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Wednesday, January 31, 2007

Voda UK – Pump Up the Volume

The quarterly game of trying to analyse the mass of Voda Stats is upon us, please find enclosed my take: (*** see below for huge disclaimer and numerous assumptions)

Quarterly Net Adds were especially strong. Active Prepaid growth was around 357k to 8,012k which seems healthy, but Voda added more last Christmas (450k) and then seemed to spend calendar 2006H1 losing prepaid customers (1,018k), presumably as the base was cleaned up. However, the postpaid growth of 175k was the best for three years and followed up from 120k growth in the previous quarter. Voda UK is obviously gaining subscriber momentum in a saturated market. There is a question whether this growth is new customer to cellular, churners from other networks or even dual-triple SIM players, but it is a net positive.

However, this is hardly surprising given the tariff rebalancing of both prepaid and postpaid in the second half of the year. I calculate that the voice price per minute has dropped year-on-year by around 12.5% whereas the MOU has grown by around 13.9% and given the active base has dropped slightly y-o-y (0.9%), this leaves Voda slightly down on Voice Revenues. I believe that the growth in reported revenues (2.6%) y-o-y is from messaging and data revenues.

This price drop of tariffs together with the fact that the business segment is far more important to Voda than the consumer segment, obviously leads to confusion about whether the dropping of Carphone was worthwhile. Arun Sarin said on the call that net adds from both direct, indirect and Phones4U exceeded expectations. The justification for dropping Carphone was in terms of individual customer lifetime profitability and sales effort inconsistency so net adds are only a small part of the overall economics question. A slight insight in the overall UK SAC position would be extremely revealing if only Voda would provide the data.

The other part of the economics puzzle that Voda UK keeps extremely close to its chest is the percentage of on-net traffic. Obviously, the Voda family plan and some of the business tariffs are geared towards keeping as much as possible of the traffic on-net and incrementally the cost of carrying this traffic will be next to zero.

Churn although dropping is still humiliating high on both postpaid and prepaid bases even though the prepaid churn seems to been inflated by the base clean-up last year. Given the Voda share of the business and the typical miniscule churn, the churn on postpaid consumers must be horrific. This has to be the biggest challenge for Voda UK to overcome. In fact, it is an industry problem and I think that both length of contracts and distribution networks will feature as the key strategic concern in 2007 for all operators.

Overall, given these metrics and the momentum that o2 have generated during the year, I am almost certain that o2 have overtook Voda in q4 in terms of UK cellular revenue market share. However, I still think Voda will lead on profitability and cashflow. For the worlds leading mobile company to lose the #1 market position in its home market is embarrassing and gives hope to every Voda competitor throughout the world.

Given all this, I’m currently neutral on the Voda UK Fiscal Q3 performance. 2007 needs a dramatic improvement: it appeals to my sense of humour that it will probably take an Italian to reverse several years of lack of focus and poor decisions.

***Assumptions and Disclaimers:
#1: All inactive customers are prepaid: so of the claimed 16,939k customers with an inactive rate of 86.7% gives an active base of 14,686k customers.
#2: If the prepaid % is 60.6% then the contract % is 39.4% and these are all active: therefore active contracts customers are 6,674m and active prepaid are 8,012k
#3: ARPU needs to be adjusted for the inactives ratio to give ARPU of actives
#4: Average Quarterly Actives = (Current Quarter + Previous Quarter)/2
#5: % Revenue of Messaging and Data can be applied to Average Quarterly Active to give approx. Quarterly Revenue. Voice Revenue makes up the balance
#6: The differential between these service revenues and historic reported total revenues for the UK business is accounted for by equipment + other sales.
#7: These assumptions can be applied to all reported KPIs for the UK back to June 2004.
#8: All this is the opinion of Telebusillis, who has still not forgiven himself for not investing in Voda after any old fool should have spotted that Sir John Bond would have provided a short term impetus to the share price.

For those wishing to critique my assumptions or even enhance the humble model, email me and I will send by return a basic excel spreadsheet.

