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Monday, July 31, 2006

Filling the Pipes

I recently received a MMS text reply to a picture message that I sent to an email address - just saying "Thanks for the picture and the free reply was a great service and he wished his operator provided a similar service"

I think this is a nice example of filling the pipes, the message reply could be a maximum of 500 characters and sent via IP directly to the Vodafone MMS server and is designed for 100% on-net traffic.

A nice feature at nearly zero marginal cost.

FM Radio & Cellular

How Analogue is that?

CSR announced their results for Q1 last week and they mentioned they are currently sampling FM Radio & Bluetooth functionality on the same chip and expects to start generating revenue from the chip in 2007. They mentioned that the current problem with FM Radio in the phones is the interference from the electronic circuitry produces interference and poor reception.

How about a bigger problem and more fundamental problem – FM is Analogue technology and uses vast prime real estate on the spectrum inefficiently.

I cannot believe with the entire effort going on to convert the UK to 100% digital TV that FM radio is escaping the digitalisation effort. After all we have a perfectly good crystal clear solution that many, many millions have been invested in – DAB radio. Frankly, I am disgusted that OFCOM are still regularly issuing local FM Radio licences – they should really be turning them off. They should be encouraging people to use the digital technologies and look for a plan to turn off both FM and MW technologies. Still I wouldn’t take the fascist move of preventing people to sell products with FM radio and Cellular functionality; however I would tax the chips to pay for the digitalisation effort, say £3/chip.

More importantly what on earth are the cellular operators thinking of subsidising handsets with FM radio? It is worth completely zero and perhaps is cannibalising fee generating services by encouraging people not to buy music tracks from them or registering for their Radio DJ services. Personally if I was an operator, I would charge a minimal price for contract phones with FM functionality otherwise I would risk looking like a complete and utter fool. If the operators charged say £5, then we’ll see how many punters really want this functionality.

I don’t blame CSR either as they are just responding to their customers requirements. In fact I blame Nokia, I believe they were the first to put FM radio functionality into the handset. I believe CSR are just trying to add more functionality to its’ chipset to help its’ main customer, Nokia, and more importantly hold off TI who are Nokia’s key partner and are expanding into Bluetooth.

In fact, CSR are becoming the chip supplier who provides features of dubious value to the operators. I’d love to hear of an operator who is actually making money out of Bluetooth – go to any playground and you’ll see kids exchanges pictures & music (especially ringtones) via Bluetooth for free. I admit that Bluetooth functionality with headsets is good for the operators. CSR’s next big chip is going to be a WiFi chipset which is going to be about as popular with the operators as a cut in termination fees.

I know that Nokia is a big #1 in the cellphone market, but they just cannot go winding up the operators and playing them for fools and not expecting some sort of backlash in the medium term.

The King of the Internet & Pipex

Pipex (much more expensive Broadband than Free) have launched the first element of their advertising campaign featuring David Hasselhoff. I presume the marketing theory is some sort of viral campaign. As I believe Pipex need all the help possible in their battle against TalkTalk, Sky, BT, ntl and the rest of the motley crew, I'm quite happy to contribute and post a link. But do not think for a second that I am one of those internet freaks who worship the Hoff.

Sunday, July 30, 2006

Vodafone: Key Leading Indicator

As I’m sat browsing the Sunday Papers, I’m struck on how every man and his dog can’t resist passing judgment on Vodafone’s challenges:

The Sunday Times concentrates on Vodafone cutting the subsidy on 3G handsets and therefore the proportion sold compared to GSM only handsets has dropped. It also looks at the survey on customer loyalty with o2 (81%) well ahead of T-Mobile, Vodafone and Orange. The hapless H3G UK only has loyalty of around 33%. This is most important indicator of all as the operators either lose customers or have to provide higher subsidy to keep their base. Though extremely interesting, the whole of Sunday Times article is basically a re-presentation of a Enders Analysis Report and as such constitutes a very good advertisement for that company.

The Sunday Telegraph focuses on the (de)-centralisation question and notes that the new Chairman, Sir John Bond achieved great success at HSBC which is known as the “the world’s local bank”. The article goes on to say that Sir John Bond has let it be known that Arun Sarin is living on borrowed time and operational performance must improve for him to survive.

The Sunday Business (or whatever it is called this week) argues that convergence is the most important challenge facing Vodafone, much more so than who is the leader: it notes that o2, BT and Orange are planning converged network. In a different article, the same author in the same paper on the same day goes on to speculate who is going to replace Arun Sarin saying Peter Erksine (Telefónica), Vittorio Colao (unemployed) and Stan Miller (KPN) are the favourites.

So there we have three different papers focusing on three different strategic issues and two commenting on the expected short life span of the CEO. It is apparent that Vodafone will far it nigh on impossible to keep itself out of the papers. The British Press currently spell blood and they will not let go until there appetite is satisfied.

Personally, I think the leading indicator is when Sir John Bond lets Arun Sarin go, because I think that Sir John Bond will hold onto Arun until he thinks the bottom has been reached. It is better to give the next man/woman a fresh start without worrying about managing the decline. It may take 12 months, it may be shorter, but when Sarin goes: we all will know that Sir John Bond thinks the bottom has been reached and Vodafone’s fortunes will on the up from that moment.

Friday, July 28, 2006

Where are the biggest wallets?

Have you ever wondered where in the world to launch a premium product?
This map gives a big clue. Courtesy of the wonderful WorldMapper Research Project.

Income over $200
In 2002, 53 million people in the world lived in households in receipt of US$200 purchasing power parity (PPP) per day. Of these high earners, 58% lived in the United States.

Western Europe and South America are also home to quite large populations of high earners. Within Western Europe the most very high earners live in the United Kingdom, Italy and France. The highest earners of South America live primarily in Brazil and Argentina.

Few very high earners live in Southern Asia, Northern Africa, Eastern Europe and Central Africa.
Now remind me again, why should Vodafone sell out of Verizon Wireless?

BSkyB – Leveraging the Power of Content

Free Cash Flow

In today's results to 30th June, Sky revealed it generated £563m of FCF in the year. This is after total capital expenditure of £212m (including £37m on LLU unbundling), but before £209m on the purchase of Easynet. Sky can easily afford it’s capital broadband plans of £250m over the next couple of years (£130m – fixed and £120m – success based). It can also easily afford the £290 of cash operating losses.

The scary thing for the competition is that the cash-generating part of the business is remarkably capex light. Sky only spent £212m on capex, of which £37m was on unbundling exchanges. Furthermore another big chunk of the capex (£38m) was spent on upgrading IT support systems which will be shared with the new broadband business.

Transmission Costs

One thing that should frighten the Telco’s is how cheap Sky’s transmission costs currently are: in 2006 they were £171m for the TV business which is flat year-on-year. Total transmission costs increased by £63m because of the Easynet network costs, which was only acquired at the beginning of January so yearly run-rate on the fixed network that Sky have acquired and building will probably be at around the same rate as the whole of the TV transmission, once the LLU build out is finished. If we conservatively just look at the DTH revenues, transmission costs are only 5.4% of revenues. If you consider the bandwidth that this delivers, this is an absolute huge advantage compared to DTT (Freeview), Cable or Copper.

Content Investment

Sky spent £1.6bn on programming – this is huge barrier to entry to anyone thinking of entering the content business, especially when you consider the Sky bundling approach. The spend on Sport is the largest chunk of this is an incredible £766m – how anyone else in the UK can compete with this is beyond me. Sport is obviously the cornerstone that drives Sky forward. Movie costs were £310m which is in absolute decline (down £33m y-o-y and the lowest figure for six years). News & Entertainment costs were £200m, an increase of £20m because of an increase in own cost & commissioned programming. Third party channel costs fell to £323m (a drop of £39m) and the third party channel cost per subscriber is £3.37/month.

The overall trend is what interests me: Sky is spending less with third parties and spending more on generating its’ own unique content, whether internal, (eg SkyNews) commissioned (eg SkyOne) or rights-based (eg exclusive Sports Rights).

Digital Penetration – core business growth

I don’t think Sky’s growth in its’ TV service is by any means complete:
- First – it is going to add new subscribers to Sky. Sky’s targets around 400k a year which is about £156m/annum at current ARPU rates. I don’t think this is a stretch at all and could quite easily grow the 500k per annum which would add £200m/annum

TV Homes w numbers

- Second – there is big upselling opportunities on the base – only 13% take up multi-room, HD has only just launched (again Sky are technologically in the lead) and there are the people who will upgrade the bundle (around 45% take Sports + Movies + All Channels)
- Third, additional revenue streams such as Advertising Revenue will improve as audience share improves. Wholesale content seems to be stable which they attribute to Cable losing net premium customers.
- Finally and this is where the telco’s will be really envious – Sky actually increases product prices on a yearly basis!

