Big Telecom Horizontal Mega-Mergers Likely Would Not be Approved, Hope Notwithstanding

There is giddiness in some quarters about big merger prospects in the U.S. telecom market under a new federal administration. Some of that optimism is realistic, as a reasonable person would expect at least some amount of regulatory rollback. On the other hand, some of the touted or hoped for deals seem to so badly violate a basic antitrust formula related to industry concentration that the horizontal mergers (providers in the same industry segments merging) remain unthinkable.

One can argue that the rules will be changed, and that antitrust tests will shift. If so, the

Herfindahl-Hirschman index (HHI), a commonly accepted measure of market concentration, will have to be discarded. Lots of things might change. But some of us would guess that the HHI will not be made irrelevant to big merger reviews. And by the HHI tests, nearly every horizontal mega-merger touted (Comcast-Verizon, Sprint with T-Mobile US, Comcast with Charter Communications) would so badly fail the HHI antitrust screen that the mergers would fail to be approved.

Hope, as they say, is not a strategy. Most who tout such mega-mergers undoubtedly know the odds of HHI-busting mega-mergers are slim to non-existent, but might hope to shape the climate for other deals.

The HHI is calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers, and can range from close to zero to 10,000. The U.S. Department of Justice uses the HHI for evaluating potential mergers issues.

The U.S. Department of Justice considers a market with an HHI of less than 1,500 to be a competitive marketplace, an HHI of 1,500 to 2,500 to be a moderately concentrated marketplace, and an HHI of 2,500 or greater to be a highly concentrated marketplace. Clearly, all the horizontal mega-mergers now floated would so grossly skew toward the higher range as to make the combinations untenable, in antitrust circles.

As a general rule, mergers that increase the HHI by more than 200 points in highly concentrated markets raise antitrust concerns, as they are assumed to enhance market power under the section 5.3 of the Horizontal Merger Guidelines jointly issued by the department and the Federal Trade Commission.

So look at one obvious generic example.

Consider a “hypothetical”  industry segment with four total firms, where the market leader has 40 percent share, provider number two has 30 percent share, the number three provider has 15 percent share and the fourth provider also has 15 percent share.

The HHI for that market (HHI = 40^2 + 30^2 + 15^2 + 15^2 = 1,600 + 900 + 225 + 225) yields an HHI score of 2,950, a level already deemed ‘highly concentrated.”

That hypothetical example roughly corresponds to the U.S. mobile market. The application to the fixed network segment is a bit more complicated, but that market also would be deemed highly concentrated, albeit on the lower ranges of that determination, as is the case for the U.S. mobile market.

The fixed network internet access provider market and fixed network communications markets tend to exhibit the “hypothetical” highly-concentrated markets.

So unless HHI, used globally as a test of market concentration, is ignored, the big horizontal mega-mergers are almost certainly precluded.

source: Sizlopedia

Zimbabwe Rolls Back New "Higher Price" Rules for Mobile Voice and Data

Raising minimum prices can sometimes appear a logical policy to protect a domestic industry of any type. POTRAZ, the Zimbabwe telecom regulator was set to establish new minimum prices for all voice and data services provided by Zimbabwe’s mobile network operators in January 2017, and now has reversed that decision.

Minimum prices, viewed as a way of protecting telcos from competition and protecting mobile operator revenues,, would have created a minimum  12 cents per minute rate for voice services and two cents per MB for data usage.

Such policies likely are ineffective long term. Many regulators have banned use of VoIP, for example, but that does not seem to have worked, longer term, in any market where it has been attempted.

So far, it arguably has not been possible to “protect” incumbent communications service providers from the effects of the internet by using such protectionist measures. It might be argued that such measures allow incumbents more time to adjust business models, however.

Such “keep prices high” measures also conflict with other goals, such as allowing consumers to use more communications apps and services by lowering the price of such usage.

5G to Create $500 Billion in U.S GDP Over 7 Years?

5G networks could create up to three million jobs and add approximately $500 billion to U.S. GDP through direct and indirect potential benefits, while anchoring the development of smart cities initiatives, according to report authored by Accenture, commissioned by CTIA, predicts.

