India 700-MHz Spectrum Auction Faces Potential Buyer Strike

Minimum prices set for an auction of 700-MHz spectrum in India are so high (two to four times higher than prior auctions)  that many of the leading mobile companies will not bid. And, according to Fitch Ratings, the eventual spectrum winners might well regret having won. That “winner’s curse” has happened before, often with 3G spectrum auctions.

India's telecom regulator recommended a reserve price of INR115bn (US$1.7 billion) per MHz for nationwide 700MHz spectrum.

Fitch Ratings “believes that efficiency gains from deploying 4G services on 700MHz will be insufficient to offset the relatively high price.”

The reserve price is about twice the price set for 800-MHz spectrum, 3.4 times the reserve price for 900-MHz spectrum and four times the minimum prices set for 1.8 GHz spectrum.

Winning therefore “could exert further pressure on participating telcos' balance sheets and cash flow, and limit their ability to invest in capex over the medium term,” say Fitch Ratings analysts.

In fact, the top four telcos, including Bharti Airtel, Vodafone, Idea Cellular and Reliance Communications may hesitate to bid, as balance sheets already are “stretched,” while available cash is expected to become an issue once Reliance Jio enters the mobile market in the spring of 2016.

Instead, the leaders might choose to rely on spectrum they already have acquired. Bharti Airtel will use 900 MHz, 1.8 GHz and 2.3 GHz.

Reliance Jio, after having invested about US$15 billion on spectrum and networks, will use 800MHz and 850MHz spectrum.

In March 2015, the leading mobile operators had to spend of US$17.7 billion to retain use of spectrum they already were using.

“We believe that there are far fewer reasons for telcos to invest as much in the 700 MHz auction,” Fitch says. As always, there are other alternatives.

Companies can, to some degree, trade and share spectrum, for example.

They also can buy other firms, acquiring spectrum in the process.

During 2015, Reliance Communications merged with Sistema JSFC's MTS India. Reliance Communications also has further plans to merge its wireless unit with that of Maxis Berhard's Indian unit, Aircel Limited.

Fitch believes that smaller and weaker telcos will further seek to be acquired  or exit the industry.

Videocon India, one of the smaller firms which is struggling, has agreed to sell its 4G spectrum assets to the third-largest telco, Idea Cellular.

Fitch expects competition to intensify upon Jio's entry in the market

Blended monthly average revenue per user could fall by five percent to six percent to around INR160 (2015: INR170.

Earnings will suffer as prices drop and marketing spend increases.

"Long, Slow Decline" for Fixed Network Telcos, Says Moody's

Not every problem has a solution, at least not a solution satisfying to the entities with the problem.

In the U.S. market, for example, an entire category of service providers--”long distance” suppliers--ceased to exist. Sure, the assets remained in service, but the firms, and the category, essentially disappeared.

Recall that AT&T and MCI were stand-alone firms engaged solely in the long distance voice (and to some small extent in the capacity market). AT&T was bought by SBC, which took the name and assets.

MCI was purchased first by Worldcom and then Worldcom by Verizon. Sprint still owns its long distance assets, but it is a smallish and declining business with little impact on overall company financial results.

The same fundamental problem is faced by the larger fixed network U.S. telcos. “Slow yet steady decline” is the fate that awaits CenturyLink, Frontier Communications and Windstream Services, according to ratings agency Moody’s.

“Constraints such as capital allocation practices that favor shareholder returns, lagging infrastructure relative to cable companies and high cost of capital will prevent wireline telecommunications companies (telcos) from taking the necessary steps to fuel growth, resulting in their slow yet steady decline,” says Moody's Investors Service.

Essentially, the telcos are caught in a death spiral (my words, not Moody’s). As they are owned by dividend-seeking investors, the firms cannot shrink or cancel their dividends without causing massive investor flight, with few “growth” investors available to replace those fleeing equity owners, since virtually nobody believes those firms can become “growth” properties.

“Telcos such as CenturyLink Inc. (Ba1 negative), Frontier Communications Corp. (Ba3 stable) and Windstream Services LLC (B1 stable) all have high dividend yields that promote a cycle that steadily erodes each company's value and scale,” says Moody’s. In other, the need to pay dividends starves the firms of the capital they might otherwise put into network infrastructure.

