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Voice over Wi-Fi and the Implications for MNOs

September 24, 2014

As Apple unveils the iPhone 6 featuring Wi-Fi calling and texting and T-Mobile US immediately puts it into practice, changes are on the horizon for MNOs. A recent analysis of data traffic in the US has shown that over 50% of mobile communications are now carried over a Wi-Fi connection, whilst the rest travel over a cellular network. Whereas indoor Wi-Fi networks were once predominantly confined to homes and offices, they are today becoming increasingly commonplace in public spaces such as retail centres, transport networks and even city centres.

As we go about our day-to-day lives currently, we switch between Wi-Fi and cellular networks when we move from one location to another – perhaps meaning that we are out of Wi-Fi coverage for fewer than 30 minutes a day. If voice over Wi-Fi becomes mainstream, it poses the question of whether many users would want to incur the cost of mobile subscription when they will be able to make calls in numerous Wi-Fi hotspots.

The increased use of indoor Wi-Fi networks has reduced the attraction for MNOs to roll out radio networks in buildings, and seems to have already killed the unborn market of picocells for home coverage. Most of the Wi-Fi -covered venues also have a cellular infrastructure to assure the transport of legacy voice and SMS traffic. With the development of Wi-Fi infrastructure using the latest 802.11 ac wireless networking standard and delivering up to 433 Mbits, mobile operators are now postponing their decision to roll out small LTE cells in the same venues and are increasingly thinking of offloading the cellular traffic to the Wi-Fi network.

This decision by operators not to invest in indoor LTE infrastructure might then prove unwise. A shift to Wi-Fi as a means of carrying data traffic could well result in revenue loss, and may force them to make drastic changes to their business models which are, in essence, made up of investments in a network that is then sold in pieces to subscribers. If this model is to be challenged and potentially overtaken by the introduction of a wide range of mobile communication services over Wi-Fi, MNOs will need to take steps in order to protect their position.

By Philippe Berard, Consultant at Coleago Consulting

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Iliad’s bid for the US market; lessons from France

August 22, 2014

Over the past 18 months, Iliad has grown from a small fixed broadband provider, to become one of the key players in French mobile telecommunications

At the beginning of 2013, Iliad’s consumer brand Free could only boast 4m fixed broadband customers, most of whom were drawn to Free as a result of their unique Freebox product. A smart piece of Customer Premise Equipment (CPE), the Freebox aggregates different services such as Wi-Fi access, Community Wi-Fi, IP telephony, IP TV and more traditional broadband services.  

From inception, Iliad’s Free has always used disruptive, in-house technologies to underpin their business strategy, without having to rely on third parties. It therefore didn’t come as a surprise when they decided to launch their mobile services in the competitive French market, drastically disrupting the well-established mobile landscape with very cheap and simple subscription tariffs. These aggressive tariffs fostered a complete rejigging of the French mobile market, with the merger of SFR and Numericable on one side, and Bouygues Telecom in a dire situation today on the other.

The Community Wi-Fi network was undeniably one of the best assets Iliad leveraged to offer cheap data services in France, with subscribers seamlessly roaming on and off Free’s Wi-Fi network. This allowed Iliad to cut the cost of the origination and termination of calls, SMS and data traffic, as it mostly uses its MVNO network provided by Orange.

Cheap tariffs and disruptive in-house technology are part of Iliad’s DNA, and undoubtedly Xavier Niel’s group sees an opportunity in the US, where the ARPU has gone up by 17% over the past 4 years, in comparison with a drop of 6% in Europe during the same period.  US tariffs are on average 40% higher than those in Europe, meaning that should Iliad make a second bid that T-Mobile would deem adequate, it would be well positioned to capitalise on these generous tariffs to carve out its own market share.

Although T-Mobile has decided to turn down Iliad’s offer, currently Xavier Niel’s bid is the only one on the table.  T-Mobile’s CFO Braxton Carter has recently commented, however, that the first offer is never the best, indicating that he feels there might be scope for further negotiation with Iliad.

More interestingly, Braxton Carter has mentioned T-Mobile is now ready to carry voice over Wi-Fi traffic, mentioning fixed operator partners such as  Comcast in last week’s discussion of Iliad’s bid. Iliad may therefore decide to push a hybrid solution of Wi-Fi and LTE network to lure T-Mobile, thereby achieving low tariffs and undercutting its competitors.

Should Iliad succeed in entering the US market, it may be bad news for Verizon and AT&T, especially if Xavier Niel succeeds in also striking a deal for offering fixed services which again stitch mobile and fixed together.

