EU, US Merger Barriers Will Change Growth Strategies

Though not every region necessarily will follow the pattern, big mergers--in either the European Community or United States--have come unstuck in a way that suggests regulators are going to resist them.

Most recently, the EC blocked a proposed merger of Telefonica’s O2 and Hutchison Whampoa’s Three in the United Kingdom. No further thinking about big mergers in the U.S. mobile market has been thought about since the blocked Sprint merger with T-Mobile US.

In 2011 an AT&T acquisition of T-Mobile US was blocked. In 2002 a merger of DirecTV and EchoStar has prevented.

The proposed Comcast acquisition of Time Warner Cable likewise was nixed in 2014.

Nor has big merger opposition been confined to telecommunications. Since 1997, Staples and Office Depot have tried to merge twice, and been rejected twice. In 2016, Pfizer Inc.’s takeover of Allergan and Halliburton Co.’s purchase of Baker Hughes also have been prevented.

To be sure, some deals--such as the AT&T purchase of DirecTV, or the Charter Communications buy of Time Warner Cable--have been approved. In the former case, assets acquired did not alter the market structure in either fixed line or mobile businesses, and shuffled, but did not measurably restrict competition in the video entertainment market.

In the latter case, the combination did not trigger foundation of a new firm with more than 30 percent access of U.S. homes, the traditional trigger for antitrust action in the consumer video or telecommunications business.

At least for the moment, the pattern of behavior suggests that one avenue of growth that has been crucial for big telecom providers over the last decade--growth by acquisition--is closed, at least within the ranks of leading providers in the U.S. and European Union markets.

That is going to be a problem. Unable to grow by acquisition, and facing negative growth in their core markets, the leading service providers are going to suffer a possibly-prolonged period of stringent revenue growth in their domestic businesses.

Sure, one can argue, new emphasis will have to be placed on growth by acquisition outside the home markets. And the already-intense search for brand new markets (Internet of Things, connected cars and so forth) will continue.

But nobody expects those new sources to have the bulk to displace eroding legacy revenue sources.

Hutchison is likely to fail in its bid to acquire Wind in Italy, as well.

But those are “within the silo” deals. It appears regulators are approving “outside the silo” deals.

In other words, AT&T could acquire the satellite video business of DirecTV because it was out of domain. BT could acquire EE for similar reasons (fixed line operator acquiring a mobile firm).

That suggests, at least for the time being, that leading telecom providers will not seek to acquire “in-silo” assets, but complementary out-of-silo assets. That might mean more fixed-mobile or mobile-video entertainment deals, across silos.

Alternatively, more acquisitions by access providers of content or app entities, non-facilities-based segment specialists (enterprise IT, non-consumer-facing assets, over the top apps and services) or growth internationally will happen.

But that path tends not to add much gross revenue, compared to what might be possible when an in-silo acquisition happens.

So firms might be forced to consider international acquisitions to increase revenue bulk, but avoid regulator opposition to a reduction of competition.

Within domestic markets, we are likely to see more acquisitions outside the legacy core.

FCC Forces Charter to Overbuild 1 Millon Homes

As often is the case, the U.S. Federal Communications Commission put some conditions on its approval of the merger between Charter Communications and Time Warner Cable.

Broadly, Charter has agreed to not impose broadband usage caps on its customers for seven years.

Charter also will provide “no charge” interconnection for online video providers and will be subject to  restrictions on its ability to keep programming from being available on online platforms.

Charter furthermore will offer high-speed broadband to two million more homes and offer a low-income broadband program for eligible households.

Somewhat unusually, the FCC also requires Charter to “overbuild” at least a million households already served by another cable TV operator offering high speed access of at least 25 Mbps downstream speeds.

That last clause is unusual. It essentially requires that Charter compete with another cable TV operator, something cable TV operators have been historically loathe to do.

Predictably, an organization representing small cable operators is worried that provision will mean not only competition, but ruinous competition for its members.

American Cable Association President and CEO Matthew M. Polka says harm will occur because Charter has scale advantages, and will “have an economic incentive to choose locations served by smaller providers because Charter can most easily drive them out of the market.”

Of the merger conditions, it is the requirement to overbuild which is the most unusual.

Google Fiber Seems to be Sustainable

For many years a reasonable rule of thumb has been that a competent provider in the fixed network consumer communications services business could reasonably expect to get 30 percent market share within the first few years of operation.

That was true for cable TV operators getting into the voice business, for telcos getting into the linear video subscription business, and for telcos and cable TV providers getting into the Internet access business.

It now appears Google Fiber is getting to the 30 percent threshold in its first few markets. If so, then Google Fiber is a sustainable endeavor.

In the mobile business, similar rules of thumb suggest that any single mobile operator requires market share around 30 percent to sustain itself long term.

source: McKinsey

But there is a major caveat. All such analyses are based on current notions of capital investment and operating costs. Should capital or operating expense assumptions change dramatically, the conceivable market structure could also change dramatically.

In other words, under different assumptions about the cost of market entry, more competitors could survive. Equally plausibly, lower-cost competitors could imperil the existence of legacy providers.

One might note that the emergence of platforms using unlicensed spectrum, or shared spectrum, could change assumptions about the range of sustainable business models, as well as the viability of firms with high cost structures.

Games Generate 90% of Google Play App Revenue

Since 2012, Google Play downloads grew by almost 400 percent, while  app store-related revenue has gone up by a staggering 3500 percent, according to App Annie.

