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Thursday, November 30, 2006

3Q2006: MTS vs Vimpelcom:

MTS (MBT) and Vimpelcom (VIP) have just released their 3Q results. They are both the clear market leaders in Russian cellular market and both are floated on the NYSE. Subscriber markets shares are MTS leading with 34.1%, Vimpelcom has 32.4%, the next largest operator is Megafon with 19.1% and the rest has 14.4%.

The main Russia market is probably already saturated with AC&M Consulting estimating that at the end of Sept, Russian market penetration is around 101% with 146.8m subscribers. This figure is vastly inflated with subscribers being defined as having activity within the last 6 months as opposed to 3 months which is the norm in Western Europe. Vimpelcom effectively admit that their figures are 8.86m too high or 22.8%. Even if this rate is repeated across the market and accounting for the predominately prepaid market and the use of duplicate SIM cards – there cannot be a lot of growth left in terms of actual “human” subscribers.

vip mbt 3q

Year on Year Revenue and Profit growth is extremely healthy for both companies, although Vimpelcom is narrowing the gap on MTS. This is probably why MTS reshuffled its senior management in August bringing in people a lot more familiar with Western style marketing.

Future expansion for both is probably outside of Russia in the old CIS countries. Vimpelcom is leading the expansion charge with networks in Ukraine, Kazakhstan, Tajikistan, Uzbekistan, Georgia and Armenia; whereas MTS has networks in Ukraine, Uzbekistan, Turkmenistan and a 49% minority in Belarus.

Ukraine is the largest CIS market and MTS has a healthy 16.4m subscribers in the #2 operator ,UMC, earning US$415m revenues, OIBDA US$234m and Operating Income of US$174m. However, Vimpelcom has only recently launched and has a meager 0.9m subs, US$11.5 revenues and a loss at the OIBDA level of US6m and Operating Income of US$12.5m. The Ukrainian investment by Vimpelcom highlights the huge risk of investing in Russian Cellular. The main shareholders of Vimpelcom, Alfa Bank and Telenor are actually the joint owners of the market leader in the Ukraine, Kyivstar, and at face value it seems crazy for Vimpelcom to enter the market. It certainly has created a lot of fighting between the shareholders which is still not resolved to this day.

In Central Asia penetration is low and both companies have positions in the key market of Uzbekistan. Both are looking at expanding into all countries and recently had a real interesting brawl in Kyrgyzstan. In an unprecedented move the MTS founders have decided to reimburse the US$170m MTS seem to have lost in this unforgettable venture.

Both MTS and Vimpelcom were keen on expanding into the Caucasus and Vimpelcom has recently emerged winner of the early rounds purchasing assets in Georgia and Armenia. It will be interesting to see how much value these acquisitions bring in future reporting.

vip mbt ytd

Both companies shares have performed extremely well in the previous quarter and I’m sure that part of the reason is that all major shareholders in Vimpelcom (Alfa and Telenor) and MTS (Sistema) are either buying shares directly or performing a share buyback programme.

I see very little operationally which will be a problem for either company, both will start generating large amounts of cashflow as the Russian markets saturate. The CIS will provide both companies will plenty of growth, albeit nowhere near as much as the recent growth in Russia.

The main problem with both is that it seems the owners want to merge the companies with Western companies. The MTS owner, Evtushenkov, is pushing for a merger with Deutsche Telekom who used to be a minority shareholder in MTS. The main owner of Vimpelcom, Fridman, is looking for a partner in the holding company, Altimo, for the Alfa group telecom assets. The MTS deal would be potentially quite clean; any Altimo deal would be horribly complex with minority positions in multiple assets who are fighting with their partners. A secondary problem is the real increase in political risk associated with Russia.

In summary, I feel that both are well performing companies with Vimpelcom probably currently slightly outperforming MTS. However, there are large risks of buying into the shares because the majority shareholders desires. They will be extremely interesting to watch over the next 12 months.

Leveraging Multinational Networks

My Cyberfreund, Tim Poulus, pointed out the recent MVNO deal by Maroc Telecom in France on the SFR network. This is actually getting quite interesting because it is an example of a telco multinational leveraging its overseas assets. Vivendi is the majority owner of both SFR and Maroc Telecom.

Tim also points to the success of the Ay Yildiz sub-brand of KPN in Germany. My initial thought on this is that Vodafone must be thinking of a counter-attack based upon the newly acquired Turkish network. Vodafone obviously has a cost advantage in call delivery between Turkey and Germany, but this is probably not enough. Perhaps, Vodafone should add new services such as the ability to transfer money between Germany and Turkey? They could even use their newly developed money transfer product from the Kenyan subsidiary. Pat Phelan over at Roam4Free writes about the size of the opportunity looking at Western Union profits of US$1.3bn in 2005.

In fact why should Vodafone limit itself to Germany? Supply in the UK building and plumbing services market has dramatically improved over the last couple of years with the mass migration of vast number of Polish workers to the UK labour market: in total the Home Office estimates there are 600k migrant workers from Eatern Europe. Vodafone needs to move fast into this market: although Vodafone owns networks in Eastern Europe, it is nowhere near as strong as the T-Mobile.

Vodafone could also develop similar products for the old Commonwealth Countries such as Australia, New Zealand, South Africa and India. There is huge number of immigrants, transient workers and students from these countries.

Vodafone needs to discover new ways of leveraging its size advantage, especially in the current era whereby Brussels is seemingly determined to reduce roaming revenues.

Tuesday, November 28, 2006


Yesterday, in the great petty bureaucrat boxing game the EU Information Society and Media Commissioner Vvyvan Reding landed a couple of heavy blows against the UK regulator, OFCOM.

The first blow was a naked display of power by the EU in publicly chastising OFCOM for trying to allow the UK Mobile Operators to attempt to get a return on their 3G investment. This was very much an appeal to the UK consumers that the EU would get better pricing for your calls than the UK regulator, if they were allowed to be the supa-regulator.

The second blow was by reopening the festering wound that was the 3G spectrum auction. Every EU country received a lot less than the UK and Germany in the 3G spectrum licensing and were extremely upset to miss out on what they thought was an undeserved bonanza for the UK & German taxpayers. The EU strategy is to open this wound at every opportunity in their quest for the power of developing cross-EU spectrum sales.

I still think the reign of Vyvyan is close to ending.

OFCOM & Broadband Regulation

I am getting more and more concerned about the increased volume of comments I am seeing of the ilk: “OFCOM must do xyz to sort out abc in the UK Broadband market” This will be music to a bureaucrats ears and OFCOM should proceed with extreme caution. OFCOM’s mantra should always be “We advise you to choose your Broadband Supplier with great care”. In other words they should actively be promoting that people should take personal responsibility for their decisions. I have admitted that I personally chose TalkTalk, made a mistake and now have been sent to Broadband Jail for the remainder of my contract period (approx. 11 months) sentenced for the crime of diabolical broadband decision making. I am hoping that at the end of my sentence I will become a fully reformed member of Broadband community again.

In my opinion, the sign of a good regulator is one that does the absolute minimum.

One of the key roles of the regulator is to ensure that there is enough information is produced in the market place to ensure that people can make informed decisions. Note, I have said the market rather than the regulator should produce the information. The negative publicity that TalkTalk have had in the marketplace is more than enough to ensure that people will have second thoughts before signing. Charles Dunstone is trying his best to say “We are performing now the same as the rest”, but independent surveys such as ADSLguide suggest otherwise. Also, the importance of the jungle grapevine should not be underestimated: people rely on their communications services whether fixed line, mobile or broadband so much that a popular topic for conservation is becoming “Who has had the worst broadband customer service experience and from whom?”

I’ve also heard many people complain about TalkTalk charges for customer service. I don’t think it is OFCOM’s duty to solve these issues. Already we are seeing Vodafone launch with a Freephone customer support line and I suspect many people will now be growing aware of hidden charges from broadband suppliers.

I’ve also heard people complaining about problems of losing service during the unbundling hand-over. The press is all over this and Openreach continue to publish their weekly kpi’s even though they are shameful in terms of fault rates. The question for the consumer is - do they think the reduction in price is worth the risk of downtime associated with a poor conversion? The problem of insufficient Openreach resources will be sorted as supply and demand is eventually matched in the long term, however I fear that the problems with line transfer will be much more difficult to solve. This is from many years of experience of cabling and having had the anoraky pleasure of seeing inside numerous exchanges. Whenever you start touching things which haven’t been touched in many a year chances are that problems will occur. Of course, Openreach will get better over time, but the fundamental problem is that physical work needs to be carried out on cabling for LLU.

Even where information is currently limited, OFCOM do not necessarily need to regulate.
For instance, it would be extremely useful if ISPs opened their networks to allow third parties to develop tools to provide third party metrics about the quality of the network and reliability of the services. In the near future, I know we are going to see an avalanche of broadband providers blaming everything on Openreach whereas in the majority of cases this is not going to be true, especially when we are talking of line speeds, bandwidth bottlenecks and particular service faults. An enlightened ISP would allow third parties access to their networks to provide metrics. Obviously, the ISPs with rubbish networks would not allow independent metrics to be produced and therefore consumers would be left with a real question mark over them whatever the ISP themselves claim. OFCOM could facilitate the process by getting the developers and ISPs together to agree on a common set of metrics and the required monitoring points. Only in the most extreme case of non-cooperation would OFCOM have to regulate.

