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Tuesday, October 31, 2006

Vodafone: Disruptive Products

There is a nice write-up about the Vodafone Kenyan associate, Safaricom, which is about to launch a money transfer product. Although digital cash is nothing new, I find it interesting that the mobile companies seem to have to more success in launching it in emerging economies rather than the developed world. Paul Makin of Consult Hyperion explains the success factors:
"M-Pesa is a valuable case study of digital money in action. It involves replacing cash with electronic money, it is for the mass market, it radically reduces transaction costs (for the least well off), provides new functionality including remote payments and, most of all, it provides an infrastructure that delivers capability and efficiency to the microfinance world, allowing them to stimulate new growth, new business and new opportunities."
One of my first posts back in April was about Location services about how the mobile industry had missed the boat with location services and companies like TomTom and Google were going to run away with the spoils. Well, imagine my surprise when TomTom announced an innovative service to be launched with the aide of the Vodafone Netherlands GPRS network.

Apart from the name of the service, the advantages of the TomTom system are:
Compared to RDS TMC based systems the TomTom travel time information service will have the following benefits. Firstly, it covers all major roads of the Netherlands as opposed to just the motorways. Secondly, it will contain door to door travel time information rather than just the length of a traffic jam. Thirdly, the TomTom navigation device can accurately compare various alternatives for total travel time and can (automatically) calculate the best alternative.
The main advantage which wasn’t mentioned in the TomTom press release is that the cost of the service is far lower than the alternatives. I can’t wait for the service to be rolled out to the UK.

PlusNet: Raising the Bar

Once again, Plusnet have shown the rest of the Broadband UK how to communicate customer service levels.

The note is extremely detailed and unbelievably contains some KPIs which would even mean something to its customer base: average call answer times (11 mins), average ticket close time (30 hours), support backlog, provisioning backlog, etc.

The most interesting metric to me is the fault rate per supplier group: comparing the LLU base, Max base and standard resold base. Interestingly, the fault rate on the BT rate adaptive product is approaching the fault rates on the Tiscali LLU platform.

Well done, PlusNet.

3Q06: Telenor Blockbuster

Telenor released their 3Q results last Thursday to universal acclaim. However, something strikes me as slightly strange about the company and I’ve been mulling over this for a few days now.

1. Subscriber Numbers

The first thing that struck me was the claim of having 105.2m subscribers. No matter how I slice and dice the numbers, I can’t reconcile to the Telenor claimed figure.

Telenor 3q Subs

This claiming of 100% ownership of the customers in partially owned subsidiaries is so last century and a warning bell to me that there is some sort of gaming going in attempting to prove growth.

2. Corruption Risk

Whenever anyone mentions Bangladesh to me, I always think that this is named in the annual Transparency International Corruption Perceptions Index as the most corrupt place on the planet.

Obviously and I stress this, I am not suggesting that Telenor is engaging in corrupt practices, but there is a risk to the underlying business model when a company operates in any corrupt country. I have basically dreamt up a metric (in co-operation with a currently anonymous third party) which gives an indication of this overall risk.


Basically, Telenor has a score which averages out to places like Bahrain and Jordan which to me is quite high. For a comparison, I ran the 3Q results of SingTel through the model and despite operating in places like Indonesia and The Phillipines, they came out significantly cleaner than Telenor.

I’m not sure if this risk is factored into the Telenor share price.

3. Political Risk

i. Malaysia

Telenor owns 61% in its' Malaysian subsidiary digi.com. Unfortunately, the law only allows foreign companies to hold 49%. Therefore, Telenor has to sell 12% of its' holdings and treat the investment as an associate. Telenor has known about this since increasing its' stake from 32.9% to 61% (increase of 28.1%) via market purchases for NOK3.2bn (US$490m) in Sept 2001. digi.com is floated and current market capitalisation is US$2.44bn.

In 2005, Digi.com contributed NOK2,142m of EBITDA and NOK1,075m of Operating Profits which are just under 10% of the Telenor total. This is a significant amount to deconsolidate.

ii. Thailand

Thailand also has a law restricting foreign ownership to 49%. However in 2005, Telenor performed a series of complex transaction with holding companies to increase its' effective ownership to 70.6%. It effectively paid NOK1.2bn for an additional 18.2% of the mobile company. This puts a valuation of the company at around US$1bn. Telenor consolidated the Thai asset in its' accounts in 2005 with a book value of NOK 6170m (approx. US$943m)

This might have seemed like a sensible strategy whilst the government was controlled by the owner of the major telecommunications competitor. However, he disposed of his stake in a "tax-free" manner to the investment arm of the government of Singapore. This seemed to have been the final straw for many members of the public and a military coup then ensued.

Telenor now faces a real uncertain future in Thailand and an investment of which they will probably will have to sell part of it. The question is how much money they will recover from the stake given that the buyer is probably local and they can't sell control for a premium. There is also the matter of deconsolidating the earnings and treating the whole venture as a financial investment in the future.

iii. Bangladesh

An election is due next year which could change the rules of the game significantly. Also the current government have cut the interconnect rates by 20%.

iv. Pakistan

Enough said without going into the problems Telenor faced after a Danish joke went down badly.

I'm not sure if the true extent of this political risk is factored into the value of Telenor.

4. Partner Risk

The partner of Telenor in the important Russian and vitally important Ukrainian venture is the legendary Alfa Bank (via Altimo). To say that Telenor and Alfa do not see eye to eye would be the understatement of the century. Vimpelcom have already launched a subsidiary in the Ukraine to compete with Kyivstar. Just today Vimplecom have announced they will bid for a licence in Montenegro, which is where Telenor already operate.

The whole situation is extremely messy and I personally think could get even worse for Telenor, especially if Vimpelcom gets de-listed from the NASDAQ.

5. Profit Risk

I am completely on my own on this one, but I feel that the high margins that Telenor make in the third world are not sustainable. In Bangladesh, Telenor makes Operating Profit margins of 42% and EBITDA margins of 57% - these are extremely high. It is not going to take a genius in the Bangladeshi government or even worse some NGO peacenik to claim that these are excessive returns for one of the poorest places on the planet. In the Ukraine the situation is even worse, Operating Profit Margins of 47% and EBITDA margins of 60%. In Serbia, Operating Profit Margins of 48% and EBITDA of 59% - I can easily see a third entrant (Vimpelcom) finding these margins attractive.

A drop in margins is not the end of the world, if absolute profits increase. I’d like to know how close to saturation these markets really are. Ukraine has 80% penetration and four mobile operators with two having really small market shares and well financed parent companies – the only action for them is to attack the leading player which is Kyivstar.

6. Conclusion

Telenor is performing really well at the moment, but I wouldn’t dream of investing in it, because in my opinion the risk is far too great.

Customer Counts

I got slammed by a couple of readers for my comment that “Total Customers” is a more important count than “Post-paid Retail Customers”, so I’d like to take this opportunity to clarify my thoughts on the various elements of customer counts:

1. Affiliates

Sprint includes “affiliates” of 853k in its’ figures: this is ridiculous. Affiliates are in effect just branded customers and I would expect that Sprint only collects a small royalty. An European parallel would be Vodafone including Vodafone Iceland customer figures in its’ count because they are branded Vodafone. Vodafone doesn’t hold any equity share in the Icelandic operations and has only extremely limited control over the operation.

So, I would not recommend using Affiliates in a “true” customer count.

2. Wholesale

As far as I aware Sprint, Cingular and Verizon all include Wholesale customers in their’ “Total Customer” Count. I think this is a big strategic mistake as well. The problem with including these figures in your customers count is twofold:

i) Limited Control on the Additions.

If a wholesale customer decides for whatever reason to turn the tap off whether in terms of marketing or subsidy, then the operator customer figures suffer, therefore creating a problem of perception. An extreme example of this was T-Mobile in the UK when Virgin Mobile was providing the majority of growth and its’ customer base. Sprint is currently heading into dangerous territory over 10% of its’ base accounted for by wholesale customers.

ii) Reduces ARPU comparisons

Obviously a wholesale customer will produce fewer revenues than a similar retail customer: including wholesale customers in the base reduce ARPU figures. T-Mobile tried to get around this by quoting ARPU figures (ex-wholesale base) and Sprint is trying the same tactic. Again, the problem is one of perception.

Personally, I think the best strategy is to count each wholesale customer as just one in the base. Vodafone does this with its’ BT base and obviously the effect is to inflate its’ KPI figures.

3. Prepaid

Prepaid should definitely be included in the base, although I have a problem with the definition of a prepaid customer. Most networks now define a prepaid customer as someone who has made a chargeable event over the last 90 days. I think this is to generous and should instead be altered to someone who has been “connected” over the last 30 days. The reason I use the term “connected” is to avoid the Vodacom issue whereby people were still being counted as users, despite calls just being made to voicemail.

If Mobile Operators feel the need to highlight just how many subsidised phones they have laying around doing not a lot; they can always publish the number of inactive customers.

4. Postpaid

Postpaid is fairly straightforward, however I would love to know how many customers are “out-of-contract”. In other words, what percentage of the customer base are paying the monthly charge whereas they could negotiate a new plan if they so desired.

Shock Horror: Carphone does an exclusive deal.

Carphone Warehouse has signed an exclusive distribution deal with TeliaSonera to support the launch of the Spanish 3G operation, Yoigo (ex-Xfera)

The hypocrisy is unbelievable – it is OK for Carphone to sign exclusive deals when it benefits them, but when they are on the wrong side of exclusive deals, they threaten legal action. No doubt, the cycle in Spain will finish up somewhat similar to the UK.