"These telcos have strong operating cash flows and the ability to invest more, but they are hindered by market expectations for dividends," said Mark Stodden, a Moody's Vice President and Senior Credit Officer. "Their weak market position can only be changed by increased investment, but this would threaten dividends and is unpalatable to both equity investors and management teams."

Moody's also notes that the high cost of capital has kept these companies from investing in the necessary infrastructure to provide faster-speed service to residential and small-business customers.

A widening competitive gap between these telcos and cable TV operators is the result.

Some problems just have no positive solutions. As was the case for the long distance providers, market exit will be the eventual result.

Iliad Ponders U.K. Mobile Market Entry

Iliad’s Free Mobile, eyeing asset disposals a Three UK and O2 merger would entail, is considering entering the U.K. mobile market.

European Union regulators will give the proposed merger close scrutiny, as the merger would reduce the number of facilities-based national mobile providers from four to three.

That is a key reduction, as many observers and regulators think four is the minimum number of contestants to promote robust competition. An entry by Iliad might, some could argue, immediately bring the number of leading providers back up to four.

Others might argue the U.K. market already has Virgin Mobile and other mobile virtual network operators, with future entry by Liberty Global a virtual certainty. Sky might be interested in any divested transmission and customer assets as well.

Ironically, no matter what regulators or incumbents seem to desire, new competitors seem able to enter mobile and Internet access markets rather frequently, despite the high barriers to entry that many would say exist.

In India, Reliance Jio has triggered a massive restructuring wave.

In the U.S. Internet service provider market, Google Fiber and scores of independent ISPs are building gigabit Internet access networks in markets dominated nearly completely by cable TV and telco ISP operations.

In the U.S. mobile market, where regulators nixed a merger of number three and number four mobile providers (Sprint and T-Mobile), Comcast is preparing its own entry into the market, while Dish Network has amassed serious spectrum assets (either to entry as a retailer or to sell its assets), while additional contestants such as LIghtSquared and Globalstar also want to get into the mobile business in some way.

One might well argue that no matter what service providers and regulators might prefer, reducing the number of leading providers in mobile or Internet access markets is proving to be ephemeral.

Telco Success in New Markets Can Take a While

As mobile and fixed network telcos gear up for coming Internet of Things opportunities, it will be helpful to remember that success will take time. That same admonition applies for mobile video services or any other over the top efforts telcos ultimately will undertake.

Rarely do telcos achieve success right out of the gate. In fact, it can take a decade or two before it is clear they have obtained a sustainable position in a new market.

A few will remember the skepticism many had a few decades ago about prospects for telco to succeed in entertainment video, especially in roles other than as distributors of subscriptions.

The argument had been that telco ownership of content assets would not work well, as content was not a core competence. Skepticism about telco roles in the over the top app (OTT) arena are similar, and early efforts in OTT sometimes have suggested skepticism is warranted.

But it also is fair to recall that it has taken decades for telcos to position themselves for a leading role in linear video entertainment. There was no “overnight success.” In part, the reason was the need to upgrade a substantial percentage of physical plant to support quality video.

Many do not recall that US West, Pacific Bell, Bell Atlantic and AT&T once considered owning, or actually owned, major cable TV assets.

That those assets later were divested only shows how long it can take before a sustainable business model develops in the telecom business. BellSouth filed to operate a cable TV service in 1996.

Prior to that, PacBell, Bell Atlantic and Nynex had formed TeleTV, a business unit to create programming.  

And as many would attest, replacing copper access with fiber to home is a huge financial undertaking.

That alone, given the difficulties, would have been an obstacle.

But AT&T now is the single biggest distributor of linear video in the U.S. market. Yes, it relies heavily on former DirecTV assets, but its leading position is striking, for an industry not believed to be a serious contender in video, decades ago.

There has been even more skepticism about telco ability to compete in the video programming part of the business. But that might have been said about former cable TV operators as well, and that has proven a misplaced fear.

So long as programming entities are allowed to manage themselves, there has proven to be no serious impediment to cable TV operator success as owners of programming assets. Verizon hopes to prove that also is the case for telcos.