The famous case of non-cooperation is the relatively few ISPs who are refusing to release MAC codes for people who want to change supplier. OFCOM have said now they are currently considering whether to change the voluntary code of practice to a mandatory one. Unfortunately for them Openreach have actually decided to act now by charging high prices for ISPs who do not provide a MAC code. This will force all the ISPs to provide MACs. If there is still a few not providing the codes then Openreach should double the prices. Eventually the ISPs will realise the game is up and start play to fair. No need for regulation at all, in fact hitting the ISPs in the pocket is much better than involved the bureaucratic OFCOM processes.

In fact, the only example I can think of where OFCOM should possibly regulate is on BT Openreach charges. This would only happen if BT was proven to securing monopoly rents from its exclusivity on the local loop. However, this is the area that OFCOM have given up the ability to regulate.

Perhaps there is also a case for regulation if BT refuse access to its exchanges to someone. However, this bridge should only be crossed in the highly unlikely case of it happening.

John Caudwell: Class Act

John Caudwell gave away £3.5m to 500 of his staff on Saturday night.

Basically, anyone who had been with his various ventures for 5 years received £5,000 and then an extra £1,000 for every year of service. The maximum amount received was £17,000. This only applied to people below Associate Director level, so the main beneficiaries were shop assistants, call-centre workers and head office admin staff.

Billionaire Caudwell sold his entire operation to Providence Equity Partners and Doughty Hanson & Co for £1.46bn three months ago.

Voip Regulation

I getting worried, extremely worried about OFCOM. After the ridiculous regulation on Junk Food and the inquiry into the BSkyB acquisition of a minority in ITV, we now have what at first glance appears to be a leak to the Times about forthcoming OFCOM regulation on the nascent VOIP market.

“Regulator feels it is time for action”

I think we need something more tangible than a feeling before regulation is implemented. OFCOM needs to have some hard core evidence of wrongdoing or confusion in the marketplace causing damage to the economy.

“Service not working when the buyer’s computer is turned off”

This is ridiculous and treats the early adopters of VOIP technology like imbeciles. Does OFCOM tell the mobile phones companies to advise that you need to turn your cellular on to make and receive calls?

“The phone line going dead in power cuts”

Whilst a computer needs power to operate – what happens if someone is using a laptop? what happens if someone has a UPS? This is strictly speaking not true and again if we draw comparisions with the mobile world – Does OFCOM tell users that you need to charge your battery to keep the services working? Does OFCOM tell fixed-line DECT handset users that your need to keep your fixed line phone charged? This is another recent example of OFCOM treating Joe Public like a moron.

“Inability to call 999”

This is true, but the way round this is to have a quiet word with the VOIP providers and also I’m sure if this is publicised some non-moronic entrepreneur which this country is full of will just develop a 999 gateway for VOIP calls.

We now have a situation whereby a regulator who was famous for a light touch and leaving market forces to weave its wonderful web is now going to be famous to be the most heavily regulated VOIP market in the world.

If true these rumours are an absolute national disgrace. Someone needs to do something before people start recommended the abolition of OFCOM and the transferring of power to regulation-lite Brussels.

Monday, November 27, 2006

Top-Up TV Anytime

An eagle eyed reader pointed out to me the correlation of the new Sky by Broadband name, Sky Anytime and the new PVR service to be launched by Top Up TV called Top Up TV Anytime. Apparently the name of the Top Up TV service has been in the public domain for many a month and therefore if the Top Up TV marketers were even half competent, they would have registered the Anytime trademark for broadcasting use and might be earning a few pounds from litigating against Sky. Personally, I do not subscribe to the view that Sky are merely using Anytime as a method of torturing their ex-executives now running Top Up TV.

They might need every drop of revenue quite soon because I feel that Top Up TV Anytime Service doesn’t have a chance in a million of succeeding. The premise behind the service seems to be that punters buy a PVR for £180, pay a connection fee of £20 and a monthly subscription fee of £10. This is for the nightly download of a maximum 13 hours of content from a distinctly average 11 channels. There is an option of paying an extra £5/month to get a nightly movie from Universal. The PVR has a capacity of around 100 hours of programming and can record “normal” TV content. More detail on the service is available at the excellent Digital Spy site.

I believe initially Top Up TV were actually quite farsighted in renting capacity four streams on the DTT multiplexes when they were going cheap. The problem they have is that the licenses expire in 2010 and are now a lot more valuable. ITV has bought the multiplex that Top Up TV uses and this means effectively that the maximum amount of time Top Up TV have left is 4 years. Again, the conspirators will theorise that BSkyB have just acquired another 17.9% of another instrument of torture. Five became a minority investor in Top Up TV paying £20m for a 20% stake in December 2005. Personally, I don’t see this as a validation of the Top Up TV business model, just the fact that Five had made a massive cock-up with DTT and in effect didn’t have any spectrum for when Digital Switchover starts in 2008.

The other interesting snippet is that Setanta Sports plans on launching its Premiership Football channel on one of the streams in Aug 2007 as well as on Sky and NTL. BSkyB will be absolutely terrified on this service taking off and ruining their franchise. I expect more on this closer to the time with Sky making Setanta’s life as hard as possible. They also broadcast an adult channel called Television X which they charge £10/month or £6/night.

Just to make things worse for Top Up TV is the forthcoming launch of BT Vision, I’m not sure of what this will contain, but I can almost guarantee it will put the Top Up TV offering to shame. There is speculation in the press today of the BT IPTV service on December 4th and I will my powder dry until the official launch.

Qualcomm: An Empire Under Siege

Over the weekend, I was catching up on my missed event list and was fascinated with the Qualcomm (QCOM) London Investor Roadshow from Nov 11th. I was horrified when the CFO, Bill Keitel, mentioned that QCOM legal bill during FY06 had increased by US$100m and was expected to increase by another US$100m during FY07. It is scandalous that the biggest beneficiary of 3G technology seems to be the legal profession.

The reason that QCOM legal bill seems to be completely out of control is that QCOM have resorted to law to defend itself against three big beasts trying to dismantle its empire. The empire itself is worth a lot of money: Friday’s closing of US$37.58 gives a market capitalisation of US$62.1bn. Net cash of US$9.9bn gives an Enterprise Value of US$52.2bn. QCOM generated in 2006 Free Cash Flow US$2.6m so the yield is 5% which is actually quite low for a company in a pivotal position in a high growth industry. To me, the stock market is saying they think QCOM’s empire is in decline.

So who is fighting QCOM and why?

Group 1: Nokia (NOK), Ericsson (ERIC) and Texas Instruments (TXN)

These are the key people complaining to the EU that QCOM is using anti-competitive behaviour. I know that it is difficult to believe that the World #1 Mobile Handset Maker, the World #1 Mobile Infrastructure Maker and the world #1 Mobile Chip Maker are whinging to the EU and the fact they are involving politicians seems to me to indicate just how poor their negotiating position is. However, this is nothing new and QCOM was only allowed a seat at the 3G table in the first place after the US government got involved with its EU counterparts in the debate. Realistically, once the negotiating has got to the level of irrational politicians – any outcome is possible and associated with any uncertainty is a discount in valuation for QCOM.

Two facts stood out from the presentation: NOK royalty payments to QCOM have increased by 900% since 2001 and sales of WCDMA handsets by value (62%) have overtaken GSM handsets (38%) in the June ’06 quarter.

In 2001, NOKs Mobile Phone Division had a turnover of €23,158m and Operating Profit of €4,521. In 2005, NOK divisions relating to the sale of Mobile Phones (Mobile Phones, Multimedia and Enterprise) had a turnover of €27,653m and an Operating Profit of €4,176m. Meanwhile, over in QCOM land over the same period revenues have grown from US$651m to US$7.526m and Earnings before Tax have grown from US$234m to US$3,156m. So, in the five year period since 3G was introduced, NOKs handset profits have fallen by €345m, whilst QCOMs profits have increased by US$2,922m. You can see why NOK would try and renegotiate the 5% royalty rate. The fear factor for NOK is that one day soon all phones sold will contain CDMA technology and therefore they will be paying 5% of revenue for every phone sold over to QCOM.

As a chip maker, TXN is a completely different story and I can only think that their complaint is QCOM leveraging its royalties to give them an unfair advantage in chip pricing. However, I’m struggling to see this in terms of market share: it looks from some TXN investor slides that they have greater than 50% market share in the WCDMA market. In terms of overall wireless market, TXN figures show they had an increasing 18% share whereas QCOM had a declining 14% share.

However, there are two recent wireless chip events which will worry TXN. The first is the design win by QCOM at Motorola (MOT). MOT has traditionally used Freescale (FSL) as their chip manufacturer, which is hardly surprising given that FSL used to be a division within MOT. QCOM will have to work hard to gain a large share of the MOT business, but the door of the MOT building is ajar. Second the demise of Siemens Mobile will cause some turmoil in the GSM chip market, not least for Infineon which was the Siemens chip manufacturer. In fact, if I was a major player in the GSM equipment market, I’d be extremely worried about a major patent holder, Siemens Mobile now part of BenQ, will be looking for a way to earn a return on a loss making investment. The experience of Interdigital with NOK seems to show that litigation has the potential to provide a decent return.

