TalkTalk: Credit where Credit is due

Over the last couple of days, I have had a wonderful experience with TalkTalk Customer Service, overnight I emailed my ADSL settings:

Upstream Rate (Kbps) 448
Downstream Rate (Kbps) 3648
US Margin 24
DS Margin 13

and politely asked if my downstream margin could be reduced to improve my speed.

This morning, I received a wonderful reply that:

I’ve changed your profile to the 9DB SNR margin and you should see a speed improvement at this, I wouldn’t want to try the 6db margin as you may find you get a dropping connection with your line length being 3.1km from the exchange.

Sure enough, checking my router statistics this evening:

Upstream Rate (Kbps) 448
Downstream Rate (Kbps) 4416

How about that for service? Brilliant I say.

The secret to success seems to be periodically visiting the top TalkTalk forums where it is rumoured that Level2 TalkTalk Broadband engineers also lurk. In the future, I feel that politely posting questions to this new forum (that I am not connected with) might be read and more importantly solved by well connected readers of the forum.

Tele2 Q1 – Going Backwards

Tele2 released their Q1 results yesterday and I must say that I wasn’t impressed in the slightest.

The first problem for me is that they had no disposals to announce – they announced a review of their operations at the annual results and a move towards facilities based operations and away from the resale of fixed (CPS) and mobile (MVNO) services.

The second and much bigger problem I have with the results is the announcement that they are changing the policy of counting active mobile subscribers in the Nordic region from 13 months to 6 months and it will involve a write down of around 900k subscribers. To put this in perspective the whole Nordic base is just 4.3m subs, so 900k is around 21%. Tele2 used this phrase to imply it is a mere reporting issue – “As a way of standardizing reporting both internally and externally…” However, seeing that nearly every other mobile operator reports active as 3-months, I have basically zero faith in any customer numbers that Tele2 spin. This ridiculous definition of an active customer is especially important in high churn markets such as Russia which Tele2 are reporting as their biggest success.

This brings me onto my third problem with Tele2: I personally think Tele2 is heading for a disaster in Russia. They don’t have anywhere near the scale to compete with the big three of MTS, Vimpelcom and Megafon. More importantly, if the Scandinavian giants, TeliaSonera and Telenor and struggling with the politics and local business practices – what chance does Tele2 have when the going gets tough?

The only way I’ll change my mind on Tele2 is if they start getting decent prices from selling up the non-profitable non-facilities based bunch of ventures throughout Europe, but I seriously doubt there is a lot of buyers given that they are taking what seems forever to sell them. Also, if Tele2 were stretching the definition of a customer to the limit, I have a big worry about how many other skeletons Tele2 have trying to get out of their cupboard.

The struggle of Tele2 offers a prime lesson in why the days of vertical integrated telcos are still here and although the transition to a “bit pipe” makes theoretical sense on a consultants powerpoint slide – currently it makes zero sense for shareholders.

Carphone Analyst Day: I – Fixed Line Division

Introduction

The timing of the Carphone Analyst Day has always created alarm bells to me – normally it is after the trading statement, but before the details of the results has been disclosed and yet deal with the Carphone vision of the future and usually involves the announcement of investment in a new direction.

Yesterday, Carphone also announced a new structure for financial reporting creating a stand-alone division for the UK Line Division and lumping the rest of the operations together. I immediately had the same feeling as occurred when Gordon Brown announced tax cuts in the budget – where is the trick?

Despite my natural born cynicism I haven’t discovered one yet relating to the fixed line separation and can think of only more clarity going forward to investors on a division which has very different characteristics to the trading parts of the empire.

I’ve decided to split my interpretation of the analyst day into two episodes: one covering the distribution and other the fixed line division.

The Capex Carousel

All communications networks share one great feature – they can always be improved with the injection of cash. I’m not sure this is a great feature for investors, but I’m sure it is good for someone.

Dark Fibre

Neil McArthur announced yesterday that Carphone was making a switch from leased bandwidth to dark fibre. This was delivered as a throw away, but I’m sure it was actually quite a big decision for the senior team to make – dark fibre is only of any use if it is lit and to light it you need electronic kit, sites to house and power the kit and people to maintain the kit.

It is also relatively simple to lease dark fibre on the core of the Carphone network which after all is a mere three sites in Irlam, Brentford and Birmingham. There are also a lot companies with nationwide rings with spare dark fibre who would compete hard in an auction scenario for the business. It is also relatively simple to light the fibre, after all Carphone will have spare space, power and on-site engineers.

The difficulty becomes when the Carphone LLU exchanges are connecting to this core ring and for this it will have to have a presence in all the major cities of the UK. This may not involve a physical building, but rental of space within another telco’s building where they can connect dark fibre to the core ring. Again this is not much of a problem, but a bigger expense - a few network operators have points of presence in the major UK cities and there is plenty of fibre in the City Centres.

The real difficulty is that home telephony services are delivered by exchanges in the suburbs where a lot less fibre has been laid, apart from BT and the Virgin Media franchise areas. From the invaluable Samknows database, if we take the LS (Leeds) postcode as an example where BT have 23 exchanges; CPW plan to unbundle 14 of these exchanges in mainly the suburbs. If you click on the Samknows link and play with the Google Map by choosing CPW ADSL availability, you get a visualisation of the problem facing Carphone providing backhaul in just one UK city.

The point that I am trying to make is that a bland statement such as “control of backhaul costs is essential for profitable operation and expansion” is actually in practice quite a difficult task and more importantly can involve an almost infinite amount of capex over an infinite period. There will always be a way of further reducing operating costs by investing capital in a network.

Increase in Reach

Carphone announced an extension of their LLU network to 1,650 exchanges which will take them to 86% of UK population coverage and create daylight between them and Sky in the race to build the largest LLU footprint.

Again this is more capital, say £25m with 500 exchanges @ £50k per exchange and adds more backhaul further from city centre suburbs in less populated exchanges, say £6pa with 500 exchanges @ £12k per annum. The corollary is that although less populated these exchanges tend to serve higher incomes and have less competition not only from other unbundlers but also from cable.

In fact, I wouldn’t be in the slightest surprised if this time next year Carphone announce the roll-out of LLU coverage to another 500 exchanges.

Class 5 Voice Services

A lot of people tend to portray getting a VOIP service up and running is a pretty simple affair – Carphone revealed a little challenge yesterday which takes a huge amount of engineering effort to get correct.

If you are selling VOIP services into the home as the primary voice path, the customer expectations are greatly enhanced from someone playing with telephony as a PC service. Carphone revealed that it was extremely hard to get equivalent Class 5 services compared to the BT PSTN. The example used was voicemail and call waiting, but I can think of lots of others and Carphone has a list of the features on their site. Carphone issued a challenge of whether people could notice a difference with the BT services and I confess to tinkering last night (whilst watching the wonderful Sri Lankans hammer the Kiwis) with the non-monthly charged services and can confirm they are all working and working well.

What is more interesting is that Carphone actually stated that BT have a huge problem with this down in the 21CN trials in Cardiff and explicitly mentioned Ericsson kit (Carphone use Sonus kit) as a source of the problems. They also hinted that this was the reason that Sky was behind schedule in offering a fully unbundled solution.

Carphone are actually past the trial point and have a reasonable amount of voice traffic on the network with 500m minutes a month of Class 4 NGN Transit and 200m+ minutes a month of Class 5 NGN Access Traffic are loaded.

I actually believe that this will create quite a big barrier to entry for the smaller and non-incumbent owned ISPs. So, for instance, it shouldn’t be too much of a problem for Orange to solve, because they have the might of France Telecom behind them, but for Tiscali it could be a much bigger challenge.

On a related note, Carphone explicitly stated that they didn’t see a future for transit operators in a VOIP world and this is huge problem for the altnets, especially one’s that are still tied to third party voice and service delivery.

Network Consolidation

Most analysts will be amazed at the confession that this early in the life cycle of Carphone – they already have a large network consolidation project underway. Perhaps not so much the AOL consolidation side of the equation which should save on backhaul and core costs by collapsing those two networks into the Carphone NGN network. The SDH network will be a surprise to many. When Carphone bought Opal Telecom is Nov 2002, its biggest asset was claimed to be the “deepest interconnected network with BT switched network”. As more and more traffic moves to the NGN network in both the residential and business market, this asset will reach a tipping point and eventually become a liability.

This is a typical problem faced by all network operators and a key management challenge which is rarely discussed – how to transition customers off old services onto new services and turn off the old networks and shut down the support costs. The true problem faced by nearly every operator is that the accounting systems don’t reveal the full support costs. So, for instance, old customers appear to be highly profitable because there are no SAC costs left to depreciate and they make relatively few calls to the call centre. However, the network costs and IT costs are not fairly allocated to the customers and more importantly the whole operation becomes more and more complicated to support.

It will be interesting to see how successful Carphone are in moving to a new unified network in the coming years. It also highlights the myths that arise around some of the altnets which shall pass as anonymous here, when they drone on about how much advantage they have because their network is NGN enabled. Well, if 95% of the customers and 99% of the traffic are on an old TDM network – it is hardly an advantage more a contingent liability.

IT Capex

My last comment on Capex is the IT element - the CFO made a throw away comment that it is nigh on impossible to reduce the IT capex even after the main implementation of a new billing platform is complete - welcome to the network services world.

I suggest it is only going to get more expensive in the future as well.

Customer Base

A new target of 3.5m broadband customer by 2010 was announced with equates to around 100k/quarter of net adds over three years which can hardly be described as challenging.

