Hear Chris Buist, Director, Coleago Consulting talk about Managed Services during his keynote speech at European Communications’ quarterly seminar.
Posts Tagged ‘networks’
Chris Buist joins to develop network sharing and managed services consultancy
Coleago Consulting, a specialist telecoms management consulting firm, today announced that Chris Buist has become the latest director to join the company. Chris’ role at Coleago will be to grow its new network sharing and managed services consultancy business division.
Chris brings 30 years’ international senior management experience in the telecommunications and media sectors to Coleago. Prior to this role, Chris was head of the communications and media practice at PA Consulting. He is based in Vienna, Austria, and has worked for clients in more than 20 countries including network operators, equipment vendors and media companies. His main areas of expertise include strategic planning and network/OSS/BSS performance improvement particularly through managed services and network sharing.
“Changes in the telecoms industry have led to operators feeling the squeeze and their margins and cash flows are suffering. They now need to create savings on their networks without affecting the performance that consumers have come to expect. We see network sharing and managed services as a potential solution to this dilemma, making these services more important than ever. As such, Chis joining the team could not have been timelier,” said Graham Friend, Managing Director of Coleago Consulting. “At Coleago we are driven to continue to grow and expand our areas of expertise and therefore provide ever better services to our customers. We are excited to have Chris on board and look forward to the opportunities he will bring to Coleago in this new business division.”
Chris joins the Coleago board which currently includes Graham Friend (Managing Director), Stefan Zehle (CEO) and Scott McKenzie (Director).
European commission proposal ignores the fundamentals: We need to create an environment that attracts capital into the EU telecoms sectorSeptember 18, 2013
The European Commission’s adoption of regulatory proposals for a Connected Continent announced by Neelie Kroes on the 11th of September 2013 are as polemic as can be expected from a politician. The headline grabbing proposal deflects from the failings of member states to adopt sensible policies with regards to developing the telecoms sector. In its opening paragraph the proposal declares that “The overarching aim is to build a connected, competitive continent and enabling sustainable digital jobs and industries; making life better by ensuring consumers can enjoy the digital devices and services they love; and making it easier for European businesses & entrepreneurs to create the jobs of the future.”
To achieve these objectives substantial investments are required. Only 12 days prior to the Commission’s proposal, on Thursday 05 September 2013, PwC published a detailed analysis which showed that mobile operators cannot make adequate returns on capital employed. For the past three years the return on invested capital (ROIC) made by Europe’s telcos was below the cost of capital of around 8%-9%. In the mobile sector this is in part due to the high spectrum licence fees charged by national governments.
And yet with statements such as “It is also essential that citizens … are protected from unfair charges and practices such as roaming rip-offs and opaque contracts” the Commission conjures up an image of ultra-profitable telecoms operators which fleece consumers.
What the European telecoms sector needs most is a climate with the regulatory certainty which is favourable to investment. Only investment in the sector will achieve the Commission’s aim – which we all agree with – of excellent fixed and mobile internet connectivity and communication without borders within the EU.
Furthermore, the Commission proposal contains contradictions. Vice President Neelie Kroes said “The aim is to gradually make the telecoms sector a “normal” economic sector with limited ‘ex ante’ rules and responsibility shifting to ex-post regulation” and then demands that “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.” “Normal” economic sectors do not “objectively justify” prices based on cost but charge what the market will bear. The image of the Coca Cola bottle in the proposal is a fine example. The price per litre of Coca Cola varies hugely between a discount supermarket and a beach club on the Cote d’Azur. And yet, nobody suggests regulating prices for Coca Cola.
On the positive side, the proposal highlights member states’ regulatory failings and tardiness in allocating spectrum for LTE. This, with a call for a European authorisation for telecoms operators – and by implication European telecoms regulation – is a very positive development. This is a prerequisite for the much needed consolidation in the EU telecoms sector which will then give investors a chance to earn adequate returns.
