Economics Will Drive More Telco Consolidation

Are rural and independent telcos exempt from the “laws of economics?” If you think they are exempt, then consolidation, mergers and even bankruptcies will not happen in the U.S. independent telco business.

If, on the other hand, you believe economics and markets do matter, then it is inevitable that the structure of the U.S. rural and independent telecom business must eventually change. Some, including CHR Solutions SVP Kent Larsen, think that consolidation process will begin by 2014 or 2015.

Here’s the argument, in a nutshell. For starters, “wireless now is the preferred consumer choice” for voice and messaging, and might begin to be a more-logical choice even for broadband access. If nothing else were happening, that would put fixed network service providers at a disadvantage.

One immediate consequence is that there is less demand for fixed network voice lines and usage. The corollary is that it is hard to “grow revenues.” Simply, the historic revenue sources are dwindling and the new services (video entertainment and high-speed access) arguably are modestly profitable.

So cash flow is diminishing. That doesn’t mean many rural telcos do not have cash available. They do, says Larsen. But they can’t find suitable places to invest that cash, in the business.


source: CHR

Some will argue they should invest in upgraded networks. But the payback from such initiatives is questionable. The basic problem is that it is hard to make the case that network upgrades generate enough incremental revenue to pay for the investments.

If you wonder why AT&T and Verizon Wireless have concluded that Long Term Evolution makes sense everywhere they cannot afford to invest in fiber to the home, that’s your answer. There simply are places where fiber to the home provides a negative rate of return.

Under the best of circumstances, most rural or independent fixed network service providers would not be able to survive without government subsidies of one sort or another.

But circumstances are far from optimal.

Demography is in many ways destiny. And it simply is a fact that rural areas are losing population, says Larsen. That means fewer future customers. The customers that do remain are older than the U.S. average. That means, sooner or later, those people stop being customers.

And communications remains a highly capital intensive business. That means scale matters, since the lowest-cost provider in the market tends to win, in the end, Larsen notes.

It isn’t that smaller telcos are inefficient. In fact, they probably operate about as efficiently as they can, in terms of operating cost. But that’s part of the problem. “A 3,000-customer company can’t take out much cost,” Larsen adds.

But that is why mergers will have to happen. Unless a firm wants to go bankrupt, sooner or later, firms must combine, which will produce the operating cost advantages combinations of similar firms always provide. Overhead can be cut.

And it even is possible to predict where such mergers will happen: between companies that are in close proximity. The reason also is driven by economics: combining nearby firms will allow elimination of redundant resources. Acquisitions of far-away firms do not provide significant similar advantages.

Historically, a few firms in the independent telco industry have been acquirers. Windstream and Frontier Communications, or Fairpoint, come to mind. But those firms now are concentrating on rationalizing what they already have, so are essentially out of the market for further significant acquisitions.

That leaves only “merger of equals” opportunities on a smaller and local scale.

Nor is consolidation an issue only for rural telcos. Most independent competitive local exchange carriers and wireless ISPs sooner or later will face the same fundamental issues. It’s just the economics of a mature scale business at a time when revenue and cost pressures are rising.

Big or small, consolidation always happens in the communications business, sooner or later.

Netherlands Spectrum Auction Raises "Overpayment" Issue, Again

As you might expect, most of the new 4G spectrum that recently was won in the Netherlands spectrum auction were the biggest mobile service providers in the Netherlands. That happened despite restrictions on how much new spectrum the leading mobile service providers could acquire. 

In the auction, two spectrum blocks in the 800 megahertz band and one in the 900 MHz band will be reserved for new entrants. That was the provision that allowed Swedish mobile operator Tele-2 to secure 20 megahertz of spectrum in the 800 MHz band. 

Vodafone and KPN spent the most, with T-Mobile spending about 66 percent of what Vodafone and KPN invested. Tele-2 spent about 12 percent of what Vodafone and KPN spent, but also acquired a modest chunk of the new spectrum.

KPN has about 47 percent market share , while Vodafone has about 29 percent and T-Mobile has about 24 percent. Tele-2, a Swedish operator, also is entering the market. 

The 3.8 billion euros ($4.97 billion) proceeds were much higher than observers anticipated, far surpassing  the EUR400-500 million the government had expected.

That might have implications for spectrum auctions elsewhere in Europe,  In the United Kingdom,  4G spectrum auctions will be available in the first half of 2013, for example. 

KPN argues it won “a better package than Vodafone”, having picked up about 30 megahertz more spectrum than Vodafone acquired, the Financial Times reports. 

