Misguided approach to licencing MVNOs in Egypt

On the 8^th of May 2012 the National Telecommunication Regulatory Authority (NTRA) of Egypt indicated that it is preparing to accept tenders for a new mobile virtual network operator (MVNO) licensee. The NTRA aims to form a committee and define the necessary regulatory framework for the introduction of MVNOs within three months. In 2011 Saudi Arabia’s regulator took a similar MVNO licencing approach.

Regulators in many emerging markets have not grasped the essence of an MVNO nor do they appear to understand that there is no need for a restrictive licensing regime for MVNOs.  Of course mobile network operators require a licence, because they need to construct sites, require way-rights and most importantly they require spectrum licences. The latter point is particularly relevant because spectrum is a limited resource.

There is nothing that limits the number of MVNOs that could operate in a country other than their ability survive in a competitive market. Witness the 50 or so MVNOs in the Netherlands, if governments wish to bring the market benefits of MVNOs to their country they should allow anyone to operate an MVNO, perhaps with a simple authorisation to ensure that the MVNO adheres to telecoms regulations already in place. Once the authorisation is granted, the MVNO could then obtain a numbering range and whatever else it needs to operate. Certainly there should be no fee payable other than a cost based administration charge.

Instead of a restrictive licensing regime for MVNOs, international gateways or other telecoms services, regulators in emerging markets should endeavour to create liberalised mobile wholesale and retail markets as we see in many European markets and North America.  This may well require a fundamental shift in political thinking. One of the key reasons why many countries in emerging markets, such Egypt or India are so attached to licensing, not just in field of telecoms, is that it allows them to exert state control and extract hefty licence fees.  State control, for example restricting innovative tariffs or business models, hinders the development of a vibrant telecoms and mobile broadband market and holds back the economies in those countries.  Liberalising telecoms would be an excellent initiative to stimulate growth and bring mobile broadband internet access to the maximum number of people.

Written by Stefan Zehle, CEO, Coleago Consulting

Vodafone’s takeover of C&WW

On 23rd April 2012, Vodafone announced an expected £1bn agreement to acquire Cable & Wireless Worldwide. The move by Vodafone might on the surface look like a strange purchase – why should a leading global mobile operator active in over 20 markets want to acquire a struggling UK focused business teleco with a large international IP network and carriers’ carrier business? There are a number of reasons why it makes sense:

• It reinforces Vodafone’s UK corporate market position as C&WW has a blue chip client list that is a who’s who of UK banks and retailers as well as the UK government. Vodafone will be able to extract synergies from rationalising its combined corporate sales team. The combination of Vodafone UK and CW&W will be the second biggest UK telco after BT.
• With mobile data traffic growing strongly, Vodafone will be able to use C&WW’s extensive UK fibre network to connect up its mobile base stations which will offer improved capacity and significantly lower operating costs. The company estimates that CW&W’s fibre network currently passes one third of its UK base stations. It will no longer need to rent as many high speed leased lines from BT or rely on lower capacity microwave links.
• Vodafone will attempt to use C&WWs 425,000km international network which links 150 countries to lower its international traffic costs although that might not be such a big advantage given the highly competitive nature of the international carriers’ carrier market. Alternatively Vodafone might sell this asset to another buyer keen to consolidate that market.
• Vodafone has (conservatively) stated that it does not think it will be able to use C&WW’s tax loss carrying forward, although it will benefit from its capital allowances which could go some way to making the deal self financing.

All in all it looks like a sensible bolt on acquisition and given that it represents a small fraction of the groups multi-billion pound free cash flow the risk is probably low. We expect that other smaller fixed line and DSL players in Europe could become acquisition targets for larger telecom players looking to extract synergies in mature markets where margins are under pressure.

Written by Scott McKenzie, Director, Coleago Consulting

India: A graveyard for mobile operator’s return on capital employed

The Indian telecoms regulator TRAI published its “Recommendations on Auction of Spectrum” 23rd April, 2012.  The recommendations can be downloaded from the TRAI website in form of a rather funnily named PDF file “Finally final recommendation230412.pdf”.

TRAI proposes an amazingly high reserve price for the 1800MHz spectrum which was confiscated due to the previous corrupt allocation process. TRAI proposes reserve prices for each region or circle, amounting to a nation-wide equivalent of Rs. Crore 3,622 (€ 521 million) per paired 1 MHz of spectrum with 33 per cent of the licence fee paid upon licence award and the remainder starting after two years over a period of 10 years. Using a discount rate of 10 per cent (the approximate current base rate in India) this works out at €0.148 per MHz per pop.