Written by Stefan Zehle, CEO of Coleago Consulting
On the 7th of February Brazil made the decision to make available 698MHz-806MHz for mobile broadband services. The frequencies are those of the Asia Pacific Telecommunity (APT) band plan. ANATEL, Brazil’s regulator, now has the authority go ahead with clearing and the allocating this 700MHz spectrum to mobile operators for mobile broadband use. This should help Brazil to achieve the goals of the country’s national broadband plan (Plano Nacional de Banda Larga).
Of course the process will take time because the process of moving terrestrial TV from analogue to digital will be lengthy. In some parts of Brazil the spectrum could be cleared as early as 2016. Given the size of the country, a regional approach to opening the band to mobile broadband may be possible, although this potentially creates an interference problem.
Brazil’s decision means that the APT eco-system is gaining the scale which confirms it as a mainstream solution for LTE deployment. This means the 700MHz APT band plan may appear in chipsets and more devices earlier rather than later.
Many Asian countries have committed to the APT plan. However, the clearing of the band appears to be slow and countries such as India have only just launched 3G and therefore Region 2 may not be the main driver in developing the device eco-system. The confirmation of the adoption of the APT band plan in Latin America indicates that it will become well-established in Region 2. In addition some African countries have also looked at the APT band plan and the Russian 700MHz allocation is reasonably close to the APT band plan. Therefore we may see the APT band plan being adopted in also in Region 1.
Exhibit 1: 700MHz Allocation in Russia & APT Band Plan
|700MHz in Russia||
720 MHz to 750 MHz = 30 MHz
750 MHz to 761 MHz
761 MHz to 791 MHz = 30 MHz
|APT Band Plan||
703 MHz to 748 MHz = 45 MHz
748 MHz to 758 MHz
758 MHz to 803 MHz = 45 MHz
Written by Stefan Zehle, CEO, Coleago Consulting
With the roll-out of Next Generation Networks in the fixed telecoms world and increased network sharing in LTE mobile networks, margin squeeze is attracting increased attention. What’s at stake is to maintain competitive retail markets in a situation where multiple service providers use the network of a network operator which also competes in the retail market.
A margin squeeze may occur where a vertically integrated operator sells both the retail service and an essential wholesale input to that service. Specifically, a squeeze arises when the difference between the operator’s retail price and its wholesale price is too small for an efficient competitor to: i) purchase the wholesale input; ii) provide the remaining inputs needed to create the retail services and iii) sell the retail service on a profitable basis. In practice, there are two main scenarios in which margin squeezes may occur.
Firstly, where the price of a wholesale service is regulated on a retail-minus basis the difference between the retail and wholesale price may be too small for an efficient competitor to compete and make a profit. Secondly, where the wholesale price of the vertically integrated operator is regulated but its retail service is not, retail prices could be set at a level which does not allow competitive operators to be profitable. The intention in such a case could be for the incumbent to drive competitors out of the market so that it can put up its retail price – short term pain for possible long term gain. Looking in more detail at the two cases, retail-minus regulation is used by certain regulators for some fixed network services.
For example, the UK regulator Ofcom has argued that retail minus may be appropriate for certain innovatory services where there is considerable uncertainty about service performance and it is important to encourage new investment. For this reason Ofcom has not imposed price regulation on BT’s VULA service (next generation bitstream) although the service is subject to a number of conditions.
However, it does require that VULA prices are set at a level which ensures there is no margin squeeze. In its draft recommendation on non-discrimination obligations of 7 December the European Commission outlines an approach for NGA (but not legacy access networks) which has something in common with Ofcom’s. The recommendation proposes that NRAs should not maintain or impose cost-orientation on NGA wholesale inputs providing certain conditions are met such as equivalence of input and the satisfactory outcome of an economic replicability (margin squeeze) test. In mobile networks, national roaming charges and prices paid by MVNOs are often set on the basis of commercial negotiations although this may accompanied with the potential threat of retail minus if that does not work.