Auction results

Frequency Band	800	900	1800	2100	1900	2600
KPN	2x10	2x10	2x20	2x5		30
Vodafone	2x10	2x10	2x20	2x5
T-Mobile		2x15	2x30		4,9+9,7	25
Tele2	2x10

Vodafone spent 1,380,800,000 euro (1.381 billion); KPN 1,351,852,000 euros (1.352 billion);
T-Mobile 910,681,000 euro (910.8 million) and Tele2 euro 160,813,000 (160.8 million). 

Whether spectrum caps actually work is debatable, though policymakers are fond of the concept as a way to "stimulate competition" in the mobile market. In the recent Netherlands instance, one new operator was enticed to enter the market, but the overwhelming amount of new spectrum was won by the three firms that already lead the Netherlands market. 

One might argue that either spectrum caps or set-aside policies to encourage new entrants "work" as a matter of prudent public policy. In other words, "it sounds good." Whether they actually are beneficial in the long run is probably a bigger issue. Over time, market consolidate. 

Whether a small spectrum holding ultimately benefits consumers, or only enriches investors in the new firms, is a matter of debate. Some might even argue consumers do not benefit in the short term. 

It would be hard to make the argument that spectrum policies aimed at promoting new entrants have done anything to stop concentration in the U.S. mobile industry, for example. 

On a more prosaic level, European mobile service provider executives might now start to worry about what new Long Term Evolution spectrum might wind up costing, across the continent. Mobile service providers have been through ruinous spectrum wars before, precisely caused by the bidding for 3G licenses that nearly bankrupted a number of major European service providers. 

If the Netherlands prices are replicated elsewhere, that danger is emerging again. If so, we might someday find out that the real "winners" of the upcoming LTE 4G auctions were the firms that "lost" the spectrum auction.

Global Internet Users Doubled in 6 Years

Developing nations will become the focus of broadband growth over the next decade or two, building on a substantial amount of growth since about 2005.

By the end of 2011 2.3 billion people (around a third the world’s population) accessed the internet globally, almost double the 1.2 billion figure recorded in 2006, according to Ofcom.

Over this period growth in internet use was fastest among developing countries, and by 2011 62 percent of Internet users were located in developing countries, an increase from 44 percent in 2006.

And though Brazil, Russia, India, China and South Africa have been leading economic and communications adoption growth for much of the past decade, it now appears that those nations are reaching maturity, and that growth of communications services will be lead by a new list of nations in the emerging markets.

In significant part, that expansion will be driven by economic growth of middle classes most everywhere in the developing world over the next 15-20 years, according to the National Intelligence Council.

India, China and the rest of Asia provide important examples, as those regions will far outstrip the share of middle class consumption in the United States, Japan and European Union, for example.

Note the dramatic increase in economic growth the Council expects will happen between now and 2030. It took Britain 155 years to double gross domestic product per capita, The United States and Germany took between 30 and 60 years to do so.

India and China are doing this at a scale and pace  not seen before: 100 times the people than Britain and yet a doubling of GDP in one tenth the time. By 2030 Asia will be well on its way to returning to being the world’s powerhouse, just as it was before 1500, NIC analysts say.

IDC, for example,  predicts that emerging markets will contribute for 53 percent of 2012’s global information and communications technology growth.

And a poll of 675 global IT and business professionals suggests Indonesia, Vietnam, Qatar and Myanmar are the countries to lead that growth. Regionally, Asia-Pacific (exclusive of China and India) was cited by compared to 61 percent of survey respondents as the region most likely to lead revenue growth.

Notably, just five percent of respondents chose Brazil, Russia, India, China or South Africa as among the nations having the strongest growth, though the so-called BRICS nations have been at the top of global growth lists for some years.

In Indonesia, for example, there are around 55 million internet users. But that’s just a tiny fraction (22 percent) of its 245 million population. But growth is going to be rapid. The number of internet users grew 29 percent in the most recent year.

Predictions point to 76 million users by 2015. Perhaps ironically, the majority of Internet users are accessing the web while on the go, and not from a desk. While mobile penetration is at 54 percent, PC penetration is just five percent.

In Vietnam, 2012 information technology spending will have increased by 19 percent, IDC says.
By 2015, about 45 percent of the population will be using the Internet by 2015, up from about 30 percent in 2012.

IDC is expects 15 percent year-over-year growth of information technology and communications spending in Myanmar in 2012. Internet usage is quite low, probably in low single digits, while mobile penetration rates likely are similar.