Once you add up all the elements you could quite easily see Sky growing its’ core business revenues at 5-10% per annum. Sky’s business model is also extremely leveraged so I can see profit and cashflow growing at a quicker rate (7.5%-15% pa)

This is a nice business before you add in the home telephony and internet business, both of which should increase the value of the TV business through increased customer loyalty. 1% of churn reduction is £50m/annum saving in customer acquisition costs.


It is obvious that Sky are placing a big investment in customer care and home engineers and I suspect they are building a “digital walled garden” – if you want the best quality, features and service join the Sky Club. Carphone Warehouse are obviously taking the “value” dumb pipe approach and BT will like to play the Sky game, but don’t have the content, but do have years of telco/internet experience lead and I suspect have a far more “less digital” customer base who love analogue TV and the BBC. I’m not sure where Orange is placing themselves or o2 once they join the playing field.

I am also sure that Sky’s EPG (Electronic Programming Guide) will be a critical differentiator in the Video camp. If Google is premier Gateway for information retrieval and MySpace is the premier Gateway for Social Networking, the Sky EPG will be premium gateway for video whether on the net or broadcast. This will be a bit asset in the future.

Murdoch Snr

Murdoch Jnr’s Dad gave an interview the other day and it is obvious that the BSkyB model will be replicated in Italy and the USA. His comments about commission rates for advertising on MySpace will have sent a shudder down the spine of Google. I’m almost sure that BskyB will not get any sort of exclusivity on Myspace content as it expands overseas. It is obvious that the whole of the Mudoch Empire is not thinking about convergence, but implementing it...

Personally, I think BSkyB is looking the strongest going into the UK BroadBand Wars.

3G Coverage – Who Cares?

Certainly not OFCOM, after all the cash has been collected from the 3G auction.

OFCOM has updated today on how to calculate 3G coverage. I’ve no doubt this is due to Dean Bubley complaining last week about operator fudges:
In summary, Ofcom is seeking to measure the extent to which 3G services are available to the UK population where they live. Such services should, under normal circumstances, be able to provide a range of applications such as voice, text, video and multimedia services for outdoor reception with speeds up to 384kbps. Coverage to meet this obligation is expected to be primarily urban/suburban rather than rural.
So it’s official – it is outdoor coverage that counts (even though the majority of people use 3G services indoors). Even better is the definition of normal service, which is meant to deal with the concept of cell breathing:
The mix of services available at any location will depend on decisions taken by operators – for example about cell size and the number of simultaneous users supported. The proposed approach measures where a range of basic and advanced services are available under normal conditions, but recognises that this range may not be available there to all users at all times.
In other words, OFCOM will trust the design of the operators engineers. None of this would actually matter if the operators made a virtue or selling point based upon coverage and quality of service. None of them do (unlike one of the operator’s US subsidiaries) and so that about sums up their attitude to 3G and service differentiation.

You're going to reap just what you sow...

Thursday, July 27, 2006

Cleaning Up the Base

No sooner do I complain about Vodafone fudging it's customer numbers than Vodafone start to clean up the base. Only joking, I know my article had nothing to do with Vodacom announcing that they are removing 3.5m subscribers off its base. All I hope is that Vodafone bought another 15% of Vodacom, they didn't value the company on the basis of $/per subscriber

Feel the size – 3.5 million, that is 14% of Vodacom’s South African base and 8% of the total South African population. How ridiculous is that overstatement? - something must be done to clean up the Operator statistics worldwide.

The problem in South Africa is that inbound calls were being forwarded to voice mail accounts and generating a chargeable event and therefore the phone was not classified as inactive. In other words if a phone is turned off – ie lost or discarded – and keeps receiving inbound calls it still counts as active.

I wonder how many other operators have hugely inflated customer bases?

The UK Broadband War - Series 2, Episode 2

With the UK tuning into Free Broadband (but now we can’t say Forever), I would have placed a large bet that penetration of Broadband Britain would pick-up – not so.

According to BT’s 1Q results to June 2006 released today: net broadband adds for BT Wholesale were 311k and LLU full or partial lines were 222k giving a total of 533k “BT Copper DSL adds for the quarter. However, in the Quarter to Mar 2006, BT Wholesale added 682k and there was 164k full or partial LLU giving a total of 846k.

In other words the rate of growth of penetration is actually slowing!!

However, full and partial LLU is increasing with the run rate now at about 2.5k/day up from 1.8k/day. Again, this is surprising as Bulldog has withdrew from the market and TalkTalk hasn’t actually LLUed anyone yet. The only explanation, I can think of is that the big broadband ISPs (AOL, Tiscali and Wanadoo) are actually pressing ahead with partial unbundling of customer lines as they build out their LLU infrastructure. This is great for their profitability, unless the customer flips to “free” brigade before they have recouped the Openreach charges.

The TalkTalk Almost Free Broadband Offer now has 476k signed up (as at 26th July) from the launch date on 11th Apr. The previous statistics release on the 5th June was 340k which implies the sales rates has slowed from 6.18k/day to 2.67k/day. This is still pretty good if you consider BT Retail is adding 1.72k/day (though this is net and BT suffer from churn). Carphone Warehouse (CPW) are also reporting that 40% of people taking up the offer come are existing broandband customers, in other words 190k are churners. This is incredible, especially when you consider that quite a lot of people will be within contract terms and therefore cannot currently churn. Also surprising is that 81k (17%) are actually outside the unbundled areas and paying £10/month extra for the really-not-free product. It is hardly surprising that Dunstone is relatively comfortable that CPW will end up unbundling more exchanges than forecast. Currently, I envision CPW as a hive of activity will the engineers busy unbundling and adding capacity to the Opal network, the call centre people dealing with queries and it is obvious that this is creating Dunstone more than a few headaches which he is admirably quite happy to admit to. However, I suspect the cause of his nightmares is whether he has got the maths correct on the economics of broadband – the telecom history books are littered with examples of new entrants who underestimated support and capex costs, saw pricing decline much faster than expected and had investors turn off the funding tap.

BT Retail have maintained their market share of net adds at around 30% (absolute 158k) which implies to me that that the big ISPs are losing market share rapidly and this is before the Sky "upload/download/save loads" effect kicks in. I think people are underestimating the Sky machine – Dunstone was quite derogatory saying “Sky is only for 8% of the population” when an analyst asked a question. He also was quite rude to his mobile customers saying he is surprised by their level of subsidy for small spending prepaid customers. He should know – his MVNO business in the UK is going nowhere fast: only adding 19k subscribers in the quarter to June and is probably still burning cash at the same rate as before.

One thing is for sure – the Orange Free* Broadband offer (*only for people who spend more than £35/month) hasn’t improved the position of Wanadoo who, according to the France Telecom 2Q results, now have 1,004k customers - a meagre net add figures of 18k or 3.4% of the market. Whether the reason for this is that people haven’t taken up the free broadband offer or that the existing Wanadoo base are churning to the TalkTalk offer (eg me) or the almost free Sky offer. The evolution of this are going to be fascinating because Murdoch Junior and Dunstone are adamant that the bundle of mobile and home broadband will not work. Meanwhile, France Telecom is setting the target of “adjusting the cost structure” as the main priority with profitability of the mobile operation dropping to 26.2% - will this result in commission drops for the Carphone Warehouse.

I’ll be looking out for the Tiscali, AOL and the smaller ISP results (Pipex + PlusNet) as I feel a radical reshaping of the market is starting to happen. I feel there still have a few mysteries yet to be solved.

• Will the C&W Wholesale LLU package be renamed the C&W Nosale LLU package?
• Who will buy Tiscali and AOL?
• Will they have any customers left at sale time?
• How much value is declining in the AOL UK property per day?
• When will O2 launch?
• What cards (if any) do T-Mobile & Vodafone have up their sleeves?
• Will ntl go bust trying to fight off BT/Freeview and Sky?

These questions - and many others - will be answered in the next episode of UK Broadband Wars.

Wednesday, July 26, 2006

Moving the Carousel to the Continent

Once again the UK Taxman proves that the underlying principle of "I'm Alright Jack" applies in all negotiations with our EU partner countries.

The upcoming solution to the rampant Carousel Fraud going on is the introduction of the "Reverse Charge" VAT Accounting Rule.

As Mike Cheetham, director of trading company Bond House Systems explains:
'It's going to make the UK a VAT-free haven to feed VAT fraud in every state,' Adding that the reverse charge will speed up fraud for other member states. Cheetham believes an end-seller fraud will be produced, where a person selling to the public collects the VAT but doesn't pay the VAT to Customs. He also said an end-user fraud will be generated, where fraudsters will pretend to be VAT registered in order to buy goods VAT-free.

