Vodafone Gets Ready to Grow

Most observers think Vodafone, fortified with cash from the sale of its stake in Verizon Wireless, will be an early mover in an expected wave of mergers in the European communications business.

In fact, Vodafone already is in the midst of a deal to boost its position in Germany, Europe's largest communications market, by trying to buy cable operator Kabel Deutschland.

The Vodafone bid to buy Kabel Deutschland might face a new hurdle, though. The issue is that 75 percent of Kabel Deutschland shareholders must tender their shares in a first part of a two-stage tender process by midnight Sept. 11, 2013, and some shareholders already are saying they will not do so.

Vodafone is offering a total of 87 euros ($114) per share in the deal, estimated to be worth about 10 billion euros. If Vodafone does not raise its offer, and the bid fails, Vodafone would not be able to submit another bid for 12 months.

Of course, the anonymous expression of such fears sometimes is a tactic a major shareholder can use to try and coax better terms from a buyer. At least so far, Vodafone has said it will not raise its offer.

But much changes as bid deadlines near a close. Despite its public stance, Vodafone negotiators probably are considering what they can do.

It is not clear whether there is some way Vodafone can please some reluctant shareholders while not actually raising its bid.

Some might note that is precisely what SoftBank also said in its recent successful effort to acquire Sprint. What SoftBank finally decided to do raised returns for shareholders at the expense of Sprint’s working capital, without actually altering the total amount of the offer. In that case, though shareholders were able to wring a bit more out of SoftBank, those gains came at Sprint’s expense.

Even if Vodafone manages to secure the necessary shareholder votes, it would face significant regulatory hurdles in Germany, some believe.

Liberty Global earlier was unable to consolidate the German cable TV operator market due to resistance  of the country’s Federal Cartel Office. A proposed merger between Unitymedia and Kabel BW in Germany was blocked by the German courts.

The alternative for Vodafone, should the Kabel Deutschland bid fail, is to build its own facilities, or perhaps buy other cable assets in Germany. Vodafone will have to consider infrastructure investment in any case, as no cable operator has national coverage, even if does win Kabel Deutschland.

Vodafone probably does not want to continue renting capacity from its competitor Deutsche Telekom.

Of course, Vodafone also could decide to invest elsewhere as well. In Spain there is Ono and in Italy Fastweb could be of interest. SFR in France, or TIM Brasil and GVT in Brazil.

In any event, the Vodafone bid is part of a growing wave of expected consolidations in the European communications market.

Some think Vodafone will wind up prey for another buyer. Either way, it is likely to be easier for European service providers to buy and sell each other sometime in 2014. 

One speech does not a policy make, but European Community officials continue to plow ahead with plans to create a more-unified “single” telecom market within the EC region, on the model used for a unified market for trade, though many important details remain unsettled.

It isn’t yet clear, for example, how regulatory authority will work. Some think a single EC telecom regulator is required, though that does not seem to be in the offing, immediately. Others say there is no way 28 national regulatory bodies will cede their authority, so pushing for a change that drastic would certainly fail.

Nor is it clear how EC goals of reducing roaming costs will be achieved. Mandatory reductions already have been enforced, but there is some confusion about whether policies to reduce tariffs further ultimately will be enforced by regulatory fiat, or whether there are other mechanisms to achieve those results.

EC officials probably will insist on such continued rate reductions. But service providers  are sure to continue resisting such reductions. And it remains unclear whether the proposed rules will include roaming rate reductions.

There has been concern that the big reductions in wholesale rates, intended as a way of encouraging the creation of a single EC communications market, would further depress service provider revenues and so hinder investment in next-generation networks.

Service providers were concerned, among other things, about the opportunity for arbitrage opportunities. That typically happens in communications when there is a wide disparity between wholesale rates and retail rates in any market.

Some had estimated that as much as £7 billion a year could be earned by wholesalers taking advantage of the rate spread. Such arbitrage discourages investment in facilities on the part of incumbents and over the top or wholesale-based competitors as well.

Analysts at Bernstein Research had estimated the rate reduction proposals would allow non-facilities-based rivals to undercut major network operators by between zero and 65 per cent, depending on prices in each country.

The biggest potential impact, they say, would be in some of Europe’s biggest markets, Bernstein Research argued.

“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.

44% of Fixed Broadband Homes Buy an OTT Subscription Video Service

About 44 percent of U.S. fixed broadband subscribers currently have a subscription to some kind of online video service, such as Netflix, Hulu Plus, or Amazon, according to Parks Associates.

You might argue that points to consumer behavior that is a precursor of some future shift in TV delivery. Consumers have become accustomed to watching Internet-delivered video, and have gotten familiar with the idea of buying a video service from an entity other than a cable, satellite or telco TV provider.