If anyone wants to complain about the size of the font for assumptions and disclaimers, I will only say people in glass houses shouldn't throw stones ;-)

Tuesday, January 30, 2007

Bloggers Block and the PSP

My Bloggers Block of last week seems now to be over and normal service is resumed.

I can officially put the Bloggers Block down to depression caused by the OFCOM Public Service Publisher proposals. How they can seriously expect me, as a UK Taxpayer, to pay my share of the £100m per annum for that pile of rubbish makes me want to cry. I will definitely be drawing up a reply to the consultation which closes on March 23rd and I encourage all other UK Taxpayers to reply and express their disgust.

After all, if 44,000 can whinge to OFCOM about Big Brother, I’m sure we can round up a few when OFCOM is proposing to Burn Our Money.

US 4Q2006 Battle of the Titans

us4q vzw att

The underlying story of the last year is one of Verizon Wireless (VZW) catching Cingular in terms of bulk and Cingular catching VZW in terms of efficiency and profitability.

In twelve months, Cingular has added approx. US$1.4bn in cash generation and US$778m in Operating Profit. This is a fantastic achievement and shows that the merger benefits are being achieved. Cingular will struggle to catch up with the VZW margins before the Analogue and TDMA networks are turned off in 1Q2008. I also expect the rebrand of Cingular to "at&t mobility" will be expensive and do nothing in the short term to help with churn.

Cingular has a lot of work to do to reduce churn to VZW levels: a 0.66% monthly churn rate differentiation may not seem like much, but it equates to 1,272k gross customers that Cingular have to recruit each quarter just to keep the status quo with VZW. VZW is very smart in now reporting three figures for churn: retail postpaid, retail prepaid and wholesale. I suspect Cingular will have to repeat this categorization in 2007.

Meanwhile, VZW have not progressed in the year with the Operating Margin with it remaining in the 25% range. In the 4Q conference call, Denny Strigl, said that the margins would remain steady throughout 2007. However, maintaining the margin has resulted in US$300m (12.7%) increase in absolute profits which is also a great number. It certainly puts the stagnant profits in many markets of the 44.4% minority partner, Vodafone, in perspective and shows why Voda still loves VZW as an asset.

The source of this growth in the bottom line for VZW was the Revenue growth and VZW now advertise themselves as the #1 USA wireless network in terms of revenues. Verizon is closing fast on Cingular on the all important Service Revenue metric and will probably overtake them in 1Q2007. This is because VZW has a higher average spend per customer (ARPU) which is partially a result of VZW having a higher number of the higher spending retail postpaid subscribers on its network.

Personally, I think Cingular and Sprint are falling into a “European” style trap of counting the wholesale customers as customers. This is because as the wireless market inevitably saturates, Wall St will start to focus on ARPU and Churn Indicators. Whilst, wholesale customers are typically more profitable percentage-wise than retail customers, they bring down the key ARPU and Churn metrics. Large successful European Operators such as Vodafone and O2 have started not to count wholesale customers and therefore inflate the overall ARPU figures and lower the churn figures. This trend is not a problem for VZW as it has the lowest percentage of wholesale customers on its base.

VZW is now advertising itself as the #1 network in terms of Retail Customers. I expect that by the end of 2007 given 2006 growth that VZW will actually overtake Cingular in terms of overall customers. Although a successful launch of the iPhone could help Cingular in overall numbers.

I was a little disappointed with the Verizon comments on the conference call about the iPhone. For one, it runs the risk of starting a slanging match with the main competitor. A little humility and quiet confidence with - "We are happy with our position and will compete when the time is right" - would have been suffice for me. However, there was clearly pressure on Denny Strigl to answer - why did Apple not pick VZW?

I thought the answer about the distribution network was interesting because I remember reading a while back about Wal*Mart putting huge pressure on the Movie studios for equal prices for DVDs and digital downloads. I believe they also had a fight with Disney which Jobs has a large shareholding in. Wal*Mart didn't want the same thing happening in DVDs as is happening with iTunes and CDs. I think given that Wal*Mart will predominately sell prepaid that this comment was purely VZW sucking up to Wal*Mart and creating trouble for Cingular in the process with one of the key US prepaid distributors.

