Expected Europe Consolidation Wave Causes EE to Rethink Sales

In anticipation of an expected major consolidation wave in Europe, carriers have to make decisions about whether they are buyers or sellers. In some cases, planned asset sales have been put on hold.

That is true for U.K.'s EE, which faces likely entry by AT&T into the $313 billion market, plus a Liberty Global-owned Virgin Media and a Vodafone with lots of new capital to deploy.

Deutsche Telekom and Orange of France apparently have slowed an effort to sell their 50-50 U.K. wireless venture known as EE.

In part, that is because of an expectation that the competitive situation could change in a major way, and soon, causing firms to rethink their strategies. Keeping EE intact might be useful for Orange and Deutsche Telekom in case they need to go on a buying spree of their own.

There are clear signs of change. America Movil wants to buy KPN.  Vodafone is said to be eyeing Fastweb in Italy. There is speculation that AT&T might try to buy all of Vodafone when the Verizon transaction is completed.

Vodafone is said to be weighing a purchase of Liberty Global, which only recently swallowed Virgin Media.

Telefonica is buying E-Plus in Germany.

The point is that major carriers might soon find themselves in an "eat” or “be eaten” situation.

AT&T could pay about 80 billion pounds ($124 billion) for what’s left of Vodafone, according to Robin Bienenstock, an analyst at Sanford C. Bernstein, basing her estimate on a valuation of six times earnings before interest, tax, depreciation and amortization.

AT&T has examined takeover candidates including Vodafone, U.K. mobile carrier EE (a joint venture between Deutsche Telekom and Orange), as well as parts of Spain’s Telefonica.

That might strike some as odd, given the declining amount of revenue being earned by European mobile service providers. But AT&T seems to be thinking, as does SoftBank’s Sprint, about ways to boost revenue by emphasizing fourth generation Long Term Evolution services.

Whether Vodafone is a buyer or seller, a huge rearrangement of assets now is conceivable, essentially forcing all the major players to weigh moves of their own.

The upshot could be an accelerated transformation of Europe's troubled telecom industry.

Across the European Union, there are far more than 100 mobile and fixed-line operators, owned by a jumble of more than 40 groups, according to consulting firm IDATE. That compares with just four big mobile operators in the U.S., where the cable-television and broadband business is consolidating, too. As a result, revenue and profit at many European telecoms has been falling in a stagnant economy.

The biggest turning point in the European landscape has been Telefónica SA's agreement this summer to buy the German mobile unit of Dutch telecom Royal KPN NV in a €8.55 billion ($11.4 billion) deal.

"This is the starting gun ," said Robin Bienenstock, an analyst for Bernstein Research. "The chessboard is going to reform really, really rapidly." The potential mergers could make mobile service provider operations bigger, wed fixed line networks and mobile networks and reduce the number of leading contestants in many markets.

There have been $99 billion in deals targeting European telecom companies this year, the highest figure for the same period since 2000, according to Dealogic. Nearly three-quarters of this year's deals have been for fixed-line or cable companies, the highest percentage since 2003, according to Dealogic.

Is Apple Making the Same Mistake, Again?

Apple surprised some observers, it is safe to say, by not releasing a low-cost device aimed at China and other similar markets.  

To be sure, Apple has been saying it would not do so, but many expected Apple would change its views, as it is changing its views about screen sizes for tablets (smaller) and smart phones (larger), when it earlier had insisted there was no need to change.

Right or wrong, that move suggests to some that Apple is committing a "colossal" error, choosing to maintain a "premium" niche instead of dominating the mass market.

The essence of the argument for trouble is that Apple is clinging to charging ultra-premium prices for products that are no longer ultra-premium, as well as maintaining prices that are so high Apple is priced out of the world's largest and fastest growing markets.

Some of you with long memories remember that Apple made the same decision in the 1980s, when it allowed Microsoft, with a vastly-different strategy based on ubiquity, relegated Apple to a small and niche role from which the firm never really emerged (in the PC market).

Some argue that Apple is in danger of making that same mistake again, by essentially adopting the same strategy again--a premium and small smart phone niche--rather than going for dominance globally. 

Others think Apple still has a strategy that will work. 