Anchoring those benefits are direct investment by mobile operators of perhaps $275 billion nationwide over seven years to create the networks, Accenture predicts.

Job impact includes 350,000 new construction jobs and 850,000 other jobs in the United States created by network suppliers and other partners over a seven-year period of network build-out.

The multiplier effects could lead to an additional 2.2 million jobs in communities across the country, creating approximately $420 billion in annual GDP.

Accenture believes 5G also will potentially supply high-speed internet access to about five percent of U.S. residents who currently do not have access. That assumption is directly based on 5G being a direct substitute for fixed network connections.

If faster Internet connections allow users to utilize video applications for telecommuting, or participate in e-learning courses that give them additional skill sets or certifications, creating a more competitive workforce in different localities, that would, in turn, attract higher-paying jobs to these communities.

So If localities embrace 5G, and citizens who are not already online become adopters, an additional $90 billion in GDP could result, with 870,000 new jobs..

Communities of all sizes are likely to see jobs created. Small to medium-sized cities with a population of 30,000 to 100,000 could see 300 to 1,000 jobs created. In larger cities like Chicago, we could see as many as 90,000 jobs created.

“5G-powered smart city solutions applied to the management of vehicle traffic and electrical grids alone could produce an estimate of $160 billion in benefits and savings for local communities and their residents,”  These 5G attributes will enable cities to reduce commute times, improve public safety  said Tejas Rao, Accenture North America practice managing director.

The attributes of 5G that will benefit smart cities include higher speeds, more connections, wireless connectivity in unprecedented locations (street lights to sewer holes) quicker, more adaptive response times that support time-sensitive applications.

Ultra-low-power connections, such as sensors for leak detection in water mains, also will e key, since the replacement cycle is directly related to battery life, Accenture argues..

Smart Grid. 5G technology will help unleash the next wave of smart grid innovations. Across the country, those benefits could be as high as $2 trillion dollars over 20 years By allowing many unconnected, energy-consuming devices to be integrated into the grid through low-cost 5G connections, 5G enables these devices to be more accurately monitored to support better forecasting of energy needs.

Also, by connecting these energy-consuming devices using a smart grid, demand-side management will be further enhanced to support load balancing, helping reduce electricity peaks and ultimately reduce energy costs.

By automatically dimming public lighting when no pedestrians or vehicles are present, smart lighting can save power and reduce light pollution while still keeping neighborhoods safe. For example, San Diego believes it will save an estimated $1.9 million annually through the installation of smart  street lights. Across the U.S., the potential savings from this approach are estimated to be more than $1 billion per year, Accenture says.

Reduced traffic congestion of 40 percent, enabled by vehicle-to-vehicle communications, could save drivers and enterprises in medium-sized cities approximately $100 million annually. Smart parking could boost urban parking revenue by 27 percent.

Verizon 750-Mbps Symmetrical Access Will Still be About the Bundle

Verizon’s new 750-Mbps symmetrical internet access is going to illustrate the importance of retail packaging in the internet access business. Some might argue that the upgrade, while significant, still leaves Verizon trailing other offers by gigabit providers such as Comcast, Google Fiber, AT&T or other independent internet service providers.

Some might argue the potential impact is significant, since the bulk of activity is likely to happen around all triple-play offers sold by Verizon, not just the internet access product line. One of the lessons we seem to have learned in the still-early days of gigabit internet access is that such offers actually stimulate upgrades of the less-capacious tiers of service. In other words, the main revenue and subscriber impact of a new gigabit offer is likely to be higher sales of products offering less raw speed. Most consumers do not buy the highest tier of service.  

The other important issue is that most U.S. consumers buy bundles of various sorts. So the important upside is not sales of stand-alone internet access services, but sales of bundles (triple play or dual play).