 By Philippe Berard, Consultant at Coleago Consulting

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Telefonica O2 and e-Plus merger: MVNO access strengthens competition and wholesale and retail levels

July 8, 2014

Last week’s approval by the European Commission of the acquisition of e-Plus by Telefonica Deutschland (O2) became possible through concessions at wholesale level. Telefonica committed “to enter into capacity based wholesale agreements with one or several (up to three) Upfront Mobile Bitstream Access MVNOs (“Upfront MBA MVNOs”) in Germany prior to the closing of the merger.” This broadly follows the capacity based MVNO deal offered by Hutchison in Ireland to gain approval for its takeover of O2 Ireland.

Germany already has a vibrant MVNO market, not least as a result of the e-Plus multi-brand wholesale strategy. In regards to the wholesale markets, the Commission is satisfied that these MVNOs will not be harmed by reduced competition at network level. The existence of competitive MVNOs also acts as an insurance against unwarranted retail price hikes and hence alleviates the Commission’s concerns in the retail market.

The merger will take costs out of the mobile industry in Germany so shareholders will benefit. Telefonica Deutschland further committed to “make the following offers: (a) a spectrum offer consisting of the lease of 2×10 MHz in the 2.1 GHz band and of 2×10 MHz in the 2.6 GHz band; (b) a national roaming offer; (c) a divestiture of sites offer; (d) a passive radio network sharing offer; and (e) a sale of shops offer.” An Upfront MBA MVNOs might buy some spectrum. However, the Mobile Bitstream Access effectively provides access to capacity. There is little point in owning spectrum; indeed such a limited spectrum holding would make little sense without immediately entering into a spectrum sharing agreement with Telefónica Deutschland. There is little differences between this and the MBA MVNO arrangement.

Passive infrastructure sharing had been a feature of the German market for some time. Perhaps Vodafone Germany and T-Mobile will also look to increase the sharing of network resources, active and passive with each other and also with the merged Telefonica Deutschland and e-plus. Are we seeing the first steps of an evolution towards a national neutral host network with regulated wholesale prices?

With return of capital employed in the European mobile industry below that of some regulated utilities such as water and gas, investors may be better off by effectively pulling capital out of the mobile industry by means of outright consolidation or through sharing networks including spectrum, i.e. a “merger lite” strategy, becoming regulated utilities.

Noteworthy is that e-Plus was one of the four operators bidding for the 2x30MHz of digital dividend 800MHz spectrum in Germany which did not obtain any block. The outcome of the spectrum auction is likely to have been a factor in KPN’s decision to put e-Plus up for sale. In the next German spectrum auction only three operators will compete for spectrum, probably resulting in auction prices close to reserve prices. This is another reason for investors to be cheerful about the trend towards consolidation in the European mobile industry.

By Stefan Zehle, CEO, Coleago Consulting

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Network sharing vs competition in the Czech Republic

June 19, 2014

Last week, Mobilnet.cz reported that Vodafone CR (Czech Republic) issued a complaint against the radio access network (RAN) sharing deal between Telefonica O2 CR and T-Mobile CR, stating that it breached a rule set down by the Czech Telecommunications Office (CTU) that such arrangements should not be exclusive. So either everyone gets invited to the RAN sharing party or there cannot be any RAN sharing at all.

Blocking a network sharing deal would be bad news for the two operators and ultimately also consumers because it will delay the availability of LTE and increase operator costs. However, allowing two parties to cooperate is likely to produce competitive advantage for the two shares and this is what Vodafone objects to.

The obvious solution is to open the deal to Vodafone as well. This would effectively herald the end of network based competition, at least at RAN level, which is where most of the network cost is. Network sharing is consolidation by stealth which flies under the radar of the EU Competition Commissioner. It is an effective way of taking costs out of the mobile industry.  If Telefonica O2 CR and T-Mobile CR invite Vodafone to the party this would remove the threat of scuppering the deal and may reduce total industry costs further. Return on capital employed could recover for all three operators, while consumers benefit from faster LTE roll-out and better LTE coverage.

By Stefan Zehle, CEO Coleago Consulting

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Hutch – O2 Ireland acquisition approval: Hutch plays it well, the “Connected Continent” loses out

June 2, 2014

The conditions attached by the Competition Commission to the clearance of the acquisition of Telefónica Ireland by Hutchison 3G shows that the Commission is still desperate to maintain network based competition. H3G offered a package facilitating the market entry of two mobile virtual network operators (MVNOs), with an option for one MVNO to morph into a mobile network operator by subsequently purchasing spectrum from the merged entity. “H3G committed to sell up to 30% of the merged company’s network capacity to two MVNOs in Ireland at fixed payments. The capacity is measured in terms of bandwidth and the MVNO entrants will obtain a dedicated “pipe” from the merged entity’s network for voice and data traffic.”