The other answer was the high level of on-going commissions that Apple requested. I also think was intended to apply pressure on Cingular within the analyst community. Basically, VZW was saying the deal isn't worthwhile and Apple gets to eat too much of the cake. I'm not sure how Cingular can answer these allegations without revealing the contract terms. One thing Cingular have in their favour is that in early '08, the analogue and TDMA networks will be turned off, the rebrand will be over and therefore Cingular margins will shoot up naturally. Wall St will be none the wiser and the exclusive deal will seem justified to the financial community. This is of course assuming that the details of the deal don’t leak out beforehand which will be what VZW will be hoping for if the terms are indeed onerous.

The other point is that the answer looked canned and ready to go and missed the big chance to plug CDMA innovation and technological strength versus W-CDMA. The question was actually about VZW's poor handset range - which I don't think is true. In terms of functionality, I think VZW has always led Cingular. I also think with the imminent launch of broadcast mobileTV and the poor data speeds on the iPhone, Denny Strigl missed a trick or two.

Given that the iPhone is functionally inferior to handsets already on the market, the key to success is the power of the Apple brand and the fact that many followers of the Apple Cult will undoubtedly buy the handset in droves like lemmings on a cliff. My big question is who are these lemmings currently signed up with? If they are “cellphone poseurs” they may already be users of trendier Cingular GSM handsets and therefore the iPhone may just be an expensive exercise in cannabilisation. I think the T-Mobile Sidekick crowd will also be sorely tempted to jump ship to the Apple brand.

The probability of Samsung and LG not rushing out a CDMA handset with a touchscreen and motion detector before the launch of the iPhone is next to zero.

I can't believe in the UK that voda, orange or t-mobile will launch the iPhone product and destroy their music strategy in the process. I am guessing that the UK launch network will be the "all fur coat and no knickers" operator - o2. We will then really see the power of the Apple brand and Mr Jobs may not like the answer. I can guarantee that the US$599 price point won't survive for a nanosecond in the UK.

Joost & BBC Video-on-Demand Plans: Fatally Flawed Design (at least in the UK)

At last - someone apart from myself is starting to look at the Joost architecture and realise that it will not be allowed to work – at least in the UK.

I totally agree with the article that content or lack thereof will be a huge problem. The founders of Kazaa got away with seeding the P2P pirate music market because they were just not on the music mafia radar. This time around Joost will be monitored by every legal practice in Hollywood and the first sign of any copyrighted material being transmitted will result in more subpoenas than any rational person would think is possible. In the long run, there may be an extremely small market for user generated content, but currently YouTube rules this roost. Why would anyone upload their content to Joost?

The biggest problem that Joost face is that the UK ISPs will just not give them enough bandwidth to make the service usable. Four of the big five UK ISPs (BT, ntl, Tiscali and Orange) have or plan their own video services and they have no legal right to provide guaranteed bandwidth. Even worse, in the UK there is a huge precedent for limited bandwidth on certain applications and most users terms and conditions allow ISP to aggressively pursue this practice. Current throttling of P2P networks on some networks reduces available bandwidth to around 20kb/sec at peak hours whereas the article indicates that 1Mb/sec is required to make Joost usable. Personally, I think that the majority of ISPs will deliberately target the Joost service to make the service unusable and strangle it at birth. Joost will have zero comeback.

The more intriguing situation will occur when the BBC finally launches its Video-on-Demand services. I think the streaming service is badly designed because the ISPs have zero incentive to enable multi-cast technology on their networks and therefore the service will be unusable for the vast majority of the UK. In fact, if I owned a mid-sized network with no video plans, I’d go to the BBC and ask for financial support to enable multi-casting on my network – after all the BBC already pay ntl (Virgin Media) for carriage and pay for satellite capacity from Astra. Why should ISPs not receive revenue for providing the bandwidth?