The key cost here is the amount of churn and Carphone seem to be extremely reluctant to issue a number, although they are fully aware it is probably at this stage the second most important variable in the determinant of profitability.

Carphone keep mentioning the ridiculous 1% per month churn figure which equates to on a base of 3.5m of 140k leaving every quarter, whereas on what I think is a far more realistic figure of 30% per annum means 262k leaving every quarter. If Carphone manages to keep SAC costs to around £50/sub, this equates to £52m of SAC costs per annum just to stand still which is £1.20/customer/month.

The non-broadband base (cps + narrowband) is expected to decline to around 1m by 2010 from around 2.5m today. Although today customers are probably highly profitable, there will become a point where the modem banks and TDM voice kit need to switched off. The important challenge for the Carphone is to transition these onto the broadband platform and lose as few as possible to churn. Obviously with around 4.6m customers today (2.3m BB + 1.8m CPS voice and .5m aol narrowband) and 4.5m customers in 2010, Carphone aren’t planning a hugely successful transition.

It is noticeable that Carphone admitted deficiencies in managing the one.tel acquisition which lead to a large churn in the base and said they are on top of the problem with AOL. This is quite news, but I question the value of the AOL brand in the UK in a 2-3 year horizon and the willingness of the customer base to pay a premium for the services. In fact, I feel that apathy is Carphones best friend in managing churn on the non-broadband base.

P2P Comments

I must comment on the P2P part of the Charles Dunstone speech which was completely bizarre. I can understand and empathise with anyone would doesn’t want to invest in the content business, but to go on and on about illegal p2p downloads being the reason is just asking for trouble. Carphone may have a few issues with OpenReach that they are working through, but if the music or movie industry target the network because of his cavalier attitude towards P2P Dunstone may need more lawyers than engineers.

Even stranger is that it seems from reading the bulletin boards that Carphone currently throttle all P2P traffic and therefore isn’t exactly adopting a P2P friendly positioning. Also, the plan to charge per GB which was mentioned will drive the bandwidth hogs off the Carphone network, which again is a legitimate strategy but not one for a non-content ISP. I would personally recommend a strategy for Carphone to work to make its network legal P2P friendly and efficient and therefore give it an edge over the rest.

Conclusion

The Capex Monster and its insatiable appetite for cash is now firmly entrenched in Carphone UK Fixed Line business. This monster doesn’t mind digesting new coverage, new technologies, new services or even new companies; the monster doesn’t object to either large projects or small projects and many a successful entrepreneur has historically tried to tame the monster with very limited degrees of success.

The challenge for the Carphone investors, of which Charles Dunstone is the largest, is to see whether the UK Fixed Line division is actually providing a decent return on capital. The separation of the operation into its own division reporting its own EBIT performance is a welcome step but only one side of equation. Also Carphone needs to be clear on including the amortisation of acquisitions and reorganisation costs in the EBIT calculation. Investors also need to remember the absolute of capital invested, including corporate acquisitions, customer acquisition and capital for network services and most importantly the cost of this capital deployed.

The other side effect of the separation of the divisions is that it is now far easier to create a completely seperate financial structure for the Fixed line business: whether this be asset based financing, a spin-off, taking the division private or even a trade sale.

Most importantly, the message I am hearing loud and clear is that the UK Fixed Line although a bit of a troublesome teenager is now big enough to stand on its own two feet.

UK Cellular: 02 goes mass market on upgrade cashback

It has been well known that for quite some time a call to cancel your mobile contract brings forth all sorts of special offers not normally published by the network operators and certainly offers that any independent retail network would struggle to match. These offers have taken the form of better handsets, discounted tariff plans, free extras or basically anything bar the kitchen sink to keep your custom.

Today, o2 has gone public with one of its offers and even added a green tint for the eco-shoppers with a £100 cashback offer for a 12-month upgrade, if no handset upgrade is required. Notice, this cashback is immediate and doesn't require the production of a million pieces of paper to prove qualification.

This is interesting not because of the offer per-se, but more because o2 is openly publishing that killer upgrade deals and money saving offers are available without leaving the comfort of your own couch. There is certainly no need to go to an independent retailer and get an upgrade or even, heaven forbid, think of churning to another network.

For O2, the economic variables of the offer are pretty straightforward:

• they do not have to supply a handset upgrade which would probably around £100 on average;
• they do not have to pay an upgrade commission to any third parties;
• ARPU’s probably remain constant with the discount appearing as part of the retention costs; and
• the likelihood of churn is sharply reduced.

O2 had at Dec 2006 around 6.2m contract customers, if only 5% of these take up the handset free option at upgrade time (or around 310k), I would guess the promotion would be seen as wildly successful.

For the large independent mobile phone retailers the Annus horribilis continues:

• no-one now sells a full selection of all operators services and therefore complete independence cannot be claimed;
• the operators continue with their 18-month (or even some are going to try 24-month) contracts which reduce the amount of churners and upgrades; and now
• the operators try to disintermediate the retailers on upgrades by making a push direct to consumers and taking the handset out of the equation.

The balance of power keeps on shifting towards the network operators and away from the independent retailers.

Sir Michael Grade at the VLV Conference

Sir Michael Grade is in the news today covering his opening speech at the annual VLV conference.

In the Guardian, they focused upon his attack on the recent junk food TV ad ban:

"I'm not opposed to regulation. What concerns me is that [when] any special interest group pops up and gets a campaign going and makes a fuss, successive governments' knee-jerk reaction is we should be seen to be doing something, 'I know, let's impose some advertising restrictions, that will shut them up',"

This implies to me that Sir Michael Grade feels OFCOM is merely an extension of the government given that the supposed apolitical OFCOM installed the ban and an advertising ban was not in fact declared government policy.

The Times focused upon his request yet again for more free spectrum:

“Mr Grade said that, if Ofcom will not reserve spectrum for HD, ministers must intervene and use powers in the Communications Act to direct spectrum for a particular use.
The BBC and electrical retailers are backing the call for reserved HD spectrum. Ofcom believes it would be possible to squeeze “four to six” HD channels on to Freeview using the existing allocation of spectrum, a claim the broadcasters reject.”

Do you ever get the feeling that the ex-Chairman of the beeb doesn’t care too much for OFCOM decisions?

Something that neither paper picked up on was that the CEO of OFCOM, Ed Richards, presented later in the day – a copy of his speech is already available on the excellent OFCOM website.

Ed Richards fired back a bullet back to the broadcasters in general about participation TV:

“Recently the trust between broadcasters and viewers has been tested by events surrounding the use of premium rate telecoms services in television programmes.
…
The rules are in place. What has happened here is not a failure of regulation, but a failure of compliance."

The rest of his stuff was pretty earnest and non controversial stuff about the challenges in developing a vision for Digital Media beyond 2012.

Truphone Cripples “Calling Party Pays”

Knowing that there must be some business model hidden somewhere, I thought I’d examine the Truphone Mobile VOIP charging schema.

You can make plenty of free calls IF both parties are in a Wi-Fi zone. Now, given that the Nokia N95 is after all a mobile device first and foremost – how do you know if you are both in a WiFi zone? – the answer is you can’t.

If you are mobile and outside a WiFi zone, what happens? Well, the very kind people at Truphone forwards the call to your handset using the Mobile POTS functionality, but charges you the termination rates and not just the normal mobile termination rates but a marked up rate. From the Truphone price list, this is how much the call costs:

• O2 – 14.9ppm,
• Orange – 15.7ppm,
• Other - 30.0ppm,
• Three – 29.3ppm,
• T-Mobile – 16.4ppm,
• Vodafone – 15.0ppm

And this is the best bit, you have to setup a prepaid account to Truphone to cover all these charges – they don’t offer credit to no-one, even though you’ve bought the top-of-end-mobile model and paid full whack for it and presumably already have a mobile post paid account.

Most confusingly to the customer is that the above charges about don’t include VAT – in fact VAT is deducted when you top-up your prepaid account so a £10 top-up only is worth £8.51 of calls.

Of course, Truphone offer the option of you rejecting the call if you so desire, but how tight are you going to appear to the caller? How inconvenient is this?

In other words, when you are outside the comfort zone of your WiFi zone, the call receiver will end-up paying for the calls not the caller and thus ending the 20+ year tradition of Calling Paying Party in the UK mobile market.

Calls to non-SIP phone numbers are also charged at the above pre-paid rates with an introductory offer for geographical fixed lines numbers being free for a couple of months. In other words, Truphone is again making money of the termination rate differential and given Ofcom currently imposes a limit on average termination charges of 5.63ppm (voda, o2) or 6.31ppm (t-mobi and orange), the gross margin will be quite high for them.

Apart from the above not-so-free calls, Truphone stresses in its sales pitch that the service is good for roamers, in fact Dean Bubley chronicled a real life example of a mobile road warrior:

"So far I’ve spent 137 minutes on SIP calls using the N95. Setup was trivial, dialling is as simple as pressing “internet call” on a contact. Call quality is indistinguishable from GSM roaming call..... I've saved $292 so far, so that's payback in 9 days [for the phone purchase price]"

Apart from the obvious statement that in the example, he uses the roaming warrior was being charged around 100ppm which is obviously a rip-off and therefore I don’t blame the guy to look around for alternatives. Possibly if the WiFi rates in the hotel were reasonable and given that the guy was calling a SIP number and not paying termination fees then Truphone would be a solution for this particular use-case.