H3G probably has the first MVNO customer lined up, or else the acquisition cannot go ahead. The likely candidate is UPC. UPC is one of the few telecoms providers in Ireland with a large enough customer base to be comfortable to take on the fixed cost associated with becoming an MVNO under these terms. With that, UPC would become a quad play company. This means that at retail level competition will remain vigorous while costs are taken out of the mobile industry. So far, so good.

However, it is highly unlikely that the MVNO would want to become an MNO with all the cost implications as well as the daunting prospect of participating in future spectrum auctions to stay competitive. Therefore, just like in Austria, Hutch played it well by making a spectrum divestment offer that is unlikely to be taken up. The Commission does not get it: In mature markets new network based market entry does not make sense. Consolidation is the name of the game for the European mobile industry.

MNOs are dominated by fixed costs. Because around 75% of their costs are fixed, profitability comes through scale. In contrast MVNOs are dominated by variable costs with the proportions of fixed to variable costs roughly reversed compared to an MNO. This means an MVNO is not operationally geared, has a lower risk of not achieving break even, and can operate profitably at a lower scale. Hence an MVNO can play in niche markets. The fixed cost deal offered by Hutch Ireland is clever from Hutch’s perspective because it offsets Hutch’s fixed costs with a fixed revenue stream, and is probably betting on a limited impact because only one player in Ireland is likely to have the ability to commit to a five year fixed cost deal.

The Commission missed an opportunity. In addition to the fixed cost MVNO condition, it could have requested a similar variable wholesale price undertaking as in the approval of Hutch’s acquisition of Orange Austria. A low wholesale price (€0.002 per Mbyte for data) not only serves as an insurance against unwarranted retail price rises, but creates the opportunity for players who are not MVNOs in the traditional sense. Innovative business models would use mobile access as part of a service, such as smart metering, automotive services, home security, M-Health, etc. and might even include handset manufacturers such as Apple or Samsung as well as OTT players. If innovators could find the same wholesale price and access conditions across the EU, we would be well on the way to overcoming the disadvantages associated with the fragmentation of the EU mobile industry and truly leverage the value of LTE mobile broadband.

By adopting a country by country approach to set conditions to clear consolidation among mobile network operators, the Competition Commission might address country specific competition concerns but does nothing to advance the “Connected Continent” agenda. Next up is the proposed acquisition of E-Plus by O2 Germany. Let’s hope for a better set of conditions which signals a harmonised, fast track merger approvals mechanism with the aim of advancing mobile industry consolidation in the EU for the benefit of consumers and investors.

 

By Stefan Zehle, CEO, Coleago Consulting

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Telefonica O2 and e-Plus merger: a new 4th network operator makes little sense

April 17, 2014

Today the FT reported that in order to overcome objections to the proposed take-over of E-Plus “Telefónica has offered to equip a new German mobile competitor with spectrum”.  This is similar to the offer by Hutchinson 3 in the context of its take-over of Orange Austria. In the event there was of course no new network based entrant in Austria, the aim of the Telefonica O2 and E-Plus tie up is to take costs out of the industry by reducing the number of mobile network operators. At this stage of the industry life cycle consolidation at network level is expected. This is driven by high prices paid for spectrum and continuing high LTE capex while revenues remain flat or in decline. When free cash flow declines, capital has to be taken out of the industry simply to get back to returns that are not below the cost of capital.

The FT also reports that Telefónica promised concessions for MVNOs. Competition remedies at wholesale level in the form of a reference wholesale access price offer – similar to what was agreed to by Hutchison in Austria – are a much more effective remedy. This is particularly true for Germany which already has a vibrant MVNO market. Indeed E-Plus pioneered the multi-band MVNO strategy and hence concessions at wholesale level are likely to be impactful. Given the competitive MVNO market in Germany, regulating wholesale prices provides an effective insurance against retail price increases, which might otherwise result from the tie-up.

If indeed wholesale price regulation ends up as the key remedy, and this in Europe’s largest mobile market, we are one step closer to the structural separation of the European mobile industry into NetCos and ServiceCos.

Written by Stefan Zehle, CEO, Coleago Consulting

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Elimination of EU roaming charges implies a move towards regulated wholesale rates

April 11, 2014

On the 3rd of April 2014 the European Parliament voted (with some amendments) to adopt the Commission’s proposal to end roaming charges in the EU by the end of 2015. This was part of a wider vote in support of the Commission’s proposed regulation for a “Connected Continent”, the term used for the telecoms single market. The regulation must be approved by parliament and the European Council. With this, the Commission also moved a step closer to regulated wholesale prices and hence the structural separation of mobile networks into NetCos and RetailCos.