In terms of the BBC P2P service (iPlayer) again I believe it will be throttled to death, but a tiny percentage of users will not care and use the service even if takes a couple of days to download a hour length drama. The advantage that the BBC has over Joost is that the BBC actually own the copyright for some valuable content. The problem the BBC has is that they plan on DRMing the content and therefore their P2P network will be a lot less valuable than one’s that offer the pirated versions of the content which will inevitably appear.

There is a reason that BSkyB has spent a lot of money on buying a state-of-the-art UK fibre network. It is also very interesting the way BSkyB and Google are currently dating and planning a few joint services.

I think it is third time unlucky for the founders of Joost but the pile of cash that they have made from Kazaa and Skype will be more than adequate compensation. I think the BBC plans in their current format are fatally flawed, but they have the financial power to pay the ISPs for the bandwidth to make the service successful. Channel 4’s plans are even worse than the BBCs expecting that the user will pay for the content, but the CEO already has the begging bowl out for state financing.

Monday, January 29, 2007

Vodafone: Already 3.5 million net adds in the bag

Voda will report their 3Q KPI’s on Wednesday, but some of their associated companies have already reported:
  • Vodacom in South Africa added 2.454m customers of which Voda has a 50% share;
  • Verizon Wireless in the USA added 2.305m customers of which Voda has a 44.4% share;
  • Egypt added 771k customers of which Voda has 54.9% share. Voda will also add 381k through the stake increase in Egypt of 4.8%; and
  • In India Bharti added an amazing 4.910m customers in the quarter of which Voda has a 10% share.
Probably the biggest net growth in the customers for the quarter will come from Turkey which I estimate to be the only subsid to beat the 1.227m net customers in South Africa.

The most interesting markets are in the UK where people will be focused on the lack-of-Carphone distribution effect and Germany which is the source of much doom and gloom in the press.

Of course, all the above has to be balanced by the sale of stakes in Belgium & Switzerland which will reduce the overall figure.

I think this will mean that Voda will probably fall a couple of million short of the magical 200m subscriber figure. And anyway with Voda, people should really discount the overall figure to account for the dubious policy of counting inactive customers…

Wednesday, January 24, 2007

OFCOM: BBC On Demand Radio

I believe the OFCOM report has shown the limits of the whole Market Impact Assessment process by focussing on two small areas with their recommendations for on-demand radio.

The first is that the BBC radio product could impact the audio books market. This is completely ridiculous. In the first instance, the size of the market is completely tiny with an annual turnover of only £71.4m of which the BBC themselves has a 32% market share. Secondly, publishers will not hand over the radio serialisation rights to the BBC if they are worried about ruining the potential future sales from audio books. The reason they allow the BBC to broadcast an abridged version of the books in the first place is for promoting the printed copy and I don’t see this being affected by the on-demand service. In fact, if this was the case then no-one would allow promotional adaptations appearing the Sunday newspapers. Most importantly, the decision whether to allow broadcasts should be left to the publisher and not require any artificial intervention by a regulator.

The same argument can be made over classical music – if a performer wants to appear on broadcast radio, but not allow the material to be available on demand then it is up to them to negotiate those rights with the BBC. Secondly with respect to the BBC Orchestra – the debate should be whether the BBC should have an orchestra rather than through which medium their content is allowed to be distributed. Exactly the same argument can be applied to other formats such as on demand availability of rock concerts. For instance, these days Glastonbury is so huge that they could quite easily say to the BBC that video and audio broadcast is permissible, but the content should be available on demand. Although it should be noted that most of the highlights seem to miraculously appear on YouTube shortly after the concert. OFCOM instead of focusing on this theoretical abuses of BBC power should investigate real abuses of BBC power such as the recent Noel Gallagher (Oasis) revelation that if certain BBC DJs do not gain access to new material before anyone else then they refuse to broadcast it. Apart from showing that some BBC DJs care more about their egos than their listeners, this exposes the danger of permitting the BBC to have such huge market shares in radio.