However, how many people are in this niche:

• still paying top notch rates for mobile roaming;
• making over 2 hours of calls in a particular session, be it an evening or visit
  
• roaming for 9 sessions over the length of mobile contract; and most importantly
• really care how much their mobile phone bill is and want to go through the decision point of making WiFi calls rather than mobile calls.
  

This niche will be tiny in the UK and I would be extremely surprised if it was more than 25k people.

The other interesting part of the Truphone business model is that WiFi access in the Cloud areas are for free. I wonder if Truphone is paying the The Cloud a cut of the expected revenues whilst in their HotSpots?

The other interesting part of the business model is how Truphone got placed on the Nokia handset in the first place? Was this because of technical excellence? Or was it because Truphone are paying Nokia a fee – whether per handset or by revenues?

Obviously there is potential for Truphone to share revenues of its high gross margins from the termination fee business. I don’t understand why they don’t just offer the mobile operators a share of the revenues to cover handset subsidies and acquisition costs?

As for the Truphone user experience, I particularly loved this answer as part of the “Truphone Known Issues” page:

Issue: My / the other person's voice breaks up sometimes during the call
This could be caused by any number of events in the network path between you and the other party in the call, however the most common reason is WiFi radio interference. Some ways this can happen include:

• Traffic on a nearby WiFi connected laptop (e.g. you are web browsing whilst talking, or an email arrives while talking).
• Traffic on nearby Bluetooth devices
• physical obstruction - e.g. somebody walking between the phone and the access point

It is hard to completely prevent all these things, but one good rule is to hard-wire devices like laptops if possible, and turn off the WiFi, to keep the radio environment as clean as possible.

This doesn’t exactly fill your average punter with confidence does it – if someone walking between you and the access point is going to causes the call to break up. Mind you, the product is still in beta, perhaps they'll work out the kinks before they go live.

All in all, I continue to be less than impressed with the Truphone offering.

Ridiculous Nokia N95 VOIP Saga

Truphone may think they are being really clever making videos showing how Orange has apparently “crippled” the N95 by disabling the VOIP functionality. It is certainly attracting a lot of noise. Orange is not alone and apparently Vodafone have done the same and no doubt there will be a long list of operators in Europe who will have done similar.

Truphone says the workaround is buying an unlocked phone at Expansys and this is a perfectly true workaround. Unfortunately, it is priced at an unsubsidized level of £630 from Expansys. Direct from the Orange shop, on the stupidly named Orange Dolphin tariff of £35/month for 18 months in which you get 600 cross net minutes and unlimited texts, you can pick up the phone for £90 upfront.

If we look at this another way with Orange you get the phone on 18-month interest free loan. For a £90 upfront payment you also get unlimited texts for the 18-months and over 10,000 mins worth of calls to any phone in the UK - not non-geographic and international numbers. I know which sounds cheaper to me especially as VOIP calls are only free when calling a very limited set of numbers within the range of an WiFi access point that may or may not require payment for service.

I think when you look at these figures – you have to question who is guilty of mis-representation - Truphone or Orange?

I know your average man in the street doesn’t give two hoots for VOIP – they want cheap handsets and cheap calls. Further most of the reviews of the N95 that I've read don't even comment on the TruPhone VOIP client. In fact the specification of the phone by Nokia doesn't even mention VOIP.

Truphone know full well the rules of the mobile application game works are: first you get a manufacturer to load the software on the phone, then operators decide which applications they have for their subsidised versions of handsets. The fact they have decided to windup the operators in this way smells of someone who has nothing to lose – I think they must know the big operators won’t launch phones with the TruPhone VOIP clients bundled. However, it also risks of doing harm to the Truphone relationship with Nokia, because I'd guess that Nokia need the Operators to provide the volume on the phone sales more than they need a two-a-penny VOIP client creating trouble for them.

What is even more interesting is that the big application boys of the internet world has decided to go down another route: Skype have a pseudo-voip client on the X-Series from 3 – they worked together with the operator to get a mutually beneficial solution. This X-Series bundle is now being rolled out to the handset manufacturers. Vodafone will probably take a similar route with different applications this summer when they launch their mobile internet phone.

Only time will tell whose approach is the best – but my money is definitely not on the Truphone approach.

New Low in Sky Virgin Media battle

I confess that I flicked through the Virgin Media 10-Q yesterday and it crossed my mind that I could write something cruel about the lack of profits. However, this was also balanced by what I felt was reasonable brand charges from the Virgin Group. I decided the bigger story was a comparison of the Q1 results and how the battle was affecting actual market performance and shareholder returns.

The Times instead has decided to go personal with an article entitled – “Virgin Media awards seven executives £25m after losing £510m” - I presume that this story couldn't be planted with the Telegraph.

It gets more petty and far more personal from that lowpoint:

• “…Board members of the British cable company also held a special meeting in the Caribbean island of Puerto Rico… to which spouses and partners of directors were invited and their costs of travel met by the firm.”
• “followed by Cob Stenham, who died in October and received $10.7 million in pay and awards in 2006…Stenham’s family were given extra time to exercise stock options, while an executor to his estate was appointed.”
• “Steve Burch, who spent 17 years at US cable operator Comcast before joining Virgin Media in January last year. His pay package includes $175,000 for legal costs relating to litigation with his former employer.”

This battle is very, very nasty and several people will regret what they have said for many, many years. I advise extreme caution for anyone caught up in the crossfire...

Channel 4 – VooDoo Economics & Scare Tactics

The Great Brains involved in Public Service Broadcasting seem to be at their most creative when justifying their periodic injection of hard earned taxpayer cash. This time around it Channel 4’s turn and the economic report commissioned by OFCOM and prepared by L.E.K. is an absolute beauty, which is nowhere as near as negative as Channel 4 has spun it into the mainstream media. Remember this headline from the Murdoch owned Times “Channel 4 could collapse after 2012, according to research for regulator”

I am amazed that the OFCOM & Channel 4 CEO's get away with discussing Channel 4 in such a bad light and get applauded by the mainstream media. I take a contrarian’s stance and believe both should be fired for portraying such a potentially valuable taxpayer asset in such an appalling way.

The basic problem for me with the Channel 4 CEOs performance is that he is in complete in control of its costs – he can reduce the Channel 4 costs if he has the will. Any half decent CEO manages his budgets to match his revenues and forecasts to give a little bit back to shareholders; in the Channel 4 not-for-profit case they can add any excess to “reserves” for later return to taxpayers or even for a rainy day to cover the eventuality of the PSB Apocalypse ever arriving. In the Central Case of the LEK report Channel 4 never run out of cash – they still have around £150m lying around in 2012. To paraphrase the CEO of five – “I would love to have Channel 4’s problems”

The report goes on and on about super-inflation in programming rights – well, there is only super-inflation because Channel 4 is bidding £20m for stuff like Desperate Housewives. Surely, Channel 4 can say to the independent programme makers "I want a series about xyz and I've only got £x million to spend" and someone will make the programme for them? The report also goes on about a zero increase in revenues over this period – I am all for taking the safety first approach in budgeting, but any half decent CEO could do something to avoid Doomsday occurring on a 5-year horizon?

I think the CEO should also look at Channel 4 distribution costs especially on Freeview - why Channel 4 needs 6 channels is just beyond me? C4 definitely needs one; E4, More4 and Film4 are a bit more dubious but seeing I’m feeling generous, I’ll concede their right to exist; but two time shifted channels, E4+1 and Film4+1? – come on this must be a joke.

This is more true when you look at the costs – C4 were gifted four channels from the ever generous taxpayer on the top notch PSB multiplex, but rents two others from National Grid Wireless at an annual "opportunity" cost of around £12.5m each based upon recent DTT spectrum rental deals. That is a potential annual saving of £25m without any lost of content. Channel 4 could even put the time shifted stuff on More4 and Film4 when the channels are not broadcasting. If people had really missed vital must-see content they could then record it for later viewing.

If the contracts with NGW are long and contain onerous early termination clauses, C4 could rent out two of the higher quality four gifted channels on the better multiplex until the NGW contract could be terminated. £25m a year distribution costs for two time shifted channels which hardly anybody watches with no PSB content – welcome to the voodoo world of broadcast economics. All of this is before the duplication distribution on the satellite and cable platforms.

The theoretical economic model for Channel 4 is that “hit” commercial shows such as Big Brother fund the high brow PSB stuff such as Channel 4 news, Dispatches, the religious stuff etc which hardly anybody watches and are therefore uneconomic. The trouble is that Channel 4 has also been losing money on its many digital non-PSB ventures in their various guises and reincarnations since launch and therefore the absolute amount of subsidy used for PSB is nigh on impossible to figure out.

Given past mistakes, I can also almost guarantee the latest greatest money spinning idea in launching a radio multiplex is also going to be a money loser which yet again is ultimately funded by the taxpayer. I can just speculate about the conversations in the Channel 4 boardroom:

“I know we were saps at missing out on the Freeview launch… National Grid Wireless is earning supa-profits on renting out channels on gifted multiplexes… we're paying how much to them for spectrum that's more than the lucifer in the sky charges?…but there is more spectrum coming up… hmmm... I know we know nothing about radio… but if National Grid Wireless can make a tonne of dosh in TV…wirelesses are those things you use to listen to the radio aren't they?... why don’t we lobby for loads of that Digital Dividend spectrum while we’re at it and pretend we need it for High Def TV?… its currently ours anyway and possession is 9/10s of the law”

Instead of playing this ridiculous game any longer, OFCOM should do something really, really brave and tell Channel 4 to bugger off.

