Will Regulators Allow Consolidation Wave to Begin in Europe?

An important test of regulator will to allow significant consolidation in the European Union telecom business is about to begin.

KPN has agreed to sell its German operation E-Plus to Telefonica Deutschland, in an 8.1 billion euros ($11 billion) deal that has to be approved by European Commission authorities.

If approved, Telefonica Deutschland would have 30 percent mobile market share. Deutsche Telekom and Vodafone each would have 35 percent share.

Equally important, regulator approval undoubtedly will stimulate additional deals. An important matter is the number of major providers in each market, as some national regulators have insisted that four is the minimum number of providers necessary for competition. The Telefonica Deutschland deal obviously would reduce the number of strong national mobile players in Germany to three.

In recent deals such as in Austria where operators sought to take markets from four to three players, regulators have demanded concessions such as spectrum divestments and pledges to offer competitive wholesale access to rivals.

So approval is by no means assured. But KPN’s competitive situation in Germany illustrates the importance of spectrum and customer assets, as KPN trails its other competitors in that respect. Simply, KPN’s operation is too small.

As of the end of March 2013, E-Plus (KPN) and Telefónica Germany had a combined 43.3 million mobile customers in Germany.

E-Plus had around 24 million customers, with eight million postpaid. O2 has just under 20 million clients, with around 10 million postpaid customers.

What really seems to matter is the number of postpaid customers, since the average revenue per user for a postpaid account is so much higher than a prepaid account. 

Prepaid ARPU is  is six euros a month, while post-paid ARPU is 27 euros a month.  

Also, prepaid accounts tend to churn more than postpaid accounts.

Verizon Introduces 500 Mbps Service

If you think Google Fiber shows Google is crazy like a fox, think again: Verizon has begun deploying a new top-tier FiOS Quantum Internet access service, featuring speeds of 500 megabits per second download and 100 Mbps upload.

The 500/100 Mbps speed is initially available in parts of every FiOS market, and Verizon will deploy the service throughout the entire FiOS footprint into 2014.

For consumers, the 500/100 Mbps speed is available as part of a bundle or in stand-alone fashion, starting at $309.99 per month for a double play or $329.99 per month for a triple play with a two-year agreement.

For small businesses, the new top speed is only offered on a stand-alone basis, starting at $369.99 per month with a two-year agreement. The service also is available to consumers and small businesses on a no-contract, month-to-month basis.

Verizon's 500 Mbps service is an obvious response to Google Fiber’s ability to change consumer expectations on the speed front, though Verizon will not try to compete directly on the price front.

Indonesia Regulators to Raise SIM Prices Two Orders of Magnitude

One of the more basic economic insights is that raising the price of a product reduces demand for that product. 

So it is that Indonesia’s Telecommunications Regulatory Body plans to hike the price of subscriber information modules to a minimum of IDR 100,000 ($10), from current prices as low as IDR 2,000 ($0.2).

That might sound like a clear anti-consumer move. But the rationale is more nuanced. Monthly churn in the Indonesian mobile market is about 20 percent a month, meaning the equivalent of a complete turnover of the national customer base every five months.

Whatever difficulties that poses for service providers, it also is a consumer problem to the extent that all that churn is accompanied by a high rate of customer telephone number turnover.

The culprit would seem to be the high use of prepaid service enabled by mobile SIMs. In this case, the regulator hopes to reduce the amount of churn, and the associated number of inactive telephone numbers.

There is another angle, though. Regulators say higher SIM prices will reduce the use of “SIM boxes” that can fraudulently route international calls so that it appears to the telco to be a local call.

Such practices are not terribly unusual, and cause an estimated service provider revenue loss of US$77 million every year in Indonesia.

Southeast Asia Tablet Sales Up 100%

Sales of tablet computers across Southeast Asia have doubled over the last 12 months to reach 6.1 million units, according to GfK Asia. About 43 percent of all computing appliances sold in Southeast Asia were tablets.

Across Singapore, Malaysia, Thailand, Vietnam, Indonesia and Philippines, sales of tablet devices between June 2012 and May 2013 increased 101 percent, GfK Asia says.

Indonesia was among the volume leaders for tablet sales, accounting for nearly 1.3 million units, marking a 141 percent rise year-on-year. In the Philippines, tablet sales grew 322 percent over 12 months.

Sales of Tablets, Especially Smaller-Screen Tablets, Grow 61% in Myanmar

New devices and new networks, often unforeseen by the telecommunications industry, have played a huge role in overcoming the problem of supplying voice services to billions of people in the developing world.

In 2000, one might still have looked at tele-density figures for Africa and south Asia and still have concluded that not much was happening, in terms of adoption.

But that changed, sometime around 2004, when a growth inflection point was reached, both in terms of income and use of mobile phones. Some of us would argue that something quite similar will happen with Internet access.

The question is how the massive adoption of Internet apps will happen. The simplest answer is that people will get Internet the same way they got voice services: by way of the mobile network.

In that view, the smart phone will be the way most people will use the Internet. But tablets are a wild card. For decades, development experts have tried hard to create a $100 PC, on the not unfounded assumption that the price of a PC is a barrier to adoption.

But tablets, especially lower-priced tablets with seven-inch screens, might also be quite important.

It now appears tablet devices now are making it possible for people to acquire and use computing devices other than smart phones, while Wi-Fi hotspots are the network those tablet users rely on for Internet access.

In Myanmar, for example, a country with extraordinarily low mobile phone and fixed broadband adoption, tablets are proving to be a crucial device for Internet usage. Total fixed and mobile voice penetration, for example, is 10 percent.

