Do we need telephone numbers?

Already most communications that take place over telecoms networks do not involve telephone numbers. Email and other internet based communications increasingly dominate business and consumer communications. Fixed network voice calls are moving to mobile and Skype like services. By some estimates the last fixed line phone will be retired in 2025. Even if the decline of fixed phones and with it fixed telephone numbers is not that fast, clearly the writing is on the wall.

Meantime in the mobile world, telephone numbers are growing fast. However, sending messages to mobile numbers and calling mobile numbers has started to go out of fashion. Messaging services such as WhatsApp are replacing SMS and increasingly people use Skype on their handsets. Of course Skype also sells telephone numbers, but most Skype users don’t bother to buy one.

The trend away from making standard mobile voice calls is accelerating with the adoption of LTE. For example, in contrast to older versions of the iPhone, the new iPhone with Apple’s iOS 6 upgraded FaceTime from a WiFi only feature to a cellular feature. AT&T Wireless was the first to allow customers to use FaceTime over LTE if they signed up to their new shared data tariff plan. The key aspect about the new tariff plan is that in terms of pricing it is data centric, with voice playing minor role. Most mobile operators still base their tariff plans on a minute bundle with data added to that, but this will change rapidly as LTE becomes commonplace.

If telephone numbers become obsolete this poses challenges not just for operators but also regulators. The world of telephony is organised around telephone numbers and there is an element of sovereignty in country codes and national numbering plans. If telephone numbers become obsolete, governments have surrendered this sovereignty to the internet. This is a frightening prospect to some governments.

Many aspects of telecoms regulation are number focussed. If people no longer need telephone numbers, national regulatory agencies effectively lose control over telecommunications within their borders as well as internationally. The spat at the December 2012 ITU meeting in Dubai over regulating the internet is only the opening skirmish in what is likely to turn into a major battle.

The way in which the obsolescence of telephone numbers will impact will differ between markets. Some emerging market countries still have not fully re-balanced fixed network tariffs, e.g. Tunisia, Algeria, Kuwait to name a few I am familiar with. Subsidising the cost of the line rental from long distance calls will no longer be possible. For example, in the case of Tunisia the fixed line rental retail price would have to increase by a factor of four to cover costs. Such price increases are politically unacceptable and hence it seems tempting to look for money elsewhere, e.g. from Google, Skype (Microsoft), and perhaps even from the most valuable company on the planet, Apple.

The transition will not be problem- free for developed markets. Already regulators fret over the issue of calls to emergency services. On its website Skype clearly states “Skype is not a replacement for your telephone and can’t be used for emergency calling”.

On the plus side, if telephone numbers become irrelevant, operators and regulators will not have to worry anymore about fixed and mobile number portability.

Written by Stefan Zehle, CEO, Coleago Consulting

Is time running out for the Combinatorial Clock Auction format?

Earlier this month, I attended the Spectrum Management Forum 2012 in Munich and was interested to hear several presenters criticise the Combinatorial Clock Auction (CCA) format. The CCA format which has clock and supplementary rounds where bidders bid on indivisible packages of spectrum and where prices paid are determined by a second price rule has in the last few years found increasing favour by many governments for spectrum auctions. Under the second price rule, the price a winner of a particular package pays for its spectrum is determined entirely by competitors’ bids.

Supporters of the CCA format, claim that it results in more economically efficient outcomes and reduces aggregation risk where there may be complementarities between lots e.g. between high and low band spectrum.

Most of the criticisms of the CCA format relate to the fact that it is incredibly complex to prepare for, that the outcome is not very transparent and it can lead to perverse results. But there are other issues that for instance competitors can “game” the system and drive up prices paid by other bidders by bidding on larger packages that they do not sincerely want to win. In addition it represents a difficult issue for companies to deal with from a corporate governance point of view in terms of establishing bid limits and deciding whether to bid sincerely.

We can confirm that complexity is a serious issue as one CCA auction that we have been involved in required our client to value more than one hundred thousand different spectrum packages to prepare for the supplementary round. In terms of strange results there have been several auctions where there have been very large disparities in prices paid e.g. the 2012 Swiss multi-band auction and the 2010 Danish 2.6GHz auction.

We have worked with most major auction formats and while CCA was introduced with good intentions we are starting to doubt that the benefits outweigh the disadvantages.

Written by Scott McKenzie, director, Coleago Consulting

Why mobile data should be more like mustard

Industry analysts and commentators continue to marvel at the “growth in demand” for mobile data and indeed some mobile networks are groaning under the strain. It appears however that the meaning of the word demand has been forgotten. Demand, in an economic sense, relates to the willingness to pay. One could say that there is a “high demand” for Ferraris as who would not want one, but few can afford them which is why they are not clogging up the motorways.