In essence the Commission wants EU consumers be able to use their mobile phone within all EU countries in the same manner as they would at home. “…Further reforms in the field of roaming should give users the confidence to stay connected when they travel in the Union without being subject to additional charges over and above the tariffs which they pay in the Member State where their contract was concluded.”

However, the problem with this is that most consumers chose domestic tariff plans with bundled minutes and data plans, so that within the bundle the incremental cost of usage for consumers is nil. Selling bundles also makes sense from a mobile operator’s perspective because most costs are fixed. In contrast, in a roaming situation an operator’s costs (the wholesale rate an operator has to pay to the visited network) are proportional to usage – i.e. variable. The Commission and the Parliament appear to be aware of this problem, and the adopted text states that operators “may, notwithstanding the abolition of retail roaming charges by 15 December 2015, apply a “fair use clause” to the consumption of regulated retail roaming services provided at the applicable domestic price level, by reference to fair use criteria. These criteria should be applied in such a way that consumers are in a position to confidently replicate the typical domestic consumption pattern associated with their respective domestic retail packages while periodically travelling within the Union.”

Much will depend on how the “fair use clause” is written. If we take at face value the text “consumers are in a position to confidently replicate the typical domestic consumption pattern associated with their respective domestic retail packages while periodically travelling within the Union”, this may mean that customers on large minute and data bundles can use these freely at any time across the EU. Alternatively the EU would have to define what “periodically travelling within the Union” means. Does it mean 30 days a year, or 180 days, or how much? Assuming the Commission does not want to place limits on how much Connected Continent consumers are allowed per year, there will be no time limits. Taken to an extreme, a mobile user could shop around for the cheapest SIM-only deal in Europe regardless of his or her country of residence. A prime example is EU parliamentarians who shuttle between their home country, Strasbourg, Luxembourg and Brussels.

The fair use provision is designed to address the problem that it is ultimately impossible to regulate retail prices without regulating wholesale prices. The Commission appears to be aware of the difficulty in defining “fair usage” and the implication for operators’ margins. The adopted text states: “In addition, the Commission should by 30 June 2015, in advance of that final abolition of retail surcharges, report on any necessary changes to the wholesale rates or wholesale market mechanisms, taking into account also mobile termination rates (MTR) applicable to roaming throughout the Union.” This is the real bombshell because it heralds EU regulation of wholesale prices.  In the same way as the EU has driven the regulation towards lower MTRs this may happen to wholesale prices.  The target might be a Reference Wholesale Access Offer, for example with the €0.002 per Mbyte of data rate imposed on Hutchison 3 Austria to allow their acquisition of Orange Austria to go ahead.

In regulating mobile tariffs, the EU is focusing only on roaming charges, whereas international call pricing is also highly unbalanced. In most cases international calls are not included in a mobile minute bundle and charged at a premium. This leads to oddities. For example, for a UK mobile subscriber with a bundled minute plan the incremental cost of a call to a UK mobile numbers is nil. Hence for a call to a UK number that is roaming in Poland, the marginal cost to the caller is nil and, according to the EU roaming charges cap, the called party pays no more than €0.07 per minute to receive the call. The marginal revenue to the UK operator is €0.07 per minute. However, if a UK mobile user calls a Polish mobile number the price paid is substantially higher. For example, Vodafone’s standard to Europe call price is £1 a minute (€1.20). In other words, Vodafone’s incremental revenue is 17 times higher, although costs are the same.

The Commission also proposed that for European fixed calls “operators will have to charge no more than a domestic long-distance call for all fixed line calls to other EU member states. Any extra costs have to be objectively justified.”  Will the same principle be applied to mobile operators? If yes, the scenario where a consumer buys a SIM in one country and uses it in another becomes practical. In this scenario, where within the EU distance and geography no longer matter for mobile retail prices, the retail activity of a mobile operator might evolve into what is in effect a pan-European MVNO with an “always best connected” value proposition, regardless of the access network used. Under these circumstances, who will then want to bid for spectrum and invest in networks?

Either way, we are moving to a situation where the EU mobile industry is subject to extensive price regulation. And yet, the EU Directorate General for Competition is totally focussed on preserving competition at network level and in-country consolidation of mobile operators is hard to achieve. This makes little sense. Now that the cost of calling has come down, perhaps Neelie Kroes can afford to make a call to Joaquín Almunia (Vice President of the European Commission responsible for Competition Policy) and attempt to sync policies.

Written by Stefan Zehle, CEO, Coleago Consulting

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