You might argue the next intervening step will be further bundling of access to services such as Netflix with standard linear video services. That, in fact, is precisely what Virgin Media plans to do in the United Kingdom.

Virgin Media is testing delivery of Netflix video to its customers using TiVo boxes. The test will involve about 40,000 of its Tivo-using subscribers.

Virgin Media said it planned to roll out the app to all of its 1.7 million TiVo customers by the end of 2013.

Younger consumers are more likely to subscribe to over-the-top video services, and eight percent  of consumers 18-24 have never subscribed to a cable, telco or satellite delivered video subscription TV service.

"Consumers have a variety of viewing options now thanks to OTT content, which is dismantling the traditional TV business models," said Heather Way, Parks Associates senior analyst.

For whatever combination of reasons, over the top video is much more popular than the video industry’s traditional video on demand product.

"Online video is now a common source of video viewing in U.S. households, while transactional VOD (TVOD) is near the bottom,” said Way.

It is probably reasonable to assume that 70 percent of broadband users watch online video, including sources such as YouTube and paid subscriptions such as Netflix.

How Big Will U.S. Mobile Revenue Be in 2017?

By 2017, U.S. mobile service revenue will top $212 billion, according to analysts at the Yankee Group. By some estimates, the business already is larger than that. Verizon has indicated the market had surpassed $241 billion in 2010.

If total U.S. communications service provider revenue is about $338 billion by 2017, that implies mobile will be about 63 percent of total industry revenue.

Much depends on whether video entertainment video entertainment revenues are included in the mix, though.

Insight Research predicts that global telecommunications services revenue will grow from $2.1 trillion in 2012 to $2.7 trillion in 2017 at a combined average growth rate of 5.3 percent. For most people, that will seem reasonable, given the growth of wireless services globally.

Wireless subscriber growth, particularly in Asia and other emerging markets, will raise wireless revenues by 64 percent from current levels, while wireline revenues show only modest growth. And what growth occurs in the fixed network realm will happen in broadband services.

Wireless 3G and 4G broadband services are projected to grow at a compounded rate of 24 percent over the forecast period and wireline broadband services projected to grow at a 13 percent compounded rate over the same forecast horizon, the Insight Research predicts.  

Globally, revenue will be more skewed than in the United States, though. But some have made optimistic revenue projections about revenue growth globally and in the United States.

The most-surprising prediction, by far, is the forecast that, between 2011 and 2016, North American carrier revenue will  rise from $287 billion to $662 billion, representing 11 percent compound annual revenue growth.

In 2014, telecommunications companies will make more money from mobile broadband than from fixed broadband for the first time, according to forecasters at Ovum.

Fingerprint Reader is the Significant Takeaway as Apple Introduces New iPhones

Apple's fingerprint security strikes me as the most significant longer term news, though in revenue terms the lower-cost iPhone 5C will represent the most near term revenue for Apple.

The reason is that the fingerprint sensor could be a key enabler of some future Apple entry into retail mobile payments. And I long have maintained Apple is the one company that could really revolutionize mobile payments. 

The issue has been whether Apple had any interest in doing so, and what new category of devices Apple could create around its ability to fix an old problem in a much better way. 

Some will note that the fingerprint sensor provides much better security than passwords. That's true. But identity verification will be more important if Apple really does make some move into mobile payments. 

Virgin Media to Feature Netflix

Virgin Media is testing delivery of Netflix video to its customers using TiVo boxes. The test will involve about 40,000 of its Tivo-using subscribers.

Virgin Media said it planned to roll out the app to all of its 1.7 million TiVo customers by the end of 2013. 

The feature illustrates how hard it is to precisely describe "what" role many applications or services play in the video entertainment ecosystem.

Some would legitimately consider Netflix a distributor of content, a bit akin to a cable TV, satellite TV or telco TV provider. The difference, in that view, is the delivery mechanism. All of those customers pay a recurring subscription fee, and each of the providers assembles its own menu of content. 

Others might consider Netflix a programming network, akin to HBO. That is the way Netflix is being delivered by Virgin Media as part of its test and proposed roll out. Netflix essentially is a "channel" in that context.

It likewise is becoming harder to describe the roles other Internet ecosystem participants are taking.  Apple is a device supplier, but also a music service and content store. It may take on other roles in the future.

Google is an app provider, a device supplier, an ISP, an advertising network and a supplier of operating systems and browsers. Other roles likely will emerge. 

Microsoft is an operating system supplier, but now also a smart phone, tablet and game player manufacturer and a supplier of global communications services.  It is becoming a music services supplier. 

Some might consider the move by Virgin Media dangerous, as it enables a competitor.  It certainly is unusual, for the moment.

