Wi-Fi offload won’t reduce the need for more mobile spectrum

During the Wi-Fi Offload Summit in Frankfurt on Jan. 23, a number of interesting developments in the Wi-Fi space were presented. A key question for mobile operators is whether Wi-Fi offload reduces the growth in mobile broadband (HSPA and LTE) traffic and thus the need for more mobile spectrum.

Research presented by Deutsche Telecom from tests in Hamburg and Rotterdam showed that when Wi-Fi is advertised and available free of charge in a particular area, this immediately generates substantial Wi-Fi traffic but does not reduce the volume of mobile data traffic. Towerstream Inc. presented conflicting evidence from its outdoor Wi-Fi offload network in New York.

From other findings presented, it is clear that both Wi-Fi and LTE traffic are increasing dramatically. Perhaps what is at work here is the Jevons paradox, which proposes that as technology progresses, the increase in efficiency with which a resource is used tends to increase (rather than decrease) the rate of consumption of that resource. The increasing availability of free Wi-Fi coupled with a rapid uptake of smartphones and cheap tablets would underpin this theory as one feeds off the other.

The growth in Wi-Fi is also driven by the desire of shops and malls to engage with shoppers on their in-store Wi-Fi networks. There is marketing value for retailers to have shoppers on their Wi-Fi network as soon as the shopper walks into the store. EE in the U.K. is turning this into a small business line, equipping supermarkets such as ASDA with a Wi-Fi infrastructure. Rather than identifying shoppers at the checkout when they swipe their loyalty card, ASDA hopes to be able to identify and engage with shoppers from the minute they are within the store’s Wi-Fi coverage. For example, coupons could be sent to a handset at the beginning of the shopping trip and can be used right away rather than languishing at the bottom of a shopping bag. This is just one of the many marketing benefits of free in-store Wi-Fi.

The simultaneous growth in Wi-Fi and LTE traffic may also be explained by the fact that Wi-Fi has other uses compared to cellular. The proliferation of TV Anywhere apps turns tablets and laptops into TV outlets, and in Canada, Bell has launched the first wireless TV proposition. TV over Wi-Fi creates a surge of Wi-Fi traffic in residential areas. Other devices in offices, public indoor spaces and outdoors rely increasingly on Wi-Fi connectivity because it is cheaper and more flexible than cable connections. This all takes Wi-Fi capacity in cities and raises the Wi-Fi noise floor.

In regard to the rapid adoption of tablets, all are Wi-Fi-enabled, but few are 3G (HSPA) or LTE-enabled. As people take these tablets out of their homes they will look for Wi-Fi access, thus increasing Wi-Fi hotspot usage. However, smartphones have a personal hotspot feature and where tablets are not in Wi-Fi coverage, we are seeing “cellular on-loading” from Wi-Fi devices.

Having paid for a shiny new LTE device, some customers would prefer to pay another €10-20 a month rather than having to faff about with logging onto Wi-Fi. Asking smartphone users to choose between LTE and Wi-Fi is the antithesis of a ubiquitous mobile broadband experience. However, Wi-Fi 2.0 with SIM-based authentication increases the ease of Wi-Fi access and may even be transparent to the user.

Another factor which determines the amount of LTE vs. Wi-Fi traffic are the policies for applications set in smartphones. For example, which bearer is allowed or preferred for which application. Some apps do not work via LTE; for example. FaceTime on the iPhone. In the U.S., the first version of the iPhone 5 with iOS 6 did allow FaceTime over LTE. This came as a bit of a shock to cellular operators as AT&T blocked FaceTime over cellular on most plans, but subsequently changed the policy. What cellular operators really want is to be able to set policies dynamically based on the app, the location, time of day and perhaps even the type of customer.

Nevertheless, most mobile operators have some Wi-Fi offload strategy. The focus is not so much on relieving congestion in busy areas but to deliver an “always best connected” value proposition. In short, LTE and Wi-Fi complement each other. The growth in Wi-Fi does not reduce the need for more cellular spectrum to serve the growth in mobile broadband traffic.

Written by Stefan Zehle, CEO 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.

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 geography and roaming in telecoms

Today most people are familiar with services such as Skype. Effectively a location independent mobile service, with Skype it does not matter where people call from nor does it matter where the called party is located. Geography has become irrelevant. By the end of Q4 2012, it was anticipated that roughly 50 per cent of international call traffic is likely to have taken place via Skype and similar services rather than traditional carrier traffic.