Meanwhile, Carphone launched another new service yesterday, which will do nothing to endear them further with the network operators.

3Q06: TDC German & UK MVNOs

TDC fully owns a Service Provider (Talkline) and partially owns a MVNO, easymobile, which operate in Germany and the UK. As expected, customer numbers are up (3.5m v 3.1m, but revenues (DKK 1990 v DKK 2005) and EBITDA (DKK 143m v DKK 159m) are down year-on-year. These 3Q 2006 figures were released this morning as part of the TDC results. The reason given for the decline is lower commissions in Germany. This doesn’t exactly bode well for Carphone Interims on Thursday.

DKK 143 is only £12.8m and these results are before any depreciation which should be small and head office mindshare which could be quite substantial. In the overall context of TDC, these figures are miniscule and given the prospect for MVNOs are not exactly awe-inspiring; it doesn’t make a lot of sense for TDC to retain ownership. It is hardly surprising that all the German Service Providers are thinking of merging.

Overall, more evidence to support my theory that MVNOs only work in markets where rapid growth is occurring and the network operators are not focussing on every part of the market. In the long term, all MVNOs will get squeezed out of business.

Monday, October 30, 2006

3Q06: US Cellular Majors

The US Major Cellular companies have finished reporting for the 3Q and there are three main stories: Verizon’s relentless pursuit of Cingular in terms of being the leader for subscribers and service revenues; Cingular improvement in margins; and Sprint’s decline.


Verizon Wireless are already stating that they are the leader in Retail Subscribers (i.e. excluding Wholesale) and Total Revenue (i.e. including handset sales). Personally, I think these statements of being the leader on these counts are a little premature – the metrics that matter to me are Service Revenue and Total Subscribers. The gap in total subscribers is narrowing down from 3m a year ago to 1.9m today; similarly the gap in Service revenues is also narrowing down from US$451m a year ago to US$192m today. If the market continues on its’ current path, I expect Verizon Wireless to be the undisputed market leader on all metrics by this time next year. What is without doubt is that Verizon Wireless is gaining market share by any metric. The Christmas quarter may see a slight fillip to the relative position of Cingular, but this will reflect the higher share of pre-paid customers, whether retail or wholesale, on their base rather than any underlying market gains.

The metric that is king for me is operating margin and there is no doubt that Cingular is catching up Verizon on this one. Cingular’s Operating Margin has shot up from 7.5% one year ago to 14.8% today. This is truly a fantastic achievement and the COO of Cingular, Ralph de la Vega, who has been driving the integration of the old AT&T and Cingular deserves every single bit of credit that he is receiving. The integration is not complete and Cingular still has to turn off its’ analogue network and transition the TDMA customers (of which there are 3.6m); these events are due in early 2008 and it will be extremely interesting to compare margins at this time. Cingular are absolutely adamant that they can catch Verizon and although I believe the bar may be set too high, I am less of a disbeliever today than I was back in early 2004 at the time of the merger. When Seidenberg was asked the question in the Q&A session today, he implied that by the time Cingular catches Verizon, Verizon will have moved on. To prove his point Verizon has moved on from 21.8% operating margin one year ago to 26.2% today.

To me the key question, which Seidenberg ducked, is when growth will slow down. Annual Service Revenue growth for Verizon is 16.5% and for Cingular is 12.2%. It is relatively easy improve margins when revenue growth is so strong. The European market shows that margins are quick to decline when growth in the top line stops. Alltel mentioned in their 3Q call that in the major US metropolitan markets, it is extremely difficult to compete with Verizon and Cingular. We are seeing big markets share gains by both and realistically I can see both Sprint and T-Mobile (from a lot lower base) being weak for another couple of years and then perhaps they will joined by the cable companies. After that, if any growth is left it will be heavily fought for and stagnation could trigger a price war. The keys will be how Cingular and Verizon decide to expand into secondary markets, either organically or via acquisition and whether either decide to focus into specific niches eg prepaid, which will send shivers down the MVNO spines.

Finally, it is really sad to see the decline of Sprint after the acquisition of Nextel: I think the appalling results are just a reflection of a confusing strategy. Cingular after their merger with AT&T bit the bullet and went all out to move everyone onto GSM technology, committing to the GSM route to advanced services. Sprint in their heart of hearts must know that iDen is a dying network technology, but they are apparently making no effort to transition the customers to CDMA. It appears that Verizon is stepping into the void and doing the job for them. The whole Nextel merger appears to me to be an ill-thought out knee jerk reaction to the size of Cingular and Verizon.

Convergence has been in the news for the last couple of years and obviously Cingular (SBC & BellSouth) and Verizon have large fixed-line base to sell convergent services into. Ever since I can remember, Sprint has blown tones of cash trying to develop a local loop path. The latest attempt of getting into bed with the Cable Companies seems fatally flawed to me. The recent AWS Auction 66 has only reinforced my initial beliefs.

Why Sprint would risk everything in the pursuit of immediate bulk and a mythical convergent offering is beyond me. I suspect that Sprint will struggle along for the next few years until the cable companies are ready to digest it.

Finishing off, Verizon had winning bids of US$2.8bn in Auction 66 compared to approximately US$2.2bn in quarterly operating cashflow. Note, I approximate cashflow as Operating Income adding in the non-cash depreciation and amortization and subtracting the Capital Expenditure. Obviously, this is missing the change in working capital, but is useful as a ball-park figure. My point is that Verizon got a lot of spectrum for not a lot of cashflow, especially when you compare it to some of the risks taken by the smaller players.

Friday, October 27, 2006

US MVNOs - Tracfone the leader

Tracfone, the US MVNO aimed at the Hispanic population reported its numbers the other day as part of the 3Q results of the Mexican giant, America Movil. Tracfone added a net 226k customers giving a total base of 7.23m. Quarterly revenues were US$330m, EBIT of US$32m, Monthly Churn of 5.4% and ARPU of US$13/month.

The reason I mention this is that its’ performance puts the Sprint MVNO’s to shame who collectively only added 177k in the quarter to stand at 5.528m. Gary Forsee mentioned that the Sprint share of the annualised revenues were now around US$650m, which works out around US$9.8/customer/month. Theoretically, the Sprint wholesaling operation should provide much larger margins that the Tracfone MVNO as Sprint don’t need to acquire or service customers. Sprint’s MVNO customers includes such big name MVNOs as Virgin Mobile, Qwest, Embarq, Helio, Disney Mobile and Movida which all apparently grew in the quarter, but none of them matched the growth of Tracfone. Also, don't forget the 30k soon to be disconnected ESPN Mobile customers are included in the Sprint figure. All the Sprint MVNOs are on the CDMA network; Tracfone is predominately on the Cingular GSM network and therefore has the benefit of cheaper handsets compared to the CDMA MVNOs.

Sprint also has a prepaid service of its’ own on the iDen network this is called Boost. It added only 216k customers in the quarter to give a total of 3.8m. To be fair the growth was constrained by capacity constraints on the iDen network itself. The turnover in the quarter was US$364m and Boost customers have a much higher ARPU of US$33/customer/month but has a much higher churn figure of 6.8% and no doubt higher SAC’s (because of handset costs) than Tracfone. Again, Sprint doesn’t disclose the profitability, but I would guess it is better than Tracfone just because Sprint owns the iDen network. However, I would add that if the Sprint iDen network is capacity constrained at the moment, then Sprint should really be adding higher margin post-paid iDen customers if possible. According to my back of the envelope calculations Sprint have not added of these net since the purchase of Nextel last year, if we exclude the additions from the Nextel Partners acquisition.

In general on the US market: Cingular have already reported and had a blockbuster quarter, Alltel also reported this morning and seemed at first glance to have done okay without setting the world on fire. I will do an overall market comparison after Verizon Wireless reports on Monday, but it looks to me already that the big winners are Verizon and Cingular with the big loser Sprint and the rest being also rans, including T-Mobile.

Thursday, October 26, 2006

Orange: More Sour Fruit

A platinum-class mega uber-value reader writes to inform me that the Orange Cinema offer might not be as good for shareholders as I originally thought.

Also, Orange have dropped their UK broadband prices this morning. This looks like a big price cut to me.

Finally, there is rumour going round that Orange are preparing for exclusion zones around its’ retail outlets. I don’t believe this one, but it highlights the lateral thinking going-on in the Orange Groves to reduce customer acquisition costs.

Speaking of which, another highly valued reader has pointed out that Radio 4 has a programme on tonight (and for seven days on audio-on-demand) about the fun the hedge funds are currently having shorting Carphone Warehouse. Well worth dragging myself away from the 18 Doughty Street experiment.

Orange UK: Going Nowhere Slowly

Orange has released its’ 3Q customer and revenue figures.

The rebranding of Wanadoo to Orange and the launch of Free Broadband seems to have had zero effect on the market. Similarly, the fever pitched activity in the Mobile market seems to have zero effect.

orange uk figures

When I look at these figures, I think of one thing – time to cut costs, especially expensive ones like customer acquisition costs. I also think of non-conversion of 500k narrowband customers to broadband - I wonder where they have gone to?

On the bright side, Orange has renewed its’ great cinema campaign

Wednesday, October 25, 2006

Exchange Updates

BT have also recently provided details of the rollout of the 21CN. BT have deployed a website which contains a FAQ and expected dates of the exchange rollout. The excellent independant "Broadband Resource" has updated its’ database and I would recommend using this as it also contains information about the LLU services and providers at each exchange.