TRAI based its decision on the prices paid for the 2.1GHz spectrum in 2008. Coleago previously commented on the extraordinarily high prices paid then, the main factor being the restricted supply of spectrum. The acquisition of 3G spectrum had a seriously negative effect on return on capital employed for the winning operators.

TRAI commented that the reserve price in terms of per MHz per pop is not so different from prices paid in some European auctions. That is correct; the average price paid for 1800MHz spectrum in 2010 to 2011 in Germany, Greece, Portugal and Italy amounted to €0.129 per MHz per pop. However, the Eurozone per capita GDP is US$32,521 whereas the per capita GDP in India amounts to a mere US$1,389.

The whole idea of setting reserve prices for the 1800MHz spectrum at 80 per cent of 3G auction prices, adjusted for inflation and the better propagation characteristics of the 1800MHz spectrum compared to 2.1 GHz spectrum is unreasonable.  Surely the point of an auction is to find out what the value of the spectrum is?

The recent trend of setting very high reserve prices started among the highly indebted countries of Europe. In countries where reserve prices have been very high, such as the spectrum licences renewal in Greece, the price paid at auction was the reserve price. Operators cannot do without spectrum and they are therefore sitting ducks for Governments to extract cash. The somewhat unprofessional argumentation and process put forward by TRAI illustrates that this is merely about extracting maximum cash from the mobile industry in India.

A further example of the bizarre TRAI recommendations is the proposal to set the annual Spectrum Usage Charges. In paragraph 3.152, TRAI states that “Any such charge should be only to cover the administrative costs attendant with resource management”. TRAI then proposes to set the Spectrum Usage Charge at “1 per cent of the Adjusted Gross Revenue” of operators.  There is of course absolutely no link between an operator’s revenue and the administrative costs of TRAI. This illustrates that this is really just another cash grab by TRAI.  No doubt this money will be put to good use by the Indian Government. Transparency International (TI) ranks India, 95 in its Corruption Perceptions Index (CPI) with a score of 3.1 compared to 9.5 for New Zealand (rank #1). Investing in India is not for the faint hearted

Written by Stefan Zehle, CEO, Coleago Consulting

The ferocity of the battle for the mobile wallet will keep competition in check

Project Oscar, the mobile wallet joint venture between Everything Everywhere, Vodafone and O2 has been referred to Brussels over fears that it will “stifle innovation” according to the Financial Times (13^th April, 2012). There is a fierce battle raging to define the standard for mobile payments and a key element of success in a standards war is first mover advantage. The mobile industry is often criticised for being slow moving and cumbersome so this referral and the ensuing lengthy probe is a cruel blow.

This is another example of the uneven battlefield in which operators have to compete compared to the Over The Top players such as Skype, WhatsApp, Facebook and Google. Competition for the mobile wallet is already intense with Google Wallet leading the charge but PayPal, Monetise and a range of other players are hot on their heels. It will not be long before Facebook joins the fray and many were surprised that the latest iPhone did not ship with Near Field Communications which would have opened the door to an iWallet – it surely will not be long however. Mobile operators are under intense competitive pressure from a wide range of OTT players who simply do not face the same level of regulation and scrutiny. Regulators and competition authorities need to take a wider perspective on the competitive landscape, if not they will be the ones stifling the innovation and competition they are so anxious to promote.

Written by Graham Friend, Managing Director, Coleago Consulting

The new iPad illustrates the importance of mobile broadband spectrum and the device eco-system

The New iPad was launched early March 2012 in many markets world-wide. It appears to be a highly desirable device.  Among its many features Apple touts 4G connectivity. However, a closer look reveals that only the American region 4G bands, namely 700MHz and 2100MHz have been included in the radio chip set.  Of course the device also includes 3G connectivity and here it is compatible with European 3G/HSPA in the 2100MHz band and also in the 900MHz band.

It is likely that  Apple will launch a European iPad version with LTE at 800MHz and 2.6GHz, but in the meantime there is a problem. In Europe, not many operators have refarmed the 900MHz spectrum to 3G HSPA and some operators do not hold any 900MHz spectrum.  This means in Europe mobile broadband access for the iPad is restricted to more densely populated areas where 3G is available in the 2.1GHz band.