More and more people are installing Skype on their handsets or using Facetime on their iPhone, and they are getting used to the fact that calling from their mobile phones doesn’t necessarily have to involve the mobile operator. What’s more they also get video telephony. Increasingly people use WiFi on their smartphones, both at home, at work and in public places. The introduction of WPA2 as well as SIM based authentication which allows automatic connection to a WiFi network without signing in makes it easy for users to route their traffic via WiFi and opt out of traditional telephony.  Operators such as Rebtel in Sweden and Republic Wireless in the USA focus on this opportunity – these mobile operators that use WiFi offload “push” their customers to make calls using Skype like services.

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.

During 2013 we will see the start of a fundamental reshaping of mobile telecoms service offerings driven by new services based on the IP Multimedia Subsystem (IMS), the evolution of mobile wholesale as well as regulatory trends. Some operators may go all the way and break the link between the mobile telephone numbers and geography. After all it seems somewhat archaic that in a world where distance does not matter, mobile operator tariffs are still based on location and distance. Location is not an issue with Skype or FaceTime and this is one of the reasons for the success of these OTT operators.

Some operators have already introduced services based on IMS, for example in Canada the Rogers One Number service allows the seamless switching between a smartphone and computer. It allows mobile operators to leverage the proliferation of free WiFi connectivity to in effect extend their network coverage world-wide.  This allows mobile operators to fight back against OTT services such as Skype, WhatsApp and FaceTime by in effect becoming themselves an “OTT over WiFi” player.

There are also traditional mobile services that allow users to avoid roaming charges and thus take at least one aspect of geography out of equation that already exists for voice (Truphone, WoldSIM and other) and data (roamline.com, in collaboration with KPN). The business model is built on exploiting the difference between lower wholesale prices paid by MVNOs versus high inter-operator roaming tariffs by offering customer SIMs with multiple numbers in different countries.

The opportunity to take geography out of mobile pricing is not limited to roaming. For example, Turk Telecom launched a service in Germany and Belgium aimed at the Turkish ethnic segment in these countries. Customers are charged exactly the same amount to call numbers in Belgium or Turkey. Turkcell could add the ability to recharge linked accounts (a Turkish person working in Belgium can recharge the prepaid SIM of relatives in Turkey) and make small mobile payments across borders. Smart, of the Philippines is already going down this route, targeting the Filipino diaspora segment around the world.

As a result of these trends in international call pricing as well as roaming, Geography may soon become irrelevant.

Written by Stefan Zehle, CEO, Coleago Consulting

How to become a successful wholesale Mobile Virtual Network Operator (MVNO) host operator

With most mobile markets (including many in developing markets) becoming heavily saturated the mobile business is becoming increasingly a market share game. It is well understood that with high fixed costs, Mobile Network Operator (MNO) businesses demonstrate increasing returns to scale and therefore obtaining a larger share of the market in terms of service revenue is the key to success. The switch from voice to data is further exacerbating this issue.  Just as Fast Moving Consumer Goods (FMCG) companies such as Proctor and Gamble have multiple washing powder brands to serve different market segments, so MNOs need to develop a multi-brand strategy involving a mix of their own (retail) and partner (wholesale) propositions which extend their reach. We often meet MNO clients who want to grow their business by developing a wholesale MVNO strategy and are asked how they should go about it. The following are the basic principles:

Constantly Scan the Market for Opportunities

In order to be successful in such a multi-brand world, MNOs need to be good at understanding different segments in the market that might currently be underserved as well as spotting good potential wholesale partners who have complementary assets such as distribution or customer relationships. In other words they need to develop strong strategic, competitor and market intelligence functions internally and then set them to work constantly scanning the market looking for opportunities. It should be noted that some segment opportunities might be better addressed with a wholly owned brand if no suitable wholesale partner can be identified.

Sell, Sell, Sell But Do Not Forget Account Management

Once an opportunity and potential partners are identified the organisation needs to have the capability to make the deal happen and afterwards manage the relationship. In order to do this they need to set up a dedicated wholesale department which is really a professional Business To Business To Consumer (B2B2C) sales and account management function. Each wholesale partner should be assigned an account manager who will be involved in developing the wholesale contract and working with the partner on an ongoing basis to make them a success.

Accommodate Different Business Models

Within the limits of national regulations, we advise MNOs to offer wholesale partners a range of models all the way from co-branding or branded reselling through to a full MVNO. Different partners will have different technical and IT capabilities e.g. a supermarket might want to have a co-branding deal so that they can focus on distribution while a more infrastructure minded partner such as a cable TV operator might want a full MVNO and just rent the radio access network. In all cases the partner will need some sort of clearly differentiated product or tariff if they are to be successful with their target customer group.

Remember it is Not a Zero Sum Game

Many MNOs are reluctant to give good terms to wholesale or MVNO partners reasoning that they can potentially serve the end customers themselves. If a wholesale partner has the right target in mind they will be able to deliver new customers that the MNO cannot reach on its own. Therefore in order to motivate chosen partners we advise MNOs to offer generous terms which reward success. The guiding principle should be that x% of something is worth infinitely more than 100% of nothing.