OFCOM mention that people are not worried that iPlayer can only be used for BBC material – what a surprise, which commercial supplier would really want their stuff branded by the BBC? In fact this shows the arrogance of the BBC who seem to believe from a standing start that their iPlayer will dominate the player market.

The biggest impact that OFCOM have missed is that the BBC should not force people down the route of using the iPlayer, after all the BBC does not govern which brand of radio player is permitted to listen to content. In effect, the BBC should place the content on a server and publish APIs that allow anyone to access them via any means. In effect, the BBC should open source the content.

The BBC is predicting that usage of the service will grow to 304 million hours by 2011. This seems quite high to me and I’d love to know how many unique users the beeb expects.

Tuesday, January 23, 2007

OFCOM: BBC On Demand Proposals

OFCOM have released another monster (and interesting) report which is the Market Impact Assessment on the proposed BBC On Demand services. It is too early for me to have digested the whole 168 pages, but there are three points that immediately spring to my mind from an initial glance at the report.

OFCOM estimates of Video Services Consumption


This picture will be so scary for the traditional advertising based networks: basically they need to develop alternative sources of revenue – fast. It is especially scary for Channel 4 and five, who buy or commission the majority of their content and therefore will probably, not own many non-broadcast rights.

It also shows the relative importance of PVRs compared to VOD which I totally agree with. The lack of subsidized PVR on the Freeview platform shows the underlying fault in the distribution compared to cable and satellite.

DVD viewing are expected to decline, which I also wholeheartedly agree with and I consider the HD-DVD wars will come to pass as the biggest waste of money since World War I.

I believe that the four long term underlying trends facing the networks are:
  • broadcast hours declining, but remaining especially strong for event TV such as live sports and news. A larger and larger chunk of the total hours watched will be served by consumers who are just not appealing to advertisers;
  • non linear viewing with PVRs will explode and will be rapidly become the preferred method of watching dramas and non-event TV;
  • Video-on-demand (or downloads) will serve the long tail, especially for films and old classic series. I believe the BBC approach of 7-day catch-up will fail in the market; and
  • the terminal decline of physical media (eg DVD or CD) as a means of distribution.

Flow of Funds


The above chart neatly sums up the problems for the typical Free to Air broadcasters:
  • the fastest growing part of the industry is subscriptions (ntl + sky) which is growing at 14% per annum;
  • advertising is shrinking; and
  • the licence payers which is the viewers part is also growing at nowhere near the rate of subscribers.
Therefore in the eyes of the external producers and rights holders, it is becoming more and more desirable to do deals with Sky and ntl rather than the traditional channels.

I also believe that the approach of BT, Channel 4 and five in their VOD services is also fatally flawed (via small charges). The bundle will beat it every time and this is something that Sky Anytime offers.

On the bundle, I also expect Sky to start to take aim at the DVD Rental and Sale market quite soon. I can imagine them offering for instance at £10/month subscriptions – 5 DVD Rentals per month either the new releases via satellite broadcast or for the long tail via Sky Broadband to your PVR to watch once at your convenience. No need to visit Blockbusters ever again. Also you offer the capability to buy the DVD once watched and all the DVD extras are downloaded. The experiments will probably start this year once the PVR is connected to Sky Broadband. It might start with just one Hollywood studio, for instance, Fox.

Basically, the channels face being squeezed by both the external right holder and the subscription channel retailers. For students of Media Industry History, it is of great note how John Malone at TCI managed to accumulate great capital wealth, by effectively taking minority equity positions in several channels.


I believe the BBC management is being delusional in believing that DRM will work in short, medium or long term. 7-day catch-up will be irrelevant because EVERYTHING will be available. It will not even take the DRM to be cracked for everything to be copied. After all free to air TV is not encrypted and can be recorded to PVRs and then uploaded to the internet.

