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.