Cannibalisation – What Cannibalisation?

Many MNOs are concerned that wholesale partners might cannibalise their core retail customer base. Our experience tells us that these risks are often greatly overstated especially if the partner has been correctly selected and has a well-defined target.  If an operator has a low market share then the risk is inherently low and even market leaders can benefit from a wholesale multi-brand strategy by for example using discount MVNO partners to compete with the later entrants without impacting their more premium retail brands.

Scott McKenzie, Director, Coleago Consulting Limited

Rising reserve prices in mobile spectrum auctions are a cause for concern for all

Ever since the Federal Communications Commission began auctioning spectrum rights in the mid 90s nearly all regulators around the world have relied on market mechanisms, such as auctions, to allocate and value spectrum. Regulators recognised that mobile operators themselves were best placed to value mobile spectrum and that the role of the regulator was to design an auction that encouraged operators to reveal their valuations and allocated spectrum to those that valued it most highly. Such an approach should yield a, close to, economically efficient use of spectrum which is a common objective for policy makers. Regulators would however set a reserve price which represented the minimum price they were prepared to accept for the spectrum. The conventional wisdom was to set a low but “non-trivial” reserve price in order to discourage “frivolous bidders”. During the 90s, the Dot Com era and in most recent auctions the actual prices paid have been determined after many rounds of competitive bidding and the final prices were higher than the reserves. However, there is a noticeable trend amongst regulators in auctions for new spectrum such as lots in the 2.6GHz and Digital Dividend frequency range as well as for existing spectrum such as 900MHz and 1800MHz to set a much higher level of reserves than in previous auctions. Specific examples of high reserves compared to historic levels and other auctions include the proposed auctions in Ireland and Switzerland as well as the current auctions in Spain. The trend towards higher reserve prices is a concern for all.

Regulators continue to rely on spectrum auctions to value and allocate spectrum and indeed in some countries, such as Germany, the use of auctions is written in law. However, their confidence in the effectiveness of auctions is being shaken by low levels of auction participation – especially in the case of renewal of existing spectrum

holdings. For spectrum auctions to generate economically efficient outcomes they rely upon competition amongst bidders. However, when the number of bidders matches or is less than the available spectrum such competition will be absent and the spectrum will be sold at the reserve. The absence of excess demand and competition is

increasingly likely as markets mature and potential new entrants recognise the typically higher valuations placed on spectrum by incumbents compared to Greenfield operations and may decide not to participate. This was exactly the experience of the Singaporean and Norwegian regulators in their auctions of existing 900MHz spectrum holdings in 2008 and 2004 respectively. As regulators may expect to only receive the reserve price the level of reserves is receiving a much higher level of attention.

Regulators may have amongst their objectives the goal of capturing for society part of the private value of a  natural scarce resource such as spectrum. With auction prices failing to reflect operators’ private values due to a lack of competition regulators are seeking to estimate the market value for themselves. A typical approach for regulators is to use benchmarks from previous auctions however benchmarking is generally a blunt instrument and the results are heavily influenced by whether the high 3G prices achieved during the Dot Com book are included. As a result regulators are considering developing their own bottom-up valuations to supplement any benchmarking evidence. Indeed at a recent workshop on spectrum valuation in Brussels the majority of the participants were regulators. The task of valuing spectrum is a role that regulators have historically accepted they are poorly placed to perform.

If spectrum is likely to be sold at reserve and regulators are seeking to estimate market values in order to set reserves then this should be a cause of concern for all. Spectrum valuation is a challenging exercise even for the operators who are best placed to conduct the activity. If reserve prices are set too high in error then the spectrum may be left unsold and this will lead to a significant loss of economic efficiency. High reserves may also deter participation in the auction which only serves to reinforce the lack of potential competition within the auction and in subsequent downstream markets. If spectrum prices are based on reserves and spectrum is allocated to the incumbents then the process effectively becomes an administered approach and could suffer from a lack of transparency.

Regulators should make every effort to encourage participation in an auction and if the auction is expected to be competitive they should set low but non-trivial reserves. However, if an auction is unlikely to be competitive then regulators should question the value of holding an auction at all and consider introducing other measures such as

Administered Incentive Pricing to ensure economic use of the spectrum. As with the use of AIP in markets like the UK and New Zealand, if spectrum is going to be priced based on an administered approach then the approach should be inclusive, transparent and involve those that understand the value of spectrum the best, the operators.