The other factor at play here is the trend towards single chip solutions which requires a lot of innovation, multi-skilled engineering teams and deep patent portfolios to be successful. Both TI and QCOM seem to have detailed plans to make the transition – I’m not so sure about the rest of the industry, but this is through personal ignorance rather than a statement of fact.

All of these factors seem to spell to me that the next step is consolidation within the wireless chip industry. Therefore, I feel TXN will be focussed on more pressing matters than litigation and probably have added their name to the complaint to lend emotional support to their #1 customer NOK. After all, the chance of EU politicians giving a sympathetic ear to a US multi-national is next to zero.

On the infrastructure side, I suspect Ericsson (ERIC) is far more concerned about the rise of the Chinese vendors, especially Huawei. The QCOM business model of licensing patents to all and sundry actually levels the playing field and I think ERIC will want to retain its competitive advantage. In addition to the infrastructure business, ERIC has a fabless chip business and of course retains part ownership of the SonyEricsson mobile phone venture, so ERIC will have the same handset concerns as NOK and chip concerns as TXN.

Therefore, it seems that the stakes are really high in this round of WCDMA negotiations and the positions really boil down to:
• NOK, ERIC and TXN want lower royalties and to keep their competitive advantage against smaller industry players; and
• QCOM want to keep the status quo.

There is plenty of middle ground for a settlement, but I suspect time will pass and a lot noise will created before pen is put to paper on any sort of settlement agreements. Meanwhile the shareholders are hurt as valuations reflect uncertainly and the industry is hurt as profits move out to the legal profession.

Group 2: Broadcom (BRCM)

Although, BRCM is one of the parties crying foul to the EU compliant, it is the litigation in the US courts which is interest. The general impression I got from the call is that the BRCM proceedings are a bit of a distraction from the main event which has next to zero chance of success. QCOM also mentioned that BRCM had been playing foul and had actually stole secrets from QCOM and hence the QCOM litigation against BRCM in January.

I just see the whole chapter as a classic example of an aggressive company trying to enter a market. After all, Silicon companies seem to be more addicted to lawyers than to sand.

Group 3: The Wimax Gang

The WIMAX gang are basically trying to muscle the wireless market away from the current CDMA world and into a not-so-brave-but-highly-lucrative new future. Personally, I think this fight is almost over with CDMA emerging a champion and the WIMAX crowd will probably retreat to some small niche market like backhaul. Given the size of the wireless market and potential for future growth, it is hardly surprising that Intel and the rest of the gang would make a play for the market.

QCOM and the 3GPP/3GPP2 standards bodies have actually put up a really good fight in the technological capacity game. There is now so much confusion and vapourware in the press that no-one can be absolutely certain whose system offers the most bang for bucks.

There is also the myth that Wimax royalties will be low or very close to zero. I actually take the QCOM party line here and believe this is absolute nonsense. QCOM estimated that the WIMAX key patent pool contains 1,550 patents owned by 330 companies. Even if we allow for outrageous exaggeration, we are still left with a large number of companies to keep in check. It will only take one to break ranks and litigate for the whole licensing pack of cards to collapse. QCOM use the example of a bankrupt company taking on the big boys, like the infamous NTP taking on RIM. This is obviously the politically correct version of future events, because QCOM actually claim to hold a number of key WIMAX patents and I have no doubt that QCOM will litigate at a time and place of their choosing. I suspect a part of the increased legal bill at QCOM is being spent prepared litigation against the WIMAX gang.

There is also a general consensus that electronics only play a small part in the overall price equation compared to spectrum acquisition, site acquisition and operating costs. Therefore, it was always vitally important for the WIMAX gang to convince operators to move to their technology. I can only think of one major operator, Sprint Nextel, who has been conned, sorry convinced. Sprint are in such disarray that frankly I wouldn’t be surprised at anything they do and I seriously doubt whether the executive decision makers will be around at the time (if ever) the WIMAX service reaches profitability. If the WIMAX don’t convince anyone else soon, they may as well pack up and go home.

While we are examining the lack of threat of WIMAX to the QCOM business model, we should also examine the frequently heard “CDMA is dying” and will be replaced in the long run by GSM/WCDMA, obviously for the GSM-only crew this is great story to spread.

The basic problem for QCOM is that it is a complete truism that GSM has completely trounced CDMA and TDMA before it as a technology. This is manifesting itself in the economies of scale which are bringing cheaper handsets to key low cost markets. Vivo has struggled so much in Brasil that it is now building a GSM overlay market and seemingly moving away from CDMA. In India, there is a lot of public pressure from the CDMA operators (Reliance and Tata) to lower the cost of CDMA handsets to GSM levels. In China, China Mobile is showing far higher growth than China Unicom, the CDMA operator. Nobody can doubt these facts and it is really vital for QCOM to get the costs of handsets down so that the playing field is balanced. I see QCOM fighting back with its single chip solutions, but whether it is enough will be open to question, after all by the time the single chip solution is released the GSM market will have moved on. The real damage here is that NOK-et-all use the argument GSM has won because of the level of QCOM royalties, whereas the truth may be something to do with economies of scale.

I also feel that with the future deployment of 3G technology in emerging markets that some of these economies of scale questions will be answered. I take the opposite position to the cynics who believe that emerging markets will remain voice and text markets, I think that ultimately 3G technologies will spread and the use in the emerging world may actually be heavier than in the developed world because of the lack of fixed-line infrastructure in a lot of these countries.

In we look at the world’s biggest cellular markets in terms of value rather than volume the situation is rather different. In the USA, Verizon Wireless is the top performer and in Japan, KDDI is the top performer, both of whom use QCOM CDMA technology. In Western Europe CDMA has effectively historically been barred from the market by politicians. Again, we can argue what is the real root cause of this success and I have a lot of sympathy with the conclusion that, for instance, Verizon Wireless because of its management strength would be successful whatever technology they used.

I also think that QCOM will never allow CDMA to die and be replaced by WCDMA in the long run. This is because it needs a technology which provides a test bed for its innovation without having to get the technology approved by a hostile committee. Also, I think Verizon Wireless and KDDI will be more than grateful of the opportunity to differentiate its service, something that the European operators would die for.

In short, I don’t believe that WIMAX poses a short, medium or long term threat to QCOM. I also don’t believe that CDMA will die, although I agree that GSM will enjoy economies of scale advantages for the foreseeable future in emerging economies.

As well as building up legal billable hours, QCOM is busy moving ahead and spreading itself into two key new markets.


I am personally extremely excited about the size of the MobileTV opportunity. In the long run, I see almost everyone, whether on a mobile or some other device, having and watching mobile TV. I think QCOM is playing it extremely smart in designing its own air interface, MediaFlo, securing spectrum and deploying a network. The MediaFlo network build-out was named as the determining factor in the losses of US$133m in the Strategic Investments segment. QCOM already has signed up the key anchor tenant for this network in Verizon Wireless and I predict a lot more regional operators will sign up when the economics are proven in the major cities.

Use of the Strategic Investments division to seed a market with new technology is nothing new to QCOM and to me gives an indication of the size and commitment to specific technologies. It is also a strategic advantage, because you would never see NOK or ERIC taking this approach. For sure they might make a few loans and take a minority position, but securing spectrum and taking a 100% risk is not in their play book.

Qualcomm seem to taking a similar approach in Japan, however this time they are sharing the risk with KDDI which makes sense. I’m also going to predict that QCOM will take a big risk in the UK and take the same approach as in the USA. I’m not sure whether they will bid on the L-Band alone or with BSkyB or in a remote scenario a joint QCOM/BSkyB/Vodafone. However, I’m sure they finally see the opportunity of building a decent sized European business and more importantly beach-head to fortress Europe.

I also think QCOM are being really smart in developing a multi-mode chip for all the competing MobileTV standards. If QCOM can build this at the same price as single mode (DVB-H, DAB) chips then it will prove that supporting multiple standards is not as big an overhead as some people make it. It also de-risks the decision to put MediaFlo support in handsets for the manufacturers. Most ingeniously, it makes the decision of air interface purely on the performance of the air interface. All I can say is that QCOM must be confident of MediaFlo outperforming DVB-H.

Operating Platforms

I’m not sure to how describe the BREW and uiONE software platforms, but they seem to gaining traction, of note is the recent wins at o2 and TIM, these are big wins. It is apparent that QCOM is taking a radically different approach with supporting operators to NOK-et-all - this is a huge strength of QCOM and the benefits should be strong in the long run. Successfully working with Vodafone to launch integrated circuits for PCs and providing all the assistance to design an extremely cheap Vodafone branded 3G phone. This has been done at a time when tensions between the operators and traditional handset manufacturers are high and more or less guarantee a willing ear for any new technology proposed by QCOM to the operators. I suspect that QCOM is trying to squeeze the value chain into Intellectual Property Owner, Chip Maker and Software Provider ie Qualcomm, Device Assembler ie Huawei or whoever and Service Provider ie O2, Vodafone-et-all.


