Mobile Internet Access Retail Price Might Need to Drop by an Order of Magnitude

Retail price points for consumer mobile, and especially mobile broadband services, face huge challenges in emerging markets.

Consider a “typical” third generation (3G) mobile service network with a cost ranging around one U.S. cent per megabyte.

Emerging market retail prices might range from about 1.5 cents to 2.5 cents per retail megabyte of consumption.

But competition could drive revenue to levels of about $0.002 to $0.004 per megabyte, in many emerging markets, for 3G service, according to analysts at McKinsey.

In other words, retail prices could drop by an order of magnitude in the relatively near term.

That implies potential mobile service provider cost of about $0.001 (a tenth of a cent), to support the anticipated retail prices.

An order of magnitude reduction in costs, in a service provider context, is very tough to achieve. While one might argue backhaul costs, or wide area transport costs, could reach such levels, it is vastly more difficult to reduce costs that much in the other operating portions of the business.

Nor is it easy to reduce capital investment to create the access network, by an order of magnitude. Long Term Evolution, many argue, will cut costs of the network by about 30 percent. Thta's helpful, but nowhere near an order of magnitude (10 times) cost reduction.

AT&T Announces DirecTV Acquisition

AT&T will acquire DirecTV in a stock-and-cash transaction for $95 per share, or about $48.5 billion.

The transaction enables the combined company to offer consumers bundles that include video, high-speed broadband and mobile services using all of its sales channels nationwide, better positioning AT&T in the competition with cable TV operators.

That is the most immediate change, as up to this point AT&T had been able to sell an owned and branded video product only in parts of its fixed network, limiting the scale of AT&T triple-play and quadruple-play offers.

By 2015, AT&T, for example, will be able to market to only about 33 million locations, some argue, using its fixed network. But AT&T now says it will reach 70 million broadband locations, after the deal.

The DirecTV buy means AT&T can sell its own branded service to nearly every home in the United States.

Verizon’s FiOS covers about 17.8 million homes, so the two telcos will pass about 51 million U.S. homes, by 2015, out of perhaps 145 million U.S. homes by 2015. That implies coverage of about 35 percent of U.S. homes. Other telcos will sell telco TV as well, but collectively could only theoretically reach about 14.5 million homes, or so, by 2015, best case.

Even under the best of circumstances, it is unlikely U.S. telcos would pass even 45 percent of U.S. homes by 2015, some might argue, without satellite coverage.

So the DirecTV acquisition instantly and fundamentally changes AT&T’s video footprint. Though the ultimate implications are yet unclear, AT&T also gets DirecTV’s operations in South America as well, offering a potential growth vehicle in international markets, at some point.

But AT&T also points to the deal’s ability to help AT&T deliver entertainment video to any screen, fixed or mobile, linear or on-demand.

But AT&T also says 15 million customers--mostly in rural areas-- will get faster high speed access as a result of the deal, mostly because the additional cash flow can be used to upgrade existing facilities, in addition to the upgrade plans AT&T already had announced as part of Project VIP.

To help it gain regulatory approval, AT&T will sell broadband-only service at current prices for three years after deal closing, at speeds of at least 6 Mbps. That measure will address concerns that the deal will lead to forced bundling of video with existing “broadband-only” offers.

AT&T also will maintain “stand-alone” purchasing of DirecTV nationally for at least three years after deal closing, with uniform national pricing. That likewise is designed to allay fears that an immediate shift to bundling will happen.

AT&T also will operate under 2010 Federal Communications Commission network neutrality rules, selling “best effort only” consumer Internet access, for three years after deal closing, irrespective of whether the FCC re-establishes such protections for other industry participants following the DC Circuit Court of Appeals vacating those rules.

DirecTV’s South American business is the biggest in the region and DirecTV has more than 18 million subscribers, still growing.

The deal includes a stock price “collar,” automatically adjusting AT&T’s bid if the price of AT&T’s stock falls or grows before the deal is concluded.

Vodafone Buys South Africa's Neotel

Vodacom, the Vodafone-owned company serving South Africa, is buying Neotel, the  second largest provider of fixed telecommunications services in South Africa.

Neotel will become a subsidiary of Vodacom South Africa, creating a national service provider with annual revenues of more than R5 billion (US$0.48 billion).

Vodacom will gain 15,000 kilometers of optical fiber network, including 8,000 km of metro backbone facilities in Johannesburg, Cape Town and Durban.