But Virgin Media gains by doing so. By making convenient Netflix access a part of the video subscription, Virgin Media adds more value to its video subscription customers. Most such moves by legacy providers to embrace new providers entail some risk. 

But Virgin Media clearly believes the benefits outweigh the risks, in this case. 

Network Neutrality: The Long Term Implications

As a U.S. District Court weighs a legal challenge to the Federal Communications Commission’s authority to promulgate network neutrality rules, European regulators are tussling with the same issues. One wonders whether the debate also misses a much larger point.

The future communications ecosystem might in fact require the creation and use of many quality-enhancing mechanisms, used to support services created and delivered (assembled) dynamically, to support both end user application requirements, application innovation and service provider financial health.

In other words, some of the key network neutrality concepts, especially quality of service mechanisms that discriminate between packets, could be a foundation for tomorrow’s sustainable ecosystems.

If one assumes that the revenue required to sustain continuous investment in next generation networks always is generated by revenues earned by serving end users and business partners, then it is axiomatic that if the current revenue underpinning is threatened by changing demands, then new revenue mechanisms will have to be created.

Some might argue that is not the public’s problem. Such people also likely see no problem were a major trade union to prefer the death of its members’ jobs by causing an entity bankruptcy, rather than modify their wage and benefit demands.

This actually happens. Eastern Airlines unions in the late 1980s had a choice: agree to contracts they apparently abhorred, and keep Eastern Airlines flying, or refuse, and see Eastern go bankrupt. The union chose bankruptcy .

Assuming an observer is not such a nihilist, the health of the ISP and the communications infrastructure matters to everyone, since all useful and entertaining applications require a fast, low latency, affordable, capable and flexible network.

Let us assume that today’s access provider business model is unsustainable, driven by erosion of the legacy revenue model, competitive impact on retail pricing and a shift of value to “over the top” applications whose key characteristic is that the value and revenue is mostly captured by third parties using access and communication networks.

PwC, for example, has argued that massive telecom network investments over the past decade or so have failed to generate a financial return. In fact, PwC argues that the average long-term return has been a mere six percent or just 300 basis points less than its cost of capital.

If you think there is no problem, you might not care about ISP survival and flourishing. The rest of us ultimately do have a stake in this matter.

Many would argue that ISPs need to create new sources of value derived from more flexible use of their networks. In the past, some have argued that “bandwidth on demand” could be part of the answer.

Others prefer something more along the lines of applications or computing resources on demand, or end user information (location, type of device now connected, preferences and past behavior) on demand, but you get the point: flexible networks able to create customizable features and services often are seen as one key way access networks will provide new value.

It is difficult to envision how quality, not just flexibility, would fail to be part of the raw material for such an approach to creating network value.

Resources that are “what you want, when you want them, the way you want them” would seem to require some assurance of quality, especially if rated (priced) on an “on demand” basis.

Users already assume Internet connections are relatively ubiquitous, rather reliable and reasonably affordable.

Beyond that, they have few expectations. And that is the value ISPs must create.

The telecom business used to exist to make its own apps work. Now the telecom business exists to enable third party applications. That is a huge shift.

And it is hard to see how that works very well as a revenue model for the access providers unless they have something more valuable to provide their application providers. Quality of service attributes would seem to be one of the more promising avenues.

In that sense, network neutrality is an impediment. Without packet shaping, quality of service features are hard to create. Sooner or later, that will become obvious.

Verizon Headed for Net Neutality Win?

At least one equity analyst thinks there is trouble for U.S. network neutrality rules.

“We believe a D.C. Circuit panel majority signaled today at oral arguments that it’s inclined to pare back FCC Open Internet rules in a way that would allow cable and telco broadband providers to charge Internet edge providers for improved connections to broadband customers,” said Christopher C. King, Stifel , Nicolaus & Company equity analyst.

“We believe that both Judge Tatel and Judge Silberman signaled they believe the FCC’s current Open Internet rules violate a prohibition against applying traditional “common carrier” regulation to broadband providers,” said King.

“The two judges seemed to agree with Verizon’s contention that the agency had thwarted

its ability to negotiate paid agreements with edge providers, King argues.

Judge Tatel repeatedly suggested the court could throw out the FCC’s anti-discrimination rule that restricts the ability of fixed broadband providers to charge edge companies. But King thinks Judge Tatel also wanted to prevent ISPs from charging app providers for best effort access.

Judge Silberman at times suggested the court should also throw out the anti-blocking rule, but

Judge Tatel seemed disinclined to go that far, King reports.

There could be additional legal challenges, but any reversal of the network neutrality could have long-term implications for ISPs and major app providers, especially those providing bandwidth-intensive applications such as streaming video.