In fact, OFCOM should go a step further and look at the Channel 4 PSB remit and decide what, if anything is really necessary in the multi-channel era. What is the point of taxpayers paying for Channel 4 news when BBC News 24 is already on round the clock? OFCOM should get rid of all the PSB Baggage and put the remains of the remit out to tender for the other channels to produce and broadcast. OFCOM can take the Channel 4 spectrum back and auction it off to pay for the remains of the PSB remit.

Channel 4 could then presumably be reborn as a profitable company earning decent returns. OFCOM could then go a step further and privatise Channel 4. In an auction scenario, I am certain that a debt free bunch of channels with around 10% of UK viewership and a higher share of the “youth” eyeballs and no uneconomic PSB remit would attract a tidy sum.

Return of the Dunstone Blog…

He has managed to write an article to celebrate the 1-yr anniversary of TalkTalk almost-free-broadband. I love the fact he is referring to TalkTalk now as the Challenger – for those with long memories anybody else remember what happened to the original Virgin Challenger?

I notice he says the service is at over 700k customers on 14th April which is up from the 655k on 31th March and implies a run rate at around 20-25k per week which is not at all bad really given the bad publicity, especially if he is connected a lot of them directly to LLU and thereby not going through the ipStream loss-making period.

BBC Radio starts DRM trial

No, not that DRM, we’re talking about “Digital Radio Mondiale” which is going to be marketed as “Digital Medium Wave” to distinguish it from DAB Radio. The trail is running for a year at 855kHz for BBC Radio Devon and transmitted from Plumer Barracks for the antennae anoraks.

The trial is a joint project between the beeb and National Grid Wireless. As far as I concerned it is great news and a step in the right direction for the abolition of analogue radio – the sooner the better. There is an interesting beeb R&D paper (pdf) for anyone interested in more details on the technology.

OFCOM stance on Access Networks

Whilst the ex-OFCOM executive, Kip Meek, who is Chairman of the Broadband Stakeholder Group and allegedly resigned from OFCOM because of the appointment of Ed Richards to the CEO position, starts the lobbying process for public funding of access networks, Ed Richards made his position quite clear in a recent interview with OFCOMWATCH.

OW – Just to pick up on the theme of public money in communications. Lets talk about publicly funded access schemes. People have suggested that public money will be required if are to have an alternative next generation access network. Do you have any view on those sorts of opinions?
ER – Well, I am not persuaded that it is. And it certainly shouldn’t be for large parts of the country. Let me answer this by analogy – when broadband started in this country people said to me at the time ‘we have to have broadband all over the country it will never be provided for by the market, the market might go to 60% but there’ll have to be government funding for the rest.’ Remember that? That’s what they used to say. Lots of people – the Broadband Stakeholders Group – lots of people. And I remember saying in response, ‘well let’s just wait and see shall we, wait and see if there really is a problem.’ What level of coverage do we have for broadband now? 99.6%! How much public money was necessary to do that? Zero! Would it have been a waste of taxpayers money to spend it on supporting rollout? Yes! Next generation is the same in my view. It may well be that in due course we feel that a public subsidy ends up being necessary some years down the line but its definitely not where you start. I would not be surprised if it turned out that we didn’t need any subsidy and the bulk of next generation access was done by the market in exactly the same way that current generation broadband evolved.

Meanwhile back in La-La Land efforts are still underway to:

• fund the patently ridiculous “Public Service Publisher” prosposals;
• justify wasting yet more money giving the nations top “Public Service Pornographer”, Channel 4 a cash injection; and
  
• create some voodoo economics to squander yet more spectrum on the Public Service Broadcasting.

All of this activity, whilst OFCOM cannot issue a single comment about 40k Customer Complaints on Celebrity Big Brother.

Broadband Stakeholder Group

A very interesting report from The Broadband Stakeholder Group which basically tries to prove the argument that we need to invest in next-gen-ACCESS-networks (either fibre or docsis 3.0) or uk plc runs the risk of falling behind the international competition.

More especially, the case for public finding is starting to be made

...a gap is opening open up between the ‘public value’ to society of next generation broadband and the ‘private value’ available to investors in these services. Evidence of the positive externalities resulting from next generation access has yet to emerge – largely because these networks are only just being built. However, over the next two years as international deployments of next generation broadband accelerate and a new wave of bandwidth intensive are taken up by the mass market, the requirement for next generation broadband in the UK is likely to become much more transparent.

Fight the beeb, not yourselves.

For as long as I can remember the UK cable industry has been trying to prove that Sky has been leveraging its exclusive content to gain an advantage in distribution. Historically, this has caused numerous long investigations and several remedies have been applied. Today, Sky has probably less exclusive content, especially in the Sports area, than previous and certainly has nowhere near exclusivity on general Entertainment or News channels.

Virgin Media should sit down and think long and hard the real reason why BSkyB thought that value of their programming had fallen over the last few years. I would argue that is because the BBC, ITV, Channel 4 and Five have all launched lots of new channels which are relentlessly cross-promoted on their main channels and have higher viewership figures than either the Sky or Virgin Media channels. In this environment it is hardly surprising that BSkyB think the Virgin Media channels have dropped in value. The only solution to this problem is for Virgin Media to improve the appeal of their channels and gain viewers – it is a long and difficult road that Virgin Media face in the content arena competing against the Public Sector Broadcasters.

However, this doesn’t account for the fact that Sky wanted to raise the price of its channels to Virgin Media despite Virgin Media stating the Sky share of viewing had also dropped over the previous year. I can see why Virgin Media didn’t want to pay for commercial reasons, but I think that arguing this is the act of a monopolist is tenuous at best.

The biggest threat to both Sky and Virgin Media is the same as it always has been, which is “Free-to-Air” TV. In the days of old analogue TV when there was four to five channels, both Sky and Virgin had the killer combination which was Football + Movies + lots of Long Tail Channels. Virgin Media had the additional advantage of cheap telephony, recently this has disappeared but Virgin still have a slight advantage in broadband.

The proliferation of channels available on the DTT platform and the take-up has actually narrowed the gap and the only way that both Sky and Virgin Media can keep their advantage is either through exclusive content, improved quality or additional features. Last year’s record auction of the premier league rights, the recent manoeuvering to break the Sky monopoly with the Hollywood studios, the relentless promotion of High Def TV, Video on Demand and PVRs should be seen in this context.

This context also helps to explain the recent actions of the beeb:

• the intense political lobbying for more spectrum from the Digital Dividend is only the “Public Sector Broadcasting” industry staying we need more channels to negate the Sky and Virgin Media capacity advantage – although spectrum is a lot less scarce than before they want another public subsidy. This time around they are using the excuse of High Def TV for this free spectrum and public subsidy.
• the iPlayer and the various beeb experiments with broadcasting over the internet is just an attempt to reduce the Sky advantage in new technologies and getting the end-users and ISP industry to foot a big part of the bill. I’m sure the beeb will soon promote technology linking the computer hard disk content to TV viewing in order to deliver PVRs on the cheap.
• Video on Demand is currently a big theoretical advantage for Virgin Media, but I see the beeb trying to link to the BT and other IPTV platforms to reduce their advantage.

In effect, this is the big debate we should be having – whether the beeb should be allowed to expand into all these areas subsidised by a general licence fee and on the back of really, really dodgy economics including some very doubtful concepts such as public value tests approved by what is in effect the beebs own board.

I firmly believe the only way for the PayTV industry to counter the creeping scope of the beeb is by offering the customer a premium service which is simpler to use and contains some premium content. As convergence occurs, BT is going to be drawn more and more into the battle. A lot of the technology being proposed is going to be well beyond the average viewer. This is the beebs Achilles heel, the biggest beeb viewers are not technologically savvy, not going to be big users of the new services and be extremely upset that the beeb is spending more and more of the licence fee on these projects.

Both Sky and Virgin Media have a chance is this area with both having a vast army of customer support staff. A perfect losing strategy is drawing the customer into an argument between themselves. Also, Virgin Media have a long way to improve having historically had an extremely poor customer service record.

I don’t believe the beeb can ever be beaten in the political sphere, however the commercial sector has a chance in winning the hearts and minds of the consumers. This is why I believe the battle between Virgin Media and BSkyB makes zero sense and instead both should be positioning themselves against the publicly funded broadcasting. The beeb and channel 4 must absolutely love the current disputes because they reinforce their positions.

Ukrainian Cellular & Kyivstar

AC&M are reporting that Kyivstar actually lost 142k subscribers in Mar to 22 million subscribers. Overall, the market added a meager 100k to 51.4 million which is a theoretical penetration rate of 108%. Even accounting for double counting, the market is probably already saturated in terms of individuals.

What makes the market even more dangerous for the two largest players is that there is two smaller sub-scale players backed by multinationals with extremely deep pockets. What normally follows in this situation is a price war.

The obvious way to avoid future pain is from market consolidation and for a starter it would make obvious sense for Kyivstar (owned by the shareholder of Vimpelcom – Telenor & Alfa/Altimo) to merge with URS. Given the bad blood between Telenor & Vimpelcom, I seriously doubt whether the logical outcome is the chosen one.

The fact that Telenor has just deconsolidated Kyivstar just as subscriber numbers and potentially profits have peaked probably means that they are digging in for the long term.