Bond House Systems advice should be noted as they are probably quite expert in Carousel Fraud after their epic 3-year battle with the VATman, which they ultimately won.

Personally, I’m all for competition between member states in order to reduce end-user taxes. However, I suspect that the governments will not reduce its’ expenditure in order to compete and instead will move the tax burden to where the punters have no option but to pay up.

It's not personal, It's strictly business

In the late 1980’s Motorola taught Nokia a painful lesson in patents: it sued Nokia for GSM patent infringement in the USA and took the case to the International Trade Commission attempting to get the import of Nokia’s products to USA banned. Nokia quickly settled for US$20m, when US$20m was a lot of money for Nokia, and licensed Motorola's GSM technology. As a consequence, Nokia quickly established a company wide initiative to start patenting everything coming out of their labs, because they realized the patent process could be a legal means for negotiation and market leadership as opposed to a pure technical disagreement over invention. Prior to this, Nokia thought that short product cycles would render patents valueless.

When the 3G standard was being architected in the late 1990’s, Nokia and Ericsson tried to develop a European flavour of CDMA elbowing out Qualcomm and they were nearly successful with their efforts in the darkened ETSI rooms. However, Qualcomm taught Nokia a painful lesson in the power of Capitol Hill lobbying and ultimately got the US government to threaten a trade war with the EU. The US even sent a “verbal note” to the Finnish government threatening them not to go ahead with licensing 3G spectrum before the Intellectual Property Rights issues were resolved. Eventually everything was resolved by a deal being struck between Qualcomm and Ericsson. Nokia continued to haggle for a while, but eventually licensed the Qualcomm IPR with some GSM IPR in return.

In 2006, as the adoption of W-CDMA is starting to kick-in and Qualcomm has changed the rules of the game from the late 1990s: it has sold the infrastructure and handset business and focused on technology licensing and chips, Nokia is yet again back at the negotiating table.

The proxy war that Nokia is fighting in Brasil and India is frankly a joke: everyone knows the only reason that no-one can compete with Nokia and Motorola in ultra-low cost handset market is because they control the vital GSM patent pool together with the (current) scale advantage for GSM: Ericsson, Siemens and Alcatel have left the handset game and just collect the GSM royalties. Similarly, everyone knows that China will not license a 3G technology which will leave its’ incumbent equipment providers at such a huge disadvantage.

Meanwhile, Nokia keeps on learning painful patent lessons with its’ failure to close out cross-licensing agreements. Is this just Nokia settling a couple of disputes before it enters the ring for the main bout?

I think everything is bubbling up nicely for a quite a brawl: every follower of The Godfather Saga knows that as power is passed from one generation to another, more than a little blood is shed.

100 Not Out

Thanks for James Enck who convinced me to start writing a blog,
All who since have encouraged me,
My ever growing band of readers and
Sainsbury's for providing the vino collapso to keep me going

Keep Smiling,

España: Voda v Telefónica (2Q 2006)

In the interest of fairness, after reporting on Voda getting trounced in Italy by the incumbent during the 2Q, I thought I’d see how the current star performer of the EuroVodaPortfolio in España is sizing up against Telefónica Móviles who reported this morning.

vod espana telefonica

Vodafone albeit from a much smaller base is rapidly improving its’ revenue market share. What is interesting though is that the overall market is still growing, witness that Telefónica is still growing healthily and therefore the competitive pressures are lower.

Also interesting is that Telefónica managed to grow OIBDA margins a full 220 basis points to 45.4% giving quarterly OIBDA of €1,024m. Not only did the revenues increase, but the costs decreased, seemingly because of a lower churn rate. The Voda margin is considerably smaller (approx. 34%) than Telefónica’s though this is probably more due to the lack of scale and rate of growth.

It also helps quite a lot that there are only 3 players in the Spanish market and therefore competition is limited. I suspect that this is all going to change in the near future as Amena is rebranded to Orange and Xfera enters the scene.

Voda Italy v TIM (2Q 2006)

Telecom Italia (TI) released their 2Q results last night and I thought it would be interesting to compare the relative performance to Vodafone Italy. The comparison is quite difficult because TI yesterday released full half-year results, whereas Voda only released a set of KPI’s of dubious value. Vodafone’s half year is Mar-Sept wheras T.I’s is Jan-Jun. Note, I have grossed up the relevant Voda figures (traffic & customers) to take into account Verizon’s equity holding.

vod italy tim

The headline figure is that Vodafone has lost market share compared to Telecom Italia, probably this is why last week Vodafone went crying foul play to the Italian courts.

TI also revealed that its’ EBITDA margin has declined from 51.7% to 49.8% y-o-y (Q2 comparison) and the absolute EBIT has declined from €2,025m (1H’05) to €1,874m (1H’06) – hardly a great performance. We will have to wait to see Voda’s profitability performance, but I suspect that it also will show a decline after all, the EBITDA declined from 53.4% in fiscal year 2005 to 52% in fiscal year 2006 (to Mar)

Whilst the impact of termination cuts is apparent to all, I suspect the effect of H3G Italia will have had a bigger effect on the market dynamics. I also suspect that if a merger is manoeuvred between the third player, Wind, and H3G Italia that normal market dynamics and high profitability (relative to Scandinavian, UK & Dutch markets) should return for all.

Wholesale Customers: Correct Treatment?

Vodafone UK counts its’ 341k BT MVNO Customers (214k Business & 127k Consumer – Mar ‘06) as a single customer. I'm not sure of the treatment of the student MVNO on the Voda network.

O2 UK counts its’ 1m+ Joint Venture Customers with Tesco as zero. Although it does count of part of its’ base the wholesale customers in a similar venture in Germany with Tchibo – hardly consistent treatment.

T-Mobile UK counts its’ 4.346m active Virgin Wholesale Customers (as at Dec-05) as part of its’ base , although it does not comment on the 362k (CPW Mar-06) Fresh customers. Furthermore, OFCOM in its’ quarterly statistics also carries the caveat that T-Mobile uses a different basis for defining active customers and therefore its’ base is overstated. EasyMobile proably does not represent even a rounding error, so I think we can safetly ignore them.

Orange UK is easier because it doesn’t have any MVNO customers.

With so many MVNO customers around and the different method of calculating the base, it is hardly surprising that comparing operators’ performance is extremely difficult. Does anyone else this is a deliberate strategy by the MNOs?

Tuesday, July 25, 2006

Sarin Wins By Landslide

Every Western European politician would give their right arm for the sort of affirmation that Arun Sarin received this lunchtime from the shareholders.

3. Re-elect Arun Sarin as a director
Support: 33,460,492,613
Against: 3,710,627,541
Abstain: 2,219,432,723

Mind you politicians usually have to stand against someone. Arun's main challenger was not even on the ballot paper. Personally speaking, this guy would get my vote.

Even the controversial adjusted bonus targets were approved without much trouble...
15. Approve the Remuneration Report
Support: 31,427,385,227
Against: 3,357,831,297
Abstain: 4,605,368,872

I heard a rumour that it was the Arun election song and video that finally convinced the doubters. Was that Luc Vandevelde bringing in the wheelbarrow of cash? More importantly, will the dissenting shareholders now shut up for a while? Not a chance.

Finnish Bloodbath Finished

Elisa, a small Finnish operator released its 2Q results today. Most noticeable was the dramatic improvement in the mobile operations over the last twelve months.


It is apparent that since the two big MVNOs, Saunalahti and ACN were bought out by Elisa and TeliaSonera the market has stabilised extremely quickly. Churn has fallen off radically and ARPU are now finally on the rise again.

The Finnish market gives a big clue to all regulators throughout the world how to lower prices in a market – increase competition. In the UK, we have seen this effect with H3G UK cutting prices in the extreme, despite the huge sunk costs of the 3G licences. I’m sure that there are a few UK-based oligopolist’s scheming how to take out the disruptive H3G and resume normal shareholder service.

Also, it makes the decision of Teliasonera to launch Xfera in Spain ever more masochistic: they know the forthcoming world of pain and still insist on going ahead, strange…

Millicom Q2 Results

Millicom released their results yesterday and they showed the clear and steady progress Millicom are making. The growth engine for earnings seems to be improvement of performance in Latin America, sale of a Pakistani TDMA network and forthcoming restructuring of the balance sheet with sale of the holding in Tele2.

The CEO didn’t comment much about the failure of the Chinese Sale apart from it cost US$5m and the company wasn’t looking at being broken up, bit by bit.