It is also worth noting the relentless pace of the BSkyB/Easynet LLU deployment currently having 519 exchanges enabled. It is also worth noting that both CPW and Tiscali are still refusing to open-source its' exchange data.

BT: Two Small, but Important Steps

The first step is a small acquisition of a US security company, Counterpane Internet Security. The company provides advice to companies how to protect their networks against hackers. The biggest asset is not the customer base but the guru of security, Bruce Schneier, whose Cryptogram email newsletter and books are read by anyone and everyone mildly interested in security.

Survey after survey names security as the biggest concern of individuals and companies in the internet era. If BT can establish itself as the worldwide authority of security and has the safest network – it is a huge differentiator and something that users would gladly pay a serious premium for.

The second step is the naming of Novell as the provider for Identity Management in the 21CN. Although, directories and authentication are pretty obscure terms for your average person, this is a key piece of the 21CN jigsaw and will be at the centre of most of the next-generation services rolled out in the future by BT.

If BT can establish the most trusted and accurate database of individuals and companies in the UK and more importantly develop APIs for third parties to use, then again it will have a huge competitive advantage in the marketplace. Even more importantly BT is developing this capability under the radar of the regulators…

Come on guys get the basics sorted out

The first lesson for any IT / Telecoms Infrastructure Engineer is the importance of physical security and therefore I am really surprised about some recent breaches which have caused serious network downtime.

The first example is in Hertfordshire back in Aug 2005, when thieves broke into a site which brought down the Vodafone Paging network. More unbelievably is that 160k users are still using Vodafone Paging services.

The next breach was on 17th October which is shrouded in mystery and to me looks a little like an inside job, where allegedly £6m of Cisco kit was stolen and brought down the Easynet/Sky network. Apparently:
"Two of them, they used a valid swipe card to open the side gate, went in with a van; down to the basement. Helped themselves to a load of kit, loaded it up, drove out.
Finally on the 22nd October, Vodafone again was hit with someone entering a North Wales facility and:
"There was a robbery of some cabling in north Wales and that caused parts of the network to go down. The Midlands, parts of the north-west and south-east, and north Wales were affected."

Tuesday, October 24, 2006

German MVNOs – Last Rites?

TeleGeography is reporting that the 5 German MVNOs (Drillisch, debitel, mobilcom, Talkline and Phonehouse) are planning a merger which would create the world’s biggest MVNO with 25m customers and a distribution network to die for.

Personally, I see this as illustrative of the fundamental weakness of the underlying MVNO business model: it only works for niches where the network operators are not prepared to venture in a particular moment of time. Even worse, I believe the MVNO model is self-destructive: the more successful a MVNO becomes the more appealing the niche becomes to the network operator to target. The final nail in the coffin is that any network operator has a huge cost advantage over any MVNO and therefore will ultimately win out. The only viable strategy for a MVNO is to build a niche and sell-out: witness the exit route of the only MVNO success stories, Saunalauhti in Finland and Virgin Mobile in the UK.

Over the last couple of years in Germany, E-plus has launched several sub-brands aimed at particular market niches (Immigrant, Low Cost etc) and triggered a response from T-Mobile and Vodafone who have slashed prices across the board. This will have directly affected the MVNOs margins and churn rates and given that two are owed by private equity (highly leveraged) and another by a UK Retailer (Carphone Warehouse - who needs cash for other purposes); it is hardly surprising that all five are thinking about a strategy of reduction in costs rather than expansion.

In my opinion, the strategy is flawed and will only prolong the MVNOs ultimate death. The better strategy is to wait for a couple of the MVNOs to merge and then for a remaining MVNO to raise the “For Sale” sign – available to all networks. A MVNO which could easily follow this path is Talkline, which is ultimately owned by TDC, the incumbent in Denmark, which is owned by private equity and also owns really, really juicy assets in the Denmark, Baltics, Poland & Switzerland. I think a “For Sale” sign on TDC would trigger a bidding war between Vodafone and Deutsche Telekom and potentially deliver decent returns on the investment for the private equity companies.

For Sale: 50k Demon/Legend Home Users

Thus has bought a couple of ISPs over the years: Demon & Legend spring to mind. Today, they have put the 50k home users of these ISP’s up for sale. Note they plan on retaining the SME customers.

I'd love to know if it was BT that approached them and it seems extremely sensible to me not only to sell, but to sell via an auction. Also, the price that Thus achieves will be a really important benchmark for the smaller ISPs which will come on the market over the next couple of years. Effectively the purchaser will only be buying the customer base and one that is presumably loyal to Demon/Legend, because neither of them do any serious marketing and probably the prices charged are higher than currently in the market. Personally, I would be balancing the risk of churning vs the economies of scale in LLUing.

The result could also be surprising: as well as the usual suspects (BT, CPW, BSkyB & Orange) I could see that the quality of the base appealing to both o2 and Vodafone and will give them a little momentum.

YouTube: From Concept to Hyper-growth

There is an absolute fantastic video about the creation and early days of YouTube from the quiet founder, Jawed Karim. This is a University lecture he did last night - I think. It is 50 mins long and required viewing for anyone interested in the process of creating an internet company.

Four points stand out for me:
i) the roots and functionality from other “killer applications” (LiveJournal -1999, HotorNot - 2000, Wikipedia – 2001, Friendster - 2002, del.icio.us - 2003, Flickr - 2004) which all proved that social networking sites could work and more importantly could be scaled.

ii) The role of enabling technologies in determining the right moment to launch applications, in the case of YouTube there was Home Broadband, Digital Camera’s and Cellphones (Grrrr – said the mobile operators – another wasted revenue opportunity), Cheap Hosting Bandwidth, Macromedia Flash 7 (using this as the video player was a huge innovation)

iii) The role of two TV events which were only shown once on network TV: the Janet Jackson Wardrobe malfunction in Feb 2004 and the Stewart interview on Crossfire (867k watched on CNN, 3 times that number watched online). Also, the role of Tsunami in the Indian Ocean on Dec 26th 2004 where the only coverage available was made with cellphones. It is noticeable that two of three key events mentioned involved videos with copyrights.

iv) Version 1.0 was a flop. Only when they added in 2.0: Related Videos – to increase viewing, features to encourage user interaction, and an external player so the MySpace generation could use it easier did it take-off. It also received a big boost when it was slashdotted.
The final thing that stuck out to me is that he seems a nice and modest guy – sometimes the good guys do win.

Saturday, October 21, 2006

Russian & Norwegian Shenanigans

The issue of an international arrest warrant for Rozhetskin, who is the guy who sold his stake in Megafon to Fridman (Alfa/Altimo) rather than Galmond & Reiman (IPOC) seems to have triggered another batch of leaks about the murky world of doing business in post-communist Russia. The story is well worth a read and contains information, whether true or not, which has never been revealed before.

At the moment, Teliasonera is sensibly keeping well out of the Megafon argument and things are all quiet on its’ ongoing battle with Altimo in Turkey. However, Telenor is battling on in the full spotlight and seems to me to be consistently losing. Unfortunately for Telenor, it seems in a lot of trouble back home for loaning the daughter of the CEO Jon Fredrik Baksaas a few mobile phones. The difference between what can get you in trouble in Russia and Norway is stark.

It should have been such a good week for Telenor as the founder (Muhammad Yunus) of it’s partner (GrammenPhone) in Bangladesh won the Nobel Peace Prize for his work on MicroCredits. Would be churlish of me to mention the possibility of lobbying from a major sponsor of the Nobel Peace Centre in Oslo on behalf of one its’ partners?

Friday, October 20, 2006

Expensive business - the MVNO Game

From Earthlink’s 3Q Report:
During the third quarter of 2006, EarthLink's wireless joint venture, HELIO, significantly increased operating activities. Specifically, HELIO increased distribution to over 2,500 retail doors and initiated a national television and print marketing campaign. As a result of the increase in HELIO's operating activities, EarthLink recorded an equity loss of $26.2 million in the quarter, compared to an equity loss of $4.6 million in the third quarter of 2005.

Also during the quarter, EarthLink invested $39.0 million of cash in the HELIO wireless joint venture.

For the fourth quarter of 2006…including an expected equity method loss of $30 million to $35 million attributable to EarthLink's proportionate share of the losses of the HELIO wireless joint venture.

Remember the Earthlink’s figures are only half of the total losses, since they own 50%. It looks like the burn rate on the original US$440m commitment from SK Telecom/Earthlink is pretty high at the moment. It was mentioned that capital contributions for 2007 is expected to fall to US$20m. I must stress, according to Earthlink everything is going according to plan.

Helio are only targeting a 12m slice of the US population which are 18-32 years with household income over US$40k/annum. They are claiming ARPUs of US$100/month which is double Cingular & Verizon levels with Data ARPUs of US$25/month which is around four times the Cingular levels. Interestingly, an incredible 80% of Helio users are using WAP to access MySpace.

In total Earthlink has recorded cumulative losses of US$64,724k in Helio (US$15,608k in 2005 and so far in 9 months of 2006 US$49,116k) that is a lot of money for a reseller to max. 12m people. Until Earthlink releases overall revenue and cost figures, people are going to question the logic of the business model. The jury is still out.

BT Pipex

The Business is reporting that BT is casting its’ slide rule over Pipex. Although the article goes into great depth about the potential for Wimax deployment, I prefer to see the deal as the "C&W Broadband Wholesaling Dream Killer Move".

