The risks with Google Wallet

Interest in the industry regarding NFC and mobile payments is continuing to grow following the joint venture by Orange, Vodafone, O2 and T-Mobile, with the Google Wallet emerging as the latest major breakthrough. It will aide NFC to continue to take off (albeit slowly at first) and it is our expectation that we will see NFC technology be built into a growing number of new mobiles, including the iPhone 5. But uptake will still be slow over the next 18 months to two years. However, NFC chip makers are forecasting that 40 to 50 million NFC-enabled phones will be in circulation by the end of 2011, so early adopters are likely to be investing in a new handset pretty soon.

Making money out of mobile payments was one of the drivers that drove the share prices of telecoms companies to stratospheric levels during the Dot Com boom. Ten years on and the Google Wallet is the only real  progress that has been made in relation to m-payments outside of some mobile banking applications for developing markets and the UK operator joint venture earlier this year, of which we’re still waiting to see the results. One of the reasons for the lack of progress is that m-payment is a classic example of network economics. The more customers and the more sellers who adopt an m-payment platform, the more valuable that platform becomes. The GSM mobile standard was a perfect example of network effects in action and the lack of global or even national coordination for an m-payment standard is a contributing factor to the lack of success to date.

Google seeking to establish a dominant standard is a risky business. If it gets it right, like Microsoft, it can look forward to significant returns. If it gets it wrong, like Betamax video and more recently HD DVD, it can expect some difficult questions from shareholders. A number of players in the last 10 years have sought to establish a payment standard but none have been successful and their attempts have been somewhat half hearted.

Written by Graham Friend, Managing Director, Coleago Consulting

The Network Sharing Conundrum

By Sharad Sharma, Senior Consultant, Coleago Consulting Ltd

Network sharing is gaining momentum

Mobile operators worldwide are struggling to increase the ARPU where voice, the main source of revenue source is commoditised and the data is yet to carve its way to be a high revenue generator. However, in order to maintain the technological leadership in the market, high investments are still needed in the networks whether it is a developed economy or a developing economy. The operators are facing a big challenge to justify the investments in the network. As a result operators look to identify cost cutting opportunities. Some of the costs saving initiatives are easy to tackle but the others like network sharing and network outsourcing involve business transformation of high degree.

Network sharing as a cost saving initiative has been gaining momentum in the different countries but also to improve performance. Tower sharing and national roaming has been around for quite a while now with operators across the globe are sharing towers for speedy network deployment. Originally Network Sharing was looked at in the light of revenue generation for incumbents and a more favourable to greenfield operators, helping the latter to increase roll out coverage faster. However, today network sharing is viewed from the angle of cost reduction.

Forming separate entities to pool tower assets or an entity to manage a consolidated network in the case of RAN sharing are of interests to many operators. However, there may be trouble ahead if such agreements are not thought through correctly: A cookie will always taste different when two different people make it even if it is the same recipe. These initiatives are now a trend and the decision to implement is taken without a detailed assessment of the opportunity. It is very important to assess the market dynamics and company’s own capability before actually going ahead with the network sharing. Many questions need to be answered before making a decision as to the network sharing model, the partner, the scope and the structure of the agreement. Two of the major questions that arise are the risk of losing the network related competitive advantage and the risk of degraded quality.

Network as a competitive advantage

The increasing number of smart phones is making the customers now much more aware of network quality / capacity / congestion as variations in service quality for data services are much more apparent and much more frustrating. Operators have pursued different strategies in terms of network investment for data capacity and as a result there are greater variations in network performance and customers are more aware of the differences. As a result network once again has become a source of competitive advantage. This may well lead operators to turn away from network sharing deals as they would not want to neutralise their advantageous position.

But are these strategies giving an operator a sustainable competitive advantage or is it just a short lived like any other voice quality improvement that the customers forget after all operators achieved equality. On the other hand, is it possible to gain this competitive advantage by a cost saving initiative like network sharing? The answer depends on the case.

