Telefónica Weighs Major Investment in BT

source: Deadzones.com

Telefónica appears to be angling for a deal giving it 20 percent ownership of BT, while returning O2, the asset formerly representing BT’s mobile business back to BT.

BT got out of the mobile business in 2002, which BT had started in 1985, as a short term measure to shed debt. BT was not the only firm to be forced to do so.  

One of the most surprising telecom asset sales of the past couple of decades would seem to be AT&T’s sale of its cable TV assets in 2002 after assembling them in 1998 through 2000, and the spin off of its mobile assets in 2001 (after acquiring the McCaw Cellular business in 1994).

Given the current thinking about the strategic value of high speed access, the dominance of cable-based high speed access, mobility as the growth driver within the broad telecommunications business, and the contribution video entertainment services are making as part of the triple play bundle sold by telcos, the asset dispositions by AT&T an BT might appear to have been untimely, if necessary at the time.

Now there are rumors BT will reacquire O2, its former mobile assets, as AT&T, in one sense,  later bought its way back into the mobile business as well.

It is a somewhat convoluted story, but the spun off AT&T mobile assets were acquired by Cingular Wireless, a joint venture between SBC and BellSouth.  

After SBC Corp. purchased the former AT&T, and then bought BellSouth, its former partner in Cingular Wireless, Cingular was rebranded AT&T Mobility.

So what’s the story? Sometimes grand strategy can bump into tactical reality. The sudden collapse of the telecom bubble in 2001 was one of those confluences. Both AT&T and BT had to shed assets to reduce debt, and larger strategy had to wait.

source: Visual Insights

So barely two to three years after each firm made big decisions to get into or out of a line of business, each firm reversed course. BT became a mobile virtual network operator in the United Kingdom three years after selling its mobile assets.

AT&T made the bigger shift, shedding mobile and also fixed network assets it had intended to use to underpin its voice and high speed access strategies. A few years later, AT&T itself was completely sold to SBC Corp.

But sometimes larger strategy can drive tactical decisions. Telefonica appears to be angling for a broader alliance with BT to bulk up in anticipation of higher competition in the European mobile market. That creates a willing seller to match a willing buyer.

All of that makes sense, though it is ironic that BT and AT&T would divest, and then reacquire, core mobile assets that today drive, or will drive, revenue growth for both firms.

 

LTE: A Race Nobody "Wins"

Some might argue it is a waste of much time to argue about which region or nation is "ahead" or "behind" on some measure of communications usage, performance or investment. The reason is that the metrics always change, and that there are multiple relevant metrics.

There is, in other words, no sustainable advantage. 

One often hears it said that "the United States is behind Europe on high speed access speeds and prices." It depends on whether one compares the plans people actually buy, for example, no matter what existing plans are offered. 

It does not matter what the typical lowest, median or most-expensive plans actually are, if most people do not buy stand-alone high speed access plans, as is the case in the U.S. market, where most buy triple-play packages. 

Among the other issues are variations in national prices for all products and services. On a percent of monthly income, or yearly income basis, U.S. high speed access costs as little, or less, than similar plans in Europe or elsewhere. 

There are anomalies: EU consumers pay less per month than U.S. consumers for mobile wireless services, but U.S. consumers use five times more voiceminutes and twice as much data, according to the GSMA.

So it matters whether one measures price only, or price-per-bit, or price-per-call, which related price to quantity. In the area of voice calls, U.S. consumers pay 333 percent less per minute of use than do EC customers.

But measured as percentage of household income, U.S. prices actually are lower than in Europe, even though the conventional wisdom and studies tend to suggest the opposite is true.

When converting for purchasing power parity, posted retail prices in the United States rank about 43rd globally, in terms of cost, behind Columbia and ahead of Greece. Keep in mind that tells you something relevant only if most people actually buy particular plans, whether they are low-cost or high-cost plans.

Cost as a percentage of household income runs less than two percent in developed nations, as a rule. So the actual cost for U.S. or EC consumers is about the same. 

Also, which index one chooses also makes a huge difference. Measuring performance, price or availability and adoption of Long Term Evolution, for example, results in different "leaders" than measuring fixed network performance, price and availability. 

source: Wall Street Journal

U.S. Mobile Spectrum Prices Quadruple Since 2006

source: Wall Street Journal

U.S. mobile spectrum prices have quadrupled since 2006, one sign of the growing need for mobile data resources. In 2006, prices were 56 cents per potential customer (MHzPop). The current auction for AWS-3 mobile spectrum already has reached levels of $2.10 per "MHzPop" (price of one megahertz of bandwidth per potential customer).

The price per MHzPop is derived by multiplying the number of available megahertz of bandwidth covered by a license by the number of people in the area covered by the license.