Together with the potential PlusNet deal, it means BT is starting full-time hoovering.

Wednesday, October 18, 2006

Orange LLU Blackout

The Orange LLU service is back online after going into a blackhole for a couple of days with a non-specified network equipment failure.

Five Points stand out for me:

1. Since the failure affected all of the UK LLU customers and therefore was not a DSLAM issue at a specific exchange then the only conclusion to be drawn is that currently Orange does not have redundancy in its’ network core.

2. TalkTalk is not the only ISP with severe reliability difficulties. Only this morning, OFCOM released an important report with one of the main conclusions “some business and residential consumers find comparing price and quality of communications providers difficult” I expect some regulatory action to force the operators to release quality of service information.

3. The Press are jumping on these negative stories about Broadband suppliers. It is very interesting to notice how many sources reported that Orange has gone down but how few reported Orange was back.

4. How pathetic the Orange network status information is. TalkTalk is even worse. The champion for providing detailed updated information is PlusNet and they should be commended.

5. How difficult it will be for the LLU suppliers to provide a decent quality of service with a small base of qualified engineers. The LLU suppliers are going to learn very quickly that there is a reason for the army of expensive engineers working for BT Wholesale.

As per normal, The Register has the exclusive on the cause of the problem - it wasn't a hardware problem after all - it was the fat fingers of an Alcatel engineer.
I work for Orange, in a role that has reasonable contact with the Alcatal guys who manage the Orange broadband infrastructure. The outage was caused by an "unauthorised" change to the network which one of the Alcatel guys performed.

As I understand it, the effect of this was a permissions problem with the hardware located out at the switches and exchanges, and now requires an engineer to visit each of the 4000+ sites to restart a few bits of kit. You will find that one by one the regions come back up, but at present approx 50 per cent of the LLU customers are still offline. I would imagine it will be another day or so before the rest of the customers are back online.

Tuesday, October 17, 2006

Telco Consumer Wallet Wars: The Carphone / Vodafone Skirmish

After Vodafone’s surprise dropping of a major bomb into the heart of the Carphone Warehouse Territory last Thursday, there have been many column inches written and many an insult exchanged. Tonight, I thought it would be worthwhile to review a few of the key events and try to look ahead to the likely outcome.

1. Vodafone Build-Up

Enders Analysis seem to think that Vodafone’s actions in dropping Carphone and signing an exclusive arrangement with Phones4U was done in a fit of pique. Unfortunately for Carphone, I think Vodafone’s battle plan has been carefully thought through and the timing of the AOL deal presented a perfect opportunity for Vodafone to inflict some serious pain.

The first signs of something being afoot were when Vodafone dropped dial-a-phone back in October 2005 as part of a review of dealers and distribution channel. The rationale was simple enough: dial-a-phone weren’t delivering enough profitable customers. Vodafone had been with dial-a-phone since its’ launch in 1996 and dial-a-phone had delivered a lot of volume over the years to Vodafone. Next came the exceptionally fast dropping of The Link in August this year after the purchase of the troubled retailer by O2, again the rationale given that this was part of a wider review of Vodafone’s indirect business. Next was the revamp of 100 of the Vodafone Stores costing £15m in June 2006. Just last week news leaked that Vodafone Retail had changed its’ staff commission schemes and the Retail Chief had issued a memo called “Six Steps to Success” and staff been told to match the Carphone Warehouse and Phones 4u deals where necessary. Obviously, the Vodafone Stores are in the middle of a big change in direction in the middle of a big reorganization of the Vodafone Consumer Sales Distribution Channels.

Vodafone announced new prepay and postpaid tariffs for the consumer segment in June, August and September. The tariffs had become severely out-of-date and people (myself included) were wondering whether Vodafone were serious in the consumer segment. The prepay tariffs are supported by widespread advertising campaign, whereas all is quiet so far on the post pay tariffs. Obviously, Vodafone had not given up on the consumer market.

Vodafone announced today its’ Christmas handset range with a lot of exclusives from the major handset manufacturers. Both Carphone and Phones4U would have been aware of the handset range and the new distribution strategy when evaluating whether or not to sign up for the exclusive deal.

The final sign is the various senior management changes that have occurred over the last few months:
• April 2006 – Nick Read CEO UK. Read had been responsible for the declining market share of consumer segment since 2003. Perhaps, it was realized that historically he was fighting with his hands tied round his back and he had a plan for increased market share and profitability.
• Oct 2006 – Vittorio Coloa CEO Europe. A successful background in Italy where high SACs do not feature in the business model.

It is also important to note that none of the original vanguard of Gent, Horn-Smith and Bamford who had seen Charles Dunstone grow-up and build a powerhouse business was around anymore.

2. Propaganda Battle

John Pilger has an interesting twist on an old quote:
“The oldest cliché is that truth is the first casualty of war. I disagree. Journalism is the first casualty. Not only that: it has become a weapon of war…”
Almost straight after the Vodafone announcement came the leaked details of the Andrew Harrison memo where he claimed that the big losers in whole of this was Phones4U who had sacrificed their independence and Carphone had maintained its’ integrity by turning down the deal. Obviously, some rallying of the troops was necessary but this was ridiculous. Even more ridiculous was how many members of the press believed that Carphone were truly independent and not pushing products from whichever operator was paid them the highest commission. Vodafone does not seem to have regained the moral high game and has been on the back foot ever since. PR Score: CPW 1 VODA 0

Next came the comment from Roger Taylor, the CFO of Carphone: "It does not change our forecast one penny. Every Vodafone customer who comes into our stores now will not walk out on a Vodafone contract. Obviously, the heart of this was the thinking: “We, CPW are more powerful in the marketplace than Voda”. Orange came straight out and said they looking at its’ distribution strategy, again this was squashed with an “industry insider saying Orange comments were “sabre rattling” and then had just signed a new contract. By the weekend the truth was coming out: Peter Erksine CEO of o2 had said it was a wonderful opportunity to revise its’ costs downwards; Orange denied they had signed a new contract; T-Mobile seemed to express support; non-one bothered asking H3G UK. Obviously, the CFO had managed to convince the stock market that the Carphone business model was not going in tailspin and therefore stabilized the share price whereas the real consequences came to realization over the weekend – there would be a lot of pressure on CPW margins. PR Score: CPW 1.5 VODA 0.5.

I think implied in most of the press coverage is that Vodafone may regret its’ decision because it could lose market share. Unbelievably, in yesterday’s FT, it was suggested that Vodafone may re-hire Carphone in a years time when the Phones4U contract expires (fair enough); that the battle could extend to Germany, Ireland, Netherlands, Portugal and Spain (fair enough); and that Carphone can ride a big fall in its’ profits more comfortably than the Vodafone management can ride a big fall in its’ European subscriber base (total nonsense). PR Victory, but total spin – I don’t believe for one second that the Vodafone management believes UK market share will fall, let alone European. PR Score: CPW 2.5 VODA 0.5.

I believe the biggest gaffe of the PR battle was in fact made by the master himself, Charles Dunstone, when he was quoted in the FT on Saturday as saying: “This might sound flippant as the largest shareholder but I don’t really care about the share price. It’s a whole lot of people trying to predict the value of second-hand bits of paper” I’m pretty sure that this statement will come back to haunt Charles Dunstone in the future. PR Score: CPW 2.5 VODA 1.5.

Apart from the odd own goal, I believe that Carphone is slaughtering Vodafone in the media. But does it really matter? Wallets are going to win this battle not hearts.

3. Relative Financial Firepower

I felt a bit sorry for Geoff Ruddell, the Retail Analyst from Morgan Stanley, because there will be literally hundreds of sell-side telecom analysts rolling in the aisles thinking that someone actually believes that CPW have more firepower than Vodafone. Even worse, he may have planted the Armageddon Seed in the Vodafone Europe CEO’s mind – let’s do a scorched earth policy throughout Europe this winter – double bonus - Carphone and Sarin will be buried at the same time! (only slightly joking)

Vodafone UK had a turnover in y/e Mar 2006 of £5bn with operating profit of £700m (including in that is £333m of 3G license amortisation). Vodafone doesn’t disclose the FCF of the UK operation, but overall for the group it was £6.4bn. Vodafone also doesn’t disclose the split between business and consumer in the UK but rumours indicate that business accounts for circa 80% of UK revenues.

Carphone Warehouse in the same period had a turnover of £2.9bn and Operating Profit of £87m. Unfortunately for Carphone comparisons get worse from there with Free Cash Flow not being divulged. I did a quick analysis and CPW generated net cash from operating activities of £183m, but £199m (before M&A) went out the door in terms of fixed asset additions, intangibles such as SAC’s and interest payable giving an approximate free cash flow of approximate negative £16m, which is really bad because the underlying business is not generating enough cash to pay off debts. Cash M&A Costs of £158m are not so bad as long as the bank agree and the assets will produce cashflow – AOL in its’ current form seemingly doesn’t. Net debt during y/e 2006 increased from £68m to £273m. In the first half of the year CPW have been investing heavily in the broadband so I’d be extremely surprised if the net debt has decreased at the interim stage. We need to add to this the recent acquisition of AOL for £370m (£250m cash at completion). So net debt + non-operating commitments will be around £650m at the interim stage. This is a huge increase in leverage for a company which makes net such small margins.