Verizon sells what many would consider value-rich bundles that vary largely, but not completely, vary by headline speed. And while most consumers likely will find any of the lesser-speed packages fully functional, Verizon makes purchase of a full triple-play bundle, at any speed tier, a value-laden pick. So it will be with the symmetrical 750-Mbps

Priced for consumers at $149.99 a month for standalone service and $169.99 a month for a triple-play bundle with TV and landline phone voice service, the packaging likely creates a new way of establishing value.

The price differential between internet-only service and the triple-play bundle is just $20 a month. Without question, the triple-play bundle offers much higher value, compared to buying 750-Mbps on a stand alone basis. Verizon takes the same approach for its other packages, as well.

To be sure, consumers will be evaluating the new offer carefully, as Verizon currently is running a triple play offer including symmetrical internet access at 150 Mbps, TV, and home phone all for $80 a month for the first year, with or without contract. Contract customers pay $85 a month for the second year.

Verizon also sells a $50 a month double play including local TV and symmetrical 50 Mbps  internet. Some would argue that those price points and included services represent a rather-significant amount of value for the price.

By way of contrast, it is easy to pay $80 or more per month to buy a single service such as DirecTV, or $130 for a dual-play asymmetrical internet package with downstream speeds of 100 Mbps. For perhaps $150 a month a consumer can buy a triple-play package (asymmetrical internet) with reasonable speeds.

Initially, the symmetrical 750-Mbps service will be available to about seven million Verizon customers in greater New York City, northern New Jersey, Philadelphia and Richmond, with more markets to follow in 2017, Verizon says.

For a firm that always touted the superiority of its network, the emergence of gigabit offers from Comcast, Google Fiber, AT&T and other independent ISPs is a challenge, as those offers undermine Verizon’s “best network” positioning. So it always was inevitable that Verizon would change its offers.

Now the issue is how the new offer encourages new customers to buy Verizon services, and what percentage of existing customers will see the top-end offer as worth buying.

Cable TV operators, the leading U.S. internet service providers, cannot, at present offer such symmetrical speeds, so several segments of the customer base will see clear advantage for the new Verizon offers.

You might argue that the primary value will be for consumers with high uploading requirements. But the biggest single segment of the audience are consumers who want a triple-play bundle (or even an “internet-plus-linear video” bundle and are willing to add fixed network voice if it doesn’t cost much) for a reasonable price.

Concerns about About Need for 5G Bandwidth are Substantaily Correct; Also Irrelevant

As often happens, important new technologies and products have a “hype cycle,” where high expectations then encounter fatigue, and only later is the value obvious. So it is not surprising that some are skeptical about 5G.

To be sure, there also is a certain amount of what amounts to posturing, as always happens. Firms and countries that fear they will not be able to move as fast have good reasons to downplay the importance of early 5G deployments. Other firms, in a position to do so, obviously will tout their leadership.

As a matter of industrial policy, rightly or wrongly, policymakers also see potential “leadership” in various industries is seen as contingent on early leadership in 5G deployment.

There are some obvious challenges, especially related to the capital cost of creating a much-denser network, with more-sophisticated cell sites, to support the strategic millimeter-wave spectrum that 5G will bring, in huge amounts. Aside from the new investments in platform, 5G is going to require smaller cells than has been possible for 2G, 3G and 4G. The reason is physics: millimeter wave signals do not travel as far, and do not penetrate obstacles such as glass and concrete.

One recent study by Rethink Research, for example, suggests that the obstacles range from the typical (sites) and site approvals to backhaul. But there are lot of issues. And that refers only to the physical challenge of creating the 5G access network. Ultimately more challenging is the business model for 5G.

Specifically, will 5G actually lead to creation of huge new businesses, and revenue streams, that not only justify building 5G, but also are substantial enough to offset legacy revenue source declines. In a nutshell, the key issue is that revenue from sales of services to human beings will be under pressure. The big hope is that new services to support enterprise applications will be huge new drivers of revenue and growth.