This gives T-Mobile and Vodafone in Germany a marketing advantage. The most ardent iPad fans are probably also high voice spenders and can be locked in with a 24 months contract. Even if a European device becomes available in 6 or 12 months, in the meantime O2 and E-Plus are disadvantaged.  For O2 this is all the more annoying because they spend €1.15 billion to acquire 800MHz spectrum in May 2010.  Of course E-Plus who does not have any 800MHz spectrum will remain disadvantaged for the foreseeable future.This matters, because the new iPad is a desirable device and customers making device choices will also have to make mobile operator choices.  Take Germany as an example.  Vodafone, T-Mobile and O2 each purchased 2x10MHz of the digital dividend 800MHz spectrum in the May 2012 auction and deployed LTE and, under the terms of the licence, rolled out the network first in rural areas.  Vodafone and T-Mobile hold 2×12.5MHz of 900MHz spectrum whereas E-Plus and O2 only hold 2x5MHz.  This means Vodafone and T-Mobile are in a position to refarm 2×5 MHz of the 900MHz spectrum to WCDMA whereas the two other operators will find it near impossible.

The lesson here is that spectrum matters, as device manufacturers have to make chipset choice.  The multiplication of bands and technologies introduces technology barriers to competition and switching. This is a very different situation compared to the relatively harmonised GSM world of the past.

From an operator’s perspective, spectrum diversity provides the best device eco-system insurance. However, in Europe where only 2x30MHz of 800MHz spectrum is available, markets with more than three network operators are facing a problem if regulators are keen on packaging the spectrum in a minimum block size of 2×10 MHz.  There are of course benefits of deploying LTE in a channel wider than 10MHz, but the benefits are overstated. Spectral efficiency in terms of bits per MHz only increases marginally when moving for 5 to 10 or even 20 MHz wide channels.  While headline speeds are higher, the user experience is governed by other factors such as the number of concurrent users in a cell, distance to the cell edge, or the position within a building. In contrast the negative impact on competition resulting from different spectrum allocations, particularly in the lower band is very real.

One disturbing aspect about the European iPad launch is that even in Europe, Apple highlights the 4G capability, yet it is not compatible with the European 4G bands. Could Apple not have waited a couple more months and introduced also a European version with LTE 800, LTE 2600 and possible also LTE1800? Of course there is a little asterisk and a footnote “4G coverage is not available in all areas and varies by carrier”. Not all areas? That’s putting it mildly. Not anywhere in Europe would be a more appropriate statement.  Some disappointed buyers will take a dim view of Apple’s marketing tactics.

Written by Stefan Zehle, CEO, Coleago Consulting

European Commission’s ill aimed anti-trust probe

This week the Directorate General for Competition of the European Commission started an anti-trust probe against top European mobile network operators. Competition officials started the inquiry with a questionnaire to the GSMA. The Commission demanded information about discussions between the leaders of the five largest mobile operators in Europe after they met to debate industry issues. This investigation is wholly inappropriate.

Coordination between telecom’s network operators is essential in the telecoms industry to ensure interoperability, for example, interconnect and roaming. The fact that we can communicate seamlessly world-wide is testament to the excellent cooperation between telecoms operators. Mobile operators are now developing new Rich Communications Services (RCS / Joyn) which will be of great benefit to users.  These new services need to be standardised otherwise we cannot use these services across networks and borders. The European Commission is misguided in putting the GSMA and its members under investigation. What might be next? Will the European Commission investigate the ITU?

In our comments on the 22^nd of February (OTT Communication Services vs. Rich Communication Services) we mentioned “regulatory asymmetry”. While that comment related specifically to telecoms regulation rather competition issues, the EU investigation against the mobile network operators is further illustration of the telecoms industry coming under attack from regulation. While EU bureaucrats are busy harassing successful European businesses, companies like Google, WhatsApp, Facebook, etc are forging ahead.

Some 20 years ago the EU not only encouraged but mandated a great co-operative development in mobile communications: GSM. This turned out to be a global success. It is sad to see how divorced today’s EU officialdom is from the reality of the rapidly changing world of mobile communications.

Written by Stefan Zehle, CEO, Coleago Consulting

RCS / Joyn vs. OTT Communications Services

Here’s what consumers might say about their smartphones. “My mobile operator gave me an iPhone for free. The phone is great! I communicate a lot. Look … all those apps that allow me to stay in touch with friends and colleagues and which I downloaded for free. Oh, yes, occasionally I make a call.”

Mobile operators do have a battle on their hands. Regulators who try to extract high prices from mobile operators for new spectrum seem to be oblivious to the new reality of the mobile broadband world.