There is another gem which is buried in the Carphone Accounts and this is the level of Sales Provisions which have increased from £28.8m to £67.4m (as at 1st April 2006). Sales provisions predominately relate to “cash-back” type deals. In other words Carphone hold a substantial portion of Customers money to fund its’ operations. This is not the time or place to discuss the relative merits of cashback deals and the badwill that it generates in the customers eyes. It seems the whole of Carphone online operations is supported by cashback deals. An operator could do serious immediate damage to the Carphone business model by not permitting them to do cashback deals.

Debt and Small Margins are the Achilles heels of Carphone Warehouse.

4. Fellow Mobile Players

All the major cellular networks in the UK are part of multinational telecom-operators who can easily see how the various business models in the various European markets operate. It is obvious to me that margins in the UK are smaller than Germany (home market of T-Mobile), Spain (home market of O2) & France (home of market of Orange).

It is obvious that no-one has a real incentive to enter a price war between themselves, however if more margin appeared in the industry from the removal of someone else in the value chain then perhaps no other operator would object. On the flip side, the industry has defied logic on many a occasion.

There is another potential wildcard in Virgin Mobile who theoretically could enter a subsidy battle. Unfortunately, Virgin Mobile is now part of the cash strapped ntl empire who is feeling a lot of pain with the competing with Carphone Warehouse in the broadband voice arena. Why would they subsidize Carphone?

Orange who have a smaller base than ntl or Carphone (TalkTalk/AOL) in the fixed business will be under severe pressure from the parent in France to sell converged solutions and it must be extremely difficult to explain that potential profit has been reduced because of someone that they pay millions to every year.

O2 are not yet feeling this pressure and yet it will come in the future because of the Be acquisition. The advantage for Erksine is the above market growth in cash generation of the UK & German operations: this will not last for long especially if he enters a war with one of the other operators.

H3G UK could theoretically support Carphone, but this would require a revision of strategy from the parent company and the strategy hasn’t worked in the past, but may be needed to gain the scale to make the operations saleable.

Another company would could possibly support CPW is T-Mobile, but again the question is why? T-Mobile is actually performing quite well in terms of customer additions, but profitability is naff: in H1 ’06 revenue was £1.48m and EBITDA was a mere £232m – probably meaning after 3g amortization and asset depreciation T-Mobile UK was loss making. In the grander scheme, I also think that T-Mobile needs to perform in the USA to keep shareholders at bay – the UK is irrelevant in the bigger picture.

In summary, only a mad operator (and operator has been guilty in the past) would support Carphone.

5. Fellow Retailers

In the retail sector everybody hates the 800lb gorilla which is Carphone and they will be quite happy with the Vodafone move.

The big chain mobile specialist retailers have seen a radical change over the year with The Link disappearing (via o2) and Phones4U changing ownership. Unfortunately victory cannot be claimed for Carphone at this stage. The real situation from Dec 1st, although you would not believe it from reading the press, is that the large retail chain where a punter can go to compare all deals is Phones4U. Also, the new owners of Phones4u will see their future growth is not in the UK but in building a European wide network: in order to achieve this they need the help of the major networks (Vodafone, T-Mobile, Orange, Telefonica) and a few browny points now will not go amiss in the future.

The “real” independent retailers are the small privately own stores who actually make up the bulk of the mobile retail market number with around 1500-1800 stores and actually dwarf the CPW/Phones4U who together number around 1100. These have specialized over the years targeting niches such as ethnic communities and SME’s. I seriously doubt whether anyone cares anything about CPW – I also think that Vodafone will continue to supply them.

The other area is the large retailers such as Tesco, Argos and Woolworth’s who nearly all specialize in prepay and sales are heavily skewed to the Christmas period. I think these will actually prefer to see CPW cut down to size, especially after last year when CPW took market share back from the retailers with its’ exclusive on the pink RAZR.

In summary, Carphone can expect zero support from fellow retailers.

6. Manufacturers

The phone manufacturers are much more difficult to predict. In theory they would prefer CPW to be under the Networks control and therefore their supply chain costs are smaller and there is more margin in the industry for the manufacturers and networks to share. However, they are in a volume business and if CPW are actively encouraging churn this will lead to the sale of more handsets. Also it is easier to launch new handsets and features where there are more buyers, especially those who do not just see the handset as an opportunity to generate service revenues.

In summary, I’m not sure which way the manufacturers will lean.

7. Consumers

My initial thought is it is going to be a great Christmas for consumers. Vodafone will be determined to make an impression and show Carphone isn’t needed for successful distribution. I expect to see heavily discounted price plans with plenty of handset subsidies especially on the Vodafone own-brand and exclusive phones.

In the longer run, although Acquisition Costs will be reduced, I don’t believe the end-consumer will suffer. I expect the networks to continue to fiercely competitive and can see prices falling from the current level. I can also see plenty of innovation.

I expect the consumer will do a lot more internet shopping than physical retail shopping in the future and it is important to note that the Carphone Warehouse web sites are especially strong. A big new “independent” player could be the comparator sites such as uSwitch.

8. Likely Outcome

Unfortunately, for Vodafone it will only take one of the network operators to chase the market share rather than lower costs for everything to go pear-shaped. For the Christmas period, CPW will be absolutely determined not to lose market share without it costing too much. I think H3G UK may be unable to resist the temptation, if the parent company in Hong Kong can be convinced provide the finance. I think all the other networks will try and reduce costs. The Carphone business model is finely tuned and only requires one out of five to go for market share.

In the medium term, the problem for Carphone is much greater and I think Vodafone is determined to change the face of UK retailing and is prepared for a long fight: certainly much longer than the Carphone balance sheet can withstand pain. I also believe Orange, O2 and Ntl (aka Virgin Mobile) will see the pain that Carphone is causing in the broadband space and be very reluctant to give them a helping hand.

More intriguingly, I think Dunstone will lose his belief in the Stock Market, do a Branson and take the company private again – the private equity companies will be more than willing to give him a helping hand.

In this way, the retailing sector will be changed: SACs and Churn Rates lowered. Dunstone will have his fall guy – the shortsightedness of investors – to blame for the fundamental market changes. I expect the saga to unfold over the next 12-24 months.

In the long run, Carphone will be aligned with two operators and Phones4U with the other two – euroStyle specialist retailers. I don’t see a long term future for five operators. I also see a lot of the MVNOs suffering as the networks focus and between them cover every segment of the market. The MVNO exception is BT who will be able to bring differentiated products to the business sector with the necessary sales force support. The independent sector will shrink further, but still be sizable especially serving the SME sector. The non-specialist retailer will continue to focus on pre-pay.

Friday, October 13, 2006

Voda/P4U Deal

Now that information about the deal is coming out, it highlights to me just how weak Vodafone is in the consumer segment. Vodafone had 16,185k customers at June 30th and 39.4% of these were contract or 6,377k with annual contract churn at 20.1% - Vodafone needs to recruit 1,282k customers/annum or 107k/month just to stand still. The exclusive consumer deal with P4U required just a minimum of 30k/month - all the volume with Vodafone is in the Business Sector.

The commitments in the P4U deal are nothing special: after all with CPW selling 1.8m connections/year and only 10% being from Vodafone. I would guess that o2 will be selling above that in CPW. Also, the penalties on none delivery of volumes is not that financially different from a tiered commission system based upon volumes. The thing that is different and which hurts CPW most is exclusivity and the threat to the business model.

In terms of cost to CPW, they are rumoured to do 1.8m connections in the UK with Vodafone accounting for 10%. With Contract Gross Margins averaging at £100 this accounts for £18/annum or £5.4m contribution. Although a lot it is not on the small scale as the TalkTalk start-up losses. What will be interesting is whether people go into CPW shops to buy Vodafone products or CPW sell 10% of its’ customers Vodafone. If it is the later, CPW will find it relatively simple to sell some other network product. If it is the former it is far more dangerous for CPW, because the customer will walk over the street to Phones4U. It is a nice analysis to be done with Game theory.

Out of all the operators, Vodafone is probably the operator with the least exposure to the Consumer Segment and therefore with a healthy dose of hindsight was always probably the one who would do something seriously disruptive to the current method of selling.

The big question is whether anyone else with follow suit?

It is mooted in the Times that Orange is reviewing its’ indirect sales channel. I would think this would be an incredibly brave decision given the volumes that I guess that both Orange and O2 are doing through Carphone. I do think however that T-Mobile could be the next to break ranks. T-Mobile UK has a new US CEO, Jim Hyde, puts it very nicely:
'Charles [Dunstone] and John [Caudwell] have done a tremendous job in leveraging their brands… Well done. Well done to them.' 'But,' he adds, 'they've been helped along the way. If anyone is complaining that they're too powerful, I'd say to those people, look in the mirror.' Hyde says he has experience of dealing with retailers bigger than Carphone and Phones 4u 'by many multiples.'
T-Mobile which is rapidly growing its’ contract base adding 629k in the first half on the back of the phenomenal success of the new Flext contract (1m customers in 7 months) and it is noticeable that T-Mobile does not have a big presence in CPW since the reduction of commissions.

With the demise of The Link and Dial-a-Phone, both of whom had their contracts pulled by Vodafone previously, the retail sector is undergoing rapid change. There are other countries where the model is radically different from the UK.

At the end of the day, all the networks operators have been complaining for years about churn, the independents actively encouraging it and high acquisition costs. This situation was intolerable in an environment of rapidly falling margins – it was question of when rather than if the one of the operators would take action to sort the problem out and when the other operators follow suit.

Thursday, October 12, 2006

Upstream Free Broadband

An interesting play on “Free Broadband” has come from Upstream Internet: effectively you become an Upstream Broadband reseller and get £10 for every referral – the offer is limited to 1,000 people and it looks like over 500 have already been signed up.