In practice, commercial negotiation often does the trick, particularly when there are a number of operators in the market, but there is always the possibility of retail minus in the background and hence, the possible need to identify what the margin actually is. As mobile telecoms moves from a voice orientated business to LTE, it becomes increasingly difficult to determine what margins are because there is no clear relationship between data volumes and revenue.
Margin squeeze tests can also be applied in situations where wholesale prices are required to be cost orientated. A potential problem arises in situations where the margin squeeze test is failed since this could result in wholesale prices being set below costs – indeed, this has happened in Austria.
Setting wholesale prices below cost is warranted in situations where the incumbent is trying to squeeze competitors out of the market but seems inappropriate where prices have been reduced to remain competitive in the market. For this reason regulators and competition authorities need to take account of the prevailing circumstances when acting on margin squeeze tests where wholesale input prices are subject to cost orientation.
In this context it is interesting to note that the European Commission Draft Recommendation on non-discrimination obligations does not propose the use of margin squeeze testing for legacy access networks, where cost orientation is required. According to a 2009 ERG survey, 12 NRAs have a procedure to carry out margin squeeze tests and, indeed, a large number of tests have been conducted.
The importance of testing is likely to increase in the future, for example in the context of NGA network rollout. Given the increasing recognition that setting wholesale inputs in NGA networks on a cost orientated basis may have a negative impact on roll-out, margin squeeze testing will inevitably become an essential part of an NRA’s regulatory toolkit. Finally it’s worth saying something about margin squeeze tests themselves. Put simply there are many types of test and the appropriate way to conduct a test will depend on the circumstances under consideration.
In many cases regulators and competition authorities may do well to test for margin squeeze using two or more different methodologies. To give some idea of the approaches/issues involved: tests can be conducted on an ex ante basis or an ex post basis; tests can be conducted either on an Equally Efficient Operator basis (essentially the incumbent’s costs) or a Reasonably Efficient Operator basis (the costs of a potential competitor). The Commission’s recommendation has, probably sensibly, come out in favour of the former; tests can examine either projected or realised cash flows and/or look at year by year results.
There are arguments in favour of both approaches;for bundled products tests can be carried out either on a product by product basis or at the level of the aggregate bundle; A further and crucial factor to consider is the period over which the test is to be conducted. This is particularly important for new innovative products such as Next Generation Access where it may take a number of years to achieve a positive rate of return.
Written by Jonathan Wilby, Senior Consultant, Coleago Consulting
Rumours that Hutchison Whampoa’s 3 Austria is close to sealing a deal to acquire Orange Austria (previously One before being rebranded) for €1.4bn may be good news for the Austrian mobile sector which has seen fierce competition as four operators battled it out in a country of eight million people. It is estimated that in service revenue terms Hutchison has about 6% of the Austrian mobile market while Orange has about 19%. By comparison, Telekom Austria has 44% and T-Mobile has 31 % so the merged entity will still be smaller than its larger competitors. Although the price seems quite steep at circa 7x EBITDA it may well be justified if 3 Austria can extract hundreds of millions of synergies from the deal by rationalising the networks and avoiding damaging price and subscriber acquisition wars. Post-merger execution will needless to say be critical.
The two other operators in the market (Telekom Austria and T-Mobile) will also benefit and no doubt they will be hoping that the deal is approved by the competition authorities. This might explain, if the press reports are true, why Telekom Austria is so keen to help 3 Austria do the deal by, for example, buying Orange’s discount mobile brand Yesss! as well as some 2.1GHz spectrum and 3,000 redundant base stations. Press reports suggest that 3 Austria will raise up to €300m from these divestments which will lower the overall transaction risk.
In the coming years we expect further mobile network operator consolidation in developed markets as the industry becomes increasingly mature and margins come under further pressure. For Hutchison Whampoa, this represents a new wave of investment in Austria and its 3G business and we wonder if it is not a template to be used in other markets where it is finding the going tough.