"IP Transition:" Turning Off PSTN by Another Name

There is a very-practical reason why discussion of a transition to IP technology, and an end to time division multiplex technology, is accelerating in the U.S. market and policy community.

If you look at services with growing revenue, those services are on networks using Internet Protocol. If you look at services whose revenues are declining or peaking, those services are on the legacy time division multiplex network.

Simply, customers are deserting the older networks in favor of mobile and broadband alternatives that are IP-based. And that means revenues are declining on networks with high fixed costs.

At some point, there will be so few customers left on the older networks that they cannot be supported any longer, especially when all legacy services can be delivered using the new IP networks.
Nor is the IP transition “just” a U.S. problem. Mobile broadband supplied by the mobile IP network now is driving revenue growth, while voice revenues on TDM networks are declining at serious rates in the United Kingdom, France, Germany, Italy, the United States, Canada, Japan, Australia, Spain, the Netherlands, Sweden, Ireland, Poland, Brazil, Russia, India and China in 2011, a study by Ofcom, the United Kingdom communications regulator, finds. 

Fixed voice revenues fell, collectively, by an average of 7.3 percent in 2011, compared to a 7.1 percent decrease in 2010.

Fixed voice revenues fell in all 17 countries in 2011, the fastest rates of decline being found in the BRIC countries, with revenues falling by 17.8 percent in China and 15.3 percent in India during the year. Among the non-BRIC countries, the annual declines in revenue were highest in Poland (13.3 percent) and France (13.1 percent). That’s the legacy network.

In contrast, mobile data has seen the fastest growth rate, with a compound annual growth rate of 25.4 percent between 2006 and 2011. That’s one of the newer IP networks.

The IP transition for the whole U.S. communications business is getting new attention as the Federal Communications Commission launches a new effort to plan for an end to the time division multiplex “public switched telephone network.”

"The Technology Transitions Policy Task Force will play a critical role in answering the fundamental policy question for communications in the 21st century: In a broadband world, how can we best ensure that our nation's communications policies continue to drive a virtuous cycle of innovation and investment, promote competition, and protect consumers?" said FCC Chairman Julius Genachowski.

The effort will face lots of political pressure from lots of vested interests whose business interests might be helped or harmed in any transition. But the transition has to happen. Voice, the specific service the TDM network was built to deliver, cannot support the network, long term.

Fixed voice still represents 25 percent of total service provider revenue in the 17 countries, Ofcom reports. But only a quarter of total revenues. And those revenues steadily are declining.

Fixed voice revenues fell by 5.2 percent in the United Kingdom during 2011, a higher rate that the 3.3 percent average in the five years to 2011.

Significant declines in voice pricing are largely to blame. The fastest rates of fixed voice pricing decline being found in the BRIC (Brazil, Russia, India, China)  countries, with revenues falling by 17.8 percent in China and 15.3 percent in India . Among the non-BRIC countries, the annual falls in revenue were highest in Poland (13.3 percent) and France (13.1 percent).

But consumers also are abandoning use of fixed network voice, as well. The total number of fixed lines among the 17 countries fell by four percent to 767 million in 2011. The number of lines fell in all of these countries (except Brazil and the U.K.), where the number of lines increased by two percent and 0.2 percent respectively.

Fixed voice call volumes also fell in all of the countries for which figures were available in 2011, except France.


The logical response, for any executive facing that sort of revenue erosion would be to “cut costs.” The problem is that some service providers already have cut significantly, and some costs cannot be cut, due to pension obligations, union rules, contracts or government edicts.

At some point, no amount of additional cost cutting will compensate for falling revenues. Shutting down the TDM networks won’t necessarily fix the voice revenue problem. But all the future services will require the IP network, so whatever happens to the voice business, IP can provide it at lower cost.

And lower cost now matters, as most voice and even broadband access are migrating to the mobile networks. That means less potential revenue to support even the IP fixed network.

In fact, so fast are mobile high-speed access revenues growing that, for the first time in 2011, overall mobile data revenues exceeded fixed broadband revenue in the 17 countries.

In fact, the salience of mobility is a relatively new form of pressure. The countries where the highest proportion of calls originated on mobiles in 2011 were China (97 percent), the United States (82 percent) and Poland (81 percent), the Ofcom study reports.

As always, the transition discussions and policies will be contentious and highly political, since many contestants stand to lose or gain a great deal, depending on how and when the transition happens.

Philippines Gmessage a Test of Carrier Instant Messaging Success

Globe Telecom, the second biggest carrier in the Philippines, is about to find out how important network effects are for instant messaging users. 