Upstream Internet is an extremely interesting ISP and someone I have been following since its’ launch. The reason for my interest is that the owner is an expert in a technology called MLPPP which is multi-link PPP protocol and is a method for bonding together two or more Copper Pairs to increase broadband speeds. This solution is perfect for SME’s who do want to go to the expense of leasing a line, but already have a lot of Copper Pairs with spare capacity run to their premises for the PBX. The owner of the ISP has written a Linux distribution of the MLPPP, so the company has some supa-technical skills.

Although, the technology is aimed at SMEs, I can a day coming along quite soon when the well-offs living in rural areas and getting rubbish DSL speeds will be purchasing solutions like MLPPP to get that extra performance.

The technology is not mainstream and is an example how specialized ISPs can survive and differentiate in the mass-market.


Carphone Warehouse will continue to retain its core customer values of independence and impartiality, and offer customers the most appropriate network proposition
What a load of tosh…

Everyone knows that CPW push the products from whatever network pays it the most commission. I’d love to be a fly on the wall when O2 and Orange sit down to negotiate their next quarterly contract. It does not take a genius to figure out who is in the best negotiating position for the first time for years and years…

I’ve also heard that the internal CPW spin on the loss of Vodafone contract business is that Vodafone walked away because CPW refused to give them preferential treatment.

Replaying the CPW/AOL conference calls and thinking about the Broadband Wars end-game, I kept coming back to the a reply that Dunstone gave about a question of BSkyB churning the AOL base along the lines of “you haven’t seen what we have to offer yet” – I wonder if AOL had an IP-TV product in its’ labs which TalkTalk plan on launching?

In my opinion, the best coverage of the AOL deal was in today’s Guardian where they are comparing the TalkTalk strategy with easyJet who despite loads and loads of complaints manages to be highly profitable. I would also focus across the channel to our French Friends, where Iliad also are profitable, sell at a discount and have tons of customer complaints - a sort of “forget the quality, look at the price” strategy.

BT Comes off the Ropes

The big loser from yesterdays AOL/CPW tie-up is BT who will be losing the AOL’s wholesale revenues a lot faster now than with AOL as a standalone business. Potentially, it could pick up quite a few retail customers as heavy AOL users wake-up to the prospect of moving onto a bargain basement network.

So, it is hardly surprising that BT is starting to look at defending its’ wholesale revenues. Step 1 was undoubtedly the Vodafone tie-up, but I believe Step 2 will be to follow the KPN path and start hovering up smaller ISPs. I believe the speculation in today’s Independent has substance to it and I think it will be the first move of many for BT. Any half decent broadband retailer thinking of cashing in their chips only have to open discussions with Cable & Wireless about wholesale LLU to gain BT’s attention.

Although, there is plenty of small to medium ISPs to keep the BT M&A team busy, I think the last remaining tasty morsel on the UK broadband plate is Tiscali which becomes more and more attractive with every disposal of unprofitable territories. I doubt that BT would launch a contested bid and Tiscali seems to want to remain independent for the time being.

Step 3 will be the launch of BT Vision which will add further between BT and the crowd. Step 4 will be the revision of wholesale IPStream pricing for balance the decision between BT Wholesale. Step 5 will be roll-out of the 21CN which will increase the differentiated services that BT can offer. The final move will be the roll-out of FTTH which will be game over for the LLUers. Luckily for them they have a few years to recoup their investments.

Carphone Warehouse: Almost a statement

The CPW trading statement was a real mixed-bag between the various operations, but the real story is that the CEO and founder, Charles Dunstone, is behaving extremely badly and becoming more and more detached from the reality of his fixed-line customers and despite deploying his PR skills to the max will ultimately be exposed as a charlatan.

1) Distribution

Least we forget, but Distribution is the cornerstone of the Dunstone Paper Empire and the only part generating real cash and profits. For FY06 Distribution generated £109m profits (before interest & tax) out of a group total of £87m.

The connections figures look extremely good with an increase in contracts of 266k and pre-paid of 850k. If gross profits have been maintained at circa £100 and £28 respectively then the connections will add £26m to contract and £24m to pre-paid gross profits which is an approx 25% increase y-o-y. This translates to around £16m, if anyone takes any notice of the unique CPW metric of contribution, assuming a steady conversion ratio at just below 30%. The flip side is a 21.1% increase in stores - I’m not sure about the effect on like-for-like sales and furthermore I’m not exactly sure of the relevance of this archetypical retail metric. For instance, how does the launch of the CPW’s fourth major online site, The Phone Spot, with its’ mega-advertising budget fit in with typical store comparisons?

The importance of the Distribution arm cannot be understated and it was noted that Dunstone did not play his usual Santa scripted “Look at the products we have got coming for Christmas” game that is usual part of the interim trading statement. I sensed a chinck in the armour for the forthcoming vital Christmas period: CPW do not seem to have a “blockbuster” exclusive such as the Pink-RAZR equivalent.

Furthermore, I am still amazed that no-one discussed the conflict of interests between his fixed-line positioned and the ambitions of Orange, O2, Vodafone and Virgin Mobile in this segment. This would be especially worrying given the big “independent” mobile retail competitor (P4U) is not playing in the space.

2) Consumer Broadband

When we present the TalkTalk UK figures in a different format to the CPW presentation, we can draw a radically different conclusion – there is no radical growth of the base!

TalkTalk UK subs

The big spurt in growth was when CPW bought in Dec ‘05:
- One.tel 1.15m CPS customers + 60k ADSL for £132m at around £115/customer. Note there is a £22.2m upside in the price if Centrica manage to sell some customers
- Tele2 214k CPS customers (36k in Ireland) for £10.5m at around £47/customer.

Since then we have effectively seen CPW making a huge investment in infrastructure and pushing the base towards taking line rental and broadband services. We know that WLR on its’ own is effectively a zero margin business and the CPW rationale is that it decreases the churn. We also know that bundle for CPS+WLR+ADSL is loss-making at the gross level. The only area which might be profitable in the long run is LLU where a contribution of £7/customer/month is claimed. The ratio I like is 0.7% of the TalkTalk base is at its’ ultimate destination point. Please bear in mind that the unique CPW contribution metric is before support costs, SAC’s, depreciation of equipment and head office costs.

Please don’t get me wrong, I know that CPW has had people from other networks churning onto its’ network, but I also know that the churners off it’s’ network are in equal measure. The other problem for Dunstone is that theoretically all he is doing is substituting a low-capital consuming reseller base for a high capital consuming network base. Is the risk worthwhile?

3) Customer Service

I think that Charles Dunstone has made a huge PR gaffe with his, frankly, trickery with his appalling customer service.

First of all, he presented a graph showing “calls answered” steadily rising over the weeks to around 250k/week and the average speed to answer declining what looks like sub-1 minute from around 13 minute at peak. Who are making this 250k/week calls – his CPS base? His LLU base? Does it matter if the base is not increasing? The trend is an increase in calls/ overall customer

What is missing from the graph is the number of dropped calls i.e. the calls where the IVR instructs the queue is too long and to call back later automatically terminating the call and where someone has given up and hung up. According to my own limited personal sample: I have called the helplessline 11 times and not got through to an operator 8 times.

Secondly and most disgustingly he presents a chart where he claims that CPW are now in the top-tier of response times. If I was an executive of BT, NTL, Orange or Tiscali, I would be going ballistic given that CPW auto-drop calls and not have revealed anything of statistical significance about the survey. It is definitely a case of saying “We are crap and I won’t reveal who is crapper than us, but nudge-nudge isn’t it time that WatchDog pick on someone else than us” – pathetic.

Thirdly, what is the relevance of the “time elapsed taken to pick up the phone” to customer service? How about if when you finally get through they tell you a bunch of lies and try and blame someone else (even the modem manufacturer) for their incompetence and then charge you for the pleasure? If I was the CEO of OpenReach I’d be now setting up a simple lie-detection test – every time equipment fails in the exchange, I’d ring up the relevant customer service line and wait for them to blame BT, never OpenReach. It is always BT’s fault and shock horror they will charge you £70 if you dare to report an incorrect fault. These despicable tactics (aka call centre scripts) are surely driven by some call centre supervisor on instruction from someone on high – “Pretend we are the people’s champion and everyone else is rubbish and hope we had a bunch of idiots as users”

Finally, and I think this was a Freudian slip by Dunstone, was when he mentioned that people still kept in the queue despite the length and quality because of the value of the deal. Yes, TalkTalk are a bargain basement service currently losing tons of money attracting the people wanting a bargain. These are exactly the type of people who just love to churn and personally I have counter displaying days to go before churn every time I connect to TalkTalk Broadband

4) Missing Operations

We are missing comments on the German Phone House MVNO business, where every man and his dog knows a vicious price war is taking place in the low-end market segment where CPW position itself. We are missing a comment on the perennial loss making UK Fresh & MobileWorld MVNO operations. Similarly we are missing comment on press speculation that MVNO launches are planned in Portugal and Spain. Personally, I’m not expecting fantastic progress.

We are also missing comments on the progress of the Opal Telecom B2B business, where every other altnet is reporting competitive pressures in the UK market.

Finally, we are missing comments on the Dealer business, which strangely enough is also perennially loss-making and has undergone a radical restructure with the purchase of Hugh Symons wholesaling operation and the recruitment of Stuart Henry - ex-Orange Indirect Chieftain who seemed to specialize in winding-up all the independent sector which are now his customers.