Written by Scott McKenzie, Director, Coleago Consulting
The French telecoms regulator announced at the end of last week that they have finished the 2.6GHz auction process begun in June.
|FDD Allocation (MHz total)||Price (m€)||€/MHz/POP||Obligatory MVNO access|
The format used in France was a first price single round sealed bid which meant there was no opportunity to learn and can lead to disparities in prices paid. As if to illustrate this point, one player (SFR) got the spectrum at the reserve and did not need to commit to hosting MVNOs.Although the price per MHz per pop does not look outrageous compared to some other 2.6 GHz auctions (e.g. Denmark and Sweden for example), it is 4.5x that seen in Germany in 2010 and this might be (partially) explained by the fact that the reserve price level set in France was a lot higher than that in Germany – 25x on a per MHz POP basis.
The 800MHz digital dividend spectrum is now to be launched before year end.
Written by Scott McKenzie, Director, Coleago Consulting
The troubles of T-Mobile go back many years and are related to inferior spectrum holdings: “We were late with 3G”, said Neville Ray, SVP, engineering and operations T-Mobile USA, in March 2009. Since then T-Mobile acquired spectrum in several auctions and launched 3G, but it still has an inferior spectrum position. Spectrum auctions, beloved by the FCC, often cause reduced competition in wireless markets because the business case for spectrum auctions always looks better for larger operators. One of the largest components in deciding how much to bid for spectrum is the value arising from denying spectrum to rivals. If the US government had wanted more competition at network level it could have chosen a method of spectrum allocation other than unfettered auctions.
However, developments in the wireless industry have moved the goalposts and sooner or later the Justice Department will have to relent on its opposition to the proposed acquisition. In developed wireless markets there is now very little growth in the wireless industry revenue, i.e. the industry is mature. At this point of the industry life cycle management focus shifts from seeking revenue growth to taking out costs, for example through consolidation.
The physical network is increasingly a commodity, whereas there is increasingly fierce competition at retail level. In many markets consolidation at network level went hand in hand with increased competition at retail level with the launch of multiple Mobile Virtual Network Operators (MVNOs) and branded resellers. If the Justice Department and the FCC are concerned with competition they could make approval conditional on incorporating provisions into the acquisition that make it easier for MVNOs to enter the US market. Having said that, T-Mobile’s case is not helped by the smoking gun in T-Mobile’s past: In October 2009 Deutsche Telekom’s CFO Timotheus Hoettges insisted there was no need for further consolidation of the US wireless market: “There are four national players in the US market for 300 million households, while in Europe, where we have 350 million households, there are 50-70 operators.”
Written by Stefan Zehle, CEO, Coleago Consulting
The French telecoms regulator ARCEP announced the terms of the country’s 800 MHz and 2.6 GHz spectrum auction process in June. There are several noticeable features of the process: firstly the bands are being sold off sequentially with the 2.6GHz spectrum being auctioned in September and the 800MHz in December; secondly the auction is a first price sealed bid format, which is rather uncommon these days given the potential drawbacks with this format; and thirdly the reserve prices have been set at a very high level which is consistent with the worrying trend we have seen in other countries lately.
Since the auctions are sequential there is what game theorists call exposure risk which is due to the complimentary nature of 800MHz and 2.6GHz spectrum – i.e. a risk of overpaying for 2.6GHz spectrum as their bid price is based on an assumption they also win 800MHz and then fail to do so. In other words, should they bid on the 2.6GHz spectrum assuming no synergies with the 800MHz band and then risk not getting their desired allocation at 2.6GHz?
Given the fact that the format to be used in each stage is a single round first price sealed bid auction with no opportunity for price discovery, there is inherently a risk to significantly overpay – the so called “winner’s curse”. Equally there is a potential “loser’s curse” where a bidder might narrowly miss out on a spectrum block it might have been prepared to pay more for. With such a format, a bidder needs to study its own and competitors’ likely valuations as well as bidding intentions carefully to ensure successful participation and avoid embarrassing outcomes.
