happen in a way that is not anti-competitive. And there are legal remedies for anti-competitive behavior. But it often does not make sense to groom traffic in a “non-discriminatory” way.

Video and voice are highly intolerant of packet delay. When networks get congested, better user experience is obtained if those types of apps--video and voice--are given priority, while other apps more tolerant of delay can be delayed. Some strong forms of network neutrality make that illegal.

There is a reason “network neutrality” is so hard to understand. Defining it is difficult. And defining it is difficult because we are asked to suspend thinking about network congestion issues under conditions of scarcity.

And make no mistake: networks are risky, expensive bets, so  they will remain relatively scarce. No network can be built for infinite demand, thus necessitating hard choices about capacity. Congested networks must be managed. The only issue is how they are managed.

"Don't Worry" Said the Spider to the Fly

"'Will you walk into my parlor?' said the spider to the fly, in the poem by Mary Howitt. Will you carry me across the river, the scorpion asked the frog. You know the stories: the spider eats the fly; the scorpion stings the frog.

Google’s Project Loon, intended to supply Internet access is not competitive with other Internet service provider businesses, some might claim.

“Loon isn’t disruptive,” said Mohammad Gawdat, Google’s X VP said. “This is outside the infrastructure you are currently building.”

But Google, he said, plans to launch Project Loon commercially in 2016, “covering every square inch of the planet.”

Telefónica Weighs Major Investment in BT

source: Deadzones.com

Telefónica appears to be angling for a deal giving it 20 percent ownership of BT, while returning O2, the asset formerly representing BT’s mobile business back to BT.

BT got out of the mobile business in 2002, which BT had started in 1985, as a short term measure to shed debt. BT was not the only firm to be forced to do so.  

One of the most surprising telecom asset sales of the past couple of decades would seem to be AT&T’s sale of its cable TV assets in 2002 after assembling them in 1998 through 2000, and the spin off of its mobile assets in 2001 (after acquiring the McCaw Cellular business in 1994).

Given the current thinking about the strategic value of high speed access, the dominance of cable-based high speed access, mobility as the growth driver within the broad telecommunications business, and the contribution video entertainment services are making as part of the triple play bundle sold by telcos, the asset dispositions by AT&T an BT might appear to have been untimely, if necessary at the time.

Now there are rumors BT will reacquire O2, its former mobile assets, as AT&T, in one sense,  later bought its way back into the mobile business as well.

It is a somewhat convoluted story, but the spun off AT&T mobile assets were acquired by Cingular Wireless, a joint venture between SBC and BellSouth.  

After SBC Corp. purchased the former AT&T, and then bought BellSouth, its former partner in Cingular Wireless, Cingular was rebranded AT&T Mobility.

So what’s the story? Sometimes grand strategy can bump into tactical reality. The sudden collapse of the telecom bubble in 2001 was one of those confluences. Both AT&T and BT had to shed assets to reduce debt, and larger strategy had to wait.

source: Visual Insights

So barely two to three years after each firm made big decisions to get into or out of a line of business, each firm reversed course. BT became a mobile virtual network operator in the United Kingdom three years after selling its mobile assets.

AT&T made the bigger shift, shedding mobile and also fixed network assets it had intended to use to underpin its voice and high speed access strategies. A few years later, AT&T itself was completely sold to SBC Corp.

But sometimes larger strategy can drive tactical decisions. Telefonica appears to be angling for a broader alliance with BT to bulk up in anticipation of higher competition in the European mobile market. That creates a willing seller to match a willing buyer.

All of that makes sense, though it is ironic that BT and AT&T would divest, and then reacquire, core mobile assets that today drive, or will drive, revenue growth for both firms.

 

LTE: A Race Nobody "Wins"

Some might argue it is a waste of much time to argue about which region or nation is "ahead" or "behind" on some measure of communications usage, performance or investment. The reason is that the metrics always change, and that there are multiple relevant metrics.

There is, in other words, no sustainable advantage. 

One often hears it said that "the United States is behind Europe on high speed access speeds and prices." It depends on whether one compares the plans people actually buy, for example, no matter what existing plans are offered. 