One can argue that human beings, as consumers do not “need” 5G bandwidth. That is substantially correct. But bandwidth is not the issue. Aside from latency performance, and the changes in core networks (virtualization), the paramount issue is whether 5G creates a platform for new machine-to-machine services.

source: Rethink Research (chart shows perceived issues on a base of 75 respondents)

Verizon Upgrades to 750-MHz Internet Access, "Everywhere" FiOS is Available

There is no such thing as “sustainable advantage” in the broad access business. Consider that

Verizon finally will be upgrading its fixed network internet access speed to symmetrical 750-Mbps service, offering what will be seen by some as an important marketing advantage against cable TV operators, Verizon’s primary competition.

Cable TV operators, the leading U.S. internet service providers, cannot, at present offer such symmetrical speeds, so several segments of the customer base will see clear advantage for the new Verizon offers.

You might argue that the primary value will be for consumers with high uploading requirements. But the biggest single segment of the audience are consumers who want a triple-play bundle (or even an “internet-plus-linear video” bundle and are willing to add fixed network voice if it doesn’t cost much) for a reasonable price.

Priced for consumers at $149.99 a month for standalone service and $169.99 a month for a triple-play bundle with TV and landline phone voice service, the packaging likely creates a new way of establishing value.

The price differential between internet-only service and the triple-play bundle is just $20 a month. Without question, the triple-play bundle offers much higher value, compared to buying 750-Mbps on a stand alone basis.

To be sure, consumers will be evaluating the new offer carefully, as Verizon currently is running a triple play offer including symmetrical internet access at 150 Mbps, TV, and home phone all for $80 a month for the first year, with or without contract. Contract customers pay $85 a month for the second year.

Verizon also sells a $50 a month double play including local TV and symmetrical 50 Mbps  internet. Some would argue that those price points and included services represent a rather-significant amount of value for the price.

By way of contrast, it is easy to pay $80 or more per month to buy a single service such as DirecTV, or $130 for a dual-play asymmetrical internet package with downstream speeds of 100 Mbps. For perhaps $150 a month a consumer can buy a triple-play package (asymmetrical internet) with reasonable speeds.

Initially, the symmetrical 750-Mbps service will be available to about seven million Verizon customers in greater New York City, northern New Jersey, Philadelphia and Richmond, with more markets to follow in 2017, Verizon says.

For a firm that always touted the superiority of its network, the emergence of gigabit offers from Comcast, Google Fiber, AT&T and other independent ISPs is a challenge, as those offers undermine Verizon’s “best network” positioning. So it always was inevitable that Verizon would change its offers.

Now the issue is how the new offer encourages new customers to buy Verizon services, and what percentage of existing customers will see the top-end offer as worth buying.

Rural Markets Remain Best Niche for Municipal Broadband

Generally speaking, specialists occupy niches in the telecom business that tier one suppliers find difficult to address. Value added resellers in the small business information technology space provides one example. Metro fiber access or transport providers provide other examples. Culture or language focused mobile virtual network operators also do so. Telecom cooperatives, independent rural telcos and municipal internet access providers provide other examples of niches.

For the most part, municipal ISPs and triple-play providers operate in small community niches where either the local telco is capital constrained. Generally speaking, cable TV companies manage to compete against municipal providers better than telcos.

In Opelika, Ala., Opelika Power Services serves 11,000 households with a triple-play services that has about 30 percent market share. Loma Linda Connected Community Program operates in a California community of 9,000 households and has about 1600 customers, representing market share of about 18 percent.

The Vernon Gas & Electric Department Fiber Optic Division reaches about 31 households in Vernon, Calif. It is hard to see how that ever produces much revenue, and scant profit, if any.

NextLight, serving Longmont, Colo., selling gigabit internet access for $50 a month to some potential 33,400 homes, claims to have gotten take rates  of 56 percent, extremely high for any overbuilder. The caveat is that NextLight sells both voice and internet access, so it is not clear whether the 56-percent take rate means homes buying at least one service, or the total number of units sold, divided by homes passed.

OptiLink serves Dalton, Ga., with a triple play service, and some argue OptiLink has take rates as high as 70 percent, having been in operation for more than a decade. It never is completely clear what “take rate” means, in this context, as OptiLink does not disclose its take rate, or how it measures.