The prevalence of unlimited or “all you can eat” data offerings has resulted in significant growth in traffic but not revenue as the link between demand and the willingness to pay has been broken. Unlimited offers made some economic sense two years ago when adoption of mobile broadband was low and networks had unutilised capacity. Two years ago incremental traffic did not necessarily result in incremental capital expenditure. Networks are now congested and increasing traffic is resulting in increasing capex without increasing revenues which can only depresses returns to shareholders.

Pricing structures need to change if the economics of mobile data are to improve. Within a mobile operators’ customer base there are usually a relatively small proportion of customers who use a very high proportion of network resources. These “bandwidth hogs” should be charged for the data that they use or their usage should be constrained. In fact mobile operators should start to look at mobile data a little more like mustard.

Since 1814 Jeremiah Colman of Colman’s English mustard has been making his money not by how much mustard people eat but how much they left on the side of the plate. If you are going to charge somebody £15 a month for 2GB the customers you actually want are those who use only a quarter of their allowance. Studies show the average smartphone user is using a lot less than 2 GB a month, and perhaps a tenth of what the average dongle user gets through. If operators started to think about mobile data a bit more like mustard we might see an improvement in industry returns.

AT&T’s tiered mobile data pricing is just the start of an essential re-pricing of mobile data

AT&T, the only US carrier offering customers Apple’s iPhone, has abandoned unlimited data plans and introduced a two tier pricing model as it attempts to shape the exponential growth in mobile data traffic which is threatening network quality and depressing returns. AT&T is not the first to introduce such a pricing model and indeed some markets have taken the next step, such as Singapore, Portugal and France where pricing is already based on the speed of connection. Re-establishing the link between revenues and bandwidth is essential if operators are going to make a return out of mobile data. Furthermore, if capacity is to data what coverage was to voice then in a capacity constrained world the operator with the greatest share of industry capacity may well capture the greatest market share. As spectrum is inextricably linked to capacity we can expect to see strong bidding for additional spectrum where the number of operators in a market exceeds the available spectrum on offer as is the case of the current BWA spectrum auction in India.

Coleago’s Mobile Broadband Pricing Report – An international review of mobile broadband pricing models and trends, June 2010 examined the pricing models for mobile data across a broad range of markets. The approach to dealing with bandwidth hogs varies across markets. The following approaches are typically used for out-of-bundle usage:

• A fixed price per out-of-bundle unit is charged, often at punitive rates (e.g. A1 Austria, up to 250x the in-bundle price per MB); in some cases, the total bill for extra usage is capped at a given maximum (e.g. StarHub Singapore, Orange UK).
• Access speed is reduced, but no extra charges are applied, thus respecting the principle of ‘unlimited’ usage and capped mobile broadband bills (e.g. France, Germany, Sweden, US).
• The user is automatically transferred to a higher bundle for the given period (e.g. PT/Sapo in Portugal).
• Add-on bundles are offered (e.g. Orange UK, Telia Sweden).

The study also revealed a proliferation of price plans within the sample countries reflecting increasing segmentation as the mobile data market moves out of the introductory phase and progresses through the growth phase towards maturity. In particular, Coleago’s observed the introduction of an increasing range of bundle sizes, and increasing prevalence of unlimited offerings, as well as the launch of micro-allowance prepay plans (e.g. 20 minute surf-time in France). Where mobile broadband is a relatively new offering unlimited offers are often used as a tool to achieve a “land grab” of mobile broadband users. However, in other markets more sophisticated traffic shaping pricing models are being developed. Coleago’s also observed:

• Weekend and evening plans (e.g. France).
• Home Zone offerings (e.g. Portugal and Germany).
• Converged offerings (e.g. Portugal, Singapore, Hong Kong, Sweden).
• Plans with multi-user shared allowances (e.g. Australia, Sweden).
• Differentiated plans based on headline speeds.

In some markets an even more direct link between revenues and network capacity and speed are being established. In markets where HSPA+ has been launched there has been a move to pricing packages based on access speeds, with considerable premiums being charged for the 21Mbps service. In Singapore the 21Mbps product is charged at a 130% premium to the 7.2Mbps product and 500% premium to 1Mbps. Further examples can be seen in Portugal (e,g, Vodafone’s ‘Top’ versus ‘Max’ unlimited plans) and in France (e.g. SFR’s ‘Unlimited Pro’ versus ‘Unlimited’ plan).