Neotel also has rights to 24 MHz of mobile spectrum (2 x 12 MHz) at 1800 MHz, plus 10 MHz of (2 x 5 MHz) of 800 MHz spectrum and 56 MHz (2 x 28 MHz) of 3.5 GHz spectrum.

Vodafone says the deal will allow it to accelerate fixed network fiber to home and fiber to business connections and support a faster Long Term Evolution fourth generation mobile network.

Vodacom also expects annual cost and capital investment savings of US$28.9 million (R300 million, before integration costs) in the full fifth year, representing a net present value of approximately $140 million (R1.5 billion) after integration costs.

In one sense, the deal represents a trend: the integration of mobile and fixed assets as a fundamental underpinning of service provider strategy--telco or cable TV--in many developed nation markets.

The trend is most noticeable in Western Europe, where Liberty Global recently has moved to buy  both cable TV and mobile assets, and Vodafone owns mobile and cable TV assets.

Spain’s Telefonica is offering 725 million euros ($1 billion) for a controlling stake in Spain's pay-per-view TV operator, Digital Plus—Telefonica already owns 22 percent of Digital Plus.

Integration of mobile and fixed network infrastructure, in particular cable TV broadband networks, are emerging as a key strategic direction for Western European service providers.

At one point, AT&T in the United States bought all the assets of Tele-Communications Inc., at that point the largest U.S. cable TV provider, as the hoped-for underpinning of AT&T’s local access strategy.

The reasons for the strategy are simple enough: legacy lines of business are mature and declining. Combining mobile and fixed assets adds new product lines to bundle and boost revenue growth.

Unlike mobile or fixed telecom services, video entertainment revenues still are growing. Also, video entertainment has emerged as the second most-important fixed network service, after high speed Internet access.

Some might argue that cable TV operating costs, and the ability to upgrade Internet access speeds, are lower than those of competing telco networks, as well, allowing mobile service providers to capture fixed network capabilities with lower operating and capital costs.

In many markets, cable TV operations additionally do not have mandatory wholesale obligations imposed on telco access networks.

AT&T DirecTV Buy is Not Perfect, Just Best Available Move

None of the largest U.S. telecommunications providers have “perfect choices” where it comes to growth strategy. Comcast, AT&T and Verizon are big enough that market share issues alone will continue to raise antitrust issues in the internal U.S. market.

CenturyLink has room to grow, but as a fixed network services provider, faces the issue of inability to enter the mobile business. At this point, it has neither the capital to buy its way in, nor the platform to grow a business organically.

Historically a rural fixed line provider, CenturyLink now is a hybrid, operating some larger metro networks as well as in “traditional” smaller markets.

CenturyLink could grow by eventually acquiring rural assets AT&T or Verizon might like to divest. That is a tack Frontier Communications has taken, for example.

But both Windstream and Frontier, traditionally providers of smaller market fixed network services, have gotten their recent revenue growth from business services, not consumer services.

Dish Network has particularly been concerned about the viability of any stand-alone satellite video business in an era of triple-play and soon quadruple-play services in the consumer markets.

Though a combination of Dish Network and DirecTV might have made lots of near term sense, that deal would not solve the problem the satellite providers face as there is a strategic shift in the consumer market to quad-play services.

And such an option obviously is foreclosed if AT&T buys DirecTV. One way or the other, Dish now seems committed to becoming a provider of triple-play or quadruple-play services.

Despite the business model difficulties, one might argue that is precisely the context that has shaped small and independent fixed network telco strategic choices as well.

As always, the price at which any significant new assets are obtained could make a difference, but in the absence of “distress” sales, though additional scale helps, there are issues about the amount of leverage would-be acquirers must face.

In AT&T’s case, some observers worry that an acquisition of DirecTV means debt burdens would grow, as well as decreasing the amount of cash flow available to fund network upgrades and further growth. AT&T will have to address those concerns operationally.

And all of the larger firms face antitrust and competition concerns.

Comcast diversified significantly by buying NBC Universal, but also has offered to sell off perhaps three million video accounts as a concession to win Time Warner Cable, that move an effort to say below 30 percent share of the U.S. video market, even as it would vault Comcast into a clear lead in high speed access share, with perhaps 40 percent share of that market.

Sprint faces similar issues as it considers an acquisition of T-Mobile US.  Antitrust authorities and regulators consider the mobile market already too concentrated. The issue there is whether Sprint can convince authorities that long-term competition, innovation and investment, as well as consumer welfare, are better served by three strong providers.

