Will Western Europe Telecom Revenue Slide Reverse in 2015?

An improving regulatory environment and growing demand for high speed data should ease the pressure on Western European telecoms and cable companies in 2015, Fitch Ratings  says.

That said, revenue pressure is likely to remain in place, as many analysts believe revenue will continue to shrink through 2018. Some estimates suggest the rate of decline is accelerating, in fact, though perhaps a consensus forecast is for slow declines  in the one percent to perhaps two percent range.  

Still, Fitch Ratings believes reduced competitive pressures, the result of a shift in the European Commission's approach to telecom regulation, will help.

Policy increasingly is focused on encouraging revenue growth, part of an effort to entice service providers to increase investment in next generation networks.

Fitch Ratings believes the new policies could contribute to a gradual improvement in profit margins and cash flows in 2015. Whether that will happen or not is the issue. Through 2014, revenue trends have shown a slower rate of decline, but not yet positive growth.

Why Eliminating Mobile Coverage "Not Spots" Might Backfire

Infrastructure investment incentives are a tricky business. Policymakers must balance social objectives such as universal service and quality of service with incentives for service providers, and that sometimes is not easy. Consider the issue of coverage.

In nearly all cases, there are some places within any country where mobile service is not available (complete not-spots), or available only from some of the providers (partial not-spots).

Partial not-spots affect three percent of U.K. premises and 21 percent of land mass, as well as significant coverage gaps on major roads (10 percent to 16 percent).

A partial “not-spot” is any area where mobile phone service is provided by one or two of the four leading U.K. mobile operators. The U.K. government estimates that as much as 21 percent of the U.K. land mass is affected by partial not-spots.

Such coverage issues affect a greater proportion of the country than complete not-spots, where no mobile service is available from any carrier. The problems arguably are more difficult the bigger the country.

Providing 4G Long Term Evolution coverage to an extra 17 percent of the population would require nearly tripling the land mass covered by the network, AT&T has estimated.

An original AT&T plan reached 80 percent of the United States potential user base by covering just 20 percent of the country's land mass.

Providing LTE to 97 percent of Americans would require covering 55 percent of the U.S. land mass, for example.

The point is that inability to earn a market rate financial return is a good reason for not making an investment. And mobile operators argue that is precisely the problem with a proposed national roaming plan that would mandate network access by any mobile customer in any area where mobile not-spots  exist, no matter which firm operates the infrastructure in such areas.

An EE-funded study by Capital Economics estimates that national roaming as proposed by the U.K. government could lead to a reduction in industry capital expenditure of £360 to £440 million each year, delay the rollout of 4G by 18 months to 24 months, and reduce GDP by 0.1 to 0.2 per cent.

The report finds that national roaming would only increase coverage by two percent to four percent of the U.K. geography. Furthermore, any benefit would be wiped out by “signal locking” that would negatively impact a much larger number of people than would benefit from coverage.

Signal locking occurs when mobile devices unnecessarily connect to another network for voice and cannot access data services.

Contrary to the government’s intentions, thinly-covered rural areas could see significant reductions in investment, since mobile operators now compete, in part, on coverage.

That provides an incentive for mobile operators to build new towers in rural areas, sometimes even when the incremental revenue earned from such installations is not necessarily commensurate with investment. The value comes from the ability to provide service at all, in rural areas. That is why mobile operators tout their degree of coverage.

The proposed national roaming plan actually eliminates the ability to differentiate on coverage, since all mobile services could claim the same degree of coverage.

That illustrates the policy challenge. Universal access goals conflict with investment goals. Ironically, mobile operators argue, widespread mandatory roaming actually reduces incentives for any specific mobile operator to make additional investments in not-spot areas, as no marketing advantage results.

UK Telecom Market On Verge of Major Consolidation

After BT began moving towards an acquisition of either Telefonica SA’s O2 or EE, the wireless carrier co-owned by Orange SA and Deutsche Telekom AG, a Vodafone reaction was virtually certain.

Vodafone arguably cannot allow BT to amass that much revenue scale and bundling capability without the ability to match future BT offers and market share, as the U.K. telecommunications market would lurch towards a two-tier structure with BT possibly able to climb up to the top of the market share standings on the basis of new product bundles, while the other providers are left to compete with product offers less broad.

The example is the U.S. market, where most consumers buy a bundle of services including high speed access, voice and video entertainment, while some also add mobile service quadruple plays. The standard market offer, in that case, becomes the bundle itself, and less the discrete product components.