From January to May of 2013, tablet sales in Myanmar grew 61 percent, according to  GfK. Those 450,000 tablet sales represented 170,000 more purchases than in the same period of 2012.

GfK says at least 78,000 tablets were sold monthly since the start of 2013, possibly driven by a 20-percent drop in retail price.

Given Internet penetration less than one percent, with most of those few users concentrated in only the two largest cities, Yangon and Mandalay, it also might not be unusual that more users are starting to rely on Wi-Fi for Internet access.

GfK says Wi-Fi-only tablet sales were about 22 percent of all units sold between June and November 2012. In the December 2012 to May 2013 period, Wi-Fi-only tablet sales were about 25 percent of all sales.

And it appears wireless and mobile networks account for those changes. "The vast improvement in wireless broadband in Malaysia has increased the number of hotspots available, which helps drive the uptake of Wi-Fi only models especially with its lower price tag,” says Selinna Chin, Managing Director for GfK in Malaysia. Chin.

In addition to the use of hotspot Wi-Fi, smart phones, used in tethered mode, also appear to be driving use of Wi-Fi-only tablets. The role larger smart phones might play, compared to seven-inch tablets, is not yet clear.

Both the use of tablets as the Internet access device, and the reliance on wireless networks, especially Wi-Fi or tethered smart phones, shows the impact of non-traditional access methods in a country with exceptionally low adoption of the Internet, mobile phones or even fixed telephone service.

Wi-Fi access blurs the line between public and private networks, fixed and mobile access modes. But Wi-Fi will likely remain an important form of Internet access in many developing countries where mobile broadband is too expensive and fixed networks are not built.

It now appears Internet cafes and public Wi-Fi hotspots could play a similar role in many rural areas of developing countries. With the growing adoption of smart phones, tablets and PCs, many users who would once have used a cybercafe arguably have begun using the mobile network.

That is less the case in rural areas, though, where the traditional reasons people have used cybercafes (they don’t own a PC, for example) might still be relevant issues. Still, tablets are interesting in that they represent, in many ways the illusive $100 PC. In that case, the key problem shifts to “Internet access,” especially place-based access that allows tablet use with Wi-Fi networks.

Lower prices are important drivers of tablet adoption. In Myanmar, tablet prices dropped from US$497 in June 2012 to US$397 in June 2013, a price drop of 20 percent in a year.

Smaller screen devices, probably because they sport lower price tags, seem to be a big factor. In the first five months of 2013, demand for seven-inch devices (or smaller) has grown from 37,000 units sold in January to around 57,000 units sold in May.

The preference for smaller screen devices also is shrinking sales of larger-screen devices. In 2013, eight-inch to 10-inch device share shrunk from 38 percent in 2012 to 16 percent in 2013.

What I'd Rather be Doing Right Now....

It's summer. News flow is slow. That's me, surfing Topanga Canyon, south of Malibu. Not recently! These days, boogie boarding is fine. 

Is Google Fiber a Big Revenue Opportunity for Google?

How big a business might Google Fiber eventually represent for Google? The question has been asked ever since Google launched Google Fiber in Kansas City, Kan. and Kansas City, Mo.

You might say the questions are larger now that Google Fiber is going to operate in Austin, Texas and Provo, Utah.

So far, Google Fiber in the Kansas City markets seems already to have passed the threshold for a sustainable Internet service provider operation. About 33 percent of 200 homes part of a survey by Bernstein Research are taking the service, and three-quarters of the rest are considering doing so.

That’s a very healthy take rate so early in the marketing effort of the first year. Some 85 percent of respondents are buying the gigabit service, and about 15 percent have opted for the free 5 Mbps service.

So some might argue Google Fiber could well expand to other cities, even if doing so would require triple-digit billions over time. That has lead to skepticism about just how extensive Google Fiber might eventually become, as a product for Google.

On its earnings call for the first quarter of 2013, Google executives were asked about prospects for Google Fiber. Carlos Kirjner, analyst at Sanford C. Bernstein & Co. asked about Google Fiber impact, noting that even if Google invested billions, and managed to pass 20 million U.S. homes, Google “would be at best and mid-sized provider in a market that accounts for less than half of your current business.”

There is another way to look at matters, and that is that if Google Fiber managed to generate revenues equivalent to 50 percent of Google’s current total revenues, that might well make it a meaningful business for Google.

Larry Page, Google CEO, answered that “we would love to find businesses much bigger than our entire current business to invest in, but I think there's only a very small number of such companies that even exist.”

But fiber-based Internet access might just be one of those “very small number” of businesses big enough to be significant for Google. “We look at places where we can provide products that can make really big difference in peoples' lives and we can make a lot of money and resources doing it,” Page said.

“We're not in a business to lose money, cross subsidize or any of these things,” Patrick Pichette, Google CFO, said on Google’s second quarter 2013 earnings call. In other words, Google intends to make money on Google Fiber.

“We really look at every incremental profit dollar that creates shareholder value and really focused on these profit dollars rather than the percentage margins,” Pichette said.

“Many of the new opportunities that we may be exploring whether it be hardware, whether it be Play, whether it be – many of these will have different margins in our core business, but they actually offer great kind of – huge revenue pools, huge margin pools in absolute dollars and then create much shareholder value and in many cases with Larry and the product area leads, great synergistic value between the products to create this great experiences,” Pichette said.

Pichette also reiterated that Google expects Google Fiber to be profitable. “We did Kansas City because we know as a city was going to be very profitable,” even if the ventures are not profitable on day one.

To be sure, Google Fiber already is changing ISP behavior. But Google executives also seem to be suggesting that if Google Fiber winds up being as successful as some believe, it could generate significant revenue for Google, with acceptable margins.