Voice over Wi-Fi and the Implications for MNOs

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

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

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

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

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

On the 3^rd 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

How the Telefonica Deutschland / E-Plus merger could play out

This week it was reported that the European Commission and the German telecom regulator (Bundesnetzagentur) are applying pressure to Telefonica regarding their planned takeover of KPN’s subsidiary E-Plus in Germany.

We think on balance the deal will get approved but both parties will need to make significant concessions to get it done. This will be especially the case with regard to spectrum holdings and as we saw in Austria commitments to support virtual operators and branded resellers (i.e. wholesale access). There is always a chance that the concessions are so onerous that they may effectively destroy the deal.

The combined entity will have approximately a 39% mobile customer and 32% mobile service revenue market share in Germany, so the European competition authorities (and the German telecom regulator) will no doubt review it very carefully. Revenue market share figures would of course look much lower if the fixed and mobile markets were combined and no doubt KPN/E-Plus and Telefonica Deutschland will be arguing for this. They have a point, given the recent €7.7bn deal by Vodafone to acquire Kabel Deutschland and the fact that Deutsche Telekom sells fixed and mobile services effectively under one brand.

Regarding spectrum, the combined entity will on the face of it have a whopping 64% of the 1800MHz and 54% of the paired 2100 MHz bands, so it is likely that regulators will require a sale or handback of some of the holdings in these core bands.  In the less scarce 2600MHz band, it holds 42% of the spectrum. A similar situation was seen in the UK with regard to 1800MHz spectrum when EE was created from the merger of Orange and T-Mobile. It is possible that the other German operators will lobby to have “excess” spectrum handed back rather than sold so that the merged entity does not benefit. Some of the excess spectrum is due to for renewal in 2016 and the merger will reduce competition for these frequencies.

By contrast, in the very scarce and more valuable sub 1 GHz bands, it holds 33% of the 800MHz and 29% of the 900MHz spectrum, so there should be less of an issue here.

Clearly the deal is going to require significant concessions.  It makes sense for the competition authorities to scrutinise these deals to ensure that monopolies are not arising and customers have enough market choice.  Yet at the same time, telecom operators need to generate acceptable returns in a fiercely competitive and mature market. A difficult balancing act for the competition authorities.

By Scott McKenzie, Director, Coleago Consulting and former supervisory board member of E-Plus

Hong Kong’s hybrid approach to 3G spectrum renewal creates a “freerider” problem for the incumbents

Hong Kong’s Office of the Communications Authority (OFCA) has decided to adopt a hybrid approach to the renewal of incumbents’ 3G spectrum. OFCA will distribute two thirds of the spectrum to the incumbents through an administered allocation process and the remaining third will be put up for auction. The incumbents have the opportunity to reacquire the spectrum through the auction but it also opens up the opportunity for a new player (and many are speculating the China Mobile Hong Kong is the primary candidate) to acquire the spectrum.

When incumbents value spectrum one of the most significant sources of spectrum value attributed to spectrum in an auction is the ability to block new market entry. This “blocking value” can be very high for incumbents, especially in mature markets, as a new player seeking to win share to drive economies of scale often sparks a value destroying pricing or commission war – the experience of Three entering the UK market is a good case in point.

China Mobile may place a high strategic value on gaining access to 3G spectrum in Hong Kong and so the cost of blocking in the auction could be high. All the incumbents have an incentive to block new market entry. However, in an ideal world an incumbent would prefer “freeride” and rely on another incumbent to pay any premium for market entry. This creates a coordination problem for the incumbents and this risk is that they fail to “reach agreement” through their bidding strategies as to who will take the responsibility for blocking. The result may well be that new entry occurs despite all incumbents being heavily incentivised to avoid it.