If a license of 15.0 MHz reached a million people, with a bid price of $11.4 million, the price per MHzPop is $11,400,000 divided by (1,000,000 people x 15 MHz), or 76 cents per MHzPop.

To put the current bids into perspective, the $34 billion staked so far represents about a year’s worth of capital investment by AT&T Mobility, Verizon Wireless, T-Mobile US and Sprint, put together.

So far, one can only speculate about why prices have been so robust, as the identities of bidders are secret. 

Most had expected more modest prices, as AT&T and Verizon were expected to be the leading buyers, while Sprint said it would not bid at all, and T-Mobile US had particular needs in Chicago, but arguably could afford not to engage in a bidding war elsewhere. 

Most speculation centers on the presence of a third unexpected bidder in the major markets, however. 

Beyond that possibility, the robustness of the bids might indicate concern about the timing of anticipated auctions of TV spectrum, or the amount of capacity that might be made available. 

There are other ways to acquire spectrum, but some of those paths are closed to AT&T and Verizon. Since it appears impossible for either firm to acquire Sprint or T-Mobile US, buying another mobile company, to get its spectrum, is off the table.

There might be some small opportunities for either AT&T or Verizon to acquire regional assets, but nothing that immediately adds national scale, with a few exceptions. Dish Network has more than 50 MHz that could be sold, if Dish does not decide to move ahead and become a mobile service provider in its own right.

There are some other potential assets (Lightsquared and Globalstar), plus possible future shared spectrum assets that are likely to be made available, but none are available as immediately or are as useful, as the AWS-3 spectrum, one might argue. 

Source: Daily Wireless

Most observers think a purchase of Dish Network spectrum by AT&T or Verizon would not be blocked, but it is unclear whether Dish would sell at a price either firm might be willing to pay. 

For AT&T and Verizon, the most certain path is to acquire spectrum now, as the other options are uncertain. 

Also, Dish Network has a vested interest in pushing for high AWS-3 auction prices because higher prices will enhance the valuation of similar assets Dish purchased earlier in 2014, boosting Dish equity value. 

If there is uncertainty about the amount of new capacity made available by future auctions, or its possible availability, bidding now in the only certain auction might take on more importance. 

Zero Rating is a Normal Part of Content Services, on Internet, or Not

Ironically, zero rating of Internet apps--opposed by some because it favors some apps over others--is a standard practice in other parts of the media and content universe. Consider newspapers, magazines, broadcast television and broadcast radio, which are zero rated.

Some argue zero rating is unfair because it favors some apps over others. One could make exactly the same argument about TV and radio stations, newspapers, books or magazines. Ownership of broadcasting licenses, or simply editorial discretion, favors some content providers over others.

How regulation of Internet access fosters or hinders application and software innovation is a legitimate policy concern. But there are huge private financial interests intrinsic to the policy concerns.

Zero rating is about revenue models, for example. Many app suppliers subsidize content consumption by selling advertising, and not charging end users directly. Zero rating is another form of doing that, especially where an app provider and a specific Internet access provider have a business arrangement where the app supplier pays the access provider for data consumption.

The point is that “non-neutral” pricing and availability are a fundamental part of the content delivery business. And much of the Internet’s top activities are about content products.

Analyst John Strand points out that network neutrality rules in the Netherlands have, in one important instance, not lead to a flowering of new apps from new providers. Instead, Netflix has grown from zero consumption of Internet capacity to 20 percent of all downstream network capacity almost immediately.

“Neutrality” rules do not, in other words, prevent highly-popular or large content providers from gaining dominance in a market. Neither will an absence of zero rating rules prevent markets from operating, either.

U.S. Cable TV Companies Gain 83% of Net High Speed Access Customers

The largest U.S. cable TV companies accounted for 83 percent of net high speed access  additions in the third quarter of 2014, continuing a trend that has been in place for some time.

Of some 700,000 net new subscribers, cable TV companies added 580,000 net new customers, according to Leichtman Research Group.

The largest U.S.  telephone companies added about 120,000 net high speed access subscribers in the third quarter of 2014, a figure complicated by customers adding fiber connections and dropping all-copper digital subscriber line connections.  

Those figures are based on tracking of performance by the 17 largest U.S. cable TV and telephone companies that represent about 94 percent of all subscribers in the market.

Those suppliers now account for 86.6 million subscribers, with cable companies having over 51.2 million broadband subscribers, and top telephone companies having nearly 35.4 million subscribers.

The telco performance requires some explanation. Where copper facilities have not been upgraded with optical fiber (either “to the home” or “to the neighborhood”), cable providers arguably are taking share because the cable services offer faster speeds and roughly equivalent prices.

Where telcos offer upgraded service using fiber to neighborhood or fiber to home, DSL losses tend to be balanced by equivalent gains in fiber-enabled high speed access. Also, the largest telcos are adding net subscribers, while smaller telcos generally are losing customers.