Apple Study: 8 easy steps to beat Microsoft (and Google) from Ouriel Ohayon

Auction Policies Should Work, Not Just "Sound Good"

There is a clear difference between policies that work, and policies that don't work, but make people feel as though "something was done."

A colloquial way of putting this is that it is important to be good, not simply to feel good, when "feeling good" does not actually fix a problem, or makes a problem worse.

Spectrum auction and other policies designed to increase competition and innovation sometimes can include clauses that apparently boost competition, but actually have no ultimate positive effect. In at least some cases, those policies to "increase competition" actually can delay the arrival of more effective competition. It's a paradox, but no less true for being so.

Auction policies sometimes contain preferential treatment clauses designed to increase competition. T-Mobile US and Sprint, for example, have argued that the larger Verizon Wireless and AT&T Wireless should not be allowed to bid on reallocated analog TV spectrum, or at least that the two smaller carriers should have some preferences in that auction, to “level the playing field” between the two smaller carriers and the two bigger carriers.

That is not an uncommon regulator approach. It often is believed that “set asides” for specific types of bidders (small businesses, disadvantaged classes of people) is good public policy.

It doesn't work, one study suggests. Restrictive or preferential bidding rules distorts prices and misallocates spectrum in ways that ultimately harm consumer welfare.

Larger carriers often have access to more capital and can build networks faster, for example. In other cases, they are able to operate any particular block of spectrum with greater efficiency, because of other spectrum holdings.

On the other hand, competition and consumer welfare tend to be boosted by reassignment of existing spectrum and the existence of a dynamic secondary market for spectrum.

For example, restrictive and preferential participation rules in place for the 1994 U.S. PCS spectrum auctions resulted in lost consumer welfare of as much as $70 billion, analysts argue.

Underfunded and unfunded business plans developed by new entrants acquiring set-aside licenses resulted in substantial amounts of spectrum sitting idle for many years.

The role of secondary markets also is instructive. Following the PCS auctions in the mid-1990s, all significant new entry into the US wireless market has been through spectrum re-purposing or the secondary market.

In the German 3G auctions in 2000, policies intended to encourage market entry were unsuccessful and resulted in a 10-year delay in the assignment of one-third of the 3G spectrum, delaying its development and the benefits consumers would have otherwise enjoyed.

In Canada and several European countries, restrictive and preferential policies intended to encourage market entry distorted the auction process and were unsuccessful in expanding the number of sustainable competitors in the marketplace.

Initial changes in the competitive landscape, attributable to restrictive auction rules, proved fleeting as market forces pushed the industry structure back to a pre-auction market structure with the same number of, or fewer, national competitors.

U.S. to Auction 10 MHz of Mobile Spectrum Now, 55 MHz More in Feb. 2014

The Federal Communications auction of 10 MHz of spectrum in the 1900 MHz band (1915-1920 MHz and 1995-2000). The move has been a bit controversial, as spectrum auctions frequently can be.

Dish and T-Mobile US had urged the FCC to delay the H Block auction, which is adjacent to spectrum Sprint already has in service.

The logic for a delay is that another planned auction of spectrum (AWS-3 M-Block) in February 2015 could be paired with the auction of the H Block spectrum (about 55 MHz worth of spectrum).

But the FCC has decided to move ahead, despite arguments that a delay might be preferable, and potentially more valuable, for T-Mobile US, Dish Network or other competing carriers.

As an old aphorism suggests, “for every public purposes there is a corresponding private interest.”

T-Mobile's LTE network now covers 180 million people in 154 markets

The T-Mobile US LTE network now covers 180 million people in 154 markets, which is perhaps notably impressive because T-Mobile US only began construction six months ago. 

The carrier first launched its LTE  in just seven markets back in March 2013. As network construction projects go, that's fast. 

On the other hand, it arguably is deceptive to show coverage maps such as this, which is "not (my emphasis) representative of LTE coverage," according to T-Mobile US itself. True the disclaimer is at the bottom of the map, so the image is not legally deceptive. It just is an effort to persuade that unfortunately is untruthful. 

Verizon Wants to Sell FiOS TV Nationwide

Verizon is having conversations with major programmers about how to bring its FiOS programming service to a national audience, delivered "over the top" of any broadband connection. 