5) AOL acquisition

I have a gut feel that this is going to be a really problematic acquisition for CPW on several fronts:
- Customer Base: the average AOL customer is not your typical discount TalkTalk punter. They are technically proficient early-adopters, whereas TalkTalk are playing for the technically challenged mass-adopters. Churn will be a problem;
- Marketing: CPW have already said they are going to slash the “above-the-line” marketing budget. New customers to AOL will dry up;
- Technical Staff & Infrastructure: AOL knows how to run an ISP, TalkTalk don’t have a clue. TalkTalk need the AOL staff technical skills more than they can admit. I have a suspicion that the AOL staff will not find a sympathetic shoulder to cry on and therefore will not hang around for too long.
- Dual Branding: given TalkTalk’s incompetence on simple thing like DNS services, I can’t imagine how things like email hosting, portal sharing and ad-networks are going to work. I predict a huge fall-out.

On numbers and value, I’ll have to look at tomorrow.

6) Overall

In the trading release, Charles Dunstone cryptically said that he expected “interim headline pre-tax profits, before broadband and Virgin Mobile France operations” to be up by 50%. Pre-tax interim profits in 2005 was £32.5m and a 50% uplift gives £49m. However, total losses for Virgin Mobile in FY07 are estimated at £10m and with today’s revised estimate of broadband losses at £70m and with the losses estimated to be skewed towards the first half – I wonder if Carphone Warehouse will enter the realm of post-tax losses?

Dunstone said tonight in a sycophantic interview on BBC Radio4 that he expected that TalkTalk would be seen as the #1 alternative to BT in the future. Personally, I feel Dunstone is nothing more than an “all fur coat and no knickers” chappie that was doing limited damage when acting as a pure retailer, however now he can inflict some serious damage to the UK economy if a significant proportion of population was reliant on his terrible service. Ultimately, it would be a horror show if the “UK digital divide” was those people who used the “Charles Dunstone” service and those who didn’t.

Wednesday, October 11, 2006

UK Political Internet TV

18 Doughty Street went live tonight and I was pretty impressed: the quality was good, the content was interesting and only a few cock-ups occurred. The plan is to broadcast political commentary live 4 hours a night Monday to Thursday. Since the programme is on the internet, the beauty is that they do not have to play by the normal broadcast rulebook which allegedly is “fair & balanced”.

Interestingly, John Howard the long serving conservative prime minister of Australia had an hour session in which he revealed the importance of Talk Radio in Australia where Australian politicians of all ilk can circumnavigate the “filters of the opinionators” in the traditional media.

Personally, I’m hoping that the internet will be the battleground leading up to the next UK general election. However, I do see a major issue – decent speed broadband is needed for internet TV and this is rare in rural and working class homes – I tend to think these groups will be the key swing voters in the next election.

The channel will not just be broadcast – they are promising streaming of archives and even non-DRMed downloads for podcasting and it is supported by an interactive website. They are also trying to recruit 100 members of audience from outside London to produce documentaries. So there is a limited feature set of social networking elements to the service.

Stefan Shakespeare put up the money for channel. He is a founder of the YouGov polling company which moved market research into the internet era exploiting not only the cheapness of the medium, but also the speed and has just announced really improved results. Perhaps he might be backing another winner…

Tuesday, October 10, 2006

Operator Branded Phones

O2 has released its’ second own brand phone, The Jet, on the back of The Ice which was released earlier in the year.

The O2 honcho responsible for devices, Gareth Hayes, hopes to eventually have 20 to 30 per cent of sales made up from own brand devices. This is quite a lot especially if the own-branded phones are used throughout the Telefonica Empire.

Vodafone is also going down the same route with its’ own brand 3G phones. Vodafone's annually purchases around 45m handsets globally which is a significant 5.5% of the overall market size of 817m in 2005. 20-30% of 45m handsets is a contract that most ODM's in the world would die for.

I expect the other big mobile operators, T-Mobile and Orange, to rapidly follow suit if either o2 or Vodafone appear to get any competitive edge either through lower handset subsidies or if either manage to design a “killer” exclusive model in the future.

Although a lot of people think that mobile operators should not enter the handset manufacturing market, I believe it is the easiest (and possibly riskiest) avenue to create differentiation in the eyes of the consumer.

The biggest problem is that the operators are actually at a cost disadvantage compared to Nokia & Motorola not only because of the economies of scale issues, but because the operators own no GSM patents and therefore will have to pay royalties to into the mysterious GSM patent pool. I have seen estimates of GSM royalties at between 8% and 28% (probably new entrants pay the higher figure) but there is no official published rate as the royalty rates are a closely guarded secret. A discussion of the economic consequence of GSM royalty rates can be found in this academic paper.

If I was in Vodafone’s position, I’d seriously be looking at the economics of buying a few slightly used patents from the now bankrupt BenQ mobile (ex-Siemens) .

Caucasus – Two out of Three Ain’t Bad

It looks like Emergent Telecom Ventures / Dubai Royal Family Holdings have won (US$600m) the bid for the 90% of Armentel that OTE currently own. Emergent was founded by Juan Villalonga and Mohamed Amersi and bought assets in Georgia last week.

I wonder how long it will be before the Joint Venture makes a bid for assets in Azerbaijan to give them a full house in the Caucasus?

I still think long run that the assets will find a place in the Altimo trophycase, although they would also fit in nicely with Vodafone’s Turkish asset.

Top 10 questions for CPW in its' trading update

Tomorrow is the day of the Carphone Warehouse Q2 Trading Update and these are the questions I’d ask Charles Dunstone. I’d also have my Charm Offensive Deflector Shields on full blast.

1. How many customers are unbundled?
Although interesting, I don’t want to hear about how many loss making customers CPW have (Dunstone has already admitted he is losing money on reseller accounts), I want to know how many are generating positive margin.

2. How many LLU exchanges have customers live on them?
Although interesting, I don’t want to hear about how many exchanges have equipment sat idle in them – I want to know how many exchanges have equipment live with backhaul onto the Opal network and have actual customers using the kit.

3. What is the Average Speed that customers experience?
What is the average speed that CPW is delivering at 8pm (busy hour) to its’ users? We all know the “8Mbps marketing” and we are getting to know the “reality”, but it would be nice for Dunstone to stand there and admit that marketing and reality are two very different things.

4. What is the Reliability of the TalkTalk service?
How much downtime has the TalkTalk network suffered over the month? I would also include when specific bits of kit (eg DNS servers) are down which render the TalkTalk service useless to the average punter.

5. What are the Call Centre Volumes?
Dunstone will spin how many extra people he has recruited in the call centre, but I’d like to know how many calls per day these call centres are handling and more importantly how many calls are being dropped because the queue length is too long.

6. What is the status of the AOL purchase?
Is Dunstone still thinking of purchasing AOL UK? Does he feel that more consolidation is inevitable in the industry? Would Dunstone consider selling TalkTalk?

7. Are CPW planning to offer Mobile Operators' Broadband offerings?
Is the industry gossip true that Vodafone has asked Carphone to sell its’ broadband offering with equal prominence to the TalkTalk offering in the Carphone stores? Has anyone else asked? Does Dunstone see a conflict of strategy between his main paymasters (the mobile operators) and the TalkTalk business?

8. What is the profitability of the MVNOs?
How much money is Fresh in the UK still losing? Given the fact that Fresh has been around for a long time and never made money what is the thinking behind Carphone launching more MVNOs in other countries?

9. How much of the Retail growth is accounted for by the wholesale operations?
How many units is the wholesale operation (ex-Hugh Symon) in the UK now selling? How much of the increase in retail sales does this acquisition account for? Is this operation making a positive contribution?

10. What is the status of the USA expansion?
How many operators have Carphone signed up to sell their product? Do the recent Verizon Wireless comments that Carphone are not independent and push whoever pays them the biggest commission worry them?

Monday, October 09, 2006

A slightly positive update on Invox

I wrote on Invox/Brightview, a small AIM quoted UK company, when they were in trouble back in August and this attracted attention in the bulletin board world, so I feel it is necessary to issue an update because positive information has been released. Invox announced today they had sold their home gaming division in exchange for £1m shares and a promise for more and would now rename the company to Brightview plc and focus on broadband.

No cash changed hands and they are still renegotiating their overdraft with Barclays:
'Given the aim of continuing growth in its broadband subscriber base, we are in negotiation with Barclays Bank plc to secure facilities consistent with that goal. This may involve deferral of repayments envisaged under the existing agreement.'
As part of the deal, they now have a little collateral to cover part of the overdraft and the management must be feeling that they can now see the light at the tunnel. On a more positive note they announced they had added net 5k broadband customers in the quarter to Sept ’06 to bring the base to 45k with hopes of 50k by Christmas. I think Barclays will be focussing on cashflows and asset backing rather than customer adds for the loan, but growth in the current ultra-competitive environment must count for something.

Carphone: New Depths of Incompetence

My broadband connection went down at 12:45pm Friday lunchtime – the system log in the router was showing authentication failures, but I was connecting to the DSLAM. I immediately thought that TalkTalk were having problems with their Radius infrastructure.

Saturday morning and still no internet: slight shivering due to Internet withdrawal was kicking in. I ring the TalkTalk Technical Incompetence Line only to be fed a load of tosh: there must be a problem with my wireless router provider and to get in touch with the manufacturer (honest, I’m not making this up). Of course, I wouldn’t accept this nonsense and asked to speak to a supervisor whereupon the technical non-assistant asked where I was calling from – I replied “Leeds”. He put me on hold on came back too quickly for comfort and said “the internet was down”. I asked which bit of the internet - was it perhaps their Radius servers? He just replied the internet and said engineers were on the case and to try again in 24 hours.