Also, in some areas, telcos might have made deliberate decisions to lose share rather than upgrade networks. That might be the case either because the expected return on invested capital is higher if investment goes to mobile facilities, or because the actual business case for an upgrade provides a negative or very-low financial return.

Over the past year, there were about 2,930,000 net broadband adds, compared to about 2,540,000 over the prior year, and 2,925,000 two years ago, Leichtman Research Group says.

Broadband Internet	Subscribers at End of 3Q 2014	Net Adds in 3Q 2014
Cable Companies
Comcast	21,586,000	315,000
Time Warner	12,073,000	108,000
Charter	4,956,000	106,000
Cablevision	2,756,000	(23,000)
Suddenlink	1,135,500	32,200
Mediacom	997,000	10,000
WOW (WideOpenWest)*	729,700	-
Cable ONE	486,142	3,417
Other Major Private Cable Companies**	6,505,000	30,000
Total Top Cable	51,224,342	581,617
Telephone Companies
AT&T	16,486,000	38,000
Verizon	9,146,000	69,000
CenturyLink	6,063,000	8,000
Frontier^	1,922,000	21,500
Windstream	1,142,000	(11,800)
FairPoint	329,494	(3,927)
Cincinnati Bell	270,500	200
Total Top Telephone Companies	35,358,994	120,973
Total Broadband	85,583,336	702,590

Sources: The Companies and Leichtman Research Group, Inc.

Household Bandwidth Requirements Will Grow 31% Annually, Next 5 Years

Average household bandwidth requirements will increase by 31 percent annually over the next five years, from a peak hour average usage per household of 2.9 Mbps in 2014 to 7.3 Mbps in 2018, according to a study sponsored by Ciena and conducted by ACG Research.

Some might argue the absolute speeds are less important than the growth rate, as different studies come up with different conclusions about the current state of peak hour speeds.

A study of peak hour speeds in the United Kingdom suggested speeds of about 6.2 Mbps during the peak evening hour.

Some would argue peak hour speeds are higher in the United States and Europe, ranging between 15 Mbps and 19 Mbps during the hours of heaviest household usage.

Over the top unicast video traffic is predicted to be 4.6 times greater than traditional multicast traffic by 2018, according to the study.

Usage of Internet video, which includes smart TVs, is expected to grow from 12 percent of overall peak average bandwidth in 2014 to 25 percent in 2018, a compound annual growth rate (CAGR) of 56 percent.

Internet video will be the largest contributor to household bandwidth consumption by 2018.

But there are several drivers of increased bandwidth consumption. Households and users now connect multiple Internet-using devices in a household, ranging from streaming consoles to smartphones, tablets and Internet-connected TVs.

Larger screen TVs consume more data than small screen devices, as does consumption of HDTV content, while new ultra-high definition 4K TVs consume even more data than HJDTV..

In fact, 4K streaming video services consume three to four times more bandwidth than HDTV.

Why Dish Network Wants Higher Spectrum Prices, in AWS Auction

Typically, would-be acquirers of new mobile spectrum would prefer to pay lower prices. Sometimes, though, a bidder might actually act to increase overall prices. That appears to be the case for the on-going U.S. auction of AWS spectrum.

The actual identities of bidders are secret, but Dish Network, which has three entities able to bid, actually has a valid business reason for desiring higher prices. Dish Network purchased similar spectrum earlier in 2014, namely a paired 10-MHz block of spectrum that runs from 1,915-1,920 MHz (for the uplink) and from 1,995-2,000 MHz (for the downlink). Dish also controls 40 MHz worth of spectrum adjacent to those frequencies.

If the current AWS auction prices climb, the value of spectrum Dish Network already owns should climb as well. That, in turn, should boost Dish Network’s stock price, which in turn would become a currency to be used for additional transactions, perhaps a bid to buy T-Mobile US, for example.

Some would argue the current AWS auction prices boosted Dish Network equity value equity value 10 percent.  Some also would estimate the value of Dish Network spectrum usable to support mobile communications mobile communications at more than $12 billion.  

Others might peg the value of potential mobile communications as representing most of Dish Network’s equity value, in excess of 75 percent of the firm’s market value. That is a stunning thought, for a company with 14 million video customers and zero mobile customers.

Skeptics might argue that all prior efforts by Dish Network to reinvent the company have essentially failed, though.

Of course, Dish Network could decide simply to sell all of its spectrum, and not become a mobile operating company. But that entails risk as well, since some of the equity valuation of Dish Network includes the assumption it will become a mobile service provider, adding not only subscribers, new product lines, revenue and cash flow, but giving Dish Network an opportunity to escape the clutches of a declining business (satellite TV entertainment).

But some might well question the viability of a fifth national U.S. mobile provider, leading to speculation Dish Network “has” to buy T-Mobile US.