As there is a finite amount of available and appropriate spectrum for mobile operators and financial and practical limitations to number of mobile base stations that can be built capacity constraints will be encountered unless measures are taken to shape mobile traffic. Many markets have already begun to re-establish the link between revenues and capacity which de-coupled dramatically when mobile broadband went mass market.

Making sense of recent European spectrum auctions

Regulators across Europe are busy this year auctioning spectrum in the 2.6GHz spectrum frequency range as well as other frequencies including the 800MHz Digital Dividend. 800MHz spectrum is clearly of great value to operators as the equivalent US auction demonstrated. The low frequency allows the radio signal to propagate further which means that fewer base stations and hence capital expenditure is required to provide coverage compared to higher frequencies such as 2.6GHz. This makes the spectrum ideal for supporting mobile broadband services at manageable levels of cost. The lower frequency range also provides better in-building penetration and as mobile broadband usage seems to be predominantly in-doors, this further increases its attractiveness. The first significant auction of spectrum in the 800MHz band is currently taking place in Germany and bidding levels have already reached 0.67 $/MHz/Pop. At this level the price paid is greater than the prices paid in the heady days of the Dot Com book for 3G spectrum in Denmark and Austria but it is still considerably lower than the US 700MHz auction average of 1.18 $/MHz/Pop. If German prices reached this level it would also put them on a par with the auctions of 3G spectrum in the Netherlands and Italy at the start of the new millennium. Prices would then have to increase by more than three fold to reach the German 3G auction price levels. Prices may well continue to move higher but with few other benchmarks available it is too early to draw any significant conclusions regarding this spectrum band but at present the bidding levels look reasonable.

In contrast to 800MHz there has been much greater activity in relation to 2.6GHz spectrum. Norway, Finland and Sweden auctioned their spectrum in 2007, 2008 and 2009 respectively. This year the Netherlands and Denmark have already concluded their 2.6GHz auctions, the auction in Germany is on-going and at least a further six 2.6GHz auctions are expected at some point during 2010 (France, Spain, Poland, Portugal, Switzerland and Belgium are all expected to hold auctions this year). Mobile operators will be busy preparing their 2.6GHz business cases in preparation for the auctions and in doing so they will be attempting to make sense of the results of the spectrum auctions that have already taken place. This is no easy task when the highest price paid so far in Europe (Sweden, May 2008) is almost 135 times greater than the lowest (the Netherlands, April 2010). Analysis is further complicated by the fact that in most auctions the paired spectrum (FDD) has commanded a premium to un-paired (TDD) spectrum which in some cases attracted no bids at all (Netherlands). However, in the case of Finland the result was reversed with the TDD spectrum priced at a premium to FDD.

Attempting to make sense of these results requires the consideration of a great many factors. The timing of the auctions is important as some occurred before the start of the on-going financial crisis. The licence conditions attached to the spectrum, such as coverage requirement, should also be considered. These vary from regulator to regulator and the more onerous the coverage requirements, for example, the less valuable the spectrum. However, in the end, the final price paid in an efficient auction will determined by relative levels of spectrum supply and demand. The regulators have taken different approaches when it comes to supply and have auctioned blocks ranging from 2x5MHz to 2x20MHz and everything in between. Caps on total spectrum holdings have also been imposed in some cases. The fewer unique blocks that are offered the greater is the potential for demand to outstrip supply. On the demand side the most significant factor is the number of incumbent operators and in Europe this varies from 2 in Norway to 4 in markets like Denmark and Sweden. There has also been demand from new entrants usually arising from the existing cable operators such was the case in the Netherlands. In addition to the number of potential bidders demand will also be influenced by operators’ expectations of future mobile data traffic. Mobile data traffic is growing exponentially and no one has a clear view of where demand levels will be in 15 or 20 years time which is the typical term for the new spectrum licences. Not only must operators contend with uncertainty over traffic levels there also remains uncertainty over what levels of data throughput can actually be achieved when technologies such as LTE and MIMO are implemented in this frequency range and have matured. On the issue of TDD versus FDD it would seem that there is a reasonably clear trend that the FDD spectrum is more valuable than the TDD spectrum however this is not always the case and the relative valuations can vary significantly.

Despite a reasonable number of 2.6GHz auctions having taken place it is almost impossible to draw any firm conclusions especially as the design of each auction is also subtly different which can have a major impact on participant’s bidding strategies and ultimately the price paid. As a result, for any operator facing a 2.6GHz auction little conclusive insight can be drawn from the results of the 2.6GHz spectrum auctions to date. Therefore in order to prepare for an auction a country, operator and auction specific business case will be required to value the spectrum and to allow the operator to bid with confidence.