Globe Telecom is launching its own instant messaging service, with one key attribute: messages can be sent to people who do not use Gmessage. The new service has tough competition, including Facebook and Whatsapp, for example.


At least in part, Globe Telecom is responding to declining text messaging usage, and growing use of instant messaging platforms as an alternative. 

Instant messaging is quite popular in Asia. But the markets remain fragmented.  In China, the top instant messaging applications are Imo.im and Chatroulette. Imo.im reaches 3.7 percent of the users with 6.5 percent of all page views and Chatroulette reaches 1.7 percent of the users with 1.3 percent of all page views.

Line, which has grown to 60 million users, mostly in Asia including at least 29 million in Japan.

Also popular is Kakao Talk with 60 million users, more than half in South Korea where it originates. 

Other messenging apps include Nimbuzz, which has amassed 100 million users including 31 million in Asia, and WeChat by China-based Tencent, which is nearing 200 million users.



Globe’s Gmessage is potentially significant for a few reasons. Number one is that mobile messaging services are popular in Asia, and that is hurting text messaging revenue. 

In South Korea, KakaoTalk has more than 60 million users, and LINE is enjoying similar popularity in Japan. In China, Weixin – or WeChat, in English – has more than 200 million users. 

Alongside WhatsApp, all three are intent on expanding in the Southeast Asian markets. So Globe Telecom is fighting back with an offer of its own. 

U.S., Canada are Least Concentrated Broadband Markets

Many observers complain about the dominance of cable companies and telcos in the fixed network high-speed access market, but a new analysis by Ofcom, the United Kingdom communications regulator, suggest the United States and Canada have the least concentrated markets among 13 examined by Ofcom.

When the combined retail customer market share of the three largest broadband providers in each country is used as a measure of market concentration, and across the 13 countries for which figures are available, the average share of the largest three providers increased from 64.1 percent to 65.2 percent in 2011.

In the five years to 2011 the change in the combined connection share of the three largest providers in each country ranged from a 20.9 percentage point fall in Poland to a 16.2 percentage point increase in Ireland.

The most concentrated broadband market at the end of 2011 was France (where the largest providers (Orange, Free and SFR/Neuf) accounted for 86 percent of connections), followed by Ireland at 85 percent.

Excluding the United States and Canada (where infrastructure-based competition between local incumbent telecoms providers and cable operators makes the share of the largest three operators a less useful measure of competition) the least concentrated broadband market among our comparator countries was in Poland, where the three largest providers’ combined market share was 57 percent.

That structural difference between North American fixed broadband markets, and those of most other countries, where only a single broadband network exists, also suggests why the U.S. Federal Communications Commission is less concerned than regulators elsewhere about mandatory wholesale access obligations and prices.

While it is far from perfect, robust competition between cable operators and telcos provides a workable level of competition without mandatory access obligations and price control.

The other structural consideration is that, in the continental-sized U.S. market, for example, service providers in both cable and telco industries are prevented from becoming too large. Roughly speaking, no single service provider is allowed to gain more than about 30 percent of total market share.

That necessarily means a larger number of significant providers, on a national level. Still, the Ofcom analysis is significant. Using informal tests of market concentration across more than a dozen nations, the U.S. and Canadian markets are the least concentrated.

Demand and Supply are Issues for 1-Gbps Internet Access

It is easy to criticize big Internet access providers for arguing there is little to no demand for symmetrical 1-Gbps high-speed access services of the type Google Fiber is providing in Kansas City, Mo. and Kansas City, Kan. It comes off as an attempt to downplay the significance of a competitor's offering.

At least in part, such statements often are "jawboning" efforts to shape opinion. But there are other legitimate aspects as well. Consumers in some markets who can buy 50 Mbps, 100 Mbps or faster services, often have shown they are willing to buy slower-speed services. 

The other practical problem is that the rest of the Internet is not yet optimized for 1-Gbps speeds. Consider a recent test of Internet service provider access speeds for Netflix video streams. 

Without question, Google Fiber was the most consistently fast ISP in America for watching Netflix streamed content, according to Netflix. 

But keep it in perspective: Netflix streaming only happens so fast, on a 1-Gbps or much slower connections. In other words, a few consumers might want 1-Gbps like they want other products: for "bragging rights." 

In practice, a faster access pipe will always be bound by all the other access pipes, servers and backbone transit routes and equipment in between any two connections. Upgrading just one link doesn't actually provide that much value. It simply shifts the bottleneck elsewhere.