Written by Stefan Zehle, CEO, Coleago Consulting

OTT Communication Services vs. Rich Communication Services

We recently commented on the startling decline in SMS traffic due to WhatsApp.  WhatsApp and other Over the Top (OTT) communication services are not only impacting on SMS but also on voice usage.  The mobile operator community is fighting back with its Rich Communication Services (RCS) initiative. “For consumers, it will deliver an experience beyond voice and SMS by providing them with instant messaging or chat, live video sharing and file transfer across any device, on any network, with anyone in their mobile address book. RCS-e taps into how your consumers are already sharing their life moments with each other.” (source: RCS-e website). This sounds familiar because this is what Skype, FaceTime, and WhatsApp are delivering today.

The key difference between RCS and OTT communication services is that with the former services are provided by the mobile operators each country and with the latter they are provided by a single cloud based service provider.  RCS fits into the traditional telecoms world in which mobile operators interconnect traffic. This is why it takes time to implement it across networks to become an equally universal service as voice and SMS are today. Service universality is of course what made global telecoms so successful. But times change.

The cloud based approach is not only faster to market but a key advantage is precisely that the service is not linked to the access network nor a particular device.  For example, a Skype video call can be made between a Smartphone user connected via HSPA and another using a laptop connected via ADSL. Such cross network / cross device “rich calls” are also possible with RCS Release 2, but compared to Skype it is non-existent.

While the RCE community is busy talking about roadmaps and inter-operability, millions have signed up to Skype and WhatsApp or use iPhone’s FaceTime. Mobile operator’s “rich services” such as MMS and mobile video telephony have been around since the advent of 3G but failed to take off. And as regards universality, those who attempted international mobile video calls can attest to the low chances of success.  Nevertheless, mobile operators hold the relationship with the client, notably a billing relationship and RCE service may yet turn out to be adopted alongside OTT services.

Of course mobile operators could simply ride the OTT train and let people do what they want and charge them for the service they use, namely access and transporting bits.  RCS is designed to prevent mobile operators being relegated to a “mere bit pipe”. However, transporting bits is where most of the investment goes. Billions are being spend of building HSPA and LTE networks and acquiring spectrum, yet data transport is often priced at a low level or as an add-on to a voice centric mobile phone tariff plan.  And even worse: As we see in the Q4 2011 earnings releases from Verizon, AT&T and Sprint, profits and cash flow are being hammered by iPhone subsidies. By subsidising Smartphones, mobile operators in effect subsidise OTT service providers.

Perhaps the answer is to change the mobile operator business model. Mobile operators have in effect opened their network to competition to OTT service interlopers.  In an open market, if pricing does not relate to cost, interlopers will attack where pricing is well above costs. International call pricing is a good example. OTT service providers such as Skype and WhatsApp are global in scale. Therefore, as regards the cost of providing services (excluding access), OTT service providers have a huge cost advantage compared to mobile operators.

The other issue is time to market.  New services are easily and rapidly implemented in a cloud. The operator / interconnect model cannot match this agility. This matters because we do not even know what services might be around the corner.

There is of course one huge issue.  Telecoms operators are tightly regulated from a telecoms regulatory and competition perspective. One key regulatory objective is to promote competitive markets and consumer choice. Interconnect regulation, with its requirement to interconnect on a non-discriminatory basis, is a cornerstone of this. However, these rules do not apply OTT providers. For example, other operators cannot “interconnect” with Skype in the sense that they cannot provide their own Skype like software client to their customers which would also have the same functionality as Skype itself: see which Skype users is online, access to Skype address book, cross cloud video conferencing and screen sharing, etc.

Instead what we are seeing is regulatory asymmetry, in as much as the principle of net neutrality is high on the regulatory agenda and this means that mobile operators cannot block or charge more traffic to OTT service providers. However, the reverse is not true.  While there has been some discussion around NGN interconnect and APIs, perhaps regulators are not yet worried about the implications for monopolistic behaviour of OTT service providers because other services such as Apple’s FaceTime provide an alternative. However, the issue may well become the regulatory challenge of the future.  And challenging it would be, because national regulatory agencies (NRAs) may find it difficult to regulate a cloud service like Skype or WhatsApp who is not resident in their jurisdiction.

Written by Stefan Zehle, CEO, Coleago Consulting

What is wrong with being a bit pipe?

As the telecom world (both fixed and mobile) moves increasingly towards data there has been a lot of debate about whether it is a good or bad thing that infrastructure based telecom operators are becoming bit pipes.  The conventional view in the industry is that becoming a bit pipe is a bad thing and that telecoms companies will miss out on being able to provide lucrative new services to customers due to the emergence of OTT services which run over their bit pipes and are not controlled by the telco.  We would argue that this viewpoint, although understandable, is flawed and operators need to focus on the positive side of their situation by aiming, for example, to become the most profitable branded bit pipe provider in their market rather than expending scarce resources on trying to create new revenue streams that in all likelihood will not materialise.