In the long run that the company with largest amount of brain power will win the day and there can be doubt that some of the biggest brains and innovators in the cellular industry reside at the QCOM headquarters. It is for this reason that I predict that QCOM will ultimately prevail and claim more and more of the wireless value chain and profits. However, I also believe that the general growth in wireless will allow plenty of profits to keep the NOK, ERIC and TXN shareholders happy if not ecstatic. This outcome is far from certain and a very risky call - in fact far too risky for me to recommend to anyone purchasing QCOM shares, let alone NOK, ERIC or TXN. What is certain is that the big winners in the short term will be the patent lawyers and political lobbyists, however I don’t know any publicly quoted one’s to recommend.

Sky Anytime

Sky appears to have re-branded Sky by Broadband and Sky Mobile service to Sky Anytime. I must confess to thinking to the original “Sky by Broadband” name a little naff and limiting. Obviously, the Sky marketing folks have put their collective brains together and come up with something a little better.

Next, we need the Sky technical brains to exercise their grey matter and get rid of the rubbish P2P software as a means of video-on-demand distribution. I have nothing against the software per se, I just object to sharing my scarce TalkTalk bandwidth. And, this is before the "IQ challenged" at TalkTalk start throttling my P2P applications. However, I get a funny feeling that a non-P2P option will only exist for Sky Broadband subscribers.

I have no doubt that Sky is creating two classes of citizens those who pay for the Sky broadband distribution network and those semi-believers who subscribe to Sky, but don’t take Sky Broadband. The latter will be forced to share their bandwidth with the rest of the semi-believers, further reinforcing the value of the Sky bundle.

Saturday, November 25, 2006

Nice Cartoon from Blaugh

This is The Future

Friday, November 24, 2006

NetServices plc – Major League Problems

Netservices, a small UK wholesaler, announced their maiden annual results yesterday and the results were not pretty with a loss of £3m. Even worse is that they seemed to have eaten most of the cash raised from their IPO. As at 31st Aug, NetServices had £1.35m cash on the balance sheet; net cash is £629k after loans and lease agreements are taken into account. This compares to cash outflow of £4.1m for the full year; this cash outflow was financed by £4.2m raised during the year with their IPO on AIM.

In the outlook statement there is not much hope for the future in the current format:
“Continued corporate activity in the sector has seen consolidation of most of the larger DSL suppliers, including only last week BT making a recommended offer for Plusnet plc. Whilst satisfied with our current trading performance we continue to explore all opportunities to maximise shareholder value.”
This is classic stock exchange speak for "We are looking for a buyer, anyone interested?"

The woes of NetServices can really be put down to “Free” Broadband UK launch combined with the cost of launching new products such as their wholesale VOIP platform. Netservices made a provision in the accounts of £1m for bad debts related to wholesale broadband. Only last week, Netservices cut off one of its customers Biscit leaving around 9.5k punters in Broadband Hell. The comment on Biscit in the results was very interesting:
The impact of the decision made and announced last week to disconnect our largest wholesale DSL customer, Biscit CSP Limited (formerly v21.co.uk ltd), has yet to be determined. Initial indications are that about a quarter of the customers have so far signed new contracts with EezeDSL, which will lead to a shortfall in future monthly turnover; however, cost savings available in the network are expected to offset this lost income.
From my cynical viewpoint, it does look to me as if the whole EezeDSL process was designed to retain as many customers as possible for Netservices, despite the protestations that it was impossible for NetServices to issue MAC codes and therefore allow the punters to easily swap to any other broandband provider. Also, Netservices are complaining about the new BT Wholesale IPStream tariffs:
The announcement also includes a proposal to charge for MAC codes, effectively an exit charge when changing suppliers.
I have no sympathy for Netservices whatsoever, because the BT proposal is only for companies who refuse to issue MAC codes, not as Netservices imply for any people who leave any broadband services The BT measure is meant to force all companies to issue MAC codes for customers wishing to transfer suppliers and to stop incidents like 8.5k punters being in Broadband Hell.

In fact, the more I look at the whole of the situation, the more I think the ultimate owner of the EezeDSL service, the infamous Dominic Marrocco, will step in with a rescue package for Netservices when they run out of cash taking the remains he thinks are worth something. Dominic Marocco made his first million when he sold FirstNet to Pipex back in 2003. My favourite Marocco story has nothing to do with ISPs and is when he bought Mike Tyson's old Las Vegas property.

New Media – Old Union Problems

I was incredibly surprised this morning when I read that the National Union of Journalists (NUJ) was to ballot its members at AOL UK on strike action. The problem seems to be the confusion arising from the sale of part of the business to Carphone and the lack of clarity from the management of what is going to happen in the future.

I understood that the content side, presumably where all the journalists reside, is remaining with AOL Time Warner and therefore assumed would be unaffected by the sale of the access division. If this is true then why redundancies?

I must admit to being a little confused myself. Perhaps the content division is not doing as well as Time Warner would lead us to believe.

Thursday, November 23, 2006

More on Safaricom and Vodafone Kenya

I have been in touch with Vodafone Investor Relations again about the Safaricom interest, the party line still is:
We have an effective interest of 35%. There is no further information
Well an accountant in Kenya called Pesa Tu has explained how theoretically both Vodafone and the Kenyan government can be telling the truth.

I have re-drawn his chart to make it more legible:

There are three facts you must keep in mind when looking at this chart:

1. According to Safaricom, the Shareholding is 60% Telkom Kenya Ltd (TKL) and 40% Vodafone (K) Ltd which is true.

2. According to Vodafone Plc. Annual Reports, they acquired 5% indirect interest in Safaricom from Mobitelea Ventures in 2003. Note, they said indirect interest not direct interest. Meaning that Mobitelea Ventures has an indirect interest in Safaricom. i.e.they don’t directly own shares in Safaricom but in another company (VKL) that owns shares in Safaricom.

3. The only way to have an indirect interest in Safaricom is through Vodafone Kenya Ltd (VKL). TKL’s stake is still the same as at the time of the Original Agreement in 2000.
Thereby Vodafone PLC can own an indirect 35% (87.5%x40%) in Safaricom. In effect there are many ways in many countries with very limited disclosure that the Mobiltea holding and the ownership of Mobiltea Ventures Ltd can be hidden. Also, more striking is that Vodafone plc is of such a size these days, they can buy out Mobiltea and not reveal how much they paid for the equity because the acquisition will not be material in the overall picture.

We probably will never know who owns Mobiltea Ventures Ltd or how much profit they have made on the transaction.

Cure for Poor Carphone Service

A reader has lifted my depression after last night’s fiasco in Brisbane, he pointed me to a story from The Bromley Times about an irate Carphone Warehouse customer.

I just admire the imagination of the British Public – brilliant, absolutely brilliant.

Telco 2.0: Brain Dump

I got involved with a little brain dump exercise with the Telco 2.0 team yesterday which was quite fun and I quite like the result.

Wednesday, November 22, 2006

260 Not Out

As much as I love the communications scene, something far more pressing is going to dramatically affect my productivity in the short term.

This may seem a little like blogging suicide especially as my audience has recently grown to all time highs. However, I feel that one of the benefits of non-commercial blogging is that I don’t guarantee the volume, quality or even consistency of my opinions. I hope that none of the regular readers feel too neglected over the coming months and will understand my predicament.

Keep Smiling and let’s hope the Ashes will be coming home in the New Year…

Branson Rejected and Mr Angry.

NTL has been jilted by ITV. It has provoked an unbelievable outburst by Richard Branson seemingly blaming all of lifes woes on the Murdochs – personally I do not think he has understood the message given to him by the ITV board.

All I can think is that Branson can’t have a lot ammunition to fire is he is already saying that the Murdoch are responsible for the demise of democracy in the UK. This is a bit rich from someone who made his original money promoting Anarchy in the UK.

I can’t wait for the next episode.

Tuesday, November 21, 2006

More MVNOs For Sale

According to Telegeography, Debitel has its non-German MVNO operations up for sale. These include:
  • Denmark - 400k customers – networks: TDC & Sonofon aka Telenor;
  • France - 124k customers -network: SFR;
  • Slovenia - 90k customers – network: Mobitel; and
  • Holland - 1.15m customers – network: Telfort aka KPN
It is interesting that a Private Equity company, Permira, owns debitel and they also have a share in the consortium that bought TDC last year. It is becoming more and more apparent that the death of the MVNO in Europe is becoming closer and closer. The first wave of this is “value-based” MVNOs who compete on price and have become squeezed as the operators have found their way in every niche of the market as market saturation as occurred.

Permira only hope for a decent return is playing the major network operators off against one another to get a short term uplift to their customer bases. For instance in Holland, Vodafone, Orange and T-Mobile would love the rush of 1m customers. Even better is that this would hurt KPN. Similarly in Denmark, Telenor and TDC should fight fiercely for the base. The Norwegian Post is reporting that Telenor has bid NOK1bn (£81m) for the Danish subsidiary.

It is interesting that Private Equity is leading the consolidation in the European Telecoms industry. As well as Debitel and leading the consolidation of the MVNOs in Europe, the Private Equity boys also seem to have TIM Hellas up for sale. Next on the cards will be the break-up of TDC which is also owned by Private Equity.