Aside from the obvious implications for the future of online video entertainment, such a move would further decouple service providers from some traditional geographical limitations. In the past, mobile or fixed service providers could operate only in geographies where they owned spectrum, networks or franchises or licenses. 

The advent of the era of Internet Protocol and Internet-based communications breaks the link between network infrastructure and applications. So far, that mostly has manifested itself in over the top app growth.

But, in principle, streaming video can be sold over the top as well, as Netflix has so amply demonstrated. 

Such a move "out of territory" would allow Verizon to sell video entertainment to potential customers across the United States, and not only to the five million or so video accounts
Verizon presently services on its landline network.

Going over the top and out of territory would allow Verizon to sell to perhaps 130 million households. 

Kabel Deutschland Shareholders Vote to Sell to Vodafone

Kabel Deutschland shareholders have voted in favour of selling the company to Vodafone. 

The €7.7 billion deal is part of Vodafone's strategy to counter declining mobile revenues by selling quadruple play services. 

Vodafone is the largest mobile network in Germany with 32 million subscribers. Kabel Deutschland has 7.6 million cable subscribers. 

Vodafone said that the required minimum of 75 percent of Kabel shareholders had voted to accept its €87 per share offer, which includes a €2.50 dividend payment.

The deal still has to be approved by regulators. 

The acquisition illustrates the maturation of the mobile business as a driver of industry growth in Europe, and one of the strategies leading service providers will employ to maintain revenue growth. When organic growth is not possible, service providers turn to acquisitions.

How Big a Deal is the Right to Sell iPhones?

How big a deal is access to the Apple iPhone? According to one study, about 66 percent of NTT Docomo customers who signed up with another service provider did so at least in part because they wanted to use the iPhone.

That probably is a mixed blessing for mobile service providers. The potential good news is that the iPhone, and smart phones in general, might be the most tangible physical expression of the value of Internet access and mobile service more broadly.

The problem all sellers of intangible products (health care, legal advice, tax and financial consulting or communications service) encounter is that it is hard to show the value of something that is a process.

The buyer has no idea how good the experience will be until after the purchase is made. In such cases, a seller has to rely on proxies for value. Those proxies might include displayed certifications and licenses, degrees, awards, furniture, office addresses or professional attire.

Communications service providers have the same problem: there is no tangible product to evaluate in advance. How many people have you ever met who have a brand preference for one supplier’s “dial tone” over another supplier’s dial tone?

One might well argue, with some justification, that Internet access allows for much more differentiation. Speed or usage policies, as well as the specific configuration of retail offers, allow for more distinctive positioning than was possible with dial tone.

Those proxies are ways an intangible product is made “tangible.”

How does one cultivate brand preference for an intangible product? One way is to emphasize the more-tangible “wrap-around,” such as customer service experience, brand and image.

But that’s inherently hard, compared to the brand preferences people develop for personal products ranging from cars to perfumes and clothing brands and styles. One might argue the iPhone is the first tangible expression of personal affinity for a product whose value hinges on a communications service.

That helps service providers when they can sell the device. People are more likely to be “loyal to an iPhone” than to a service provider. Service providers do the best when the right to sell an iPhone is exclusive, but arguably are helped very little when every major service provider in a market has rights to sell the device.

The larger problem, though, is that “value” and “loyalty” as well as brand preference largely are transferred to the device supplier.

In many ways, that illustrates the “commodity supplier of access” problem all service providers face. Though it is not impossible, it is difficult to create a consumer mental image of “access” that is differentiated and preferred.

Google Fiber might be the first access service in quite some time that has a chance to transcend the “commodity access” problem, in part because its offer is so unique. A symmetrical one gigabit service, sold for $70 a month, is unusual. And it is Google acting as an ISP. That’s unusual as well.

Most service providers offering an access service are not so lucky.

How Mobile Payments, Minimum Wage Demands are Correlated

McDonald's is testing Isis-based mobile payments, for logical reasons. “At this time we are testing mobile payment in Salt Lake City, Utah, and Austin, Texas,” said Ofelia Casillas, media relations manager at McDonald’s, Oak Brook, Ill.

Obviously, the point is to get McDonald’s consumers to get in and out of the stores as quickly as possible.