Of most interest for me is the African Operations which grew revenue to US$72.7m (52% y-o-y) and EBITDA to US$28.9m (23% y-o-y). Although Millicom does not break out performance by country: it seemed that Sierra Leone suffered which is not surprising seeing the country is just emerging from a devasting civil war. Chad and DR Congo were new network launches. Ghana and Tanzania seemed to experience high growth albeit with the flawed metric of absolute customers.

Another Stupid Customer Fight in the USA

Both Cingular and Verizon Wireless claim to be #1 in terms of customers. VZW’s metric is on the basis of retail, whereas Cingular’s metric includes wholesale customers. I know for sure that Sprint Nextel has the highest number of iDen customers in the world.

In my opinion, none of the above matters: what matters is revenue market share and let’s wait for T-Mobile’s, Sprint’s and VZW’s results before we past judgement on who the winners and losers were for the quarter.

For what it is worth, you can have a successful wholesale strategy: just ask the Private Equity Companies who bought Telfort from o2 only to sell it to KPN a couple of years later for a big profit with a strategy based on being a wholesale carrier.

Monday, July 24, 2006

Film 4 For Free

Today is the day that Film4 becomes free or to be more accurate an advertising funded model. Personally, I think the Channel4 business model is great and shows the direction the other state owned TV body, the BBC, should be funded long term.

Channel 4 received its’ analogue & digital spectrum for free and apart from that has no other government funding. The model is advertising driven: you don’t like Big Brother – fine, don’t watch it and Channel4 will receive less advertising income, but unlike the BBC you are not forced to pay for someone you have no intention of watching ever. Channel4 is also forced to buy 100% of its’ programmes and does so from over 300 companies, thereby encouraging the vitality of the independent production sector and not creating another bloated monster.

As its’ Chairman reports in the 2005 Accounts, Channel4 is a beacon of light for all of us public sector cynics.
Channel 4 is a highly unusual organisation. Although it remains part of the state, it behaves in many ways as an independent, entrepreneurial outfit: flexible, market-facing and irreverent. Channel 4 is a true testament to the idea that public and private can be a potent and effective mix – a fact that many other areas of the public sector are still struggling with. We are of course privileged, thanks to our gifted spectrum: but we also have to fulfil an extensive public service remit, which requires us to commission diverse, experimental and educative programmes. I believe we deliver above and beyond those requirements. Channel 4 provides more distinctive entertainment and enlightenment at less cost, to more citizens, than any equivalent body in Britain today.

UK TV Audience

Channel4 has managed to maintain its’ share of viewing despite the inexorable rise of multi-channel viewing.

UK TV Revenue

It has also managed to increase its’ share of advertising revenue and grow the amount in absolute terms from £651m in 2000 to £729m in 2005. The multi-channel strategy has taken total Channel4 revenues to £894m for 2005.

If only the BBC took a similar approach to Channel4…

Telekom Austrian Upcoming Auctions

Over the next month the results of three auctions will be published which are absolutely crucial to Telekom Austria Central European plans.

The first is finally the auction on 31st July of Mobi 63. The Austrians have been chasing this one down for 12 months and really is a key asset in the region.

The second is the auction of Telekom Srpske which is the PTT of the old Serbian bit of Bosnia-Herzegovina, but has a nationwide cellular license again this is a key asset. I'm not sure of the actual date, but it will proably be soon after the Serbian auction.

The third which is much more difficult for shareholder returns is the auction via beauty contest of GSM/UMTS spectrum in Slovakia. The Slovaks have unsuccessfully tried to auction this before and personally I don’t see much difficult in Telekom Austria winning the auction if they really have the appetite to build a network from scratch in a fairly saturated market with two powerful incumbents (Orange and T-Mobile). In my opinion, the only thing the licence has got going from it is that Bratislavia is only 60km from Vienna and the sort of political connection which ensure a victory in a beauty contest.

I expect Telekom Austria to go all out for the Serbian and Bosnian licences: they will be expensive and Telekom Austria will need to leverage up.

Voda KPIs : Lies, Damn Lies and Statistics

Sometimes a company releases a set of data so fundamentally flawed that it is completely pointless analysing it. I really feel for a couple of my City Cyberbuddies who have to analyse the Vodafone garbage released today, but warn readers that the blogosphere has been on the case for a while. The CFO, Andy Halford, even admitted the data is flawed and CEO, Arun Sarin admitted that he didn’t manage the business on the basis of the data.

The fundamental flaw is in the definition of the customer number, which provides the headline for all the newswire services. I shall use a couple of examples to illustrate the problem.

vod inactive

First of all, Vodafone include “inactive” customers ie those prepaid customers who have not had a chargeable event for less than 90days in its’ customer numbers. As you can see from the data the y-o-y growth in every market is over reported.

vod inactive prepaid

Secondly, you can see that including pre-paid customers in the 90-day limit similarly overstates the prepaid quite significantly. Andy Halford actually used the real life example of “spinning” for the reason that UK prepaid churn was so high. In other words people buy a prepaid handset, use up the credit on the SIM card and then put their old SIM card in it to keep the same number. In other words people have have more than one SIM card.


In last years Investor Day, ex-Vodafone Director, Peter Bamford, gave some data on the SIM card effect showing the effect on reported vs actual penetration in the UK, German and Spanish market. Today, Andy Halford used the example of Italy, where on Vodafone’s base there is an average of 1.3 sim’s per customer, thereby rendering the ARPU figures and churn figures completely useless – what is point?

The mobile operators should get together with the GSM Organisation or even the Accounting Standards and agree something more meaningful than the complete rubbish they report today.

Arun Sarin admitted he manages the company on the basis of revenue market share and profitability - this seems sensible to me. Perhaps the kpi's should be changed to reflect this (+ return on capital + cashflow)

On a more interesting note for the UK market, Arun promised new tariffs, new products and new distribution. I'm intrigued about the final element, I guess the first is the long awaiting reaction to the T-Mobile Flexr product in the post-paid segment and the second I'm assuming is the launch of the broadband product.

Arun also promised that Vodafone would have a broadband product in every European market by the end of the fiscal year (ie March 2007) He sidestepped the question on infrastructure acquisitions to support the broandband launch.

On a side point, I nearly dropped my morning cuppa, when an analyst asked Arun is he was considering Vittorio Colao as a replacement for Bill Morrow - Vittorio is the bookies favourite to replace Arun!!!

Saturday, July 22, 2006

Hot Air from Helio

The US based Helio MVNO looks like it is burning through the US$440m that Earthlink and SK Telecom have committed to at a rapid pace of knots. Earthlink in their Q2 results are forecasting losses for the year of US$150m-US$170m.

Helio is starting to advertise and the first commercial is on the web. The second is also uploaded. Notice that Helio are not pushing the voice service, but the ability to upload stuff to Myspace. Helio also sponsor a radio show from LA that I listen to on the web: in the commercials they are forever pulling that Helio is the first company to figure out how to link the device to Myspace - hardly a long term Unique Selling Point. The fact that Helio have reduced the prices on the monthly bundle smacks of a mixed message to me.

It also doesn't help that the handset supplier, VK Mobile, has gone bust. UK Vodafone watchers will remember VK Mobile launching onto the UK market 18 months ago with the pink Christmas prepaid handset which has since been copied by all and sundry.

According to SK Telecom, Helio is expected to have 3.3 million customers and $2.4 billion in annual sales by 2009 . They may well have 3.3million customers, but I seriously doubt that the ARPU will be US$60 per month and I also seriously doubt that Helio will be profitable. It is all going to end in tears and the only long term winner is going to be wholesale carrier, which is Sprint Nextel. I suspect Sprint are ready and waiting with a Myspace service to be launched if Helio shows any signs of taking off.

Arun’s Addiction: Mountain Song

It looks like there is going to be an embarrassing vote for the sacking of Arun Sarin at Vodafone’s AGM on Tuesday. I seriously doubt that they will be enough votes to force Sarin out that pleasure is at the discretion of the incoming chairman, Sir John Bond.

vod 10yr

The Godfather of Alternative Rock, Perry Farrell, wrote a song back in the late ‘80s which sums up my advice to Arun at the moment.

Comin down the mountain
One of many children
Everybody held their own opinion
Everybody held their own opinion
Holding it back
it Hurts so bad
Jumping out of my flesh
And I say Ahhhh

cash in
cash in now , honey
cash in now
cash in now , baby
cash in now , honey
cash in that smell
cash in now baby
Be careful of watching the video, it is a heavy song and contains a couple of X-Rated scenes – is that Bill Morrow and Paul Donovan with their heads on fire from trying to find solutions to Vodafone’s woes?