It is interesting that most commentators have always focused on the major networks buying the minors and selling off overlapping properties as the route to consolidation. In reality, the Private Equity groups may perform this function for the majors and in the process earn a very large commission.

Peter Erksine opined today that:
“There's a lot of talk about consolidation in Europe and in the UK, if you look at the mobile phone industry, you could put forward a strong case. Virgin Mobile has been very, very quiet before and since becoming part of NTL...and if [Hutchison's] 3 was a conventional western stock market listed company then the model wouldn't work and they might say it's time to get out"
I can certainly see the point with H3G, but Virgin Mobile? I see Virgin Mobile being extremely vigorous in the market place with quad play offerings through ntl, launch of MobileTV, heavily subsidized contracts through Carphone Warehouse and leading in the Christmas prepay Suicide Subsidy Stakes. It may be an irrational strategy, but it is certainly not quiet. Perhaps, Erksine is just messaging the ntl bondholders that Virgin Mobile is actually currently investing a lot in customer acquisition and yet is going backwards in the marketplace.

If Virgin Mobile fell in the UK – it really would be time for administrating the last rites on the MVNO industry.

Ntl / Telewest commences Throttling

No we are not talking about James Murdoch, we are talking about their Broadband products. Ntl & Telewest have made much marketing noise about their “unlimited” service. Well, it is limited now.

I cannot think of a one large Broadband supplier who now do not deploy bandwidth management techniques. A little known consequence of this is that it might effectively kibosh the BBC planned p2p distribution method of on-demand content and force them to negotiate with the big ISPs.

Effectively if every ISP in the UK is allowed to throttle to their hearts content discriminating against non-favoured traffic The UK ISPs will achieve their US colleague’s dreams by the backdoor.

According to OFCOM, if anybody who wants to complain they can use Competition Law. This is a great idea for the mega-corporations, but for Joe Public is a complete non-starter.

Vodafone Business Juggernaut Rolls On

Vodafone is rightly criticised for its inadequacies in the UK consumer market, but it never seems to get complimented for the awesome market power of its business unit. This is the engine that delivers UK leading turnover and margin. Hidden within the Vodafone Interims was an interesting factoid that UK Enterprise customer market share was now 46%, an increase of 3% y-o-y, with service revenue growth of 3.1% y-o-y.

Vodafone is by far and away the leader in the 3G data card market, I’ve heard market share figures of 80% bandied around. (If anyone has more accurate and uptodate market share data feel free to email me.) It is therefore no surprise that Vodafone UK announced yesterday two software acquisitions and an exclusive software deal.

The first is a software house, Aspective, which seems to specialise in mobilising business applications.

The second is a full fixed and mobile service provider called Isis Communications who apparently have over 38000 customers and seem to own a nifty billing platform.

The exclusive software deal is with a company US company called Fiberlink who seem to provide a highly rated security solution for remote access of workers. Vodafone has a three years exclusive deal and has already sold the solution into the Financial Services Industry.

All the deals seem to make theoretical sense although no price data was released. There is also a mysterious reference to the connection with the MobilePlus strategy. I not sure if this connection is real or if you just have to claim it is in order to get anything approved internally at Vodafone.

More on H3G Skype Service

Moving on Dean Bubley's revelation that H3G's Skype service is actually circuit switched not VOIP, apparently it uses a solution from a startup company called iSkoot – this is the software that provides the interface between the circuit switched and packet worlds.

Being an eternal pessimist, it looks like a high risk option if industrial scaling is required.

Stumbling at the First Hurdle

OFCOM is known throughout the tiny world of communications nerds as a breathe of fresh air in a sea of bureaucratic bunglers. I was immensely worried when a Labour Party apparachnik was appointed to be top dog and feared that this country’s cancer of bureaucratic inference would spread to the communications sector.

Well, it looks as if my worst fears are being played out at the first test of his judgement. The only need to order an inquiry into the BSkyB acquisition of a minority stake in ITV is if someone wants to stand in the full glare of the media which unfortunately is one of the saddest traits of today’s generation of UK bureaucrats. Only an idiot can realistically say that a change of control has happened at ITV.

Ed Richards get a grip before you blow OFCOMs legacy.

Update: Someone has emailed me and said that technically this is in fact the second hurdle; the first was the partial ban of Junk Food Advertising which had already hammered another nail in the ITV coffin.

Monday, November 20, 2006

Charles is Back

After a gap of 73 days, Charles Dunstone has made another posting on his blog. It would be very easy to be completely sarcastic about this gap, but I won’t – instead I think we should celebrate that a UK CEO sees fit to blog even when he is facing a tsunami of negative public opinion.

Charles is even playing fair and provides a link to the excellent Martin Lewis Money Saving website which provides a warts ‘n’ all review of the Carphone service in which the basic conclusion is that if you want something really cheap go for TalkTalk, if you need something reliable chose someone else.

If I was going to be picky, I would say that the evidence that Charles understands the meaning of quality customer service is limited. He is still persisting with the image that the key variable is how long it takes for someone to answer the phone, not that the problem is solved first time or even horror or horrors the ratio of calls to customers is declining because the base is becoming happy or worst of all the public customer satisfaction surveys are showing TalkTalk climbing the badboy list. I know he is not stupid and therefore I’m sure he has these metrics to hand. The only conclusion I can draw is that the statistics are not showing improvement and therefore are not ready for prime time disclosure.

I also notice that Charles writes a cautionary note about the LLU process when the copper pipe is transferred to Carphone electronics. He hints that all is not going smoothly, Openreach themselves are publishing statistics that show only 1 in 5 fully unbundled line transfers is right first time. Of course on Planet Carphone, if problems occur during the transfer process it is all the Openreach engineers fault. The tales of woe are growing on the bulletin boards and when Charles Dunstone mentioned that TalkTalk could be his personal Iraq – I think he may be closer to the truth than even his worst enemies would wish on him. I’m personally betting that a negotiated withdrawal will occur within three years.

Expensive Day in Isleworth

Just as the ITV Share Certificates were being delivered down on the banks of the Thames, the Stock Market was passing its verdict on the true value of ITV and it is not pretty for BSkyB shareholders.

BSkyB-ITV – Where is my Mind?

It is a good job that the Sky shareholders are in for the long haul and trust the vision of their leaders. Could you imagine the outcry in tomorrow's paper if Fidelity or Standard Life were on the BSkyB share register?

Vodafone Kenyan Compromise

The East African is reporting that Vodafone and the Kenyan government has found a compromise solution for the pressing needs of the government for cash to restructure the struggling fixed line operator Telkom Kenya.

The solution is let the market determine the value of Safaricom via an IPO and also allow the government to use 9% of its shareholding to guarantee a US$80m loan, the proceeds of which will be used to pay for firing of 6,000 workers at Telkom Kenya. Vodafone retains pre-emption rights on all the rest of the shares.

This seems to me to be a sensible solution and is a step in the direction of Vodafone taking taking control without paying a huge premium to the government. As night follows day, once the government gets the taste for raising badly needed cash from the disposal of equity in Safaricom, it will continue to do so until its ownership dwindles to 0%. When the price of Safaricom does not reflect the current bubble prices for African Mobile Assets, Vodafone can swoop and take full control.

There is even progression on the mystery owner front: the East African has an article on the 5% mystery owner and surprise, surprise they think it is the entourage from the previous Kenyan government of President Daniel arap Moi via what looks like a special purpose vehicle called Mobiletea Ventures. According to Vodafone Accounts, Vodafone acquired 30% of Safaricom and Mobiltea 10% when the government partially privatised the company in 2000. Also, they place the Jan 2003 Vodafone purchase of an additional 5% shareholding from Mobiltea Ventures to during the replacement of President Moi regime with the current President Mwai Kibaki. However, the East African reveals:
“According to information contained in the disclosures that Safaricom Ltd made when it went to the capital market for the first time in May 2001 to issue a Ksh4 billion ($54.8 million) bond, Vodafone plc purchased a 40 per cent stake in Safaricom in July 2000 for a sum of $42 million.”
Something smells very bad here and it is time for Vodafone to come clean before the whole escapade becomes a huge embarrassment. It is amazing the results that a little pressure delivers. The East African asks the critical question:
"Questions still remain as to whether Mobitelea Ventures Ltd actually paid for the shares in Vodafone Kenya or whether the shares were given to them gratis in exchange for services they may have rendered to the British investors."
I'm sure that there is a reasonable explanation of the difference in percentage holdings due to different classes of shares and holding companies, but key is whether any transactions were performed at a fair value.

Canning Fok: It's just a flesh wound!

Listening to Canning Fok at the launch of the X-Series reminded me of the Black Knight in Monty Python and The Holy Grail.

Under normal circumstances, the list of woes (late launch, poor handsets, huge subsidies, huge churn, repeated missing of financial targets, failure to IPO Italy) of H3G is longer than any telecoms executive could possibly be comfortable with and yet the attitude of Canning Fok seems to be that “Hutchison looks at the long run and has been proven correct many times before and all the setbacks at H3G should be seen as mere flesh wounds.”

I took the whole X-Series launch event as a complete volte-face for Hutchison equivalent to the Italians changing sides at the end of the Second World War.

