What conditions will be attached to O2 Germany’s acquisition of E-Plus?

In my blog post on Monday the 29^th of July “EU in a muddle over roaming rules”, I pointed to the conditions imposed on H3G Austria to allow its acquisition of Orange Austria (Case M.6497 “Hutchison 3G Austria Holdings GmbH / Orange Austria Telecommunications GmbH), notably to publish a Reference Wholesale Access Offer for MVNOs with a data price of €0.002 per Mbyte.

The pending acquisition of E-Plus Germany by Telefonica O2 Germany will also require approval by the European Commission. It is unlikely that that it can be argued that the mobile market in Germany is more competitive than that in Austria. In fact there are indications that it is less competitive and the acquisition would leave Germany with only three Mobile Network Operators.  If therefore the Commission imposes the same or similar conditions on the E-Plus / Telefonica O2 Germany deal, we will see a Reference Wholesale Access Offer, also with a per Mbyte rate of €0.002 per Mbyte, in Germany which is the EU’s biggest mobile market.

Effectively the conditions imposed in the context of industry consolidation may eventually lead to EU-wide mandated wholesale prices.  This is a backdoor way of starting to regulate the European mobile industry and effectively create a regulatory difference between mobile access providers (MNOs) and mobile retailers (MVNOs). What may follow is an Accounting Separation requirement being imposed on EU mobile network operators.

Written by Stefan Zehle, CEO, Coleago

EU in a muddle over roaming rules

The FT commented on the effect of profitability the proposed EU roaming rules may have on EU mobile operators, not least because mandated wholesale prices open up the possibility of arbitrage.  It is evident from the Case M.6497 “Hutchison 3G Austria Holdings GmbH / Orange Austria Telecommunications GmbH, Commitments to the European Commission 11 November 2012”, that the European Commission is well aware of this issue.

As part of the Commission’s approval to acquire One Austria, Hutchison Austria entered into certain commitments, notably to publish a Reference Wholesale Access Offer and host up to sixteen MVNOs.  The interesting bit is the data pricing stated on page 29 of €0.002 per Mbyte. This sets an extremely low benchmark.

In order to prevent this low rate from being used by operators outside Austria, clause 36(l) on page 25 of the Reference Wholesale Access Offer states that the MVNO, “The MVNO shall not seek to sell MVNO services to any customer whose residence or place of business is outside Austria.”

Here the European Commission has contradicted its avowed aim to create a single telecoms market. Effectively the consumer who lives in Austria could buy a service from an MVNO, but not for example a customer in Germany. A German MVNO might also wish to buy services from Hutchison Austria at these rates to offer a seamless service that covers both Germany and Austria.  This would be a very practical benefit of the single market in telecoms. However, the Commission put rules in place which prevents this from happening.

This is an extraordinary contradiction which shows that the Commission is in a muddle over the issue. At the core is that the part of the commission dealing with competition appears to be out of step with that part that works on telecoms.  It also highlights that the fears voiced by EU mobile operators are real.

I wonder what would happen if a customer of an Austrian MVNO using the Hutchison Network moved from Austria to Germany. If the MVNO does not disconnect the customer Hutchison Austria would complain.  The MVNO might then sponsor that customer to bring a test case that on the grounds of single market provisions, the MVNO does not have the right to disconnect the customer.

Neelie Kroes has made the roaming proposals without having thought through the full impact on the mobile industry.  This deserves much greater consultation.

Written by Stefan Zehle, CEO, Coleago Consulting

Margin squeeze issues are attracting increased attention

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

What to expect in 2013: Coleago’s CEO gives his view on the global telecoms industry

During 2013 we will see the start of a fundamental reshaping of mobile telecoms services offerings driven by new services based on the IP Multimedia Subsystem (IMS), the evolution of mobile wholesale as well as regulatory trends.

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. Services of this kind are particularly of interest to operators who are not part of a larger group. 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.

Let’s look at a practical example: An operator such as Bouygues in France, Telstra in Australia, or 2degrees in New Zealand introduces a service where its customers are in effect connected to the home network wherever in the world they log on to the internet, whether using a smartphone or laptop with an appropriate client. The customer lands in Singapore’s Changi airport, logs onto the free WiFi and can make and receive calls as if he were on his home network. Initially this might be positioned as a premium service, for say an additional US$ 5 per month. The operator may lose margin on international roaming, but as a smaller operator the roaming margins are not that favourable anyway and more could be gained by attracting new customers. Furthermore, without such offerings the same customer may not make roaming calls anyway, and instead use Skype, Face Time or WhatsApp when out of the country, i.e. completely bypass the operator’s service. There is therefore potentially a lot gain for some mobile operators.