Oftentimes, take rates are measured in terms of “services purchased” rather than “account homes.” In other words, a take rate of 70 percent could mean 23 percent of homes buy a triple play or that 70 percent of homes buy at least one service.

In Bellvue, Iowa iVue, the internet and video provider owned by the municipal utility, passes 966 homes. The key point is that these municipal ISPs mostly operate in rural and other hard-to-reach areas where neither the local telo or cable TV company has been willing to invest in higher-speed internet access or more-robust video services.

Google Fiber’s recent experience demonstrates how much harder the business model might be in larger cities where cable TV and telco providers are willing to invest.

Though many are hopeful that these experiences can be replicated more widely, the business model seems to remain a challenge, as few overbuilders in major markets are able to get enough market share, and sustain that share, to successfully challenge cable TV providers, the market leaders in most areas. It might arguably be easier to displace a local telco, as possibly has happened in a few instances.

Still, so far, no independent ISP has been able to displace either a cable company or a telco in a major market.

Public Cloud Spending Accelerates

Though software as a service remains the biggest single segment of the cloud computing market, infrastructure as a service might have the highest growth rates.

If one counts both hardware and software spending to support cloud computing, plus actual services sold to retail customers, the cloud computing industry generated $148 billion of revenues between August 2015 and September 2016, growing by 25 percent, year over year.

According to Synergy Research Group, that period was the first when industry revenues were generated more from actual cloud computing services than spending to create that capability.

In early 2017, cloud service markets now are growing three times faster than cloud infrastructure hardware and software investments. Part of the reason for that is that most spending on private cloud services involves enterprises buying and deploying their own facilities.

From the fourth quarter of 2015 to the third quarter of 2016 total industry spending on hardware and software to build cloud infrastructure exceeded $65 billion, with spend on private clouds accounting for over half of the total spend.

Investments in infrastructure by cloud service providers helped them to generate almost $30 billion in revenues from cloud infrastructure services (IaaS, PaaS, hosted private cloud services) and over $40 billion from enterprise SaaS.

source: Synergy Research

source: Software Strategies

MPLS Approaching Maturity?

It is not yet clear whether developing software-defined wide area networks (SD-WAN) will represent the next generation data network, displacing MPLS, but that is a logical argument for enterprise branch network connections.

Global enterprise spending on WAN business services represents about $40 billion in annual spending.

Included in that bucket are MPLS virtual private networks (VPNs), virtual LANs, Ethernet connections, digital subscriber line, cable TV and LTE connections as well. The arguments for using SD WANs, in place of MPLS, is that recurring costs are lower, while provisioning intervals potentially are much better.

To be sure, MPLS prices are dropping about five percent to 10 percent per year, but so are internet access costs, with faster declines expected as 5G comes online.

In the separate content delivery networks business, SD WANs might also have a role, allowing private network (MPLS) performance over public internet connections.

The next generation CDN should move beyond caching and include client self-management and quality of experience capabilities, especially playing a role for mobile CDN applications, some argue.


source: Ovum

More "Free Mobile Data Offers" in India?

Idea Cellular may soon launch promotional mobile data offers lasting one to 1.5 years that offer unlimited free mobile data for 4G customers. Idea also might offer free international incoming calls.

Those moves would counter Reliance Jio’s free mobile data offers, which run until March 2017. Bharti Airtel already has matched Jio's offer by providing 3 GB extra data every month till December 2017.

Such promotional offers should never be mistaken as indicating direct shifts in the level of  “permanent pricing.” On the other hand, rarely--if ever--do such promotional offers allow “every day” pricing levels to climb back to prior levels. Such offers are indicators of increased competitive pressure, leading to pricing declines, over the longer term.

Average revenue per account in the Indian mobile market has, in fact, been declining for some years.

The Indian mobile service provider market has been in a state of disruption for several years, with Idea Cellular displacing Reliance Communications as the third-largest Indian mobile company, ranked by subscribers. The next big changes will involve mergers that could again reshape the leader ranks, and the emergence of Reliance Jio within the top-10 ranks in 2017.