But there is another angle, sometimes missed. Mobile payments could well become part of an intensified automation strategy for McDonald's, if wage pressures become a big new issue. 

One basic principle of economics is that prices and quantity sold are inversely related. When prices for any product get raised, demand decreases. Labor is a product like any other. So one reaction to a major increase in wage bills will be employment of less labor. Mobile payments and ordering kiosks are parts of that future strategy. 

An Illustration of How Speed Transforms Internet Markets

Though there are other issues at work, a comparison of AOL dial-up customers and Netflix customers illustrates the way that Internet access speed can affect business models. Simply, broadband enables bandwidth-intensive apps, especially video. You can see that in the growth of Netflix.

To be sure, it is a complicated change. AOL's walled garden of content fell out of favor compared to the open Internet. Also, AOL had early success because most U.S. residents were new to using the Internet, and AOL offered a simple way for people to get online. 

These days, "always on" features of the broadband approach to access (typically with Wi-Fi available) mean people do not actually have to do much of anything to "get online."

Still, you get the point: as access speeds have climbed, new apps are conceivable. 

EC to Review Telefonica, E-Plus Merger: How Many Carriers are Needed in Germany?

European Union antitrust regulators will examine deals such as the proposal by Telefonica and Royal KPN to combine their German assets, based on their impact on national markets rather than the whole EU. That deal would create a new market leader, at least ranked by subscribers.

EU regulators are already examining Vodafone Group’s 7.7 billion-euro ($10.2 billion) bid for Kabel Deutschland Holding.

Somewhat ironically, in light of EC proposals to create a single EC telecom market, the deal is being scrutinized in the context of German market competition, not in the broader context of how competition would be affected at the EC-wide level.

One issue for the German mobile market is the minimum number of service providers deemed necessary to maintain adequate levels of competition and innovation.

The Telefonica merger with KPN’s E-Plus would reduce the number of providers from four to three, a situation that the European Commission obviously will consider, though so far EC regulators say there is no "magic number "of providers” that always will encounter opposition from regulators.

Eventually, EC regulators might be more concerned about market share across the EC, where today that is less a concern.

Tablet Sales to Eclipse PCs by 2015

International Data Corporation expects tablet shipments to surpass total PC shipments (desktop plus portable PCs) in the fourth quarter of 2013.

PCs shipments are still expected to be greater than tablet shipments for the full year, but IDC forecasts tablet shipments will surpass total PC shipments on an annual basis by the end of 2015.

Smart phones will continue to ship in high volumes, surpassing 1.4 billion units in 2015 and accounting for 69% of all smart connected device shipments worldwide.

"At a time when the smart phone and tablet markets are showing early signs of saturation, the emergence of lower-priced devices will be a game-changer," said Megha Saini, IDC research analyst. Presumably Saini is referring to some developed markets, as demand is far from reaching saturation in most of the world’s markets.

"Introducing new handsets and tablet devices at cheaper price points along with special initiatives like trade-in programs from Apple and Best Buy will accelerate the upgrade cycle and expand the total addressable market overnight."

As always, price plays a huge role in adoption. IDC expects the lower-cost devices to drive interest globally.

IDC also expects to see more product substitution as larger-screen smart phones with five-inch or larger screens (phablets) start to compete with the smaller-screen tablets with screens of seven to eight inch screens.

iCharts

Will "Connected Continent" Plan Spur Infrastructure Investment, or Not?

As always is the case, not all stakeholders will be happy with the new “Connected Continent” proposal. Some policy advocates will not be pleased with the approach to network neutrality (too lenient on the service providers).

Service providers might not like the provisions that will take revenue and profit out of international calling. Some national regulators might not prefer the shift of authority to a centralized approach.

And many will continue to wonder where and how the funds to invest in next generation infrastructure will be found.

The “Connected Continent” plan, created by Vice President for the European Commission Neelie Kroes, might actually depress European service provider investment in next generation infrastructure, according to Strand Consult.

The main problem, perhaps, is that the proposal continues to favor “competition” at the expense of “investment.”

The proposal “will create price wars between operators, which will deliver lower prices for consumers in the short term, but remove incentives for operators to invest long term,” argues John Strand, Strand Consult principal.