Sunday morning – the pain still no internet – I was starting to hyperventilate

This morning – the horror still no internet – I was frothing at the mouth and had to go out and get a fix.

Scanning various bulletin boards, I found a single note that TalkTalk had been down and now would only work with an old password. I went home and tried my original TalkTalk supplied password and Bob’s Your Uncle I was back on t’internet.

Of course, for security reasons I had changed my original password and it was obvious that TalkTalk had lost a server and re-provisioned everyone with old out-of-date passwords. I guess there are still loads of TalkTalk customers who are still waiting to re-connect. In fact, I know there is because the service is running at 2Mbps tonight i.e. no extra loading on the backhaul.

What a shambolic bunch of cowboys TalkTalk are!!

The comedians are failing in the most basic of engineering tasks – backup/restore and supplying enough capacity. Charles Dunstone should take note that even employing the whole of India in his call centre will not solve the fundamental problem – the TalkTalk infrastructure is undersized and unreliable.

I had a friend around the other day and he asked “What are those IP addresses?” - which are stuck to my screen on a post-it note. I replied “Oh, those are the BT DNS servers - I use them when the TalkTalk DNSes crash”. It is even sadder that I now know them off-by-heart.

Thursday, October 05, 2006


I find it difficult to express how depressed I am with this extremely important appointment:
Ed was previously Senior Policy Advisor to the Prime Minister for Media, telecoms, internet and e-govt. Before that he was Controller of Corporate Strategy at the BBC. He also worked in consulting at London Economics Ltd, as an advisor to Gordon Brown MP and began his career as a researcher with Diverse Production Ltd, where he worked on programmes for Channel 4.

Wednesday, October 04, 2006

Top 6 Vodafone Investor Day Snippets

Rather than a blow by blow account of the three hour Vodafone Mediterranean Festival, I’d prefer to list my list of interesting factoids gleaned from the event.

1. Existing KPIs don’t make sense in a 1.7x multi-sim environment.

This is from the CFO of Vodafone Italy – so it must be true. Some had already drawn the same conclusion months ago and some are currently working on a meaningful set of metrics.

2. Rental Cost UHF Spectrum - €16m per annum.

Vodafone Italy has rented a nationwide channel from Mediaset at a cost of €16m per annum. I presume they have only rented one 8MHz TV Channel in the 470MHz-854MHz band.

Using €16m / annum as basis and applying a discount of 11.3% (OFCOMs estimate of the mobile operators WACC) over 15 years which happens to be the normal length of a OFCOM license gives a value of €113m.

Given that the UK is a bigger economy than Italy, this figure should provide a benchmark for the value of the UK “digital dividend” spectrum which is 14 8MHz channels x €113m. – more or less around €1.6bn.

Of course, the value of spectrum will go up or down depending upon the short term success or failure of the various broadcast MobileTV trials.

My own personal opinion is that I am amazed that Italy has found spectrum for TIM, H3G Italia and Vodafone for their own DVB-H broadcast networks, whereas the UK is struggling.

3. Vodafone Italy & Spain DSL Strateg.

It seemed that the Italians were more excited by no internet and light internet homes than the heavy internet homes. Obviously the heavy internet homes need mega-DSL pipes served by the re-sold FastWeb product, whereas no internet are served by the Vodafone Casa product and light internet by the Vodafone Casa with Internet Box – HSDPA boxes.

I like this strategy a lot: focus on the least competitive element of the market using your own infrastructure. Italy are now up to 362k Vodafone Casa Homes in 5 months which is a pretty good ramp-up.

Spain seemed to have a very similar strategy.

4. Euskaltel MVNO.

Euskaltel wholesale customers (450k) come on-net in January 2007 –nice for VOD shareholders.

5. Ethnic Market.

Vodafone have a successful product in Spain targeting the ethnic community which allows them to make calls to their home country at the same rate as local calls. Italy is launching this product going head-to-head with Wind who have been successful in this market. Spain explicitly stated that dependency on mobile in this segment is huge. I can see a huge market for this product in the UK, especially targeting Eastern Europeans where Vodafone have already networks and presumably could carry a lot of the traffic on-net.

6. UK compared to Italy and Spain.

The Consumer segment in the UK seems to be well behind the Italians and Spaniards not only in performance but also in product development. Some of the UK tariffs such as Stop The Clock and “Free” Weekend Prepaid Calling (subject to £5/week spending) seem to be localized “versions” of long running promotions from overseas subsidiaries. I find this totally bizarre. What has the UK operation been doing over the last few years? Whatever it was – it was not focusing on the operations.

SmartCom / Eircom - Cutting the Ribbon

45k Irish telco users felt the pain of relying on a financially challenged CPS provider yesterday when Eircom cut service because of non-payment of €4m by Smartcom.

A member of the Fine Gael made perhaps the most ridiculous suggestion when he suggested Eircom should be forced to notify ComReg, the Irish Regulator, one month before disconnecting any re-sellers and thereby allowing the customers to make alternative arrangements. Can you imagine the stampede for the exit door if ever ComReg ever made such a notification? Almost certainly such a notification would force the reseller into bankruptcy.

The whole episode and similar bankruptcies in the UK Broadband space show the importance of selecting financially viable suppliers for critical telecommunications services.

UK Fixed Line Call Revenues

There was some interesting data in the detail of the Q1 2006 Data Set released recently by OFCOM.

One was the share of revenue by call type compared to traffic volume. Obviously the effects of “bundled” geographic call packages are kicking in and the highest revenue earner is for fixed companies is in fixed-mobile call revenue. 60-70% of fixed line call revenue are “outside” of the typical bundle and this provides plenty of additional revenue for the bundlers to aim at. You can also see the appeal to Orange, Vodafone and O2 of bringing this revenue on-net and therefore having a big advantage compared to non-mobile players such as TalkTalk, Tiscali and AOL - BT is a different story.

2006q1 call revenues

The above relates purely to Call Revenue which was £1,367m for the quarter and excludes Access Fees which are now at £1,129m. Given current trends, I think within a couple of years access fees will be higher than call revenue in the fixed market and possibly are already if you consider a “bundle” as a fixed fee. The split between residential (£1,528m) and business revenues (£942m) also shows the folly of building a network to support just the residential market – every operator needs the business traffic to fill its’ pipes 24/7 and not just in the evening period.

The other interesting story in the statistics is in the mobile arena with the lack of revenue growth at both Vodafone and Orange compared to the relatively stellar growth of o2 and T-Mobile. If Vodafone isn't careful, they will be losing their #1 market position in terms of revenue to o2 very soon. Vodafone are already rated as #4 in terms of subscribers. This probably accounts for their recent re-emergence in the consumer market.

Although not especially up-to-date, OFCOM provides the best and most “consistent” statistics which and still is the #1 source for historical analysis of the various communications markets.

Tuesday, October 03, 2006

Georgian Handovers

Metromedia has sold its’ portfolio of assets in Georgia for US$480m. The majority of value is in Magticom the #2 cellular operator. The #1 operator, Geocell, is partially owned by TeliaSonera.

The interesting bit is the purchasers: Istithmar is owned by the Dubai ruling family the al-Maktoums, which is interesting in its’ own right with all their current telco investments. The gem is the other partner which is “Emergent Telecom Ventures” - a private equity company run by Mohamed Amersi and Juan Villalonga of ex-Telefonica fame.

When Villalonga was running round the world on a huge spending spree, Amersi was one of his trusted corporate finance advisers. In fact, Villalonga had so much faith in Amersi that he invested US$250m in a private equity fund, Gramercy Communications Partners, back in the bubble days. After Villalonga left, it all ended in tears with Telefonica losing around €75m and the fraud squad being called in. It appears given the lack of noise that everyone is in the clear.

Telefonica did have a lucky escape however, back in 1997 when Amersi advised it to bid on the privatisation of 25% of Syvazinvest of Russia, Telefonica finished in 2nd place in the auction losing out to George Soros who lost a billion dollars and called it “the worst investment in his life”

Villalonga and Amersi together founded another private equity company Emergent Telecom Ventures and began to look to Russia and the old CIS. Emergent back in 2004 got together with First National (Jeffrey Galmond of Megafon fame) to bid for the Metromedia assets in Russia/Georgia for US$300m, the deal was ultimately canned as the Metromedia shareholders thought US$300m was not enough.

Both Amersi and Villalonga ended up on the MegaFon board back in Jan 2005 , Villalonga resigned later that year because of the pressure Galmond was placing on him to vote against Alfa. Amersi has always been a representative of Alfa Bank.

In July 2005, they bought the Russian operations of Metromedia, 71% of an altnet called PeterStar, for US$215m, the other 29% is owned by Telecominvest. As far as I am aware Emergent still own a share of PeterStar.

Amersi is deeply involved in the Russian Telecom scene and seems to be on both the sides of Galmond and Alfa Bank dealings - the chief fighters for control of Megafon. I would not be in the least surprised if when the political troubles die down between Georgia and Russia, the ex-Metromedia assets end up in the hands of some yet to be determined Russians.

The recurrent themes in the Russian telco scene seem to be the expansion of the Big 3 cellular operators across the CIS, the consolidation of the fixed-line altnet business and the forthcoming privatisation of Svyazinvest.