Network sharing vs competition in the Czech Republic

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

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

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

Coleago Consulting Appoints New Director to Grow New Business Division

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 sector

The European Commission’s adoption of regulatory proposals for a Connected Continent announced by Neelie Kroes on the 11^th 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

The end of unlimited internet

At last week’s shareholder assembly of Deutsche Telekom, the outgoing CEO Rene Obermann defended the decision to stop selling DSL packages with unlimited data volumes, by arguing that only a few percent of customers will be affected: when reaching their monthly data limit, and that they would need to pay extra to keep enjoying broadband speeds, which he considers a fairer option compared to increasing prices for all users.

Price discrimination is a valid company strategy, found in many products and industries (in mobile telecoms it is already common to charge different subscription prices, e.g. for different access speeds and monthly data allowances). However, the move of Deutsche Telekom to pioneer download limits on fixed line Internet access packages, gives raise to two serious concerns:

First, Deutsche Telekom’s own IP video services will be exempt from the data limit – this already received many comments on violating the principle of net neutrality: as soon as the monthly data limit has been reached, access speed with be throttled to such a low level, that most broadband services such as YouTube won’t work anymore, while access to Deutsche Telekom’s own video service will be unaffected.

The second and more important point – and in most discussions somewhat neglected – is the effect that such a decision could have on the Internet services market. As a vertically integrated operator, Deutsche Telekom is controlling essential access network infrastructure (the local loop), which it needs to provide at regulated terms to other service providers. At the same time, Deutsche Telekom competes with these service providers in the retail market. This recent change in DSL packages has to be seen in context with another Telekom announcement: The use of VDSL2-vectoring to upgrade DSL lines to speeds of up to 200Mbps. This increase in speed (though not necessarily available to all households) could seriously discourage potential investments in fiber-to-the-home installations by alternative providers. Vectoring increases the access speed of a local copper loop only if the whole cable bundle is controlled from one single DSLAM (to manage cross-talk between copper pairs). This means, that to provide this technology, alternative access providers may be forced off the local loop, potentially limiting competition. Deutsche Telekom will still have to provide bitstream access to competitors, but this will come at an additional cost. In this case, the recent reduction in monthly wholesale access charges for the local (sub-)loop by the German regulator may not translate into reduced prices for end-users.

Although it is already part of all newly signed contracts the data limit will only be enforced by 2016. This gives Deutsche Telekom lots of time to observe the market reaction: it may be in their intention to have other competitors follow this example.

This case shows a clever example of a successful incumbent strategy exploiting legacy infrastructure assets and keeping competition at bay. While other countries move ahead with bringing fiber access to buildings and homes (with Russia currently being the fastest growing market in Europe approaching 15% FTTH/FTTB penetration) Germans will need to keep enjoying their copper wires for a while (FTTH penetration is still far below 1%). There is a lot of work ahead for regulators and ministers to assure, that Germany won’t miss the connection in a digital society.

Written by Matt Halfmann, Partner, Coleago Consulting

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

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

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

Spectrum sparks interest of mass media

With many countries worldwide moving from analogue terrestrial TV to digital terrestrial TV, the conversation has turned to what the defunct spectrum from the analogue terrestrial TV will be used for. TV is of course the mass media par excellence and hence the mass media are starting to speak about spectrum related issues, notably the digital dividend spectrum (700-800MHz) and mobile broadband.

Whilst this is something the industry has been working on for a number of years, it is now becoming of interest at a consumer level as individuals want to know how the digital switchover may affect the mobile services they receive. We spoke with the BBC Click team last week. To see their take on the digital switchover and spectrum please click here. This interest at consumer level is an excellent opportunity for mobile operators, device manufacturers, cloud service providers, software firms and other industry players to position themselves in the public imagination.

Written by Stefan Zehle, CEO, Coleago Consulting

From One to 3 in Austria: Will Hutchison be a consolidator in Europe?

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