In the near term, service providers will spend scarce capital on acquiring other service providers, not investing in infrastructure, one might argue.

Strand argues that in a newly competitive market, service providers will be forced to spend more on marketing, diverting capital that might otherwise be invested in infrastructure.

Also, if price competition heats up, profit margins and revenues will fall further, reducing the ability to invest in infrastructure.

Contrarian investors might see an opportunity there, however. One reason AT&T might be interested in getting into the tough European mobile market now is precisely the inability of other competitors to invest heavily in fourth generation infrastructure.

European Commission Announces "Connected Continent" Proposals

The European Commission’s Connected Continent plan aims to create a unified telecommunications market within the 28 member states that reduces end user costs for cross border communications but also makes it easier for service providers to gain scale in their businesses.

In part, the new proposed rules would simplify telecom regulations across the EU, giving service providers access to all 28 markets with a single authorization. The proposal also aims to loosen regulations and streamline wholesale network access procedures for service providers wanting to use an incumbent network.

While not mandating specific new roaming rate reductions, the proposal bans incoming call charges starting on July 1, 2014. That will essentially encourage service providers to offer phone plans that apply everywhere in the European Union, with no distinctions between domestic and roaming prices.

The plan also will allow customers to “decouple” their domestic calling service from their roaming calling service, using a single subscriber information module.

The proposal also prohibits companies from charging more for a fixed network intra-EU call than they do for a long-distance domestic call within the EU region.

For mobile intra-EU calls, the price could not be more than €0.19 per minute (plus VAT), lowering costs for consumers.

The proposed network neutrality rules have several elements. Blocking and throttling of Internet content and apps would be banned, giving users access to the full and open internet regardless of the cost or speed of their internet subscription.

On the other hand, service providers will be able to create and sell “specialized services” with assured quality (such as IPTV, video on demand, apps including high-resolution medical imaging, virtual operating theaters, and business-critical data-intensive cloud applications) so long as this did not interfere with the Internet speeds promised to other customers using “best effort” Internet access services.

In doing so, the EC is trying to preserve best effort Internet access without prohibiting the development of new types of managed services that actually require quality of service guarantees or features.

The proposal also would coordinate spectrum assignment across the EC region, to make it easier to provide EC-wide 4G mobile access and Wi-Fi access.

European "Single Telecom Market" Proposals Coming Soon

We are likely to learn, on about Sept. 12, 2013, in some detail, how European Community regulators want to create a more unified and single communications market within the EC region.

It isn’t yet clear, for example, how regulatory authority will work. It is not expected there will be a call to replace 28 national regulatory bodies with a single EC regulator. If for no other reason, that decision dodges a certain to be controversial issue.

The proposal is expected to take steps to elminate the difference between local calls made in-country and long distance calls made to other EC member nations. Mandated significant reductions in roaming rates appear to have been dropped from the proposal, though the proposed rules still will have the effect of lower prices for out of country calls within the EC.

“We need to extend the same formula to other areas: mobility, communications, energy, finance and e-commerce, to name but a few,” said José Manuel Durão Barroso, European Commission president.

“We will formally adopt a proposal that gives a push towards a single market for telecoms,” Barroso said. “Isn't it a paradox that we have an internal market for goods but when it comes to digital market we have 28 national markets?”

For European service providers, perhaps the biggest issue, aside from the possibility of drastically lower roaming revenues, is whether the “single market” will extend to a single market for service providers, in terms of easier ability to merge and consolidate national entities.

Many would argue that European service providers are experiencing financial difficulties because their operations are too fragmented and lack scale. In principle, a single telecom regulatory framework could clear the way for relatively rapid consolidation that would improve operator finances.

The single market principles aim to reduce complexity by creating common frameworks everywhere within the European Community nations, and allow service providers to more flexibly operate outside home markets.

The proposal also would create a network neutrality framework that some might say is not draconian. The proposal combines two elements.

ISPs would be barred from blocking and throttling lawful content.

On the other hand, the proposal allows reasonable traffic management measures to minimize the effects of temporary or exceptional network congestion. Some would say those are sensible proposals.

Significantly, the proposal also would allow ISPs to create and offer services with a defined quality of service or dedicated capacity.

Many opponents of network neutrality might find that formulation worthy of support.