Perry Farrell with his band, Jane’s Addiction, was front and centre in the resurgence of rock after the excesses of early 80’s and is now considered as a member of rock royalty

When the history of cellular is written, I seriously doubt that Arun Sarin will be seen as more than a peripheral figure. Vodafone is still waiting for the leader who is going to return Vodafone back to the peak of the mountain.

Friday, July 21, 2006

Beeb 2.0 – Out with New Media in with Obfuscation

New Media is gone and the new gig is “Future Media & Technology”, we need the Director General himself, Mark Thompson, to explain what is going-on here:

Let's turn to that division now. It's 'Future' because we believe that it should focus on what comes next in terms of technology and services, building on the insights and successes Ashley Highfield and his team have already given us. Much of what we call 'new media' is really present media and it belongs in the main content divisions alongside linear TV and radio. There are two big changes in the way we handle non-linear output and technology across the BBC. Responsibility and funding for non-linear content is going to go straight to the content divisions – all the funding for Children's websites, for instance, will go straight to Children's. The main focus of Ashley and his team will be on developing new ways for audiences to find and use our content with a focus on search and navigation and metadata, on demand, mobile, the whole challenge of Web 2.0 as well as overall hosting of our website. Technology is going to be key to our future so the second big change for FM&T is that we're going to pull all of our technologists around the BBC into a single team with a single technology budget. We need to be able to set strategic priorities across all our ideas for audiences and then deliver them as fast as we can by concentrating our best technology talent on them and opting, wherever possible, for common systems and standards. But we also know that technology works best in the BBC when it's really close to the business and when the technologists are sitting right next to the content people. So, once the priorities are set, we expect the technology teams to be out there in the content groups working with their colleagues as now. Ashley will have three new future media and technology controllers, one for each of the content groups, who will make sure that each group gets the talent and support it needs, and who will help make sure that our key future media technology projects work in tandem with our editorial vision and plans. Getting this balance right – between clear central direction and really effective local team-working – is tricky but really important: we're going to involve all the stakeholders over the next couple of months to make sure we get the implementation right. Technology is a great creative resource for the BBC – we need it to flourish and grow in confidence.

What a load of rubbish, I don't believe anyone believes this...

The truth is now no-one will know the true cost of the BBC’s web division, it is an integral part as much as the TV & Radio services and now every household in the UK has to pay for it whether they want it or not.

The BBC has just guaranteed its' mandatory bundle for the next 10 years.

The department, despite not having any content creation role, has a budget of a mere £250m per annum and the likelyhood of it moving away from London to Manchester has now been diminished.

Qualcomm Quandary

Qualcomm released their 3Q results on Wednesday evening. The stand-out for me is the pick-up in speed of WCDMA adoption.

qcom - wcdma

47% of Royalties from WCDMA accounts for US$334m in the current quarter – this is a huge high margin business (circa. 90% at the EBIT level!!) and is growing much quicker than the traditional CDMA line of business.

qcom - wcdma30

With WCDMA accounted for 30% of handset shipments in Western Europe, I can quite easily Christmas 2006 being the tipping point when more WCDMA handsets are shipped than GSM in a few European markets.

The Qualcomm business model is one where R&D leads to technology licensing and royalty payments, but a vital and growing part is that equipment providers use the Qualcomm chipsets for their products rather than other competitors (eg TI, Freescale) It is much more difficult to work out the Qualcomm share of the WCDMA chip market.

qcom - chip shipments

The chip business is growing nicely but not as fast as the WCDMA market, this may be because the chip figures are comingled (ie WCDMA+CDMA), but more than likely is that because unlike the CDMA market where Qualcomm dominates, I don’t think it does in the WCDMA market. I believe that Nokia and SonyEricsson use the TI basebands, Motorola uses the Freescale band and Samsung and LG use the Qualcomm baseband. Irwin Jacobs set a target of 50% of the baseband market and I think Qualcomm will have to work extremely hard to get that level of market share. On the upside, Qualcomm have a lot of market share to fight for in the chip business.

If I was Qualcomm, I would consider doing an acquisition which would throw the other chipmakers into turmoil – buy ARM who provides the Intellectual Property and Blueprints for the majority of CPUs in the basebands. ARM would cost Qualcomm around US$3bn which really is petty cash to Qualcomm. They could quite easily argue that Qualcomm needs a CPU engine to compete with Intel’s movement into the wireless space.

Although small, Qualcomm other leg of the tripod – the Strategic Initiatives – has always been where Qualocmm have used its’ balance sheet to finance start-up losses of new ventures to grow the use of its’ technology base. Currently, it seems the focus is the MediaFlo or broadcast TV business.

On another level, the Qualcomm results and strategy provide an insight into the forthcoming supa-fight between Nokia and Qualcomm. Both companies are titans and play in the same technological field, but look to different parts of the value chain to deliver profits. This is another fascinating battle which is occurring and is as, if not more interesting as the battle between the MNOs and governments for the excessive profits that oligopolies throw off.

The Sting in the Long Tail

Cingular reported its’ second quarter results to nearly universal applause with a near tripling of net profits to $540m from $147m, but amongst all the back slapping there are a few dark clouds appearing on the horizon.

First towards the end of the year, Cingular are to have finished all the GSM network integration between the old SBC/BellSouth/AT&T properties. This basically involves two steps:
  • Re-farming of spectrum and integrating sites – most of the work for this has been completed with 12% of sites yet to be integrated. The GSM base will have a much better network as a result of this and should be happy, also network costs will be reduced; and
  • Consolidating IT platforms – again, costs are reduced as there is only one platform, but this time there will be unhappy customers.
Most of the customers who have not currently moved are “hold-outs” who do not want to move onto the new Cingular price-plans, despite offers of discounted phones. The potential problem is that these people will chose another carrier for their service.

Second, Cingular are going to start turning off its’ old TDMA network again this is great in terms of released expensive, scarce spectrum, reducing network costs, shutting down legacy IT platforms and generally making customer support easier (and thereby cheaper) as complexity (and thereby choice) is taken out of the overall architecture. Cingular reported that the TDMA network has 4.7m customers (down 1.2m quarter-on-quarter) who represent 8% of total base of 2% of call volume. The spectrum and network & IT costs supporting this base will be a lot more than 2%. In other words, economically it is a completely rational decision to close the network.

The problem for Cingular is the noise or negative publicity that these technology “hold-outs” with create for the company. Several AT&T customers in the Seattle area have bandied together to launch a class action suit. I suspect there will be further noise as people are forced onto the “new” Cingular plans. As James Enck points out customer service woes spread really quickly on the jungle grapevine. I would add to this that no-one hates it more when the big man is perceived to pushing around the little man.

I think Cingular are also doing slightly strange things by sending out letters to customers where service is marginally profitable because of their roaming charges. In the USA, no network has 100% coverage and they make up the coverage with roaming agreements with other players. All the companies now sell national plans which profitability is dependant upon the amount of non-roaming minutes consumed. Although Cingular claims this affects only 1% of its’ base (over 500k customers) it has a much bigger potential to boomerang: very few customers understand the concept of roaming – the phone has service they use it, they do not care about the underlying network. I would guess a lot of these roaming problems fall into three categories:
  • someone who lives on the edge of coverage and is for instance working in an out of coverage area and therefore roaming a lot;
  • someone who has given the phone to a family member eg child on a family plan who lives away from home (at a University for instance) ; or
  • a company who has several branches some on-coverage or some off-coverage have given phones to members of staff in both areas.
Here the potential is for the loss of multiple accounts not just the one who is creating the roaming issue. In my opinion, roaming costs should be used as a feedback back into the network design and spectrum acquisition loop to improve coverage. Cingular here is tacitly implying that they will never aim for 100% coverage. This is a dangerous admission for a cellular company to admit.

The CFO of Cingular admitted yesterday that the record low churn figure may increase short term as these issues are worked out. The next problem that Cingular will start to face that the KPIs will not increase dramatically as in the past. Wall Street Analysts will start to compare closely the Cingular figures with Verizon Wireless (VZW) and this is the huge problem looming for Cingular. The business even after integration does not look as profitable as VZW. Cingular seem determined to hold onto the label “largest network” especially from a customer base point of view. This has led to a large number of reseller (or MVNO) additions which are just not as profitable as Retail post-paid customers and they have higher churn.

In my opinion, the key business metrics are absolute cashflow and return on capital and I expect that VZW will continue to lead Cingular Wireless for a lot longer to come.