As we have seen in other European countries, which have announced forthcoming spectrum auctions (see our recent blog post on the Greek auction for example), the regulator is setting the reserve prices at a very high level in order to guarantee a high minimum revenue – in this case €2.5bn. If we compare the reserve prices set for the auction held in Germany in 2010 for example, it is striking that on a €/MHz/POP basis the French reserve prices have been set at 100x and 25x for the 800 MHz and 2.6 GHz bands respectively (although note the format used in Germany was multi-round). Although high reserve prices do discourage frivolous participation they also undoubtedly favour the bidders with deeper pockets and it could be argued that if the regulator really believed in market forces (since they are holding an auction) then they should set a low reserve and let the market decide.
Scott McKenzie, Director Coleago Consulting
The licensing of multiple mobile networks within the same market really took hold with the advent of GSM. Often licences were awarded based on beauty contests and later through auctions. Coverage was of the main evaluation criteria and also a source of competitive advantage for mobile operators. In the early days of GSM coverage maps featured prominently in advertising and for customers geographic coverage was the main factor in choosing one mobile operator over another. Licence obligations and competitive pressures ensured that operators build coverage rapidly, even in areas with low revenue potential. This development was of course very much to the benefit of the rapid growth of the mobile communications market. In other words, licensing and building several mobile networks in parallel proved to be a tremendous success.
In 2011 few operators in developed markets talk about geographic coverage, i.e. geographic coverage is no longer a differentiator between networks and hence does not confer competitive advantage. Competition tends to be around bundled offers, handsets, price plans, rewards, content, and occasionally mobile broadband quality gets a mention. The implication is that at this stage of the mobile industry life cycle, network ownership appears to matter less and less. Indeed many operators share sites and in some cases even share the Radio Access Network (RAN).
However, the exponential growth in mobile broadband traffic means that capacity started to matter. New spectrum is being auctioned and in some cases prices paid, particularly for digital dividend 700MHz or 800MHz spectrum, are quite high – €0.70 per MHz per pop in Germany for example. Prices paid for 2.6 GHz are much lower, in the region of €0.02/MHz/pop, but still represent a substantial cost to mobile operators. Governments are keen to extract significant amounts of cash from mobile operators and design spectrum auctions to achieve this. From an operator’s perspective the question arises, how can we avoid bidding up prices for the new spectrum?
Given that most regulators have already accepted RAN sharing, perhaps the best course of action for competing operators in a particular market is to form a Network Company which will bid for spectrum jointly on behalf of operators, deploy an LTE network in the new spectrum and then lease capacity to each mobile operator. Indeed, following the conclusion of the 800 MHz and 2.6 GHz auction in May 2010 in which ePlus failed to obtain 800 MHz spectrum, the winning operators immediately announced that there would be a deal to give ePlus access to the sub 1 GHz spectrum. This begs the question whether such a deal could have been struck prior to the auction?
In the run-up to a spectrum auction collusion rules are often not clear. For example, in the forthcoming Swiss auction there are rules against collusion but also any company is allowed to bid. Could two operators form a bidding vehicle? If yes, network consolidation would take a step forward. Site sharing is already standard operating procedure and RAN sharing is becoming more widespread. Sharing spectrum would take this evolution a step further. Sharing brings of course the greatest capex and future opex benefits in a new build situation. The forthcoming digital dividend and 2.6GHz auctions and roll-out of LTE therefore present an ideal opportunity for mobile operators to increase return on capital employed by co-operating at network level while preserving competition at retail level.
There are likely to be regulatory concerns in respect of competition. These concerns can be alleviated if there is already enhanced competition at retail level through MVNOs and if operators are mindful of other competition related aspects, committing to net neutrality for example.
Moving towards a net-utility and fostering competition at retail level may seem counter intuitive. However combining careful analysis of the industry evolution as it moves into the mature phase of the industry life cycle with an analysis of capital expenditure and the return of capital employed along different parts of the mobile operator value chain may produce new insights. After all, all investors should be interested in is return on capital employed.
By Stefan Zehle, CEO Coleago Consulting