Virgin Media - Spraying bullets in all directions

I’m struggling to understand why Virgin Media have taken Sky to court. First of all, it implies that Virgin Media are not happy with the OFCOM payTV investigation. Next it implies that Virgin Media are quite happy to settle in for a long legal case – remember Article 82 and the EU vs Microsoft long running saga? We could be tied up here for a minimum of a couple of years. The only certain winners will be the lucky lawyers.

In fact, I can’t see how Virgin Media can prove that the withdrawn Sky channels are essential to the cable platform. The only way they can show the channels are important are if they have lost a load of subscribers which Virgin Media have been in the press claiming hasn’t been the case. Even if they do prove the Sky channels are important, doesn’t this prove Sky’s case that they deserve a bigger share of the cake? More importantly, I don’t understand what is wrong with the Sky proposal to sell them direct to the cable customers as is permitted on the Satellite platform. We are talking complex service bundling questions.

My analogy would be a football manager arguing a player is really important to his team, but didn’t want to pay the wages the player demanded and furthermore wouldn’t allow the player to start up a new football team in the same league. In fact, since the prima-donna said “Pay-up or I’m taking my ball home” the football manager has been saying to the tabloids that the player is rubbish anyway whilst simultaneously saying to the fans that if they don’t avoid relegation this season it is the players fault not the managers.

I also can’t see how Virgin Media can really argue that they were forced to accept the lower prices from Sky for satellite transmission of its channels. I can imagine Sky doing all sort of viewer number crunching to show the value of channels have fallen over the years. Also, don’t forget that all the numbers on the Sky platform have increased significantly over the last five years so the absolute amount of cash that Virgin Media receive will appear nowhere near as bad as they claim in unit pricing.

Virgin Media were also completely free to go outside the Sky encryption system and develop an alternate package of Satellite channels. It is further complicated by Virgin Media could have rented capacity on the Freeview platform if they so desired and sell their channels on a different platform. Theoretically, Virgin Media could have also done a Setanta-esque deal and encrypted the channels with TopUpTv technology and charged for the access - I'm sure they could have even bought TopUpTV. They had a lot of options. I admit, these options sounds a little far fetched but is this not the Beeb are trying to achieve with the Freesat platform?

Again with the football analogy, Sky is basically saying to old Flextech that they are past their best and rarely make it off the bench onto the playing field, but it isn't doomsday and they won't be kicked out of the club. Luckily because of club successes in the league the wage budget has doubled over the last five years since the last contract negotiation, so Sky are only asking them to take a minor cut in average wages earnt during their peak playing years. Old Flextech are taking a smaller wage, but not as bigger cut as their whinging agent is confusing the tabloids by quoting earnings as a percentage of the overall current club wage budget. If they don’t like it, old Flextech are free to go elsewhere or even hang up their boots if they feel really tired after all the years of struggling to keep up with the improvement in quality of the league.

In terms of economic argument most of these types of competition cases seem to revolve around the definition of “Significant Market Power”. I can’t see how Sky has SMP in the withdrawn channels. I also can’t really see anything unique on the Sky channels, certainly nothing that can’t be replicated. Virgin Media if they so desired could have gone and bought the Lost franchise and decided not to invest. I think the train of thought from the Virgin Media legal team can only be that Sky has SMP in the PayTV market and a probable remedy for this is that prices should be regulated and that would include Virgin Media as well as Sky.

All of this makes me think that Virgin Media are bluffing and really don’t want the court case to play out, because the outcomes could be extremely risky for them as well as Sky. If all Virgin Media want to do is to force Sky back to negotiating table, they might have a big surprise coming, because I don’t think Sky are in negotiating mode.

The problem with spraying bullets in all directions in a crowded market is that there is good probability that you are going to end up shooting yourself or worst still some innocent bystander.

Yet Another p2p Video Streaming Solution

First there was Joost, then came Babelgum, now it appears that we will have Skinkers LiveStream, which the beeb and other uk broadcasters are evaluating as a cheap distribution solution. New Scientist has a very good write-up of the technology which explains the two key differences to Joost.

Skinkers actually have good contacts with the beeb new media juggernaut providing the technology behind the popular beeb desktop ticker. I suppose that it also helps the Skinker sales pitch that the technology was developed by Microsoft in its Cambridge, UK labs, especially given the mysterious understanding between the beeb and Microsoft. Microsoft are part-owners of Skinkers which did a technology transfer deal.

On a more general point, if the broadcasters manage to successfully launch p2p services for video broadcast services with a reasonable takeup, then I suspect the ISPs will move in a rush to enable multicasting throughout their networks, because if p2p takes off then the load on the isp networks will be huge and someone will have to pay the cost and it looks like the broadcasters are doing everything in their power to ensure that it is not them.

P2P streaming of Broadcast also sets the scene for mouth-watering showdown with IPTV, Video-on-Demand and all the expensive services that are being currently designed.

BT set for 2 million Unbundled Lines this week

Unless, they were pulling our legs the latest OpenReach figures revealed that on 1st April, there was a grand total of 1,910k unbundled lines and the weekly adds were 87k gross and 74k net. Note the implied churn within the LLUers - that's an annualised rate of 34.7% (13k*51/1,910). 87k was a record week for additions and by my reckoning even with the Easter break means that sometime later this week we will be welcoming 2m unbundled BT lines. This is a phenomenal achievement given that exactly one year ago we were only at 356k unbundled lines. Sometimes it is important for people to take a step out of trenches and look at the bigger picture and lord forbid even congratulate OpenReach for a job well done.

The big question is how much is this hurting the BT bottom line and this is much more difficult to ascertain. I believe it is the fully unbundled customers who really hurt BT with them losing the highly profitable Wholesale Line Rental and replacing it with the lower margin OpenReach copper rental. BT also loses the inbound voice termination revenue which is significant once the line loss is in the millions.

The 2m figure includes both partial and fully unbundled lines and with only Carphone currently fully unbundling in any serious quantity, I doubt the Bt P&L is suffering much pain especially when you offset the line rental loss with the increased occupancy rentals at the exchanges and the OpenReach activity based fees.

For both, fully and unbundled lines BT theoretically also lose their Retail and Wholesale IPStream margins. However, given that currently no-one is making any real profits in broadband services apart from BT Wholesale and a few SME targeted ISPs, I would argue that BT again is currently feeling little pain. Perhaps, there is some “opportunity” loss of profits which would have occurred if there was no competition and prices were higher, but then there wouldn’t be the demand and associated volumes. The real threat to BT is in the longer term as the market consolidates into an oligopoly with each player having their own backbones and therefore a significant chunk of the traffic and therefore the revenue is kept off the BT network.

Currently, I think the broadband scenario is much the same as the early days of the Free Internet with ISPs such as Freeserve generating huge increases in voice traffic via dial-up access traffic and BT making a fortune from delivery of these calls. The ISPs of course made their money from shareholders selling up and exiting at inflated asset values. This time BT is making a fortune from filling its data pipes, but I feel the time is running out for the ISPs to make an exit at inflated asset values. The Great Pipex Sell-off will be closely followed to see if valuations have peaked and are now on the decline.

In the detail of the LLU KPIs spreadsheet was also an extremely worrying statistic for followers of Carphone LLU saga – a big jump in the DOAs (Dead-on-Arrivals) to 7.6% from 2.6% a couple of weeks ago. That is one in thirteen people are losing both voice and data service when Carphone unbundle them. Dunstone in the recent trading update admitted that DOAs were the most upsetting thing to customers, but OpenReach had improved from the early days – I can only see two weeks in the last nine months were DOAs were greater than 7.5%.

Eurotelcoblog R.I.P.

For selfish reasons, I can’t wait for the reincarnation.

For James Enck, I wish him all the best in his new role and hope it is a long and fruitful one.

BT in the FT: Paul Reynolds & the 21CN

This morning, Paul Reynolds attempted to explain to the average Financial Times reader (subscription site) the benefits of the 21CN and all that seemed to be spelt out was the headline annual cost savings of £1bn per annum on a £10bn investment. For sure there was the usual statistics to illustrate how large and complex the project is, but personally I feel that your average investor has no idea what it means to collapse 17 networks into 1, laying tens of thousands of fibre optic or even replacing kit in 5000 exchanges.

I can understand why Paul Reynolds didn't go down the route Matt Bross, the BT CTO, took in a key note address to a conference on Milan where he explained how the BT network would drive innovation through the opening up of the network to third parties and this was as important as the actual physical architecture.

I think this is perhaps a because opening up of the network is very much less tangible than cost savings (just because you open the door to an exciting new playground doesn't mean that anyone will come to play) and also because the benefits are a lot less certain (anyone involved in telecoms over the 20 years has a certain amount of blood on their hands from trying to implement intelligent networks)

Personally, I think this openness and scale is a key differentiator for BT and something that the altnets should be very scared of. Altnets in the UK such as Thus and Easynet (Sky) claim to have a Next Generation Network (NGN) and to a certain degree if someone builds a new network today, it will be by its very definition a Next Generation Network; mainly because they have bought the latest kit from the vendors and more importantly they don't have the legacy network and customers that BT and on a smaller scale C&W have to support today.

However, if BT manage to open the network to allow easier configuration, provisioning and accounting for third parties - it will have an unique advantage over not only the altnets, resellers and convergent players, but also the internet players. This is big news for investors but a difficult concept to explain. In fact, Reynolds hinted at this in the interview by saying that part of the equation in maximising returns from the 21CN is in convincing third parties not to build their own networks and instead piggy back on the new improved and open BT network.