Wednesday, July 19, 2006

Scandinavian 3G Torture

A fascinating glimpse of the economics of standalone 3G operations is given early on in every quarter with the publication of the giant Swedish fund manager Investor AB results: Investor hold 40% of 3 Scandinavia. 3 Scandinavia launched 3G operations in Sweden and Denmark back in 2003 and have a licence in Norway, but as far as I aware the Norwegian company is currently dormant and has no launch date.

Although InvestorAB report cash calls and funding to the operations in the quarter they were made, the actual P&L is delayed by three months.For the 6 months from 1/10/05 to 31/03/06, 3 Scandinavia reported revenue of SEK1,040 and Operating Losses of SEK1,580. In other words losses are still greater than revenues. In the first 6 months, Investor provided funding of SEK770m with cumulative funding of SEK3,733m. This means the overall venture required US$262m of funding in the first six months and US$1.27bn overall. This is before the big build out and launch in Norway. The spectrum cost in Sweden was free, US$118m in Denmark and US$10m in Norway. Investor hold 3 Scandinavia at a value of SEK866m in its’ books which is currently a pretty poor return on its’ investment.

Investor are forecasting that 3 Scandinavia will be break-end by 2008. Personally, I do think Investor and H3G UK may try and make an exit before then - more potential consolidation. I think the whole episode of 3 in Scandinavia highlights:

  • how difficult it is to launch new operations into a highly penetrated market;
  • the funding requirements for launching a new wireless services extend for a long time beyond the spectrum acquisition and network build;
  • if this is the situation in Scandinavia can you imagine the horror in the UK; and most importantly
  • if you were a Wimax licence holder would you be thinking of launching service into these markets?

The Death of the UK Independent Mobile Retailer

Although rumours of their death have before been widely exaggerated, I feel that the evidence is starting to come through that the independents will struggle to make it through the next couple of years.

From Mobile Today:

Around 60 electronic good retailers – the majority of them mobile phone dealers - went bust last year representing a 27% increase. The explosive growth of big retail chains, out-of-town retail parks and supermarkets for killing off small independent retailers from all sectors. The last time there were such high numbers of insolvencies was in 1993, when a major spike in interest rates forced many retailers to go bust. The figures make grim reading for mobile, but there could be worse to come. They chart a period before the networks began their current retail expansion drive.

Remember this is dealers going bust and does not include independents shutting up their shutters or morphing into SME resellers. In addition to this, the outbound direct sales operations are shutting down (thank god) with people like 3 and Orange realising that they just do not deliver profitable and happy customers: the incredible shrinking act of dial-a-phone is evidence of this. Add to these the withdrawal of The Link from our High Streets and the expanded retailed presence of T-Mobile, H3G UK and Virgin and we have a radical reshaping of the high street and distribution within the consumer segment of the market.

The end result will be more control for the MNOs, less subsidy pressure from the retailers and less pricing pressure from the handset manufacturers in the UK market.

No Bloodbath on Sky's lawn

When a company plans to invest £500m of cash over the next couple of years in addition to the net £110m (£200m for the purchase of Easynet with £90m of realizable tax losses) already invested in a fibre network entering a new adjacent market with new technology, it is a pretty frightening moment for the incumbents.


Ntl’s share price only went down by 4.87% today, probably because the market has already discounted the world of pain it is entering. However with a market capitalization of US$1.89bn it still has a long way to fall and it has £5.9bn of debt to finance.

In the UK Conference Call little was discussed about the cable company impact, but in the US Analysts Call either because of the ntl NASDAQ listing or the history of cable in the States, it featured heavily.

Sky confirmed that customers would be allowed to churn from ntl onto the Sky double or triple play offering – they must take the TV element. The acquisition cost for Sky would obviously be higher as the customer would have to return to the BT Openreach Copper Network and Sky have worked out a process with BT to manage these switchers. Although, it didn’t feature heavily in the presentation, this suggests to me Sky will be after ntl’s base and I don’t suspect they will do it quietly.

The biggest problem for ntl is that they are a broadband incumbent with 2.8m customers and a drop in ARPU by only £1/month on broadband costs them £34m pa and that is a big figure for someone who is making a loss and charges £35/month for a 10Mb connection compared to £10/month for a 16Mb connection for Sky customers.

If that wasn’t problematic enough for ntl the fact that Sky is underrepresented in its’ LLU areas compared to ntl, added to this is the fact that Sky have now finally got solutions for multi-dwelling units ie flats and the only conclusion is a few sleepless nights for the new ntl CEO, Steve Burch.

AOL Negotiations

James Murdoch protested too much about AOL. It was clear to me that he was negotiating the price downwards and signaling to other participants in the auction that live will not be easy for them if they buy AOL UK. Again in the US Conference Call, it was revealed that 50% of AOL’s Broadband Base is also Sky customers. The only purpose in revealing this statistic is reducing the price.


SkyTalk has already 200k CPS customers. I was quite surprised at this figure especially seeing that Sky hardly promotes the service. I felt that Sky was downplaying the telephony element of the launch, but they still forecast 1.5m customers by 2010 with monthly ARPU of £18.72 (net of VAT) which equates to a £337m annual business.

Partial Unbundling

I was really surprised that Sky were going for partial unbundling rather than the full unbundling that Carphone Warehouse are going for. Sky are quite open about they will not be getting the full economic benefits from unbundling initially, but they feel that it is too risky to go for LLU of voice and BT is not ready for the volume yet. If they are correct, Carphone Warehouse will have a huge problem coming up. Sky forecast that early 2007 they will start to move customers to full LLU unbundling.

Sky seem to have really thought out the customer service requirements not only by taking on an extra 1,500 call centre agents (which they emphasized were recruited in Britain and not South Africa or India) and 600 Home Service engineers. The fact they Sky will send an engineer out for installation and also bundle a wireless router is impressive.

Other Services

I feel Sky is being supa-aggressive with its’ estimates of £5/customer/month for advertising revenue from the portal either through banners or search and content distribution. This equates to a portal with £180m pa turnover. I don’t know how many sites in the UK currently actually earn that much. They claim that they currently are Europe’s biggest legal video download service.

What is not included is the Video on Demand revenues, which I suspect will be slow to grow as Sky will need to roll-out Sky+ (PVR) devices with Ethernet interfaces to their home router. Once the rollout reaches critical mass, I can see Sky causing a lot of problem to the Blockbuster business model. It will also be interesting to see if they beat the distribution costs of a DVD postal service. I expect they can thrash the costs with a real example of telco yield management by pushing out the bits during the night.

Also, Sky seem to have big hopes for its’ interactive services, such as Sky Bet, which will get a huge shot in the arm will a higher bandwidth always on return channel.


Although churn or customer loyalty is not factored in the standalone economics it is blatantly obvious that it will play a big part in the equation. The CFO revealed that a 1% reduction in annual churn (or about 80k customers) is worth easily North of £100m over a 4-year period.


This is an extremely well thought out offer with a very specific target audience – I like it a lot. Personally, I think Sky is being very conservative with the forecast customer numbers and the upside for the Sky PayTV business.

Monday, July 17, 2006

Air Wars: Episode III - Revenue of the MNO

Rumours abound that some MNOs have asked Carphone Warehouse at a high level (ie Charles Dunstone) to sell their broadband product alongside their TalkTalk Forever package.

From Mobile Today:

One director level source told Mobile: 'It's a very interesting question. Carphone still relies on networks for most of its revenue, but how far do operators want to fund its development into a competing service provider?'

'We have a broadband packages that they [operators] are all trying to copy. Everyone wants to talk to us about it,' confirmed UK CEO Andrew Harrison.

'In the world today we are all competitors and collaborators. We have made no decision yet. But we are committed to the networks and to selling their products. They are the greater part of our business,' Harrison added.

So let’s recount:

  • CPW is battling with the King of Copper, BT (amongst many);
  • Tomorrow, the King of Satellite, BSkyB, enters the ring; and
  • His main paymasters, the MNOs, are starting to get more than a little upset.
In my opinion, Charles has a short window of opportunity to sell TalkTalk to either T-Mobile or Vodafone before the walls of his empire start to come crumbling down.

Murdoch’s Baba O’Riley

Currently loads of people think Rupert Murdoch is brilliant with his purchase of MySpace and philosophise how he really gets the internet now – I’m not so sure it will work out so good for Murdoch in the end.