Also, Google Play is gaining market share the fastest in emerging markets like India, Vietnam and Pakistan.

Four of the top-10-grossing Google Play games of all time were driven almost entirely by store revenue in Japan.

Casual-style games were nine of the top-10 downloaded Google Play games of all time, representing approximately 40 percent of total all-time downloads and approximately 90 percent  of total all-time revenue.

source: App Annie

Excluding games, the remaining 10 percent of total revenue is generated by communications and social apps.

EC Blocks O2-Three Merger

As many expected, the European Commission has blocked the $15 billion merger of the U.K.’s Three and O2, At the heart of the concern is the belief that a minimum of four mobile operators are required to sustain robust competition in a market.

According to the Commission, the O2-Three merger would have led to less choice and higher prices for consumers, by reducing the number of network-owning operators from four to three.

Looking at mobile market structure, a report by the Organization for Economic Cooperation and Development notes that the “most significant” of constraints are the limited amount of spectrum and substantial economies of scale in building network facilities.

The mobile communication sector is characterised by a number of factors that significantly influence market structure, OECD says.

The most significant of these are constraints due to the limited amount of radio spectrum available and substantial economies of scale in building network facilities.

But it has to be noted: all such determinations are founded in present business models built on use of scarce licensed spectrum. But the ability to use “scarce” spectrum is dictated by interference control mechanisms that can be more efficiently designed.

In other words, existing frameworks are inefficient because they allocate spectrum on an exclusive basis, even when the primary licensee is not using a resource. Allowing spectrum sharing would dramatically increase the amount of usable spectrum, presumably changes the economics of operating a mobile business.

The point is that the long-term mobile market structure could change radically if spectrum cost constraints are altered.

The issue now is whether another company might emerge as a buyer for O2’s assets, as owner Telefonica wants to exit the U.K. market. Liberty Global, for example, is expected to enter the mobile business in virtually all of its European markets, and already had said it would consider buying any spectrum divested in the wake of a successful O2-Three merger.

source: Shape Networks

“We had strong concerns that consumers would have had less choice finding a mobile package that suits their needs and paid more than without the deal,” said Margrethe Vestager, EU competition minister. “It would also have hampered innovation and the development of network infrastructure in the UK.”

At least in part, the decision was justified on the grounds that a merger would have been bad for mobile virtual network operators.  

The Commission noted that the combined operation would have had a market share of over 40%, and would have had less incentive than its constituent parts to compete with rivals Vodafone and EE.

Ofcom, the U.K. telecom regulator, also opposed the merger.

Artificial Intelligence Will Boost Virtualized Network and Business Processes

As it would have been unwise to ignore the impact of computing and the Internet on the legacy telecommunications business, so too should artificial intelligence likewise be taken seriously, both as an enabler of productivity gains, but also as a development that has serious social, economic, social and political implications.

In one sense, virtualizing networks is a trend that AI could reinforce. So too, “big data” analytics will be enhanced by use of AI, allowing virtualized networks and processes to work better, and faster.

And it is hard to imagine that AI will not also lead to changes in sales and marketing practices. If AI can be used to predict usage and therefore demand, AI also can help organizations adjust demand “on the fly.”

But AI also will reduce the number of jobs required to run any telecom business, as AI is expected to reduce demand in other industries.

Graduate recruitment at auditors and accountants could fall by as much as 50 percent by 2020 due to the impact of artificial intelligence, according to Steve Varley, EY chairman and managing partner for the UK and Ireland. “Over time our graduate needs are coming down."

source: World Economic Forum

The World Economic Forum estimates that AI, robotics, and automation could replace five million jobs around the world by 2020.

Citi estimated that 35 percent of jobs in the UK are at risk of being replaced by automation,

Likewise, the Organization for Economic Cooperation and Development has estimated that 47 percent of U.S. jobs are at risk, and across the OECD as a whole an average of 57 percent of jobs are at risk. In China, the risk of automation is as high as 77 percent.

AI will help. It also will “harm,” in the area of employment. The issue is whether, on a net basis, more jobs are gained than are lost.

Customer Satisfaction Might be Important, It Just Is Not Predictive of Behavior

Most firms consider “customer satisfaction” an important business outcome, the belief being that satisfied customers are repeat buyers; “loyal” customers less likely to desert a firm for a rival. In other words, happy customers are supposed to be loyal customers.

source: B2B International

But even repeat buyers are not necessarily “loyal” in the sense that they are relatively immune from churn.

However logical that thought might be, the evidence suggests that even satisfied customers are not loyal customers.

source: Fiserv

For example, Juniper Research has found that 98 percent of surveyed U.K. mobile banking users are “very happy” or “quite happy” with their service.

But the survey also found that 31 percent of mobile banking users would consider changing banks if they had a bad experience with their service.

In the U.S. market, where respondents have similar levels of satisfaction with mobile banking, about 16 percent of those surveyed would consider leaving their current bank if the experience was unsettling.

In other words, customer churn, in the consumer services realm, is a problem even when customers say they are highly-satisfied with a service.

That is not to argue that customer satisfaction scores are unimportant: they might be generally significant. Virtually non-existent is the company executive that believes customer perceived satisfaction is unimportant.

The issue is simply that consumers who say they are satisfied are not necessarily loyal, in the sense that they are relatively immune to offers from rival firms.