In fact for the BBC this is not as big a problem as might be apparent. The whole design of the iMP is such that the end-user pays for the distribution costs. Does it really matter for the BBC if an user gets the content via a BBC p2p network or via some other p2p network? As long as the BBC symbol appears in the top-right corner and people realize that this is something that was paid for by the licence fee. Effectively the BBC is another subscription network who is constrained from moving into being an ISP as ntl and Sky have done.

DRM is a much, much bigger problem for non-subscription channels such as ITV, Channel 4 and five who rely on advertising revenues.

Monday, January 22, 2007

Egypt: More 3G Profits

The Egyptians have joined the Brits and Germans in earning vast upfront 3G profits. It is a shame that it not a mobile operator, but another government.

Vodafone Egypt have agreed to pay LE3.34bn (US$584m) + 2.4% of total revenues as a licence fee for 3G spectrum. Vodafone Egypt recently declared an annual turnover of LE6.8bn and revealed that approximately 22% (LE1.5bn) of this will be Free Cash Flow. Therefore, Vodafone is paying over around 27 months of Free Cash Flow over to the government (assuming no further growth) plus a share of ongoing revenue which seems a little heavy.

However, it is not as much as the third player, Etisalat, agreed to pay LE16.7bn (US$2.9bn) for a 2G/3G licence which was equivalent to 3.4% of Egypt GDP. If we look at the revenues of a % of GDP or % of mobile revenues then the Egyptian 3G auction actually raised more than the UK. Etisalat is expected to launch in April 2007. This could be a mistake of Hutchison Whampoa proportions.

It will be interesting to see (or when) if the owners of the market leader, Mobilnil (Orange / Orascom), agree to pay up.

TDC selling up in the Baltics

TDC have sold their Bite Latvian and Lithuanian mobile venture for €450m. We now know where TDC have got the €470m cash for its recent Hungarian purchase.

The interesting points are:
  • TDC sees more future profit in consolidating a fixed line market than in mobile operations;
  • Private Equity is still out bidding Telecom Operators;
  • The “market” was not that pleased with the sales amount, but we don't yet know the amount of debt left in the Bite.
No doubt, TDC will now move on selling up in Switzerland.

Friday, January 19, 2007

Beeb Licence – The Top Line

I always get frustrated when I hear the beeb expressing its licence fee in the mandatory cost to the individual householder, so here is a different view.


A quick explanation about the model:
  • Number of households is taken from the Annual report and is the combined total of fee paying colour licence payers and over-75’s who are paid for directly by Treasury and indirectly by the colour licence payers. The split in 2006/7 was 20.8m colour households and 3.9m over-75s. In other words there is a hidden 20% premium on the licence fee for "actual" payers.
  • There is another 0.3m households purchasing Black&White and Concessionary licences but frankly these are immaterial and probably are loss making after the cost of collection is taken into account.
  • There is also additional revenue from the Quarterly Payment Premium which is a further regressive tax on the poor. The ideologists at the British Bolshevik Corporation should be proud of their actions.
  • Approx. PSB revenues for 2005/6 and 2006/7 are consistently overstated by 6%. This is due to timing of payments of the licence fee. For instance, I could have paid in Feb 2006 £126.50 for the 12 months licence fee and effectively the model overstates by 10 months the £5 rise to overall revenues. If the figures were adjusted for this timing difference the total revenues in 2011/12 would be £3.7bn and cumulative increases would be £1.9bn
  • Actual revenues for the beeb are incredibly sensitive to amount of new households built in the UK. With a steady increase of 300k households per annum the 2011/2 works out to a 19.7% increase or 4.9% average increase per annum. With a zero increase in households then the fee averages out at an increase of 2.5% per annum.
  • Figures in 2012/13 are outside the five year review and are in fact a maximum so should not be considered definitive in this settlement.
  • All these calculations ignore the effect of rises in the negotiated settlement for the BBC World Service and the Commercial arm which in 2005/6 generated revenues of £260m and £620m respectively.
All told, I think the executives at beeb have negotiated themselves an extremely cosy guaranteed future, especially given they can blame the meanness of future staff pay settlements on the nasty government. However, if I was an executive I would be more concerned about this graph:

bbc-audience share

It will be extremely hard to justify any compulsory licence fee at all in 2012/3 if people continue to vote against beeb content as they have done en masse in the last 5 years. This is the beeb nightmare scenario and why they continually try to be trendy and attract the “youths” and ignore their core market.