For example, in the UK, most operators in UK claim 99 per cent geographical coverage. Now boasting of superior network quality with a combined network can be seen in the advertising campaigns. The operators like ‘3’ and T-mobile after implementing RAN sharing are claiming a better network coverage and quality while T-Mobile now ringing bells of combined Orange and T-Mobile network. Vodafone and O2 in turn moved into a tower sharing model. However, in developing countries where the networks are less mature, the implications are different because geographic coverage roll-out continues to be an issue.

Network capacity and congestion

An issue with network sharing arises in the context of capacity upgrades. Particularly in respect to mobile broadband the challenge is forecasting the capacity requirements not the network sharing or technology. If the forecasting is smartly managed for both the radio access and transmission backhaul, capacity issues could be overcome easily. However it does raise issues with regards to sharing sensitive commercial information between competitors.

Should we share now or wait?

When competition is based largely on price, the competitive advantage resides with the lowest cost operator. The lowest cost operator is probably an operator with a network sharing deal in place. An operator who currently enjoys a leading market share position and therefore decides to delay sharing may well find that when their advantage is neutralised, there are no network sharing deals to be done as all competing operators have entered into agreements. In the long run this market leader may well suffer because he no longer has the lowest cost operation and therefore would be unable to compete on price. Resolving the conundrum requires careful consideration and a valuation of the relative benefits of network superiority versus cost sharing. As with any strategic decision, timing is everything.

Austrian 2.6GHz spectrum auction results show some consistency with previous auctions but the picture is still confusing

The Austrian regulator RTR concluded the auction of 140MHz of paired spectrum and 50MHz of unpaired spectrum raising proceeds of €39.5 million from the four incumbent operators Telkom, Hutchison, T-Mobile and Orange. The benchmark for the paired spectrum of approximately €0.04 is at a similar level to the results from the German auction which also saw the 4 incumbents secure spectrum but 4 times lower than the Danish auction, another market with 4 existing operators. Whilst relative levels of spectrum supply relative to operator demand is often a significant determinant of spectrum prices achieved at auction it is clearly not the full story.

Austria has one of the most competitive and developed mobile broadband markets in Europe and the need for capacity should have pushed prices higher. However, unusually the RTR attached roll-out requirements to the 2.6GHz band requiring 25% of the population to be provided with coverage with a downlink of 1 MBit/s and 256 KBit/s on the uplink by no later than December 2013. This represents an onerous requirement for operators as it will require them to deploy LTE sooner than perhaps they might have preferred. The coverage requirements will have depressed auction prices. Attaching coverage requirements to the 2.6GHz spectrum is unusual as coverage is usually addressed through lower frequency spectrum bands such as 900MHz and 800MHz as the propagation characteristics of the lower bands are more suited to providing coverage. The mix of strong demand and onerous roll-out conditions mean that the auction results provide little additional insight for regulators and operators who have yet to auction the spectrum.

The relative prices for paired and unpaired spectrum also remains confusing as Hutchison paid less in total for its paired and unpaired spectrum (a total of 65MHz) compared to T-Mobile which only acquired 40MHz of paired spectrum. This outcome is however more likely to be due to the algorithm (effectively a second price rule) used by the regulator to determine the final prices.
The use of second price rules, where the highest bidder wins but only has to pay the amount of the 2nd highest bidder, tends to result in more economically efficient allocations of spectrum but it can lead to interesting variations in price for similar lots. For example Telkom paid 20% more for the same amount of spectrum as Hutchison and T-Mobile paid 40% more on a €/MHz/Pop for its 40MHz of paired spectrum than Orange paid for its 20MHz and the difference is unlikely to be explained in full by differences in spectral efficiencies of LTE in wider bands
As countries such as Switzerland, Spain and the UK prepare to auction spectrum in the 2.6GHz band the Austrian auction provide some insight into the potential value of the spectrum but considerable uncertainty remains.