It does not matter what the typical lowest, median or most-expensive plans actually are, if most people do not buy stand-alone high speed access plans, as is the case in the U.S. market, where most buy triple-play packages. 

Among the other issues are variations in national prices for all products and services. On a percent of monthly income, or yearly income basis, U.S. high speed access costs as little, or less, than similar plans in Europe or elsewhere. 

There are anomalies: EU consumers pay less per month than U.S. consumers for mobile wireless services, but U.S. consumers use five times more voiceminutes and twice as much data, according to the GSMA.

So it matters whether one measures price only, or price-per-bit, or price-per-call, which related price to quantity. In the area of voice calls, U.S. consumers pay 333 percent less per minute of use than do EC customers.

But measured as percentage of household income, U.S. prices actually are lower than in Europe, even though the conventional wisdom and studies tend to suggest the opposite is true.

When converting for purchasing power parity, posted retail prices in the United States rank about 43rd globally, in terms of cost, behind Columbia and ahead of Greece. Keep in mind that tells you something relevant only if most people actually buy particular plans, whether they are low-cost or high-cost plans.

Cost as a percentage of household income runs less than two percent in developed nations, as a rule. So the actual cost for U.S. or EC consumers is about the same. 

Also, which index one chooses also makes a huge difference. Measuring performance, price or availability and adoption of Long Term Evolution, for example, results in different "leaders" than measuring fixed network performance, price and availability. 

source: Wall Street Journal

U.S. Mobile Spectrum Prices Quadruple Since 2006

source: Wall Street Journal

U.S. mobile spectrum prices have quadrupled since 2006, one sign of the growing need for mobile data resources. In 2006, prices were 56 cents per potential customer (MHzPop). The current auction for AWS-3 mobile spectrum already has reached levels of $2.10 per "MHzPop" (price of one megahertz of bandwidth per potential customer).

The price per MHzPop is derived by multiplying the number of available megahertz of bandwidth covered by a license by the number of people in the area covered by the license.

If a license of 15.0 MHz reached a million people, with a bid price of $11.4 million, the price per MHzPop is $11,400,000 divided by (1,000,000 people x 15 MHz), or 76 cents per MHzPop.

To put the current bids into perspective, the $34 billion staked so far represents about a year’s worth of capital investment by AT&T Mobility, Verizon Wireless, T-Mobile US and Sprint, put together.

So far, one can only speculate about why prices have been so robust, as the identities of bidders are secret. 

Most had expected more modest prices, as AT&T and Verizon were expected to be the leading buyers, while Sprint said it would not bid at all, and T-Mobile US had particular needs in Chicago, but arguably could afford not to engage in a bidding war elsewhere. 

Most speculation centers on the presence of a third unexpected bidder in the major markets, however. 

Beyond that possibility, the robustness of the bids might indicate concern about the timing of anticipated auctions of TV spectrum, or the amount of capacity that might be made available. 

There are other ways to acquire spectrum, but some of those paths are closed to AT&T and Verizon. Since it appears impossible for either firm to acquire Sprint or T-Mobile US, buying another mobile company, to get its spectrum, is off the table.

There might be some small opportunities for either AT&T or Verizon to acquire regional assets, but nothing that immediately adds national scale, with a few exceptions. Dish Network has more than 50 MHz that could be sold, if Dish does not decide to move ahead and become a mobile service provider in its own right.

There are some other potential assets (Lightsquared and Globalstar), plus possible future shared spectrum assets that are likely to be made available, but none are available as immediately or are as useful, as the AWS-3 spectrum, one might argue. 

Source: Daily Wireless

Most observers think a purchase of Dish Network spectrum by AT&T or Verizon would not be blocked, but it is unclear whether Dish would sell at a price either firm might be willing to pay. 

For AT&T and Verizon, the most certain path is to acquire spectrum now, as the other options are uncertain. 

Also, Dish Network has a vested interest in pushing for high AWS-3 auction prices because higher prices will enhance the valuation of similar assets Dish purchased earlier in 2014, boosting Dish equity value. 

If there is uncertainty about the amount of new capacity made available by future auctions, or its possible availability, bidding now in the only certain auction might take on more importance. 

