South, Southeast Asia Mobile Profits Challenged in 2015

South and Southeast Asia might be among the world's fastest-growing mobile markets, but profit and free cash flow pressures will be significant in 2015.

Fitch Ratings expects most South Asia and Southeast Asia telecommunications operators will face a generally challenging environment in 2015, although its sector outlooks will remain broadly stable.

Minimal or negative free cash flow will result from high capital investment in mobile networks (3G and 4G),  while profit margins will decline because of  competition, Fitch Ratings said.

“Revenue growth will be limited to low-to-mid single digit percentages as fast-growing data services offset declines in traditional voice and SMS revenues,” Fitch Ratings said.

Philippine, Sri-Lankan and Thai telcos might invest 25 percent to 30 percent of their revenue either to expand networks or acquire new spectrum.

Singaporean telco free cash flow also will be low despite reduced capex at 10 percent  to 11 percent of revenue, down from the 2014 level of 13 percent of revenue. Also, Singapore firms  will continue to distribute 80 percent to 100 percent of their net income in dividends.

India, Indonesia, Sri-Lanka, and Philippines mobile operator 2015 revenue was likely to grow by mid-single-digits due to growing data usage arising from the greater availability of cheaper smartphones and more-affordable data tariffs, Fitch Ratings said.

Singapore mobile service provider revenue will grow by low single digits because of continuing cannibalization of voice, text messaging and international revenues. Higher data revenues will offset most of the losses.

Malaysian and Thai service provider revenue is likely to grow by low single digits due to intense competition,” Fitch Ratings said.

Fitch also said Philippines, Malaysian and Indonesian telcos' 2015 profit margins would decline due to competition, higher marketing expenses and data-to-voice/text substitution.

Philippine telcos, it said, were most exposed to margin declines as their most profitable text messaging revenue is replaced by data services. Text messaging revenue contribution for Philippines operators is as much as 30 percent of total revenue.

Indian mobile service provider profit margins are likely to remain stable, as voice prices gradually rise.

Privately-owned Thai service provider profitability could improve by three percentage points in 2015.

Weaker telcos in India, Indonesia and Sri-Lanka may consolidate or exit the industry.

Sprint Customer Satisfaction Plumments in One Year

Sprint is the lowest-rated mobile service provider in Consumer Reports’ latest mobile service ratings, based on a survey of 58,399 subscribers by the Consumer Reports National Research Center.

While Sprint trailed only Verizon in overall customer satisfaction among the major carriers in 2013 ratings, Sprint received “dismal marks” in 2014, in terms of  value, voice, text and 4G reliability, Consumer Reports says.

Verizon Wireless was “once again” the highest-ranked major mobile service provider, receiving high marks for data service and some aspects of customer support.

AT&T and T-Mobile got mostly neutral rankings, though AT&T was the sole carrier to receive the top rating for the reliability of its 4G service.

As in previous surveys, no-contract and prepaid service from smaller companies such as Consumer Cellular and TracFone rated better than the major standard providers for customer satisfaction.

“Our latest cell service satisfaction survey revealed a somewhat precipitous decline by Sprint that shuffled the rankings of the major standard service providers,” said Glenn Derene, Electronics Content Development Team Leader for Consumer Reports. “And smaller, no-frills, no-contract and prepaid service providers continue to do a better job of satisfying customers, and provide an increasingly viable alternative to some of the expensive, long-term contracts that many consumers find themselves locked into.”

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