Personally, I think Murdoch has been worried for quite some time about declining audiences in his print, TV & Film media and wondering where the youth of today has gone in search of its’ kicks. The journey reminds me of the words of the classic Pete Townsend song:
Sally ,take my hand
Travel south crossland
Put out the fire
Don't look past my shoulder
The exodus is here
The happy ones are near
Let's get together
Before we get much older

Teenage wasteland
It's only teenage wasteland
Teenage wasteland
Oh, oh
Teenage wasteland
They're all wasted!
So Murdoch has found where the youth of today spends its' time and now is the proud owner of wasteland. He knows better than most the anarchic mess it is in and how much the kids love the anarchy. As the network approaches it peak audience, MySpace will be at its’ peak funding requirement and as the inevitable commercialisation occurs Murdoch will be closely monitoring
how many people leave the network. It will be interesting to see if the rump that are left will be suffice for Murdoch to make a return on money on the overall project – this is where my doubtsset in. The problem that Murdoch has got is that doesn’t take a lot of money to create a social networking site and the trend setters who attract the vast numbers hate commercialisation especially in their idealistic teenage years. In other words will MySpace became a victim of churn?

Although Baba O’Riley is a great track, it is more known for the production innovation Pete Townsend invented: the groundbreaking use of a short minimalist electronic sample throughout the song. This has been repeated in hundreds of thousands of songs since especially as the cost of computing has fallen to make it possible for the masses to replicate the technique. Pete Townsend hasn’t earned a penny from the mass copying of the technique and I don't think he cares that he hasn't and in the process has kept the image of being one of rocks great icons to millions. Myspace might go the same way for Murdoch – it becomes famous for creating a blueprint how to build an online community of trend setters. Tom might remain as an icon for the internet community, but I doubt in the long run Rupert will.

Vodafone Woes

vod 12m 17th July
Back in March, Vodafone hit a low of 110p, since then we have seen all sorts of short-term initiatives to improve the share price:

- sale of Japan and return of cash to shareholders;
- new Organisational Structure;
- Annual Results + greatly increased dividend policy; and
- new MobileNonPlussed strategy.

Today, the share price has returned to 110p.

Arun Sarin must be hoping that Spencer Stuart is not searching for his replacement.

Next week is probably his final chance with the release of Q1 KPI's - I'm expecting dire news.

Quote of the Week

I know it is a bit early in the week to be handing out awards, but the quote from Charles Dunstone, the CEO of Carphone Warehouse (CPW) in today’s Financial Times in such a classic and shows such bravado that I had to read it twice to confirm what he had just said.

The article is all about BSkyB’s launch of its’ broadband service tomorrow and Charles Dunstone being worried about the threat from BSkyB.

“My next worry is that in four years time when there is no natural growth left in the market through penetration, how do you … stop yourself of getting into a round of trying to steal each other’s customers”

The guy is really cruising for a bruising: he is worried about the situation which he has actively encouraged to create in the cellular world and is causing so much pain to the mobile operators spreading to the Broadband world. Also, he doesn’t recognise three of his biggest customers, Orange, o2 and ntl/virgin as big competitors, and prefers to state he is more frightened of BSkyB – realistic, but not very good for customer relations.

The funny thing is that the two companies who are currently uncompetitive on subsidies to CPW and therefore don’t get a presence in the CPW sales channel, 3 and T-Mobile, are the one’s who don’t compete in the broadband world. Orange, o2 and ntl/virgin that compete with CPW in the broadband world are actually currently providing the biggest subsidies. One look at the CPW websites show the relative level of subsidies. CPW relies on mobile subsidies to fund its’ foray into broadband.

Now, who is the most stupid?

BSkyB and MediaFlo

BSkyB and the Murdoch Empire in general are probably one of biggest users of DVB-S technology: this is a European standard for the delivery of broadcast TV via Satellite. A derivative of the technology, DVB-T, is in use and becoming the European standard for the delivery of broadcast digital TV via the terrestrial spectrum. A derivative of the technology, DVB-H, is being heavily promoted by Nokia as a solution for the delivery of TV via Broadcast for Mobiles. I would argue that the current broadcasters eg BSkyB to have a much greater knowledge of the strengths and weaknesses of the DVB technology than the mobile operators (eg O2) which have just completed a series of trials of the DVB-H technology across Europe.

I am intrigued as to why BSkyB would select Qualcomm’s MediaFlo technology as the basis for its’ trial of broadcast Mobile TV over DVB-H. Personally, even if Qualcomm had paid for the whole of the trial, I don’t think BSkyB would have bothered if the Qualcomm solution doesn’t hold some theoretical advantage over the DVB-H technology. It is just too much of a waste of scarce technical resources for such gaming.

Secondly, I don’t think that BSkyB would be bothered with a trial if they didn’t have a route to market with the product. ie It is possible for someone to acquire technology neutral spectrum suitable for broadcast Mobile TV. The exciting thing is that OFCOM openly state that they do not want to limit the use of spectrum for a particular spectrum as they have in past (ie GSM & W-CDMA)

Third, if there is one company with the experience of launching new technologies, not being frightened of taking a contrarian stance and most importantly, putting its’ wallet where its mouth is – it is BSkyB. BSkyB is one of the few companies in the UK who could take on the Mobile Operators (along with BT) and a more than a remote chance of victory.

As much as BT controls the copper access network in the UK and the oligopoly of Mobile Operators controls the Cellular Spectrum; BSkyB controll the satellite access world and it should not be forgotten how much of a presence they have in the houses of the UK & Ireland and the power of the Sky brand. Personally, I think with the acquisition of Easynet and the exploration of the Mobile TV potential, we are starting to see the emergence of Sky 3.0.

On a side note, nothing would annoy Nokia more than the arrival of the Qualcomm MediaFlo Tanks on the lawns of the UK. It is going to be fantastic to watch this saga unfold.

Friday, July 14, 2006

Claude Shannon: Digital Godfather


Nearly everyone in the whole world has heard of Einstein and acknowledges his brilliance. Everyone in the whole world should know Claude Shannon and acknowledge him as the founding father of the digital age. For anyone who wants to learn more about him, there is a very good 30-minute documentary available on-line from the UCSD-TV.

Thursday, July 13, 2006

Another Fight Brewing in the Caucasus

Vimpelcom has bought 51% of a shell-company which holds an 1800MHZ GSM licence in Georgia for $12.6M and has a call option for the rest of the equity.

Georgia is a relatively poor country with GDP per head of US$3,300 and a population of around 4.5 million. It currently has cellular penetration of around 30% and has two operators, Geocell and Magticom with 55% and 45% market share respectively.

Personally, I think a 3rd entrant would have a lot of trouble gaining enough traction to provide big returns in the long run. Therefore, I think Vimpelcom is gaming another “Scorched Earth” strategy in its’ drive for total domination of the Russia/CIS cellular market. Vimpelcom is currently finessing this tactic in the Ukraine and causing some severe migraines to Telenor, who has the dubious pleasure of being Alfa’s partner in Vimpelcom.

The majority owner of Geocell with 83.2% is Fintur, which is a joint venture between TeliaSonera (58.55%) and Turkcell (41.45%). TeliaSonera is currently fighting with the majority share holder of Vimpelcom, Alfa Bank, in Russia and Turkey (funnily enough over Turkcell ownership) and must be thinking – here we go again…

Magticom is another ex-CIS cellular operator whose ultimate ownership is shrouded in mystery. It seems to be part-owned by a US company called MetroMedia. I suspect whoever owns Metromedia given its previous experience in St. Petersburg knows all about the Russian Cellular scene and could be already in the grip of Alfa Banks main competitor MTS.

It seems to me that the ex-Vodafone marketing man, David Haines, just re-appointed Chairman of Vimplecom, has his hands full at the moment. Mind you, David Haines is no stranger to disputes and legal wrangles after the infamous Formula I sponsorship case.

The Sky going Mobile

Phillip Alvelda, MobiTV’s CEO, was having a great day yesterday sealing a US$70m fund to finance his expansion plans. Meanwhile over the pond, BSkyB won the mobile TV rights to Premiership Football. I think if Mr Alvelda is not careful he is going to learn the same painful lesson that many of the Sky’s competitors have learnt over the years: The power of the Football Bundle.

To recap: Back in the Bubble Days, BSkyB, H3G UK, Vodafone and Sky together bid £100m for both the on-line and mobile rights for the Premiership for 3 seasons. BSkyB got the online rights and Vodafone and 3 got the mobile rights. Vodafone and 3 employed a company called TWI to package the live feeds into small clips (such as goals) which can then be downloaded. 3 published that between 5pm & 7pm on a typical Saturday evening they get around 500k downloads, which I don’t think is bad on their base of 3m customers. The rights package finishes at the end of this season just as the 3G services are going mass market.

This time around, the Premiership auctioned the rights separately for on-line (which BSkyB won anyway) and mobile. The value of the mobile rights has not been announced which to me says it is significantly lower than the previous amount - rumoured by the Guardian to be less than £10m. The main problem that the Premiership faced is that only two parties turned up for the auction: one a consortium of all 5 mobile companies and the production company TWI; and the second BSkyB. Basically, the premiership was always going to get stuffed with such low participation. Although, I am not saying there was collusion in the bidding, but the temptation would have been huge since the mobile operators are the only retailers of the service and really do they care who does the production?