Additionally, I think the beeb have fallen into a far more dangerous trap in the digital switchover. Effectively, £600m of the final cumulative increase in revenues is earmarked for assisting the elderly and disabled people make the switch to digital and whilst this admirable in its aims it is setting a dangerous trap in two areas: allowing the government to ring fence part of the revenue and committing to “helping” people do something they rather wouldn’t do.

The transition is a potential PR nightmare and will bring support issues that are beyond anyone. It is not just a case of giving away a fee set top box: it is installing it, user training, support and replacement once the box is defective. Even the charm and tact of Mussolini would struggle to run this transition on time. The fact is that for the beeb viewing age is directly proportional to viewing hours and the beeb are running the risk of upsetting their core audience in the digital switchover.

Even scarily, the BBC Trust highlighted zero knowledge of their products on offer, when they issued this statement yesterday:
The important principle of universal access to all the BBC’s services means it is right that the BBC should play a leading role in digital switchover and it is why the Governors agreed in principle that the licence fee could be used to fund it.
Can you imagine how expensive it is going to be once the government asks them to fund the transition to universal Digital Radio? How about universal access to the popular beeb Websites? What about people who have been in the “naughty pipe” because of their "non-standard" use of the p2p BBC video-on-demand service? Can the beeb please set them free of the ISP shackles?

The Executives should have stood firm and said the government should pay for the digital switchover out of future auction revenue for the farmed spectrum or even asked the purchasers of the spectrum to pay for clearance of airwaves as in the States. (ed: the beeb would never admit publicly that the USA have done anything correct)

In the near future and given the precedent, I cannot see any political party being able to resist ring-fencing some of the beeb income for “social communications” policy, after all it is one of few communications institutions left in the public sector.

It is hardly surprising that Chief Licence Negotiator, Michael Grade, has jumped ship to ITV. The Murdoch empire will be quivering with fear ;-)

Tuesday, January 16, 2007

Christmas Mobile Websites

Mobile Today announced (via Hitwise data) that O2 was the leader in Christmas online traffic with 21.96% market share. As expected, Virgin Mobile (4.09%) and 3UK (2.36%) languish near the bottom. Once, the Carphone (15.98%) other online identities, e2save (4.46%) and OneStopPhoneShop (1.28%) are taken into account, Carphone comes perilously close to being the #1 Website. It is not just on the High Street that they know how to attract traffic.

As the web becomes more and more important as a sales channel these type of metrics will be closely followed. Orange (12.75%) and Vodafone (9.9%) must have as a New Years Resolution to attract more traffic to their respective sites. Despite all the noise coming from these two companies about the web, it is telling that they are currently lagging. It doesn't bode well for them in the future.

Pipex: Trading Update

This morning Pipex released a Trading Update. Despite, three acquisitions (Homecall - £44m, Toucan - £24m and Bulldog - £12m) in the last twelve months, Pipex appears to be going nowhere fast in the home division. Broadband customers appear to be stuck at 570k and although ARPU is claimed to have increased most of this will have been caused the acquisition of high spending Bulldog customers.

The Bulldog acquisition also brought with it a wholesale deal for DSL services from Cable and Wireless and Pipex doesn’t seem to be using the service too much continuing its own unbundle programme (100 exchanges planned by Mar 2007 and 175 by year end 2007) and having 20k customers on these exchanges. I am extremely confused about the state of the Pipex unbundling programme and this is a key consideration for the value of the company as it determines how many costs a potential acquirer could cut by migrating the Pipex base onto its own infrastructure.

The Domain Name and Hosting business seem to be performing nicely and although a lot smaller in scale than the residential business is probably the Pipex jewel in the crown. The added bonus is that any acquirer purchasing this business unit gets the major seat at the table for Nominet, which is the UKs Internet registry.