It is hardly surprising that the Internet High Command were present and egging Canning Fok on; the presence of Nokia and SonyEricsson would have been slightly more of a concern to the Mobile High Command. The Internet Crowd have been looking for a mobile operator who would allow them free and unfettered access to their networks since the turn of the century. They are doubly keen now that it looks as if Wimax and Muni-Wi-Fi face an uncertain future at best.

The interesting part was that no pricing or forecasts were revealed and therefore it is impossible to calculate the potential damage which will be done mobile industry business models. The comment from the Microsoft representative was intriguing:
Since we switched our Messenger service to the 3 network people are able to message more often and we have seen 100 million Messenger conversations on the 3 platform since August in the UK alone. Every day that is people sending 1 million instant messages to their friends, to their colleagues and as they plan to go out to meet them, go to the movies, have dinner or whatever it is they want to do.
This will have sent shivers down the spine of Peter Erksine. O2 is the 800lb gorilla of UK Text Messaging handling 35% of all text messages. They are developing a next-generation IP messaging platform which I’m sure does not give a prominent place to MSN, Yahoo or Sykpe. Can you imagine the pain if all this SMS traffic moves to MSN? I do not know of one teenager who actually prefers texting to MSN. The functionality is in a different league and in additional the cost equation will probably be compelling.

I am reminded of the Uruk army storming the gate at Helm’s Deep in The Two Towers. Will Gandalf and the Riders of Rohan come to the rescue? The Uruk’s are of course the Internet Barbarians with their scorched earth policy to any telco business. The only way out seems for Arun Sarin and the Vodafone team to buy out the trouble makers from Hong Kong. The X-Series launch may not yet prove to be the decisive battle in the internet – mobile wars.

Sunday, November 19, 2006

BSkyB / ITV: Strategically Brilliant but Really Expensive Move

I think everyone was surprised by Friday nights announcement that BSkyB had acquired 696 million shares of ITV at a price of 135p giving it 17.9% ownership. It was looking increasingly likely that ITV was going to bought by either NTL or RTL. The total cost of the transaction was approximately £940m which BSkyB plan to be paid for out of an existing borrowing facility.

RTL is Europe largest free-to-air (“FTA”) broadcaster and part of the Bertlesmann group. It owns the least popular FTA channel called Five which it would probably have to sell if it buys ITV. BSkyB has had opportunities in the past to buy Five and has shown no interest. I don’t believe BSkyB for one second is worried about RTL buying ITV.

I believe the whole rationale behind the transaction is to keep both NTL and ITV weak and thereby keep the BSkyB PayTV money machine rolling on. BSkyB generated just a touch over £1bn of cashflow from its PayTV operations and I suspect BSkyB considers a NTL/ITV merger as a potential long term threat to this franchise. Personally, I think a large part of the BSkyB success can be attributed to its near total domination of “live” Broadcast Sports Rights in the UK. NTL/ITV could theoretically have a large enough market to break this near domination in the long run. Even if the risk is slight, it is enough for BSkyB to spend £1bn on what I think is a spoiling strategy.

The twaddle on the Friday Night call about ITV being a quality company and BSkyB wanting to support the board is just a tactic to avoid the transaction being referred to the “Office of Fair Trading” who rules on UK Competition Policy. BSkyB has not contravened any OFCOM Communication ownership rules although it was claimed by NTL that Sky had broken the spirit of the law.

The main thrust of the counter attack this weekend seems to come from the Virgin Group, who is the major shareholder in NTL and has always had an eye for UK Broadcasting assets. I suspect that this is because NTL has very little political or consumer support here in the UK. It is much better PR for Richard Branson of Virgin, the UK favourite entrepeneur, to stand up and claim this is manoeuver by the Murdoch to totally dominate the UK Broadcasting market and therefore the politicians should force him to sell its shareholding in ITV and allow Virgin on the cheap to run ITV.

All nonsense of course, but I suspect that Virgin/ntl cannot now afford to buy BSkyB out and therefore the only course is political lobbying not financial logic. This fight could get really nasty and will definitely be fought in the public.

There is another problem that Virgin/NTL face and that is if BSkyB prefer a weak standalone NTL and ITV, so will the BBC and Channel4. Also, the last thing that the BBC will want right now is another review of the UK TV market, especially at such a delicate time of the licence renewal negotiations. I’m also not so sure that Virgin/NTL can rely on the government for support, especially with the likelihood of general election in the next couple of years.

On the Friday night conference call, Jeremy Darroch, said the net cost of the investment to BSkyB in 2006/7 would be £10m and in 2007/8 would be £14m. This is patent nonsense:
• BSkyB will have to “mark-to-market” the investment in the accounts. Therefore BSkyB is adding a non-controllable non-cash variable to its profit equation. The profits will rise and fall with the ITV share price;

• The £1bn Revolving Credit Facility that BSkyB has utilised charges interest at 0.5% over LIBOR (currently around 5.3%), so the cost of £940m per annum is around £55m. ITV paid a final dividend last year of 1.8p/share and this year an interim dividend of 1.35p which gives total annum dividend income for the stake of around £22m. This gives net cost per annum of around £33m. Of course, BSkyB has used some of its cash balances rather than completely using the borrowing facility for the whole amount and therefore the “net cost” looks a lot better;

• Really BSkyB should be using its weighted cost of capital (“WACC”) for the true investment cost. I can’t believe that the BSkyB WACC is below 10% - so at a minimum, this investment will be costing around £100m in WACC terms; and

• BSkyB can buy up to 19.9% which implies an additional 2% purchase or around £110m is on the cards.
The other way to look at the investment is that the BSkyB annual cash inflow was £1bn in the 12 months to June 2006. An investment of £1bn in a minority equity position in a competitor to protect these revenues is not a lot to pay in the long run. It also puts the investment of around £650m in broadband into context.

BSkyB once again is showing the whole of the UK Communications that is prepared to invest heavily to secure its long term future. Having said that, I am really looking forward to the battle between Branson and Murdoch.

Friday, November 17, 2006

Virgin Mobile Christmas Risk.

This Christmas Virgin Mobile is back heavily subsidising Pre-pay handsets. This is the exact opposite position to all the major networks. Vodafone came out with last week stating that a SAC for pre-pay of £20 is sustainable. O2 came out with that they wanted to push the SIM free model. This means that the majors are looking to pay indirect channels very little commission for pre-pay sales.

The Christmas Pre-pay Sales are legendary for giving the network executives sleepless nights. I expect the Virgin Mobile team will be desperate on Boxing Day to find out how many new handsets put into the market are actually being activated and used.

The problem is sixfold:
1. Boxbreaking. This is now a highly sophisticated business operated by gangs who sell the phones abroad and can work on margins as little as £2/handset.
2. Upgrades. Customers buy the handset, discard the Virgin SIM and use their existing one. Yesterday, I went into the local Carphone Warehouse and asked the price for Cathy Kitson exclusive on prepaid. The Sales Attendant said the best price was on Virgin and I mentioned my wife might prefer to keep her Vodafone number. “No problem, just swap the SIMs - the phones are unblocked” came the reply.
3. eBay Resale. There is a big danger that discounted prepay handsets find their way onto eBay for resale by individuals looking to make a few quid for Christmas. This is greater for exclusives and collectibles - a search for Cath Kidston mobile phones show a brisk trade is already occurring.
4. Dealers buy the prepay, because it is cheaper than they can buy wholesale or because it an exclusive and then sell it on contract where they attract big commissions.
5. The usage is so low that the subsidy is never recovered from air-time margins.
6. Own base churn. The subsidy is effectively given to an existing Virgin customer who would have remained on the network and are just upgrading their handset cheaply. Although Virgin keep the customers, margins can be lost for a substantial period.

Virgin has placed most of the subsidy in a scheme called “drip feed” whereby for instance £35 airtime credit is released to users in £5 lots over 7 months as long as the SIM and mobile phone match. In other words people can’t place the SIM in another phone and get the credit. This scheme seems to me to offer a lot of protection against the typical box-breaker who typically rings a premium rate number that they own to collect part of the credit from the airtime credits.

I think ntl are more or less committed to producing quarterly revenues and profit (of a sort, operation income before depreciation, amortisation and other charges or “OCF”) figures for Virgin Mobile. Already, they are predicting OCF to drop to £6m in Q4 from £16m in Q3 because of acquisition costs. It will be extremely interesting to see the progression of the Virgin Mobile figures over the next 12 months to see whether this Christmas Risk actually translates into higher revenues and profits.

Vodafone & HWL

A lot has been made in the press about the possibility of Vodafone buying H3G UK. Arun Sarin mentioned post interims that if 3 UK was for sale then he would definitely be interested. Canning Fok fired right back with 3UK was not for sale, but Arun Sarin has a large wallet. This to me signifies the start of negotiations.

The biggest obstacle to sealing a deal is determining a price that 3UK is worth without HWL losing face publicly and highlighting the lack of return of the overall investment. If HWL packages together the whole of the European Operations including assets in Italy, Ireland, Austria and Scandinavia, I still see cannot HWL getting a return on its investment. Vodafone would want to factor in that in the medium term there are some EuroAssets that it would not wish to own. I feel Vodafone would immediately want to dispose of Austria to its local partner Telekom Austria and probably would try and auction the Scandinavian assets to TeliaSonera, Telenor and Tele2.