Bundling also deters customer churn, a key value in zero-sum markets where one service provider gains an account mostly at the expense of another provider.

The other important driver is a change from scale to scope in the consumer services business. In the past, networks tended to support a single lead app: broadcast TV, broadcast radio, voice, multi-channel TV, paging or mobile voice. These days, Internet protocol means any network potentially can deliver any media type.

But there are several other very good reasons service providers sell bundles of services. Very simply, in a competitive market no single service drives enough revenue to justify building and operating the network.

In a competitive market, where any single service sold by any single provider might only reach share of about 20 percent to 30 percent, an expensive access network can be justified, and remain financially viable, only when the network owner can sell multiple services.

In other words, selling a single customer three or four services at $30 a month, with household share between 25 percent to 33 percent, produces about the same amount of revenue as selling a single service to 95 percent of households.

There are other reasons for bundling. Service providers have found that bundling reduces customer churn. In some cases, a triple play or quadruple play customer exhibits churn as much as 2.6 times lower than single service customers.

Still, beyond any grand strategic considerations, such as gaining a facilities-based platform for competition in new markets, in-market consolidation is driven by a simple and growing problem.

It is becoming increasingly difficult for any service provider to make reasonable profits in its classic lines of business, virtually all of which face competition from new suppliers and new product substitutes. 

So integrating fixed and mobile services is less about synergies between the services and networks--though some synergies undeniably exist--and more about the sheer need to replace lost revenues with new replacement sources.

EC Wants to Raise $393 Billion Investment Fund for Instructure, Including High Speed Access

How much leverage can the European Commission gain from a €21 billion loan fund for infrastructure projects? The answer to that question is the key to a new proposal by EC President Jean-Claudaine Juncker to spark total investment of about €315 billion ($393 billion) in an effort to ignite economic growth.

At its heart is a new €21 billion fund that would give the European Investment Bank the ability to loan a multiple of that amount.

The new European Fund for Strategic Investments (EFSI) would be a partnership with the European Investment Bank, receiving € 16 billion from the EU budget, combined with € 5 billion committed by the EIB.

Key to the claim of an eventual lending capability of $393 billion is a multiplier effect of 15 on the initial funding. In other words, the availability of the “seed funds” backed by the EC would encourage other private lenders to contribute up to €252 billion in private loans.

The effort will strike some as reminiscent of the search for “shovel ready” projects touted by the U.S. White House when it launched its “stimulus” program in 2009.

The problem was that the $830 billion stimulus plan simply did not find such “shovel ready” infrastructure projects able to begin actual construction immediately.  The new EC plan likewise expects to generate all the new investment within three years.

The Fund will finance strategic projects across the EU in infrastructure such as broadband, energy and transport; education, research and innovation; renewable energy and energy efficiency.

To be sure, pumping that much money into an economy will have some effect. How much is the issue.

A 2014 study by the U.S. Congressional Budget Office found the “American Recovery Act”  raised real (inflation-adjusted) gross domestic product by between 0.1 percent and 0.4 percent.

The ARA lowered the unemployment rate by an amount between a small fraction of a percentage point and 0.3 percentage points.

The stimulus plan  increased the number of people employed by between 0.1 million and 0.5 million and increased the number of full-time-equivalent jobs by 0.1 million to 0.5 million.

According to European Commission estimates, the  investment plan has the potential to

add € 330 to € 410 billion to the EU's GDP and create one to 1.3 million new jobs in the coming

three years.

U.S. experience suggests those goals will not be met.

Hard to Say Whether LTE Boosts Revenue for Mobile Operators

Long Term Evolution, in some cases, is boosting mobile service provider revenues in a direct way, as was hoped. In many other cases, LTE provides indirect revenue value, even when 4G prices are not formally higher than 3G data access prices.

Bharti Airtel, for example, now has started offering an LTE data plan which is even cheaper than the equivalent 3G plan.

But South Korean operators are generating significantly increased revenue from their 4G customers. EE, in the United Kingdom, likewise seems to be generating incremental recurring revenue from 4G services.

In France, Free Mobile introduced a 4G offering at no additional charge to its existing 3G service, forcing rivals to lower their 4G tariffs.

3UK is allowing customers to migrate to 4G without switching from their 3G contracts and will continue to offer unlimited data allowances. Telefonica Movistar in Spain also is offering 4G at the same price as 3G.

Of 65 LTE mobile operators surveyed by GSMA, almost half of them have used the deployment of LTE as an opportunity to introduce a new form of pricing for mobile broadband services.