All that is happening is that three groups are arguing how the value chain is broken up. The Content Owner, the Premiership: The Producer and Distributor, BSkyB or TWI, and the Retailer, the Mobile Operators. Obviously, the content company was the huge winner last time (to the tune £100m), now it is someone else’s turn to reap the benefits.

Now it will be interesting to see how Sky plays its’ distribution hand. Importantly, Sky know the potential value of MobileTV because they currently have a heavily promoted service which is taken by Vodafone which packages together several channels, including music + sports. Orange + 3 have taken a different route and have signed up to the MobiTV package. As far as I aware, T-Mobile and O2 have not committed.

What are the chances of o2 + T-Mobile signing up to MobiTV when BSkyB now own all the premiership rights? What do you think Orange + 3 would say if BSkyB insisted that the only way to get premiership action is if they take the full SkyMobile service? Would they drop MobiTV – I think so. The future starts to look a little bleak for MobiTV in the UK Market.

The bundle could get even worse for the mobile operators: what if BSkyB refuse to sell to O2 and Orange because they compete against BSkyB in the broadband market? What if Vodafone decides the route to broadband nirvana is via an exclusive partnership with BSkyB for the consumer sector and in the process gets exclusivity for Sky MobileTV.

Even worse going forward for the other operators – what if BSkyB and Vodafone get together to bid for the spectrum for multicast TV and develop an exclusive service for Vodafone customers?

Things are going to get very interesting in the UK Mobile TV Market.

I also think MobiTV might be best bulking up its’ production capabilities and ties with the content owners, before perhaps a graceful exit to Qualcomm when Qualcomm needs these skills for its’ MediaFlo service in the States. This is something that the GigaOm interview hints at is the end game, which to me means that MobiTV don't really care a lot about the UK market.

Wednesday, July 12, 2006

Pipex Trading Update

Pipex have issued a trading statement ahead of their half year results. All seems well at first glance with trading ahead of revenue and profit expectations. Seeing that I am a natural born cynic and Pipex has been on a massive acquisitions binge over the last 12 months, I’d like to look at the detail in the interims when they are released on the 7th September to analyse the organic and inorganic growth and compare it to market metrics before passing judgment. The devil is in the detail.

In terms of the Broadband/Voice Division, they now have 832k customers of which 399k take broadband. ARPU is up 9% to £25, but again the question is how much of this increase is due Wholesale Line Rental which is a real low margin product and only there as an anti-churn tactic. Pipex have unbundled 43 exchanges (they have ordered 100 exchanges) and claim to be taking a conservative approach. Personally, I feel 1 million is the bare minimum number of customers to have scale in the consumer segment and therefore the longer Pipex waits before selling up or carving a niche the more it is going to struggle in this space.

The area of Pipex business that I like is the hosting and DNS business which is growing quite nicely at 23% and 26% year-on-year.

They also mentioned the WiMAX division which is now moving into commercial trails with several local authorities. Interestingly they mentioned a planned city roll-out in 2007 as opposed cities. Surely this is a typo? Mind you, they weren’t quite as successful as Clearwire in extracting start-up cash from Intel. If Pipex seriously expect to roll-out a nationwide launch of WiMAX in 2007, they will need a serious amount of refinancing and the amount may even be beyond Intel’s VC fund.

Finally, I note that Pipex say they now have a retail presence via the Phones4U shops. I'm going to have compare the Phones4U promotional capabilities of Pipex Homecall services versus the Carphone Warehouse promotion of TalkTalk Broadband Forever.

EU Regulates Everything

Vyvyan has revealed her plans as far as roaming goes and surprise, surprise everything is regulated and at a maximum. How tragic.

The charges are all linked to regulated termination rates across Europe:
  • For a Retail Customer making a call within a visited country: max charge = 2.6 x Termination Rate
  • For a Retail Customer making a call outside a visited country: max charge = 3.9 x Termination Rate
  • For a Retail Customer receiving a call inside a visited country: max charge = 1.3 x Termination Rate
Why it will not work is that everyone who is free to chose will pick as a roaming partner the company with the highest termination charge in any given market, since that will maximise its’ revenues.

For, Vodafone who has the biggest geographic network – it is a perfect solution, because they will have the biggest cost advantage compared to the other operators. Just as Termination Rates mean that the largest operator in terms of volume has the biggest advantage, so will this latest roaming initiative.

So in other words it is really for the biggest network and terrible for small regional minnows

This is not law yet and requires approval by the European Parliament and by ALL the EU 25 Members for it to come into force.

I expect a lot of noise from the small island states such as Cyprus and Malta who have a huge dependence on roaming revenues and the small local operators will be the biggest sufferers of the legislation. In order words, more horse trading before it passes legislation.

Also, Vyvyan like her name sake is proving to quite a porky-pie teller. She states in the press release “We are tackling one of the last borders within Europe’s internal Market” I don’t think so… tell that to the Polish plumber who wants to provide services in France and that is before we go on the Energy Market or heaven forbid provision of Public Services.

Beeb Annual Treasure Hunt

The BBC has released its 2005/6 Annual Report. A few points that I found interesting:

Distribution Costs

Distribution Costs have increased year on year to £165m from £157m: all the increase in cost was accounted for by the BBC digital services which accounts for £89m vs analogue costs of £76m. Personally, I’m too suspicious of what is included in these costs and the way costs are allocated between analogue and digital to draw any conclusions.

An additional complication is that two companies own the UK transmission network (Crown Castle UK & Arqiva) and the BBC’s part ownership of DTV Limited which is the holding company for Freeview.

All I can say with certainty is that these costs are extremely small compared to an atypical cellular company, however the BBC has the big advantage of being given its’ spectrum for free, they have much more of it and it is in a much better bit of the spectrum for propagation and coverage.

New Media

The usage and reach statistics for bbc.co.uk is quite impressive with average weekly reach of UK users going up from 12.3 million to 8.7 million. Overseas users have also grown to 12 million from 8.6 million. This imformation is from the logs and is slightly less than the survey based usage of 13.7 million which is accounted for by people using bbc.co.uk from work where single IP addresses are shared across a company.

638.8 millions of pages were served up over the year with news & sport accounting for overall 42% of viewing.

The growth in streaming services is even more impressive with average weekly consumption of 4.6 million hours compared to last years 2.9 million. It is even better that Radio and Audio accounted for 78% of streaming.

Miraculously the BBC has managed to keep its’ spend in check with costs only increasing to £72m from £69m. I think these figures should be treated with a pinch of salt and guess that costs are hidden elsewhere in the BBC juggernaut. For instance, I can almost guarantee that bbc.co.uk is paying very little if anything for its’ content from BBC News 24 or the World Cup team. I also think bbc.co.uk will be paying nothing to the TV & Radio stations for the advertising services: seemingly every TV & Radio presenter relentlessly plug the bbc websites at every opportunity.

Overall, I would guess the management team is feeling pretty good about bbc.co.uk. However I would question the not only the need for bbc.co.uk, but whether it should be funded from the BBC licence fee and most importantly whether it is constraining the overall growth of the UK Internet Content industry. I would definitely be referring bbc.co.uk to OFCOM to decide whether an alternative business model should be deployed before any new funds are committed: for instance, an alternative in the realm of TV content, the BBC own 50% of ukTV which is funded by advertising revenue with the BBC providing a lot of content.


The biggest problem with a huge Public Sector Broadcasting monster is controlling its’ scope and the BBC is the world champion of scope creep. The new Jam BBC service is a really good example of this. I can just imagine the meeting where the Department of Education insisted that the children of the UK needed an online resource to support the National Curriculum and assist the youth of the UK to learn. Unfortunately, they wouldn’t have had any money to develop the service. So the good old BBC steps in and says they will develop the service out of the licence fee. It costs £36m this year up from £8m. Note, this is 50% of the overall New Media - somewhere these figures do not add up.

Of course, all over the service is BBC Branding and if the youth of the UK doesn’t watch TV anymore or watches evil channels like Cartoon Network rather than Cbeebies. The BBC now has the opportunity of lobotomising them from an earlier age, after all education is mandatory for all kids, on how great the BBC is and how much value the licence fee provides. Even better is that they get you to log-in and have a password, something that bbc.co.uk wouldn’t even dream of currently (ed – but how are they going to do personalisation and social networking in beeb 2.0?)


The BBC is up to its’ old tricks – scope creep and hiding costs. It will be interesting to see how much additional funding they get in the current round.