In addition, I do not feel that Vodafone could buy the European assets without a major investigation by national regulators and worst of all, Brussels. I don’t think this would be a problem in the UK which would move to a four MNO model but the rest might object out of principle. In Ireland which would move to a three MNO model, Eircom would almost certainly object. In Italy which would move to a three MNO model with no MVNOs, Telecom Italia would want a quid-pro-quo for not objecting and Wind would be livid. It is clear to me that strategically the market is crying out for consolidation in these countries and the end of the day every operator will benefit from less competition. I’m not sure whether Brussels and the national regulators will necessarily go along with competition being so reduced in several markets.

There are a lot of potential hurdles to Vodafone owning HWL European Operations, but the biggest problem is that HWL would almost certainly lose money on its overall investment. I’m not sure HWL is that desperate for an exit. I feel the probability of a deal in this format is small.

There is also a possibility that HWL could bundle its emerging market portfolio into the deal in the form of HTIL. Again, there are large hurdles to this transaction. The first is HTILs major asset which is India competes directly with Vodafone major asset, Bharti. Although I think Vodafone would be look very closely at swapping a majority ownership in the #3 player for a minority in the #1. I also feel that some of the HTIL’s assets are in fact basket cases and more a liability for Vodafone: these include assets in Israel and Thailand. However, there are a few prime growth assets in Vietnam and Indonesia. Of course, there are also HTIL saturated assets in Hong Kong and Macau. In fact, HTIL looks a closer fit currently to China Mobile aspirations than Vodafone. HTIL also has the problem of dealing with two partners who do not seem happy at the moment – Orascom and Essar of India. Again, I think there is a small probability of doing the deal because of the complexities.

Despite all this, Li Ka-Shing and Sir John Bond will know each other extremely well given their backgrounds in Hong Kong. If anyone can manage to mould a deal appealing to both sets of shareholders, dealing with the political complexities and unruly partners, it is Sir John Bond and Li Ka-Shing.

Thursday, November 16, 2006

BT Commences Hoovering Operation with Plusnet

BT has made an offer this for morning for Plusnet valuing it at £66.7m. Given that BT already has received 25.2% acceptances for the offer it can be more or less guaranteed success. I've believed that BT will follow the strategy of KPN for some time.

At 30th June, Plusnet reported in its interims a net cash balance of £3.8m, so EV will be slightly below £66.7m. For the half year PlusNet reported Profit After Tax of £2m which gives an approximate P/E ratio of 16. Turnover for the first six months was £22.5m. The most important part for BT is wholesale revenues that BT has now guaranteed. Unsurprisingly, these wholesale network costs were PlusNets largest item in its cost base at approximately 60% of total cost base of £15m for the first six months or around £18m per annum. This figure is “guesstimated” from data within the presentation pack of the interims results announcement.

BT plan to keep Plusnet as a brand and maintain the operation in Sheffield. However, I’m sure that Tiscali in time will lose their LLU contract with Plusnet and all Plusnet's base will remain on-net. If the deal is completed by Christmas and at the time of Q4 subscriber data being released, I'm sure we will find out that BT will be back on top of the UK market overtaking ntl.

I’m also sure a few other small to medium ISPs will be studying the deal and wondering whether now is the time to cash in their chips.

Wednesday, November 15, 2006

Crumbling Biscit

9,500 Broadband Users of Biscit (aka v21.co.uk) are left without service as the wholesale DSL provider, Netservices plc, have withdrawn their services.

Netservices is a small loss-making data services company who only floated on AIM in March. In its interims in Feburary, it claimed 54k wholesale DSL customers presumably through small ISPs. In the Pre-Close Trading Update issued on the 13th September, it made a bad debt provision for £750k and commented:
The 'free' broadband season arising immediately after our IPO has destroyed more reseller businesses than anyone in the sector appears to have anticipated, ourselves included.
Definitely not a company that the faint hearted should consider investing in.

This is after last weeks failure of Fast24. The smaller reseller market is really struggling.

BT Wholesale IPStream Price Cuts

Mr Saffron from ADSLGuide has done a fantastic job in modelling the effect of price cuts from BT Wholesale. The cuts vary according to the bandwidth consumption and are in the order of 18.3% to 48.4%.

This may sound significant but they are nothing compared to the general price disinflation in the voice market. Also, bear in mind the last time the IPStream pricing changed was April 2004. Back then, there were only 2.45m DSL connections and most were being provisioned at 500kbps.

However, the LLUers should not despair too much about the price cuts. IPStream is still really expensive especially for large consumers of bandwidth. Given that a decent quality film comes in at around 4GB, LLUers who want to offer Video-on-Demand services will still have a substantial cost advantage especially if they own their own backbone.

Telekom Austria: Fantastic Footprint

I have always been impressed by the discipline of the expansion strategy of Telekom Austria. They have basically focussed upon the rapidly growing economies of South East Europe where mobile penetration has typically been low. Additionally, they have been creative in overcoming difficulties in Bulgaria and more importantly have been unwilling to overpay when the prices get too steep as with the auction of Mobi 63 in Serbia. This expansion strategy is now starting to pay dividends to the shareholders.


In the 3Q results, Operating Income was up from €264.1m to €281.6m – a healthy if unspectacular growth of 6.6%. Due to a combination of the growth in underlying earnings and the ongoing share buyback programme Earnings Per Share increased 16.6% to €0.45 from €0.38. All of the growth in the 3Q results came from recent expansion into Bulgaria, Slovenia & Croatia with each market showing improvements. In addition, the revenues at the core Austrian wireline operations remained pretty stable due to increased wholesale voice traffic delivered to Eastern Europe. Profits in the Wireline business in Austria were substantially down (€199.4m vs €218.8m) due to increased labour costs, mainly through one-off redundancies and share option payments – an eclectic mix if there ever was one.

The wireless business in Austria is also ex-growth with revenues slightly down to €435.8m vs €441.8m. However, EBITDA is significantly down (6.3%) with €162.4m vs €173.3m. I am quite surprised at this given that the market consolidated with the purchase of tele.ring by T-Mobile. The market situation is still unstable with the fourth operator, 3, having a tiny share of the overall market and I would guess that further consolidation in Austria is on the cards.

Bulgarian EBITDA is up to €97.2m from €80m, Croatian EBITDA up to €77.6 from €63.9, Slovenia up to €12.3m from €8.7m. Although tiny, Liechtenstein is even up although insignificant in the overall mix.

It looks as if the recent purchase of a start-up licence in Serbia is progressing ahead at full speed and it will be fascinating to watch over the next few years comparing the relative performance between Telenor and Telekom Austria in this crucial Balkan market. Telenor outbid Telekom Austria in the auction for the second operator, Mobi 63, paying €1.5bn. Telekom Austria paid €320m for the third licence and is forecasting spending €250m of capital expenditure to roll-out national coverage with positive cashflow occurring in 2009. No indication was given of the expected start-up losses.

The next focus for Telekom Austria is the much delayed auction of the Telekom Srpske licence in Bosnia & Herzegovina which is due to be completed before year end. The Telekom Austrian shareholders will be hoping that the reason for the delay is that Telekom Austria is the only bidder. I do not see Telekom Austria’s appetite being satisfied there either. Both Montenegro (T-Mobile & Telenor) and Macedonia (T-Mobile & Cosmote) would be relatively inexpensive to expand the footprint further, although will not make a material difference to the overall group. Before anyone thinks of expansion into Kosovo, I would imagine that some sort of political solution to the Serbian break away is necessary.

Tuesday, November 14, 2006

Vodafone Results – Taxes, Spectrum & Acquisitions


Yes, I know taxes are extremely boring but it is a sign of the maturity of the core Vodafone business when the best news from the Interim Results is all about taxes.

Given the operating profit for the six months was just over £5bn, every percentage point reduction in taxes is worth around £50m. A reduction in the effective rate from mid-30’s to low 30’s, therefore will be worth around £250m – every six months. This is significant and more than most subsidiaries are making in profits. In fact only Germany, Italy, Spain, UK & USA make more operating profits than this.

This is before the benefit of the reversal of the huge £2bn CFC provision. Vodafone seems pretty bullish that post-Cadbury they are going to win this ruling. Personally, I would be thinking of arbitraging the EU tax system even more and for instance sending some of the really profitable bits of the business to lower tax Eastern European countries. For instance, I would create a settlement house for Group Roaming in Romania where Corporate Tax is only 16%. The opportunities are endless.

Operational Performance

Rather than spending for ever analyzing each subsidiary, I plan on posting about the main markets (Germany, Italy, Spain & the UK) leisurely over the next week comparing performance between the key players.

Vodafone revealed the importance of refarming 800MHz spectrum to its 3G business model. Vodafone expect the spectrum decision in 2007/8 and seems to be pushing the regulators hard that this decision is vital for rural 3G services and also seems to be recommending delaying any further spectrum auctions until this decision has been made.