Services which allow users to avoid roaming charges already exist 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, for example, by MVNOs and high inter-operator roaming tariffs (IOT), the input cost into roaming retail prices. Some operators, who do not have a lot of roaming margin to lose, may attack and offer their own multi-IMSI services, for, say, an additional $10 per country. In the EU downward pressure on intra-EU roaming comes from regulation and using innovative IMS based services operators may be able to maintain or even increase margins. The conventions which govern how roaming is handled already started to fall apart. There are now special inter-operator deals and “roamer high-jacking”. For example, when a visitor arrives in Jakarta, it is likely that he will be greeted by the Indonesian mobile network with an SMS assigning him a local number.

The opportunity to innovate is not limited to roaming. For example, Turk Telecom already launched a service in Germany and is about to launch a service aiming at the Turkish ethnic segment in Belgium. The service, in conjunction with KPN’s Base, replaces Base’s Ay Yildiz brand. Customers will be charged exactly the same to call numbers in Belgium or Turkey. Turkcell could add the ability to recharge linked accounts (Turkish person working in Belgium can recharge the prepaid SIM of relatives in Turkey) and make small mobile payments across borders. It is easy to see that mobile operators have a lot to gain. Smart, of the Philippines is already going down this route, targeting the Filipino diaspora segment around the world.
Some operators may go all the way and break the link between the mobile telephone number 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 OTT operators.

Sooner or later someone in the EU will wake up to the fact that charging high prices for cross border calls – whereas within a bundle the marginal cost of in-country calls is in effect nil – constitutes a barrier to EU integration. This is a similar line of reasoning as we have seen with roaming pricing. There is also the precedence of regulation intra-EU retail banking transactions, preventing banks to charge more for intra-EU transaction than for domestic transactions. Again, there is an opportunity for operators who make little margin from international calls. Including international calls in the bundle would make a mobile operators’ service more attractive, possibly even halting the growth of Skype over mobile and taking back business from international mobile call specialists such as Lebara.

We are likely to see offerings from mobile operators where the national number can in effect be used across the whole EU as if the customer was in the home country. Incoming calls will be free and outbound calls will come out of the bundle in the normal way. Some operators are already moving towards this charging model, for example Vodafone’s EuroTraveller which for an extra £3 a day allows customers to use UK bundled minutes, texts and internet in Vodafone’s Europe zone. £3 a day equates to £90 a month, a huge premium that will soon be eroded since there is no link between price and input costs.

In this context the value of a wider international footprint becomes apparent. Some operators may regret that they sold off operations. Dual country “roam-like-home” offerings could be particularly attractive to address certain segments in regions that are well integrated across borders, such as Benelux, Austria-Bavaria, around Geneva and the surrounding region in France, or even Malaysia and Singapore.

The changes are hastened by the rapid decline in mobile termination rates in the EU and other countries as well as regulatory pressure. Data traffic now exceeds voice traffic and soon voice traffic will account for a minor proportion of overall traffic. MTRs based on LRIC will become very small indeed. Eventually location and distance independent mobile tariffs will become a global trend, but it will take a long time in countries, such as Tunisia or Bangladesh, who milk international inbound call termination revenue and visitor roaming revenue as a source of foreign currency earnings.

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

Turkcell launches German MVNO

News that the number one Turkish mobile operator Turkcell (home market share 56%) is launching an MVNO on Deutsche Telekom’s mobile network in Germany is not entirely a surprise given its desire to expand outside Turkey and the success that Dutch operator KPN had with its wholly owned Turkish proposition Ay Yildiz in both the German and Belgian markets over the past five years. No figures are available but it is rumoured that the A Yildiz subsidiary of KPN’s German operation E-Plus numbers circa seven hundred thousand mobile customers (>20% market share) in the 3.5m strong Turkish community in Germany. E-Plus’s real market share amongst the German Turks is therefore a lot higher as this does not include other brands that it markets (E-Plus, BASE, SIMYO, Ortel etc.). Turkcell may also have felt compelled to act given the competition it is seeing from Vodafone which entered the Turkish market via the acquisition of Telsim in 2005 (and now has a 25% market share) and which has started offering roaming deals between Germany and Turkey. The question is whether they can successfully market and distribute the right product for the Turkish German community given the headstart that E-Plus/Ay Yildiz enjoys in the crowded segment.