I believe BT is in effect accidentally(?) adding a new barrier to entry for the industry - a software based middleware layer which is owned by BT. No longer will it be suffice for altnets to lease some dark fibre, buy some sexy kit from a network vendor and employ a dynamic sales force - they will need to replicate middleware created by millions of manhours programming efforts, continually being updated, owned by their main competitor and not appreciated by the regulator.

The last quarter of the interview was spent by Reynolds trying to address the achilles heel of the 21CN - the piss poor access speeds - and here I feel BT is general and Reynolds in particular is guilty of deliberate obfuscation.

For a start, he mentions that UK punters will not be getting a worse experience than Paris or Germany. I find it extremely interesting that he has cherry picked these examples. I can counter with the consumer experience right now in South Korea, Japan or in the lucky parts of the USA which are connected to the Verizon FIOS network. Closer to home in Europe, I can point to the community networks in Scandinavia and Holland and even the grand plans to Fibre large euro-cities such as Vienna and Amsterdam. In my cherry picked areas, the citizens of the UK currently do and in the future will have a much, much worse communications experience.

Next is the dishonesty about the 24meg ADSL2+ experience - this is just as bad as the current myth that people are actually experiencing 8meg with the radsl solution. The regulator, OFCON, should get tough here and force the broadband suppliers to produce actually distribution graphs showing the day-to-day speeds that their customers are achieving. BT knows that only a small proportion of customers will ever get 20meg+ and they should be honest in this.

The problem is depending upon your point of view either the limitations of the BT last mile copper network or the economics of replacing it with its far superior competitor, fibre. Reynolds is also being slightly disingenuous with the claim that BT is introducing fibre on new sites. I know of one announced project which is for thousands of homes, whereas the vast majority of new homes being built in the UK still have copper being laid to them - BT aren't even bothering putting in a spare duct for the fibre future.

I firmly believe that BT think there is a need for public funds to assist with the fibre economics - I suspect they know the UK is falling behind globally and also know there is currently no political appetite to publicly finance the building of the next generation of access networks. I would counter that the public isn't aware of the pressing need to start building the next generation access networks so how can we possibly get public funds - if public funds are even required? I feel we should be more honest and at least have a public debate of what is required to take the UK to the next level.

UK Broadband Customer Service and Speeds

ThinkBroadband have published the results of their regular Customer Service Polls and there are few surprises:

i) The Premium Suppliers keep their lead
Zen Internet (76%), Newnet (75%), Entanet (73%), Supanet (69%), Madasafish (68%), prove the general theory that small is good for service. The message is clear that if excellence in customer service is needed the heavily promoted brands are not the way forward.

ii) Things can get better
The improvement in performance of Be which is now owned by o2 is unbelievable, year-on-year customer service has jumped by 16% on a very reasonable sample size. It will be interesting to see how the mass market launch of o2 will affect this.

iii) Things can get worse
The decline year on year across the board of the Pipex family of brands is unbelievable: Pipex (48% down 18%), Bulldog (38% down 9%), Fredom2Surf (53%, level), Nildram (63%, down 17%) It is hardly surprising that according to the Sunday Mail nearly everyone has pulled out of bidding for the company with only Carphone left fielding a low-ball offer.

iv) The Broadband Majors are struggling
None of the majors have results that set the pulse racing and provide a reason for anyone to buy their service: Virgin Cable (54%, down 4%), BT (50% down 7%), Orange (44%, down 8%), Tiscali (42% down 4%), AOL (46%, down 7%), TalkTalk (40%, stable),

v) Sky vs Virgin Media
Sky Broadband is almost at levels of customer service of Virgin Media which admittedly are nothing to write home about. It is also noticeable that the Sky brands (Sky + UK Online) are on an upward path whereas Virgin Media are on the decline. I think the Sky service is too new to make the survey results dependable, but the decline in Virgin Media is apparent for all.

I have no doubt that Sky will milk this for all its worth. In fact, during a recent Sky Brand Teach-In I saw this slide popping up.

Of course, while factually true it does help that Sky and Be do not have the legacy fixed speed base that some of the others suffer from. This legacy factor is true for Virgin Media, BT, Orange and Tiscali but but does not provide an excuse for TalkTalk. It also appears that Virgin.net is predominately a legacy base and is in need of an upgrade. It is worth noting that the thinkbroadband speedtest takes into account backhaul congestion and is not a measure of raw dsl speeds to the local exchange and therefore is a much more realistic estimate of real life performance than the (mis)advertised theoretical optimum speeds.

Conclusion
Interestingly, thinkbroadband admit that their survey is more likely to attract the disgruntled and therefore has changed the methodology to include push email requests. No survey is perfect, but I would argue that thinkbroadband probably understand the UK broadband market better than most and the 2006 trend towards more misery in the broadband market is indisputable. Let’s hope in 2007, this trend is reversed.

My personal advice for anyone wanting broadband is if you want a techie solution go for Zen Internet, if you're a non-techie and want people actually answering telephone calls/emails trying to solve your problems go for Madasafish, if you’re broke and already have satellite TV go for Sky and if you’re completely insane then go for TalkTalk. Well at least that’s my excuse ;-)

Channel 4: OFCOM review of financing

OFCOM produced a review of Channel 4 and whilst I have not finished reading all the materials, I thought I’d share a few graphics which highlight the importance of Big Brother to the broadcaster.

The big question is of course whether the tax payer should make up some of the dreamed up deficit from Channel 4. I haven’t finishing collecting my thoughts on this as I thought it would be best to calm down before I spit out a lot of venom that I might regret later.

I’ve also been playing with the various 2.0 photo applications and I can honestly say that I prefer the Google Application Picasa. I originally wanted to do a slideshow and was sampling Slideshare, but I think the rendering is so poor that unfortunately a good concept falls down. Flickr as many readers will be aware is my legacy Web 2.0, but I think Picasa is actually better on rendering, much more generous on space and has better integration with the desktop. My son told me to give PhotoBucket a try, which I did and it appears to have good integration with blogger, but I’m a little too old to play with the MySpace generation and the transitions would do my head in after a while. And anyway, I'd never live it down if I was caught out using internet tools recommended by him ;-)

Pipex WiMAX

There is very interesting news from the up-for-sale, Pipex, about the progression of its joint venture with Intel and co-operation with Nokia Siemens out this morning.

For a little background, Pipex owns a Fixed Wireless Access licence covering 168MHz of spectrum (3605-3689MHz paired with 3925-4009MHz) across the whole of the UK. This may sound a lot of frequency, but the real constraining factor is that it is not a mobile licence and it is quite high in the spectrum.

Pipex acquired the spectrum when it acquired FirstNet and had previously been running trials with Airspan equipment. Obviously, Pipex now plan on using Nokia Siemens in its trials. Even more interesting is that the equipment quoted in the News Release is for Mobile Wimax (802.16e-2005) but the standard also covers fixed access.

Graphic Courtesy of: Wimax Forum

I not a 100% sure what type of access are allowed in the Fixed Wireless licence. I’m guessing just fixed and possibly nomadic access. Although, the use of Mobile Wimax technology implies that if Pipex get the terms of their licence changed then a competitor to the mobile giants in on the cards. I’m not sure that OFCOM would permit this and the Mobile operators would go wild. I even think that it would mean a lower value for the forthcoming auction of 190MHz (2500-2690MHz) spectrum.

Even more interesting was the status of its much hyped trials in Milton Keynes and Warwick:

Pipex Wireless expects over 100 trial customers to be connected by the end of April, rising to 500 in total. Services being trialled include both business and residential offerings with speeds from 2Mbps up to 8Mbps being delivered.

Warwick is the second trial being built by Pipex Wireless in conjunction with Intel Solutions Services, National Grid Wireless and Warwick District Council. Three base stations have been built and the trial will launch on schedule with the Council as lead trial customer in early May. Initial products being provided are fixed line replacement, Council home worker connectivity and a WiMAX/Wi-Fi hotzone.

In other words, they are very, very early stage. I also think the progress isn't that impressive especially since the Milton Keynes trial was announced in Aug 2005 and the Warwick on Jan 2007.

After the plethora of Press Releases over the years, I’m reminded of The Boy who cried Wolf.

Blyk is Orange

So, Blyk have signed up with Orange as the wholesale partner for their launch in the UK this summer. I hope for the sake of France Telecom shareholders it is the first prepaid wholesale deal, because I rate the chances of Blyk’s survival in the medium term (3yrs) less than zero.

If fact, I’d go so far as to say, the more subscribers Blyk adds, the quicker they’ll get in trouble. Of course, I wish Blyk all the best as with all startups in general, but I just can’t see an ad-funded mobile service being sustainable, even if Orange gives them all the termination fees and have a rock bottom price for the service.

Combining Two Duopolists

I always thought that if you combined two duopolists, you got a monopolist. Apparently this is untrue – the spinmeisters at Arqiva call it a “unified UK communications infrastructure provider” - too funny.

I suspect this story will run and run as the competition commission get involved and provide plenty of material over the next 12 months. The reasoning that everyone else creates monopolies seems extremely weak to me.

Sky vs TalkTalk Unbundled Numbers

I played an interesting game of email tag this evening with a reader from the broadcasting sector that is no great fan of the Murdoch clan. The premise was that if TalkTalk isn’t performing in the broadband sector then surely Sky must be having a nightmare?