It has been two decades since those early forays, and telcos now are established providers of linear TV in the U.S. market. They now are positioning for mobile video and related businesses.

It might take some time. But there is no reason to believe telcos are incapable of success in video services or any of the related businesses. They just have to approach it the right way.

If history is any guide, it might take some time.

In Many Cases, Key Result of Gigabit Internet Access Will be Uptake of "Less Than Gigabit" Services

Gigabit internet access connections might seem a clear case of abundance way beyond a user’s ability to consume such bandwidth.

Nevertheless, Deloitte Global predicts that the number of gigabit per second Internet connections will climb to 10 million by the end of 2016, up an order of magnitude from the 2015 level.

About 70 percent of those connections will be bought by consumers, about 30 percent by businesses.

Greater availability and reasonable prices will drive adoption. Perhaps of equal importance is the prediction that, in 2016, some 250 million consumer locations will be able to buy gigabit connections, and will not.

By 2020, some 600 million subscribers may be on networks that offer a Gigabit tariff as of 2020, representing the majority of connected homes in the world, Deloitte says. Of those 600 million potential connections, between 50 and 100 million consumers might actually buy gigabit services (between five and 10 percent of the potential buyer base).

At the end of 2012, the average entry level price for gigabit service was over $400. By the third quarter of 2015, the average had fallen to under $200, and the cheapest package was priced at under $50, Deloitte says.

The likely result of all those gigabit offers will in many cases be that consumers opt to buy faster connections, but not at the full gigabit rates. Internet service providers that sell gigabit connections and no other speeds will see the highest adoption.

Telcos and cable TV companies that typically offer a range of speeds will probably find most consumers satisfied with speeds lower than a gigabit.

source: Deloitte

Shift Away from "Calling" Continues

Though, globally, mobile calling volumes continue to climb, developed market users often are using voice less, messaging more. Mobile voice volumes as measured in minutes have increased by 20 percent between 2012 and 2015, for example.

Deloitte Global, for example, predicts that, in 2016, 26 percent of smartphone users in developed markets will not make any traditional phone calls in a given week.

“They have not stopped communicating, but are rather substituting traditional voice calls for a combination of messaging (including SMS), voice and video services delivered over the top,” Deloitte Global says.

In 2015, some 22 percent of all smartphone users behaved that way, up from 11 percent in 2012.

The percentage of adults using instant messaging, for example,  more than doubled from 27 percent in 2012 to 59 percent in 2015.

source: Deloitte

New Networks Often Do Not Drive New Revenues

Incumbent telcos often face business model challenges when evaluating next generation network platforms. The biggest problem is that investments sometimes have to be justified on a number of drivers, since the incremental revenue is questionable.

Fixed network telcos, for example, have struggled to justify fiber to the home investments strictly on the basis of incremental revenue (linear video entertainment has been the one new revenue stream).

There is little advantage in the voice segment, and while FTTH or other fiber access networks underpin higher Internet access speeds, telcos generally have been unable to match the faster increases provided by cable TV operators.

Voice over LTE provides another example in the mobile business.

Deloitte Global predicts about 100 carriers worldwide will be offering at least one packet-based voice service at the end of 2016, double the amount year-on-year, and six times higher than at the beginning of 2015.

That will mean some 300 million customers will be using Voice over WiFi (VoWiFi) and Voice over LTE (VoLTE); double the number at the start of the year and five times higher than at the beginning of 2015.

So what is the upside?

“For most carriers launching VoLTE or VoWiFi in 2016, the primary motivation is likely to be to increase network capacity and extend the reach of their voice services,” says Deloitte.

Note what is not said: VoLTE and VoWiFi will drive higher revenues at a significant level. While eventually new revenues could emerge, that is for a later time.

What VoLTE offers, near term, is the ability to move voice calls off 2G and 3G networks and onto the LTE (4G) network.

The often lower frequency spectrum that is freed up can be reused for data services. So the benefit is indirect.

LTE is perhaps twice as bandwidth efficient as legacy voice, but that is a minor advantage in most cases, since voice occupies little bandwidth, and many users globally are shifting communications to text and social media.

Where it is possible to turn off a whole network, that also provides value. But, again, the benefits are indirect. VoLTE does not generally, at the moment, drive higher revenues.

source: Deloitte