By Graham Friend, Managing Director Coleago Consulting

How to participate successfully in a spectrum auction

Surging mobile data growth and network congestion have created demand for additional spectrum. Governments seeking to reduce national borrowing are anxious to auction additional spectrum to raise revenue whilst also promoting access to broadband services. Mobile operators have little choice but to participate or potentially suffer a loss of competitive advantage.

The last time spectrum was at the top of the sector’s corporate agenda was 10 years ago when governments auctioned 3G spectrum. For most companies the experience and knowledge of the 3G auctions of 2001 has long since been forgotten and many companies must learn how to navigate a spectrum auction all over again. Based on our experience from over 40 spectrum awards we present the keys to successful spectrum auction participation.

Lobby, lobby, lobby: Operators should be proactive in lobbying for an auction design and associated rules, such as those relating to spectrum caps, which best serves their needs. Arguments should be presented in a language that regulators understand such as economic efficiency and promoting competition.

Valuation, valuation, valuation: Bidders must have a clear view on the value of the spectrum lots being auctioned – not only individually but also the value of any synergies arising from geographic combinations, combinations of blocks providing wider channels to benefit from technologies such as LTE or optimal combinations of low and high frequency spectrum which together offer both coverage and capacity benefits.

Clear auction objectives: Economists and auction designers assume that all mobile operators only seek to maximise shareholder value but such assumptions are seldom shared fully by boards. Auction objectives are often couched in terms of obtaining pre-defined blocks of spectrum as cheaply as possible or avoiding any adverse differentials in price for similar lots compared to other bidders. The bid team requires a clear and unambiguous statement from management as to its objectives in the auction.

Know your limits: Economists also assume that mobile operators have unlimited access to funds and are not budget constrained. Few, if any operators are in this luxurious position and management will wish to impose bid limits on the bid team. The bid team need clear guidance on bid limits and how they relate to auction objectives and interact with the valuations of spectrum lots and combinations of lots.

The devil is in the detail: Auction design has improved significantly in the last 10 years which should have made developing bidding strategy more straightforward. However, auction designers are being asked to achieve an ever broader range of auction objectives such as encouraging new market entry, increasing or maintaining competition, promoting investment in rural coverage and ensuring contiguous spectrum to promote efficiency. As a result the use of multi-stage auctions, 2^nd price rules, caps, eligibility rules and linkages to spectrum usage fees for existing spectrum holdings have made developing bidding strategy more challenging. Operators should pay close attention to the detailed auction rules especially if they do not have a pure shareholder maximisation objective and are budget constrained to ensure they have a robust bidding strategy.

Know thy enemy: In some auction formats there is scope for strategic bidding (not bidding “honestly” and “sincerely” based on your valuation) or no choice but to bid strategically (as is the case in some sequential and first price sealed bid auctions) and in such auctions estimating accurately the value of spectrum to your competitors and the their bid limits is as important as knowing your own valuation.

Practice, practice, practice: A bidding strategy is only as effective as its execution Auctions involve high stakes and can be highly pressurised occasions and bid teams need robust protocols and procedures, including disaster recovery, to ensure they can execute the bidding strategy effectively. With some auctions requiring the entry of large numbers of bids (such as the proxy stage of a combinatorial clock auction) or the constant adjustment of valuations to reflect synergies (such as in the case of regional auctions) the bid team is well advised to have developed and tested auction support tools to automate these processes prior to the live auction.

Be prepared to walk away: Successfully participating in an auction may involve walking away with nothing if prices rise above the company’s valuation. It is better to walk away and to have avoided destroying shareholder value than to pay a price above the value of the spectrum.

The $8.5 bn paid by Microsoft for Skype may not be silly money

The $8.5 bn paid by Microsoft for Skype may seem extravagant when looking at Skype as a stand-alone business. However, as anyone involved in valuing M&A deals knows, what matters is the value to the acquirer of the combined business.  Microsoft has a market capitalisation of around $ 211 bn. Microsoft’s business planners will have carefully analysed the deal. A small tweak in one of the drivers of future cash flow will result in a substantial swing in the valuation of Microsoft and the deal could easily be justified on this basis. What immediately springs to mind is the potential of deep integration of Skype with Windows Mobile, potentially lifting Microsoft’s market share in the smart phone operating systems market from its current low level.  Microsoft’s recent tie-up with Nokia provides further leverage in this context. While in the PC operating system market, Microsoft’s dominance lead to regulation limiting bundling (e.g. the EU regulation concerning the bundling of MS Internet Explorer with the operating system), given Microsoft’s small market share no such limitation exists in the mobile operating system market. There is huge scope to integrate Skype in simpler phones aimed at highly price sensitive emerging markets where saving pennies on domestic and international calls matters a lot. Mobile operators are probably watching the acquisition with some trepidation.

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.