As in France, that now is precisely the conclusion national regulators have reached. Though four strong providers are preferable, French telecom regulators now believe levels of competition in mobile services have reached ruinous levels.

At least in part, French regulators believe consumer welfare, in the form of lower prices, as well as investment, are best served by three stronger providers, rather than four weaker providers.

So in addition to regulatory issues, leverage and even dividend policy are key concerns for any large deals. Taking on large amounts of debt to fund acquisitions is out of the question for most of the largest service providers. But for AT&T, issuing new equity also increases the dividends it must pay.

There also is an issue of “where” growth by acquisition is most strategic. Some observers think AT&T does not benefit as much from owning DirecTV, compared to other uses of capital.

Beyond the concern that the linear video business is mature, with growth decelerating, there is the larger strategic concern of the shift to online delivery that imperils the whole linear video business.

For the larger rural providers, the issue is the wisdom of becoming bigger suppliers in a market whose growth prospects are negative, and where recent success has been gotten in business services, not consumer services.

For fixed network providers, where participation in the mobile segment might be helpful, it now is mostly too late to enter the market, with needed scale. Basically, the mobile business has become a “national” business, with little if any room for small or regional providers, long term.

Even if AT&T wants to grow its mobile share, regulators have closed that route. Whether AT&T can afford, or wants to add significant new fixed network assets, likewise is questionable, even assuming regulators would approve, and that seems equally unlikely.

Inability to grow domestically is one reason why AT&T had been looking to buy international assets, recently. In fact, buying a specialized video provider is one of the few domestic options AT&T actually can exercise.

AT&T faces all those issues, ranging from regulatory barriers to revenue growth to capital constraints.

In proposing the acquisition of DirecTV, AT&T undoubtedly will tout the incremental boost to free cash flow, a fundamental change in profile in the video services segment, ability to better manage large dividend payments as well as fund fixed network high speed access investments.

AT&T might also suggest there are advantages in negotiating programming contracts that could be worth $400 million annually. AT&T possibly will hint at ways to use DirecTV to offload video traffic as well, allowing nearly all of its fixed network bandwidth to support high speed access.

But none of the choices are “perfect” at this point, for any of the larger service providers. If it cannot grow internationally at the moment, and if its key U.S. competitors are making moves to gain share or change the strategic context, a DirecTV might be the best immediate move.

Keep in mind the fundamental growth context for cable and telco service providers over the past decade. Telcos have gained video share, while cable has gained voice share, as well as dominance in high speed access.

But there are strategic changes as well. As Google Fiber has shown, the foundation for fixed services revenue now is high speed access, packaged in a disruptive way, complemented by video entertainment, with new cost parameters.

Though “video” has been the big business model challenge for telcos, high speed access now has become more crucial as well, first to catch up with cable, and now to fend off challengers providing gigabit levels of service at vastly destabilizing price points.

AT&T is likely to argue, in essence, that buying DirecTV helps it solve both problems. At least in principle, buying DirecTV helps AT&T fund its fixed network high speed access investments while gaining an important new position in video, the key strategic complement to high speed access.

It perhaps is not a “perfect” move. But it just might be the best available move.

AT&T Will Announce DirecTV Acquisition May 18, 2014

AT&T will announce its purchase of DirecTV as early as May 18, 2014. The deal, which some believe will cost AT&T about $50 billion, is controversial in some quarters. 



The contrarian view is that the deal exposes AT&T to a greater dividend payment burden, increases debt load and offers rather negligible strategic advantages, as the linear video business is declining or, at best, flat, in terms of revenue. 



The opposing view is that the deal makes AT&T a leading player in linear video entertainment for the first time, vaulting AT&T to about second in terms of overall video market share, providing lots of additional cash flow.



Even if the deal does not directly improve AT&T's ability to upgrade its Internet access speeds, the additional cash will underpin the effort. 



Also, the deal might allow AT&T to free up more bandwidth on its fixed network for Internet access services, at least in region, where AT&T already operates fixed networks. At some incremental level, the deal also gives AT&T enough new heft in contract negotiations with content providers that the cost of acquiring content will drop. 



Also, the same deal should increase AT&T's leverage in negotiating for future rights to streamed versions of linear content. 

What is Next Step in French Mobile Market Consolidation?

In the wake of the Numericable acquisition of SFR, which made France’s biggest cable TV operator the second-largest mobile service provider in France, market leader Orange apparently is in talks about an acquisition of Bouygues Telecom, though much speculation suggests it is Bouygues that will buy Illiad’s Free Mobile.