First, the numbers: TalkTalk announced that they had unbundled 375k as at 31st March, whereas on 28th Jan Sky announced they had 259k broadband customers of which 87% were on-net or unbundled in other words 225k. In addition, the run rate of Sky was 20k/week which means 180k in total or 157k unbundled. In other words, Sky is forecasting higher unbundled figures than TalkTalk had at 31st March.

Admittedly, the Sky figure is an estimate but Sky have historically, unlike some, outperformed their estimates and in fact James Murdoch said in the week before the results announcement there were 28k unbundled and that they were building the capacity for 40k/week. I am pretty confident that Sky will finish the quarter with more LLU customers than TalkTalk.

Also, I am ignoring the 280k TalkTalk “free” ipstream vs my own estimates of the Sky ipstream customers of around 57k. I would argue that the big difference between the two is that TalkTalk freely admit that their “free” ipstream base is actually losing money, whereas Sky charges a premium price and is trying to make a profit.

Also, this analysis ignores the acquired 327k unbundled customers from AOL – this is true. I am sure Murdoch will put the pedal down in the forthcoming few quarters to try and overtake Carphone and the rest of the field to become the #1 LLU player in the UK.

The financials are also another factor and I think we’ll have to wait for both Sky and Carphone to release their results for a proper comparison. Sky invested £146m in their H1 - £63m in EBITDA losses and £83m in Capex. The biggest point of interest for me is whose M&A strategy is better: Sky’s or Carphone’s? The only thing clear at the moment is that both decision markers are putting their own wallets on the line with them owning substantial equity holdings in their respective companies.

I think the whole analysis highlights another big difference between the companies –the Sky unbundling process is clearly better designed than the TalkTalk process. I’m not sure how much can attributed to superior engineering skills at Easynet (Sky) compared to Opal Telecom (TalkTalk), but I suspect a lot. This is ominous for Carphone on an ongoing base, because I believe as time goes by engineering skills are going to be a big differentiator not only in terms of reliability, but more importantly in cost and traffic management.

Even given all this, the jury is still out on whether either or both will be having nightmares in a three to five year horizon.

Duncan and Creative Subsidies

There is a fascinating interview in todays Telegraph with the Channel 4 Head Honcho, Andy Duncan, in which he freely brags about thinking creatively about how to achieve a further public subsidy.

Personally I find this attitude abhorrent. Andy Duncan knows full well given some of the tripe that Channel 4 broadcasts there will be a public outcry if a single additional penny is handed over. So instead, he wants the cash hand out to be hidden in a tax-break subsidy to his suppliers.

All I can say is thank goodness the UK government is skint; Gordon Brown may find the potential of a £1bn price tag for tripe too mouth watering to resist.

In other news, OFCOM today revealed in their annual plan for 2007/8 that the Channel 4 funding review will be complete this year. On a related issue, I’m amazed that OFCOM still remains silent on the 40k complaints they received for this years “Celebrity Big Bother”

Telenor: Lateral Thinking

I have to congratulate one of my favourite historical shorts on the proposal for floating part of their stake in the Bangladeshi operator, GrameenPhone on a local exchange. This is an extremely ingenious solution to the problem of how to deal with a Nobel Peace Prize Winning minority shareholder (38%) who wants to take control of company in order to give it away to the subscribers.

Although the details of the deal are vague at this moment, I suppose Telenor will float around 11% of their equity leaving them in control with a 51% shareholding. Then if GrameenBank want to give away their shareholding to subscribers they are freely permitted to do with shares that actually have a value and currency. Once the forces of capitalism weave its magic, I imagine over the medium term most of the small shareholders would sell out to more sympathetic and compliant institutions. A couple of economic earthquakes later the institutions will be literally begging for Telenor to buy out them of their shares at a reasonable price. And in true Houdini fashion, Telenor will have escaped the clutches of a troublesome minority shareholder without causing any harm to themselves.

Absolutely brilliant, top marks.

I was beginning to wonder if capitalism would ever triumph in this difficult situation, especially with the news that Telenor’s biggest shareholder was going to finance GrameenBank in their expansion plans onto the African continent.

It also looks as if the pressure is lifting on Telenor in Thailand with the news that a local float is planned of its holding in DTAC and the military junta is unlikely to sequestrate the assets of Shin Corp.

I’m expecting to hear soon a similar plan for the Telenor venture in Malaysia. All of these actions will actually significantly reduce risk in any Telenor valuation, given that analysts now have a benchmark price to use.

Carphone Still Struggling

I know this must sound slightly weird, but I actually felt quite sorry for Charles Dunstone on today’s rapidly arranged Carphone Warehouse (cpw) conference call. He definitely sounded subdued and the tone of the analysts whilst not quite hostile has definitely moved away from the sycophantic nature of previous calls.

Mind you, I’d struggle to sound enthusiastic if I had to kick off the week by knocking off £20-£30m of 2007/8 profits which according to the consensus of 15 analysts should come in at around £255m. This is now the second revision in 6-months after the Oct £20m increase in broadband startup losses.

It is also obvious that last week wasn’t particularly nice for Dunstone with the share price dropping around 10% with all sorts of rumours flying around the market. The early release of this mornings trading statement is probably an attempt to quieten down the gossip in the market.

On the retail front, there were a couple of questions about expected revenue growth in 2007/8, which were answered in terms of modest like-for-like growth and connection growth being approximately equal to expected store growth of 15%. In other words the questions were side-stepped. I know “like-for-like” revenue growth is the archetypical retail metric, but I’m not sure how relevant this metric is for cpw on a go forward basis. For instance, if the operators cut hard the level of commissions, then cpw could just reduce the amount of cashback they pay the customers or not bundle free gifts in the package and then gross margins could remain the same. For me, absolute gross margin growth is the key underlying metric for the retail business.

Another important metric for retail is the length of contracts on the market and despite Dunstone proclaiming that customers don’t like 18 month contracts, this rings a little hollow to me, especially given that talktalk offer 18-month contracts for their voice and broadband bundle. On a brighter note, there is a little experimentation starting in the marketplace with the Virgin Mobile 6-month contracts and the Vodafone and O2 airtime only packages. I also see the forthcoming market assault of monthly flat rate all you can eat mobile internet packages as another opportunity for cpw.

Personally, I think that there is a very different retail opportunity emerging to the traditional “pump and dump” lowest tariff with a handset thrown in to “seal the deal” model of the past. Historically, cpw has always been the market innovator and I see no reason why they can’t be the innovator again in the future. Another factor running in cpw’s favour is the more complex and diverse the mobile packages become, the more important and valuable an independent advisor becomes, even one with their reputation a little tarnished.

On the broadband front, I just can’t see any redeeming features in the marketplace for cpw. It seems to me that cpw still admits to problems in provisioning and support 12-months post-launch. Although, the rollout of the network equipment in the exchanges is progressing to plan, I can personally testify that cpw still has network reliability and performance issues.

The comment on dslams was also slightly strange: dunstone saying that partial unbundling of the aol base could not be routed through the huawei dslams and instead could only be served from the fujistu dslams. I’m sure at the time of the purchase of aol, dunstone said this was possible. I’m assuming given the other problems that they are taking a “minimal risk” approach and that it is a just a dslam configuration issue. This will account for the reason that so few aol customers have been partially unbundled. It also gives hope that if executed correctly there is plenty of opportunity for margin improvement on the aol base in moving from ipstream to partial unbundling.

The comment on customer churn also made me laugh – “after the initial 2-3 month provisioning period, the monthly churn is around industry levels of 1%”. Is this a joke? The entire TalkTalk almost free broadband base is still within the initial 18-month contract. So we are talking, 15% leaving during the contract, much higher figures exiting during provisioning say 5-10% which will leave around 75%-80% who serve out their talktalk sentence. Obviously, there is a huge potential for churn in the final 6-months of 2007/8 - time will tell and the clock is ticking.

The cps voice only base is down to 1,860k from 2,570k a year ago, which equates to a monthly net loss of 2.3% - this is not the churn figure which is probably much higher and takes monthly gross adds out of the equation. I’m amazed how quickly this base is disappearing. The same goes for the dial-up base which is down to 505k from 575k a quarter ago. These should be the elements of the division which are driving the profits forward as the sac’s and initial high customer hand holding should have been long past and therefore the customers are theoretically highly profitable on a cash-basis.

Unfortunately for cpw, I don’t think broadband pricing has yet bottomed out and there is plenty of room for Sky, Virgin Media, BT, Orange and o2/Telefonica to cause further pressure on the margins and even more expensively take broadband to the next level with video services which will make the TalkTalk offering looking rather staid. I reckon that alone Sky is 1 million subscribers sub-scale on the LLU front (1,500 exchanges @ 1k subs on average) and that is before the mobile operators. At current pace, I estimate there is at least three years price competition going forward before things settle down. And that doesn't take into account the cost of new technology deployment such as the reconfiguration for the bt 21cn and potentially pockets of FTTH, especially in the built up city centres.

And all that is without a commentary on other problem areas such as:

• the german (phonehouse) and uk (fresh) mvno market where margins seem to be under pressure at the other mvno's who report on a more frequent basis; and
• potentially the disruption occuring in the european handset trading market, where HMRC is causing a lot of cashflow problems to both minor and major players.

In summary, I think the retail outlook is not that healthy but there are options to develop gross margins and if anyone can pull a rabbit out of the hat – it is cpw. The broadband business is looking like disaster central and to be honest I remain far from convinced talktalk can deliver any sort of profits, especially after acquisition amortisation costs, let alone market leading profits. Most of the analyst reports that have passed my eyes seem to indicate a huge upswing in Telecom Services profit in 07/08 to around £120m – I just struggle with this number.