Zero Rating is a Normal Part of Content Services, on Internet, or Not

Ironically, zero rating of Internet apps--opposed by some because it favors some apps over others--is a standard practice in other parts of the media and content universe. Consider newspapers, magazines, broadcast television and broadcast radio, which are zero rated.

Some argue zero rating is unfair because it favors some apps over others. One could make exactly the same argument about TV and radio stations, newspapers, books or magazines. Ownership of broadcasting licenses, or simply editorial discretion, favors some content providers over others.

How regulation of Internet access fosters or hinders application and software innovation is a legitimate policy concern. But there are huge private financial interests intrinsic to the policy concerns.

Zero rating is about revenue models, for example. Many app suppliers subsidize content consumption by selling advertising, and not charging end users directly. Zero rating is another form of doing that, especially where an app provider and a specific Internet access provider have a business arrangement where the app supplier pays the access provider for data consumption.

The point is that “non-neutral” pricing and availability are a fundamental part of the content delivery business. And much of the Internet’s top activities are about content products.

Analyst John Strand points out that network neutrality rules in the Netherlands have, in one important instance, not lead to a flowering of new apps from new providers. Instead, Netflix has grown from zero consumption of Internet capacity to 20 percent of all downstream network capacity almost immediately.

“Neutrality” rules do not, in other words, prevent highly-popular or large content providers from gaining dominance in a market. Neither will an absence of zero rating rules prevent markets from operating, either.

U.S. Cable TV Companies Gain 83% of Net High Speed Access Customers

The largest U.S. cable TV companies accounted for 83 percent of net high speed access  additions in the third quarter of 2014, continuing a trend that has been in place for some time.

Of some 700,000 net new subscribers, cable TV companies added 580,000 net new customers, according to Leichtman Research Group.

The largest U.S.  telephone companies added about 120,000 net high speed access subscribers in the third quarter of 2014, a figure complicated by customers adding fiber connections and dropping all-copper digital subscriber line connections.  

Those figures are based on tracking of performance by the 17 largest U.S. cable TV and telephone companies that represent about 94 percent of all subscribers in the market.

Those suppliers now account for 86.6 million subscribers, with cable companies having over 51.2 million broadband subscribers, and top telephone companies having nearly 35.4 million subscribers.

The telco performance requires some explanation. Where copper facilities have not been upgraded with optical fiber (either “to the home” or “to the neighborhood”), cable providers arguably are taking share because the cable services offer faster speeds and roughly equivalent prices.

Where telcos offer upgraded service using fiber to neighborhood or fiber to home, DSL losses tend to be balanced by equivalent gains in fiber-enabled high speed access. Also, the largest telcos are adding net subscribers, while smaller telcos generally are losing customers.

Also, in some areas, telcos might have made deliberate decisions to lose share rather than upgrade networks. That might be the case either because the expected return on invested capital is higher if investment goes to mobile facilities, or because the actual business case for an upgrade provides a negative or very-low financial return.

Over the past year, there were about 2,930,000 net broadband adds, compared to about 2,540,000 over the prior year, and 2,925,000 two years ago, Leichtman Research Group says.

Broadband Internet	Subscribers at End of 3Q 2014	Net Adds in 3Q 2014
Cable Companies
Comcast	21,586,000	315,000
Time Warner	12,073,000	108,000
Charter	4,956,000	106,000
Cablevision	2,756,000	(23,000)
Suddenlink	1,135,500	32,200
Mediacom	997,000	10,000
WOW (WideOpenWest)*	729,700	-
Cable ONE	486,142	3,417
Other Major Private Cable Companies**	6,505,000	30,000
Total Top Cable	51,224,342	581,617
Telephone Companies
AT&T	16,486,000	38,000
Verizon	9,146,000	69,000
CenturyLink	6,063,000	8,000
Frontier^	1,922,000	21,500
Windstream	1,142,000	(11,800)
FairPoint	329,494	(3,927)
Cincinnati Bell	270,500	200
Total Top Telephone Companies	35,358,994	120,973
Total Broadband	85,583,336	702,590

Sources: The Companies and Leichtman Research Group, Inc.