Written by Graham Friend, Managing Director, Coleago Consulting

An upset in Norway following an auction of existing spectrum assets

In my article on spectrum renewal by auction, which was recently published on www.telecoms.com, I highlighted the potential risks that the Norwegian regulator, the NPT, was taking in renewing spectrum using a first price sealed bid auction. http://www.telecoms.com/197611/uncertainty-and-risk-the-results-of-spectrum-renewal-by-auction/ In the article I asked whether Norway would provide the first real upset and whether an incumbent would be deprived of key spectrum assets.

The NPT announced the results of the auction today and whilst incumbents Telenor and NetCom secured spectrum in the key 800, 900 and 1800MHz bands the other incumbent, Tele2, failed to win any spectrum at all. Tele2’s CEO, Mats Granryd made clear in the company’s press release that they regarded the auction outcome as an upset. Granryd said, “We are obviously not satisfied with the outcome of the auction, but we will continue to build on our strong position in Norway.” Instead of Tele2 securing spectrum, the mysterious Telco Data secured a robust portfolio of spectrum assets comprising 2×10MHz in the 800MHz band, 2×5MHz in the 900MHz band and 2×20MHz in the 1800MHz band.

So what contributed to this upset?

The choice of auction format is the primary candidate. In a first price sealed bid auction bidders effectively write a number down in an envelope and the highest bidders win and pay the amount they each bid. In such an auction it makes sense to bid less than the value you place on the spectrum or, as game theorists like to say “shade your bid.” The challenge, however, is to determine how much to shade your bid. Shade aggressively and if you are successful in the auction you create significant value. The risk, however, is that you shade too aggressively and someone with a lower valuation, but who shaded less aggressively, wins the spectrum.

Coleago Consulting has supported operators in over 60 spectrum auctions and we have worked on behalf of both incumbents and new entrants. As markets have matured it has become increasingly apparent that the business case for new market entry is not an attractive one and heroic assumptions are often required just to turn the business case positive. Tele2, as the smallest player in the Norwegian market, may well have taken the view that they only needed to outbid a new entrant and that a new entrant would have had a very low valuation. As a result Tele2 may have decided to shade very aggressively in the hope of securing spectrum at a low price and thus create significant value. The combination of very aggressive shading from Tele2 however and a super charged new entrant business case is likely to have generated the upset.

Written by Graham Friend, Managing Director at Coleago Consulting

Coleago join a managed services panel session

Chris Buist, Director, Coleago Consulting takes part in a managed services panel session at European Communications’ quarterly seminar.

Chris Buist’s presentation at European Communications’ Managed Services seminar

Hear Chris Buist, Director, Coleago Consulting talk about Managed Services during his keynote speech at European Communications’ quarterly seminar.

The Data Tsunami is coming to East Africa

Coleago Consulting discusses regional investment, spectrum and infrastructure strategies at the TMT Finance & Investment East Africa 2013 Conference

This is a really critical time for the East Africa region. Significant decisions about the framework for investment, particularly regulation and spectrum allocation for 3G and 4G, will have a fantastic impact on regional growth.

There are a number of important spectrum auctions coming up across the region and operators are looking at how best to use spectrum, infrastructure sharing, new technologies and business models, to meet the massive demand for data services. The industry is now entering a transformational stage with unparalleled fixed-line and mobile consolidation.

Despite significant growth and achievements achieved over the past decade, major new investment, innovation and infrastructure roll out is needed for the next phase of development.

Highlighting the changing telecoms landscape in East Africa, next week (November 26^th) sees the first TMT Finance & Investment East Africa 2013 Conference arrive in Nairobi.

In my first conference presentation of my new role here at Coleago, I will be making a keynote on “The Data Tsunami: Spectrum Allocation and Infrastructure Sharing” at the event, discussing the actions that regulators and operators are taking to cope with the global “data tsunami” that started building with 3G and is now accelerating with 4G. If you’re attending the event, or considering it, and would be interested in meeting, feel free to contact me – chris.buist@coleago.com

Written by Chris Buist, Director, Coleago Consulting