Holding 40 percent market share, it might have been unthinkable some time ago that Orange would be allowed to get bigger in the French market, and that might yet remain the case. Numericable now has about 30 percent share of the French mobile market.

Bouygues has about 18 percent market share, while Illiad’s Free Mobile has about 10 percent share. Under past conditions, it would have been unthinkable for regulators to consider supporting any mergers that would make Orange bigger.

And, most likely, that remains the case, even as French communications regulators actively seek a reduction of French mobile carriers from four to three leading suppliers.

Instead, regulators are likely to favor a combination of Bouygues and Free Mobile, a move that would create a new competitor with about 28 percent market share.

An Orange bid to buy Bouygues would trigger antitrust review and an uphill battle. So one line of thinking is that such a deal is largely tactical, aimed at driving up the price Illiad might have to pay to acquire Bouygues.

It might seem a bit unusual that the smaller firm is seen as buying the larger firm, but each firm’s equity value matters. Illiad is valued more richly than Bouygues, for example. Also, Bouygues telecom operations represent about a third of total Bouygues revenues.

For Illiad, communications is its only business.

Who Wins, Who Loses, Always Matters for Communications Policy

Perhaps significantly, there seems to be a growing belief within the European Union communications community--including some regulators--that a new balance between policies fostering “competition” at the expense of “market power” must be struck.

For the most part, such discussions center on the need for greater scale in the European Union communications industry.

But European Commission regulatory authorities and member national governments do not appear to agree on how to create a more-unified communications market for the European Union.

German Chancellor Angela Merkel, for example, has called for a reform to EU competition law in the telecom sector, allowing the formation of bigger pan-European service providers, even when that reduces competition.

"A balance needs to be achieved between market power and competition so that we can score internationally," Merkel said. Jean-Claude Juncker, a candidate for European Commission president, has also recently added his voice to the growing political support for cross-border mergers of telecom groups.

EC competition authorities, including Joaquin Almunia, European Commission vice president for competition policy, oppose easing merger restrictions.

In large part, the differences of opinion reflect national thinking, as opposed to “European” thinking, Almunia seems to suggest. But the differences also reflect traditional "bureaucratic" squabbles over where power and authority resides.

Almunia notes that national regulators are unwilling to cede authority in key areas such as spectrum allocation, in large part because auctions of such spectrum are significant generators of governmental revenue.

“These governments don't want to allocate spectrum at EU level because they are not willing to forgo the billions raised in auctions, which go directly to their respective national coffers,” Almunia said. “Unfortunately, they prefer to keep spectrum allocation and regulatory decisions in their national hands.”

At some level, the differences also reflect bureaucratic (“bureaucratic” in the analytical sense, not the derogatory sense) dynamics.

It never would be out of place or unusual for a higher authority to argue it is better placed to conduct regulatory operations than lower authorities (again, in the sense of geographic scope, not relevance or value).

Rarely do regulators or officials at any level, in any domain, voluntarily argue their mission is finished and that the agency should be abolished.

Still, those issues aside, there are now new arguments about the objectives of communications policy within the European Union. Traditionally most concerned with fostering competition, at least some regulators now say that cannot be the exclusive or primary focus, given the need for massive investments in next generation infrastructure.

Also, even the proponents of consolidation have nuanced views. National governments often oppose takeovers of major domestic companies or industries, even as they support their own national firms being the buyers of companies in other nations that would increase communications service provider scale.

Almunia, Merkel and Juncker all seem to agree that one key difference between communications markets in the EC and the United States and China, for example, is sheer scale.

But Almunia and Merkel differ on the amount of consolidation that should be encouraged. They also disagree about a transfer of decision-making authority. Almunia bluntly argues that what is required is a “fully-fledged EU telecom regulator, EU-wide spectrum allocation, and no roaming charges.”

Perhaps more significantly, Almunia also argues that competition rules that would speed up market consolidation are unnecessary.

“As to competition rules, they would not have to change for enforcement to adapt to this scenario,” Almunia said. “In an integrated EU market, the definition of relevant markets would automatically change,” with mergers considered on their pan-EU impact, not national impact.

“Therefore, if our political leaders want to be rigorous when they talk about the telecom industry in the EU, they should start thinking as European leaders, rather than giving precedence to their respective national priorities,” Almunia said.

Ironically, all parties seem to want a single EU telecommunications market. But what that means, who benefits and who might lose, is the issue.