And that in a nutshell is why I think cpw shares are still vastly overpriced...

Voda UK: Gaming the Market

There can be no doubt that overall profitability in the UK Market has been steadily declining, probably since the 3rd March 2003. Voda themselves assign the turning point to around Dec-04, but this ignores the losses at H3G UK and the amortisation of the 3G licences. This seemed to be the focus of the City on Friday and resulted in a sharp drop in Voda share price with apparent surprise at the drop in EBITDA in the UK which has been particularly severe in 2H06/07.

The more interesting part to me was that Voda UK sent four massive signals to the market which could in the short run lead to stability in margins and in the medium term a return to slight margin growth in the UK for the whole industry. Some of mathematics behind Game Theory can be fairly tricky, but fortunately the concepts are pretty easy to understand. This means it is quite easy explain the signals covering pricing, consolidation, spectrum and the value chain.

Pricing

Voda announced the old days of not responding to competitor price cuts and staying out of the market to improve year end EBITDA figures are over. Even more interesting is that despite Voda being #4 in terms of customer satisfaction and #3 in brand satisfaction in the consumer market, Voda would continue to charge a small single digit premium in pricing to their “reference competitors” which happen to be o2 and orange. The premium had risen to 25% in Mar ’06 in a bid to maintain margins.

In other words, if o2 or orange cut their prices, voda will respond immediately. In other words there is very little incentive for o2 or orange to cut their prices, because they know any gain will be extremely short term, not lead to any sustainable advantage and most importantly hurt them.

It is noticeable that both subscale operators, T-Mobile and H3G UK, are out of the “reference price” equation and their reaction will be extremely important. H3G UK seems to be currently out of the market and seem to be desperately focused on the drive to minimize losses – an aggressive market position will do nothing to help this strategy. T-Mobile were extremely aggressive last year with pricing in the Flext contract tariff and it will be interesting to see if they now continue with their rumoured equally aggressive family plan tariff after Easter.

It is important to categorically state that I do not think this is collusive behaviour as exhibited by some extremely naughty companies in some oligopolistic markets – it is more akin to a Nash “non-cooperative equilibria” situation. This is a very important point for future public policy, but is normally lost of regulators driven by politics rather than economics.

OFCOM has also done its bit to bring stability to the market with last week’s termination rate announcement. The fact that OFCOM has introduced symmetry in prices between 900MHZ (voda and o2) and 1800MHz (orange and t-mobile) operators mean there is even less incentive for orange and t-mobile to cut other tariffs in the short run. The huge pain inflicted on H3G UK with massive termination cuts is catastrophic for their business strategy of huge cross-net bundles. I expect either a revamping of bundles, a huge legal fight with OFCOM or, most probably, selling up and exiting the market.

Consolidation

It is pretty obvious that the purchase of H3G UK by one of the four operators could push the market further towards equilibrium. This would be especially true if t-mobile bought H3G UK. T-Mobile is the smallest of the four network players and therefore would benefit most from the “network” effect of loading additional traffic and customers onto their network and would also have the lowest physical network overlap compared with the other three operators.

Arun Sarin was explicit that he wanted consolidation, but he preferred someone else to buy even mentioning the potential purchaser - t-mobile in the UK. He even threw in a bonus ball saying that Wind should buy H3 Italia. This is extremely important because Voda is more or less saying to t-mobile that they will not force the price up in an auction situation. It is also well known that the new CEO of t-mobile has said that he would consider purchases in Europe to consolidate the market.

The joke question of the day was from the analyst who said “Given that H3G UK is currently out of the market, what is point of buying them?” I’m sure from the look on Andy Halford’s face that he thought the question was a trick one and therefore very quickly threw the potential hospital pass to Vittorio Colao. It should be obvious that a profit pool split up between four players is far more lucrative than a profit pool split up between five players. Also, and given the historical progression of the UK market, there is a lot of value in having one less potential schizophrenic player in the market. It also helps that there is one less buyer for government auctions of spectrum and driving up distribution costs.

Spectrum

Potentially there are three big auctions looming over the next couple of years:

• 190MHz (2500-2690MHz) which is perfect spectrum for WiMax and potentially for LTE if it ever exits halls of the standards bodies.
• 40MHz (1452MHz-1492MHz) which is near perfect for MobileTV
• The Digital Dividend Spectrum (470MHz-854MHz) which is top notch high value spectrum for loads of applications.

Arun Sarin was extremely explicit is stating that there would be no repeat of the 3G auctions and that Voda has plenty of spectrum currently available. Back in 2000, voda exhibited much more testosterone fuelled behaviour than any other operator. I am reading this as Voda stating that they will quite happily pull out of auctions rather than overpaying. This is bad news for the UK Government Treasury as they are desperate for the cash, but great news for the mobile industry and Voda shareholders.

I also suspect that OFCOM will need to be extremely careful in the auction design, because they could be horrified at some of the outcomes. For instance, in the MobileTV space, the mobile operators might not even participate and leave someone else to build and run the service akin the NationalGrid Wireless and Arqiva roles for the DTT and DAB industry.

The only good news for OFCOM is that spectrum is the oxygen of the mobile industry and if the mobile internet takes off this year with the forthcoming flat rate pricing models in the consumer market then the operators will need plenty more spectrum – in fact the more the merrier. Despite Arun Sarin claiming he has plenty of spectrum, I think he might be more than a little shocked how quickly the 2000 spectrum gets eaten, if the youth start uploading photo’s and video’s in volume to MySpace.

Value Chain

Vittorio Colao was also quite explicit in mentioning that he didn’t feel the reduction in profitability in the mobile operator space was being shared by other participants in the mobile value chain. This is bad news for all Vodafone UK suppliers; but personally I think the comment was aimed at the mobile distributors and retailers.

As much as the retailers claim they are efficient distributors, Voda want commissions reduced further. Voda led the way in the consumer segment by the exclusive deal with Phones4U, but it looks like the situation could get worse for the retailers. This will not matter if the reduction in commissions drives out the cashback and free gift deals which I believe fundamentally undermine the value of mobile in the eyes of consumers. Again, game theory more or less guarantees that once one operator breaks the destructive downward spiral of increased commissions and proves to the market that the strategy is not affecting net sales, everyone else will follow - Game Theory can easily be used to explain the Sheep behaviour typically exhibited by network operators throughout the world. I fear that the retailers and wholesalers will be caught in a huge spiral of reduced commissions over the next few years until they arrive at a sustainable level. Add to this that Voda believe that there is going to be a contracting market in Gross Adds and the future doesn’t look rosy for retailers and distributors.

Voda UK is also tinkering with its distribution channels with four initiatives: wholesale, corporates, SMEs and consumer.

The revelation that Voda only has an 8% market share of the £1bn pa wholesale market means to me that BT is roughly paying over £80m a year for its MVNO fees. Personally, I was quite surprised by Vodas estimate of the size of this market and therefore think this must include the roaming revenues paid over by H3G UK to Orange and the payments from Tesco to o2, as well as the big T-Mobile deals with Virgin Media and Carphone. The deal with ASDA should be seen in this context and although has generated lots of noise in the press, I wouldn’t be surprised if it fizzles out in a couple of years – the comparision for me is with Sainsburys which ending up giving its mobile assets away to Carphone and exiting the services game to focus on prepaid handset sales.

In the Corporate arena, I am fascinated by the move into ICT side of the market with a couple of small recent acquisitions. This could create huge long term barriers to churn at these companies and I think could protect the Voda 54% share in the Corporate sector and the 70% share of the Government sector. It will be a long hard route, but is an interesting addition to sales capabilities.

I am more apathetic about the SME deal with PCWorld to sell Laptop Access and configure it in store. Again, it is one of those deals that generates plenty of publicity, but I doubt will seriously increase Voda’s 40% share of the SME market and 30% of the SoHo market.

The focus for 2007 in the consumer segment is the growth of online sales makes a lot of sense and offers a lot of potential especially at the value end of the consumer business which is incredibly sensitive to levels of third party commissions. Again, this is extremely bad news for the online retailers, because the Voda online advertising budget will dwarf the rest and there is a potential for Voda to crowd out the market. In fact, I’d go so far as to say if the network operators get their online channel sorted, it could signal the end for independent online retailers and lots of new revenues for the online comparator sites such as uSwitch.

Conclusion

The Mobile Industry is a perfect industry for the studying the real life applicability of Game Theory to an Oligopolistic Market. This is a fact but what is more uncertain and of far more value is whether the UK market has reached the bottom of the cycle.

Personally, I sense that appetite for fighting amongst the operators is drawing to a conclusion – especially in the core voice and texting market. I also sense a big appetite for cost reduction across all the operators and this is great news for shareholders, but terrible news for suppliers, especially the UK government – chief supplier of spectrum.

Of course, peace will not completely break out – after all that will run the risk of a Competition Commission Referral. Instead, I see the battle ground moving to the mobile internet and each of the operators chasing the growth in this revenue pot. I think if this happens it will actually be great news for the industry overall.

So, I am quite optimistic about the future for the UK Networks for the first time for a couple of years: margins could stabilize over the next six months and from stabilization it is not hard for a positive virtuous circle to start developing with year on year gradual margin improvements, especially if the macroeconomic environment remains benign. However, it will only take one or two irrational acts for open warfare to break out yet again, but overall things are looking up.