For many of those mobile operators, differentiation drives the incremental revenue. That is particularly the case when unlimited data plans are replaced by new offers where speed tiers as well as volume-based data allowances are available for purchase.

The speed-based tariffs are most common in Europe, where 90 percent of operators surveyed offer them. Such tariffs are less popular across the Middle East, Asia Pacific and Africa, and least prevalent in North and Latin America where they are yet to emerge.

Bharti Airtel’s move suggests there will be pricing pressure in the Indian market. As elsewhere, though, one indirect benefit and advantage of encouraging LTE usage is that the cost of supplying Internet access is lower with 4G than 3G. For that reason, Bharti Airtel gains benefits when shifting its heaviest users to 4G, and off the 3G network.

Some might ask how 4G deployment will affect the financial return from new 3G networks still being built in India, as both networks represent new mobile Internet access services, and 4G might not be priced higher than 3G.

How Long Term Evolution affects use of Wi-Fi is not completely clear, either. Some studies suggest LTE users reduce use of Wi-Fi while other studies suggest use of Wi-Fi increases. Say

EU Reconsiders Network Neutrality

One of the problems with  “network neutrality” continues to  be that nobody agrees about what we are talking about. Now there is a potential change in European Union policies regarding “network neutrality” that essentially recognizes that it cannot be defined in a way that all 28 EU members would accept.

A new document issued by the EU president in fact suggests the “removal of the definitions of ‘net neutrality’ and ‘specialized services’” from any future policy documents.

The proposal suggests that, instead of defining network neutrality, policies only point to the objectives of net neutrality. It isn’t clear how a government agency can create or enforce a policy about a practice that is not defined, some might argue.

The inherent difficulty of the subject is further illustrated by the handling of traffic management principles--which always mean the potential for managing traffic flows to protect overall network performance under conditions of congestion. “Clear principles for traffic management in general” are required, the document argues.

That is all well and good, with the obvious caveat that clear policies will be hard, but not impossible, to craft. Especially contentious will be proposed rules about Internet service providers being required to “maintain sufficient network capacity for the Internet access service regardless of other services also delivered over the same access.”

The example given in the document is sufficient bandwidth to handle simultaneous use of email by one user while another watches streaming video.

In principle, that sounds simple enough, but requires assumptions about what apps, with what bandwidth and latency characteristics, are used at any location, by what number of devices and users, at any particular time, in an environment where end user demand changes continually.

The problem is that best effort Internet access is, by definition, conditional, a matter of  statistics, since the service is shared by many users.

And that means Internet service providers essentially have to guess at peak hour demand, in the same way that voice providers had to estimate peak demand. Maintaining sufficient network capacity” therefore requires quantifying estimated demand at peak hour. Sometimes planners are going to guess wrong.

Also, the document allows for transparent, non-discriminatory and proportionate traffic management that is not anti-competitive. Some might argue that is among the fundamental problems with network neutrality: networks have to be managed, which means sometimes it is necessary to groom (“throttle or block”) traffic, or simply let it all slow down.

Of course that should happen in a way that is not anti-competitive. And there are legal remedies for anti-competitive behavior. But it often does not make sense to groom traffic in a “non-discriminatory” way.

Video and voice are highly intolerant of packet delay. When networks get congested, better user experience is obtained if those types of apps--video and voice--are given priority, while other apps more tolerant of delay can be delayed. Some strong forms of network neutrality make that illegal.

There is a reason “network neutrality” is so hard to understand. Defining it is difficult. And defining it is difficult because we are asked to suspend thinking about network congestion issues under conditions of scarcity.

And make no mistake: networks are risky, expensive bets, so  they will remain relatively scarce. No network can be built for infinite demand, thus necessitating hard choices about capacity. Congested networks must be managed. The only issue is how they are managed.

"Don't Worry" Said the Spider to the Fly

"'Will you walk into my parlor?' said the spider to the fly, in the poem by Mary Howitt. Will you carry me across the river, the scorpion asked the frog. You know the stories: the spider eats the fly; the scorpion stings the frog.

Google’s Project Loon, intended to supply Internet access is not competitive with other Internet service provider businesses, some might claim.

“Loon isn’t disruptive,” said Mohammad Gawdat, Google’s X VP said. “This is outside the infrastructure you are currently building.”

But Google, he said, plans to launch Project Loon commercially in 2016, “covering every square inch of the planet.”