Longer term, most observers believe Reliance Jio will be a threat to the mobile market leaders.

source: TRAI

source: Datareign

OTT Voice and Texting to Cost Telcos $104 Billion in 2017

At the risk of seemingly downplaying the danger of declining voice and text messaging revenues globally, that is the lesser problem global telcos face. The trend is real.

On a global basis, over-the-top (OTT ) voice and text messaging alternatives displaced more than $84 billion in 2016. In 2017, another 23 percent erosion will happen, representing nearly $104 billion, according to Juniper Research.

Telcos globally might have lost about 19 percent of their text messaging revenues to over-the-top (OTT) alternatives between 2013 and 2015, according to Juniper Research.

In Spain, for example,  text message volume peaked as early as 2009, at 9.6 billion messages. By 2015, less than 2.3 billion messages were sent.

In the Netherlands, KPN experienced a 60 percent decline in average text message volume between 2011 and 2013. Similar declines have also been reported in South Korea following the widespread adoption of KakaoTalk, while similar trends have been seen in China.

Though it clearly matters that global service providers are losing voice and text messaging revenue, the bigger question is what suppliers do about that situation. One proven strategy is simply to harvest legacy revenues as long as possible, at the highest rate possible, while making other plans.

In the near term, in developing nations, mobile data is the immediate solution. In developed markets, where mobile data adoption already is robust, acquisitions are the near term solution, while the long term solutions involve creating big new markets in the internet of things and machine-to-machine industries.

Those, and other initiatives are likely to be jarring in some cases. As with the move by Mars from packaged goods into pet services, the range of applications and services businesses telcos and other internet service providers will seek to own and offer will be controversial.

At first glance, it might seem incongruous that Mars, a company perhaps best known for candy brands, is big in the pet services business.

But Mars owns pet food brands Pedigree, Iams and Nutro. Mars also owns the biggest U.S. veterinary operation in Banfield Pet Hospitals. Mars also owns the BluePearl emergency and specialty clinics, and also is buying VCA, the operator of veterinary offices. That represents a diversification away from consumer packaged goods and towards services.

Juniper Research suggests big data and analytics packages for both consumer and IoT (Internet of Things) devices will be fruitful. Juniper also suggests carrier billing, mobile money and mobile identity services will drive new opportunities.

Some of us might argue that even if such initiatives develop, they will be too small to fundamentally reorient service provider revenue streams. Core telecom service revenues in 2016 were about $1.93 trillion. Smaller service providers might have earnings before interest, taxes and depreciation of less than one percent. Tier-one carriers might have EBITDA of as much as 15 percent. So 15 percent of $1.93 trillion is about $285 billion, less than the capital investment carriers will make of about $350 billion.

At the revenue level, replacing lost voice and messaging revenues requires annual new revenues in the range of $100 billion. That might  be tough to achieve on the strength of billing services, mobile money and analytics services.

5G Will Happen; It Has To Happen

A few skeptics might argue that there is no need for 5G, or that the business model will not work or that consumer demand does not exist. That noted, the movement, globally, seems unstoppable, and for existential reasons. Whether 5G works out largely as planned (it actually produces new revenue streams, business models and applications), it is a gamble that must be taken.

In fact, for fixed network telcos, the odds of failure are growing, as revenue earned from investments increasingly is less than the capital investment.

source: The Economist

For that reason, there is a good reason for arguing that either capex or opex, or both must be reduced to match potential revenues earned by those investments.

In fact, the importance of cash flow, rather than other traditional measures of “profit,” indicate the shift. In past years, it was mostly unprofitable startups whose progress was measured in terms of cash flow.

But the big issue is simply that, with all existing revenue sources flat, diminishing or poised to become flat and diminish, the broad telecom industry must find big new revenue sources to replace those being lost, or face decline, if not death.

Since 5G is being purpose built to support new applications (internet of things, machine-to-machine communications, connected cars, fixed line replacement), it is a necessary gamble on the ability to create and sustain big new businesses in those areas.

There can be no certainty, at this point, about the degree of success. What there is certainty about is that doing nothing risks industry failure. So 5G is going to happen. It has to.