I did notice that Vodafone think they can reduce the Capex/Sales ratio to below 10% in the medium term – this will be great for cashflow and the business model in general. I also noticed that Vodafone is spending more and more capex on buying dark fibre rather than leasing circuits. If this is being repeated across the mobile sector it is extremely bad news for the alt-nets who rely on the wholesale leased-line market to fill their pipes.

Portfolio Management

It seemed to me that the exit from Swisscom was currently being negotiated. However, I’m not sure that will signify the long term exit from the Swiss market. Vodafone is in prime position to buy assets from TDC when the VC’s who currently own TDC get around to breaking up TDC. I’m expecting Vodafone to buy the majority of the assets: 19.6% of Polkomtel in Poland, the Lithuanian and Latvian mobile operations, the Swiss Mobile Operations and the Danish Mobile Assets. The rump of TDC will be a fixed network in Denmark and a cable company in Switzerland which will be run for cash. Obviously this will be hugely controversial in Denmark. The sign whether this is Vodafone’s strategy will be the lack of a Partner Agreement with Swisscom post disposal.

Russia was also mentioned, where Arun Sarin said nothing was imminent. I got the impression here that the debate was over price when Arun added that Russia was becoming saturated and the prices had to reflect that. Personally, I think by far and away the best partner here would be Sistema/MTS rather than Altimo/Alfa Bank. Eastern Europe in general seems high on the list and this leads me to thinking about increasing the stake in Polkomtel in Poland. I am 100% positive that Vodafone wants to own 100% of this important asset.

In Africa, Vodafone mentioned that the partnership with Vodacom was going to be the vehicle for expansion in the future. Arun mentioned Ghana as an example where Vodacom had more knowledge than Vodafone. This would imply to me that something in on the cards with the Millicom African assets. I also think Nigeria via Globocom is a possibility, where like Russia a change in political leadership may trigger a sale from the current owners. I also think there are opportunities when and if Portugal Telecom is finally bought by Sonaecom. In brief, there are plenty of possible transactions in Africa to keep the Vodacom M&A team busy over the next few years. Finally, there are the tortuous negotiations with the Kenyan government over Safaricom. Again, it is obvious to me that the government wants more than Vodafone is prepared to pay for the additional 9% currently up-for-sale. I’m also looking forward to the resolution of the missing 5% equity – Vodafone claim they own 35%, whereas the Kenyan government and Safaricom themselves claim Vodafone owns 40%. This is a long running saga of mine and I have tried repeatedly to get an answer from the Vodafone Investor Relations Team who owns this 5% to no avail. If I wasn’t an eternal optimist on these matters, I would say that something smells rotten in Kenya.

It was nice to see Sir John Bond answer a question when he opined that future growth in consumers was more likely to occur in the Emerging Economies and that means to me that expansion in Asia will be back on the cards. Of course, Sir John Bond is an expert on Asia and I would suspect that he his rolodex of contacts is second to none.

In short, I feel we might see more emphasis from Vodafone in M&A over the next few years. In the long run, I feel that this is better news for shareholders than even the tax situation.

Monday, November 13, 2006

easyMobile UK: Are they serious?

easyMobile UK shuts down at midnight 13th December. It turns out they have 80,000 customers.

easyMobile have established a procedure in place to transition the customers to Fresh. Fresh is the MVNO of Carphone Warehouse who hijacked the effectiveness of EasyMobile launch, by matching easyMobile prices and creating "free" publicity for Fresh who by the way are still unprofitable after all these years.

But the best bit is “the easyGroup will be offering a new exciting range of services in the mobile phone space via the Kelkoo website”. This is from the company who boasted they would capture 10% of the mobile market in 12 European markets.

BT Wholesale Price Changes

It is too early to provide an intelligent analysis of the new BT’s Wholesale Pricing announced this morning that will require a serious amount of spreadsheet time.

It is worth noting that these prices only apply to IPStream and not DataStream customers. Similarly, these prices do not apply to the 21CN product which is going to be called Wholesale BroadBand Connect.

Most tellingly is the following excerpt from OFCOM’s reply:
“…As there is no ex-ante regulatory requirement for BT to inform us of proposed pricing changes, we are grateful to you for sharing your plans with us in advance.
Our strategic view is that it is in the best interests of consumers if wholesale broadband prices continue to be determined by the mrket and not regulation.”
In other words you’re free to do whatever you like.

I give it a couple of days before Charles Dunstone and John Pluthero start screaming. I suspect James Murdoch will be thinking along the lines of “Revenge is a dish best served via content…”

Telecom Innovation from The Sun

The Sun is Britains best selling newspaper/tabloid and is part of the Murdoch Empire. In fact together with the News of the World, it was The Dirty Diggers first beachhead on the UK shores in 1969. Daily Sales of The Sun are around 3.2m which is down from the 1980s peak of 4m. Apparently, Rupert Murdoch is keen to keep circulation above 3m and has recently dropped the price in the North of England.

To be perfectly honest, I haven’t bought the Sun since my student days, when we used to buy it to do the Crossword, (honest, gov) so I was quite surprised this morning when I saw that The Sun had achieved a UK Telecom First. The Sun is using a single unified short code “63000” across all messaging platforms - SMS, MMS, Voice and Video – for its Citizen Journalism Initiative. I’m not sure the relevance of the 63000 number, but I’m sure the Sun will promote the hell out of it and it will become ingrained in the readers minds very rapidly. Notice on the Sun site, the use of the code spreads to email and fixed local call numbers. I would guess when you have photographed or videoed a celebrity/footballer doing something they shouldn’t – it increases the probability of sending it immediately if you only have to remember one number.

I am actually quite impressed with the way the Murdoch Empire is moving into the new world, whether by:
• expanding BSkyB into a broadband video-on-demand future through the purchase of EasyNet and the mass-marketing of the services;
• expanding Fox into the social networking world by the purchase of MySpace and since the acquisition the expansion into new territories and monetising some of the pageviews; and
• little initiatives like The Sun in bringing its’ audience into a more participatory role.
The more important Sun message for the Telco World is that Java is going to be open-sourced today.

Sunday, November 12, 2006

Verizon Wireless v T-Mobile USA: Size does Matter

There is an urban myth that size doesn’t matter: this is extremely easy to disprove in the case of the US Cellular Industry and a quick peep at the Verizon Wireless and T-Mobile USA 3Q results illustrates the point.

US 3Q Comparision

Comparing the T-Mobile 3Q 2006 KPI’s to Verizon Wireless:
• User base is around 42%;
• Service Revenue is around 44%;
• Operating Profit is around 22%; and
• Capex is around 35%
T-Mobile is only delivering a quarter of the profits of Verizon Wireless. It is easier to compare T-Mobile and Verizon Wireless because both companies only use one network technology whereas Cingular and Sprint currently have multiple network technologies.

If we look at year-on-year comparisons:
• Subscribers – Verizon 7.4m, T-Mobile 3.8m
• Service Revenues – Verizon US$1.2bn, T-Mobile US$0.6bn
• Profit – Verizon US$768m, T-Mobile US$-35m
Although the % growth in T-Mobile subscribers and service revenues is greater than the relevant Verizon figures, the absolute figures are actually dwarfed. In operating profit, T-Mobile USA has actually gone into decline and I’m sure this is because it is becoming more and more expensive to compete against Verizon (and Cingular). Even worse is the amount of investment T-Mobile has had to make into spectrum via Auction 66 and this is before the expense of a national build-out. I’m sure this extra investment was the reason that T-Mobile could claim a non-cash US$1.5bn tax gain below the operating income line.

This spells real difficulties for the parent company of T-Mobile USA, Deutsche Telekom, because the USA cellular operations have been the engine of growth over the last couple of years. In contrast, Verizon Wireless is providing plenty of growth for Vodafone, the Verizon Wireless debt load is rapidly declining and most importantly the day when the distribution of substantial dividends are restarted is probably only 18 months away.

Not so Easy MVNO

Well, it looks as if the bookies were correct and EasyMobile hasn’t made it to Christmas. The Financial Times (subscription) are reporting that EasyGroup has terminated its brand licence agreement with TDC of Denmark.

It looks as if the German operations with be rolled into the TDC German reseller, Talkline. There is still plans afoot to merge several of the big German MVNOs.

In the UK, the situation is slight more complicated as EasyGroup is looking for a new partner and apparently then there will be an orderly transfer of the customers to another provider. I am slightly confused as to who actually own EasyMobile now, EasyGroup or TDC.

Stelios Haji-Ioannou said the reason for the failure was a lack of investment by TDC after the leveraged buy-out early in the year. Personally, I suspect the reason is that the pre-paid is a lot tougher than in early 2005 now that the larger networks have moved back onto the playing field. In this environment, probably the new owners of TDC couldn't see an adequate return for investing more money and decided to cut their losses. Stelios is now threatening TDC with legal action, but I'm not so sure whether this action will ever reach court.

It was also noticeable that EasyGroup settled its case out of court with Orange. Of course, specific terms of the settlement are confidential. I am really disappointed with the settlement as I was looking forward to a surreal public slanging battle defining who owns the colour Orange and all the associated Pantone variations.

I will be regularly looking at the EasyMobile.com website to if see a subtle change of livery occurs and more importantly if it continues to supply goods.