The telco view of OTT is not entirely logical: If the definition of an OTT service is one that is delivered directly from the provider to the end customer using an open internet/broadband connection i.e. independently of the telco, then OTT services would logically cover all goods or services provided online. So not only would Skype and App stores be OTT services, but so would e-commerce sites such as Amazon or e-Bay as well as search services such as Google not to mention social networking sites like Facebook or Twitter. The whole point of the Internet is that it is open and this encourages innovation, which militates against the notion of any form of central control.

Telcos may not have the skills to launch many OTT services: In many instances telecom operators have no real competence in running OTT services as is evidenced by the fact that with very few exceptions they have failed to launch many successful OTT services. We struggled to think of many telcos that have been successful in this field.  One of the few examples we could think of was Safaricom in Kenya, which pioneered (a GSM based) mobile payment (banking) service called M-PESA. NTT DoCoMo’s i-mode service in Japan has been cited in the past but even it is an open platform and third party OTT service providers can have direct relationships with end customers.

Having a billing relationship with a customer is less of an advantage now: In the past a telco’s billing relationships with its customers was seen as a source of advantage but given the growth of online commerce many organisations (look at Paypal or Amazon or Skype) now have direct billing relationships with customers and this advantage has clearly been blunted.

OTT services increase demand for bit pipes: OTT services provided by third parties drive demand for more and better broadband connections i.e. the fundamental services provided by telcos. So the good news is that demand for telecom operator services is set to grow even if in the near term there are pressures as traditional voice and SMS revenues are in decline. Telecom operators in aggregate enjoy higher returns on capital than many other types of businesses and this combined with the utility nature of the business ought to make being a successful branded bit pipe provider an attractive business proposition. Telcos that can successfully develop and market the right mix of tailored bit pipes with the right cost structure ought to have bright future.

Written by Scott McKenzie, Director, Coleago Consulting

WhatsApp replaces SMS: 12% year-on-year decline of SMS traffic in Taiwan

During a visit to meet Taiwanese mobile operators in the context of forthcoming spectrum licence renewal, we found that mobile operators in Taiwan experienced a sharp decline of SMS traffic as users switched to WhatsApp for messaging, resulting in a  decline in SMS traffic of around 12% year-on-year. While other operators have reported that IP based forms of messaging impact SMS traffic (e.g. KPN Q1 2011, reduced Christmas SMS traffic in Finland and Hong Kong) the development from Taiwan is particularly stark. It is not often that demand of a telecoms service declines by 12% in a single year.

From an operator’s perspective the question is whether this good or bad news. In developed markets most operators sell large SMS bundles which often are not used up. The marginal revenue from SMS is likely to be near zero and therefore the reduction in SMS may not affect revenue materially. WhatsApp is a much richer form of messaging and therefore of value to consumers. This makes the mobile phone service more valuable to users and further drives smartphone adoption.

For the Taiwanese operators the good news was that the 2012 New Year SMS traffic peak was much lower this year than last year while making more efficient use of network resources which brings cost benefits. This is a fine example that with new technology potentially everyone is a winner. The same pattern is likely to be repeated for the Chinese New Year on the 23^rd of January 2012.

Of course the development is unlikely to increase AVPU and the messaging service is no longer provided by the mobile operator who only transmits the IP traffic. This is further evidence that transmission rather than services is becoming more important for mobile operators, i.e. they start to look more like bit pipes.  From the mobile industry perspective often this is viewed negatively, but at the mature stage of the industry life cycle a focus on transmission may increase return on capital employed for mobile operators. After all, services such as WhatsApp are global in scale whereas operator’s services, while allowing for cross network traffic, are not.  But as services become more valuable to consumers, so does the capability to transmit the services.

Mobile operators are of course really good at transmission and they have a billing relationship with their clients which could be leveraged to bill of all the new IP based services on behalf of the service providers. Taking the 30% margin on Apple’s AppStore as an indication this could be good business considering that there is no capex associated with this other that perhaps a little billing system upgrade.

Of course we have seen telecoms services declining before i.e. fax and even becoming extinct e.g. telex.  In some markets, including the USA, SMS traffic is still growing, but perhaps soon SMS will join telex and fax in the telecoms museum.

Written by Stefan Zehle, CEO, Coleago Consulting