The third leg of the Pipex mini-empire is the WIMAX start-up which seems to have expanded the trial beyond Miltion Keynes and has signed up another smallish UK local government in Warwick for further trials. The problem as I see it is that 3.6GHz spectrum is pretty naff and needs a lot of base stations to get decent coverage, hence the partnerships with local council who can hand out rights of way wthout the need for expensive planning permission. WIMAX definitely has a bonus compared to WiFi in that thespectrum is not shared other technologies, but it has another disadvantages in that WiFi cards are already contained in a lot of laptops and some of the more esoteric claims of WIMAX such as hand-offs are still at the powerpoint slide stage of development.

All told I am hardly surprised that the company has effectively been put up for sale.

I think the best fit for the company is BT who could realise the most cost savings from the home division, although a lot of effort would be required to merge the companies and systems which could ruin the economics. I’m sure that BT would love the hosting assets. I’m also sure that BT would not want to pay hyped prices for the WIMAX spectrum and this is a potential show stopper. However, any buyers have in their favour the recent auction of similar spectrum in Germany which only realised a mere €65m with multiple license winners. The market capitalisation of Pipex is £300m with approx. £50m of debt which is chicken feed for BT.

The Times article mentions Carphone as a potential purchaser but I can only see them interested in the home division and is probably too busy currently trying to ingest AOL to try anything too else tricky. I can’t see BSkyB being interested although its main competitor ntl could be.

All told, I don’t think it is a good time to sell the assets and Pipex is probably six months too late in putting itself up for sale to realise peak price for shareholders.

Monday, January 15, 2007

CSR: Bluetooth to GPS

CSR (Cambridge Silicon Radio) the world leading Bluetooth Chip provider (>50% market share) is to acquire NordNav Technologies AB (US$40m) and Cambridge Positioning Systems Ltd (US$35m) which will add Global Positioning Services to its portfolio of products. The aim is to produce an incremental sub-US$1 cost for a GPS chip which is a vast saving on the US$5-US$10 current cost.

I have been for a very long time wildly over-optimistic about the prospects for GPS and I'm hoping that CPS will finally crack the hardware market and take GPS in the mainstream with functionality in mid-stream phones.

We now need a lot more diverse innovation at the applications end of the market because, as much as I love Google and think their Maps product is great, we really need more than one player in this market. I would hope that some of the more forward thinking network operators are looking at the prime European asset which is TomTom and looking at developing more diverse applications than just directions.

I’m also a passionate believer in the Galileo Project which has been in the news recently for all the wrong reasons which are normally associated with EU projects ie funding and locations. I just hope everyone gets their act together and delivers.

Surf, Speak, See

Sky has launched a bundle for £26/month with a £20 connection charge. £11/month is still payable to BT for line rental. In the bundle you get:
  • Surf - 8MB max download speed (RADSL) with 40GB limit and Wireless Router. You must be in the Sky LLU coverage area. This is priced a £5/month as a standalone product for existing Sky subscribers.
  • Speak – Free Evening and Weekend Non-Geographical Calling. This is priced at £5/month as a standalone product for existing Sky subscribers.
  • See – All Six Entertainment Bundles plus all free channels. The Bundles are detailed here and are priced at £21 as a standalone product.
This is the opening salvo from Sky in the forthcoming Virgin Media (ex-ntl) battle, which should provide hours of entertainment for innocent sideline viewers.

It will be interesting to see if there is any knock-on in the broadband market. Personally, I don’t think the offer is that great but then I wouldn’t even dream of a TV subscription package without Cricket as part of the bundle.

One interesting part of the offer is that Sky is not interested in Wholesale Line Rental and the customer still receives a bill from BT for line charges. This is diametrically opposed to the Carphone position who insists that although WLR is a zero margin product it is essential for reducing churn.

Sunday, January 14, 2007

TalkTalk: The £680m Carphone Gamble

An alternative format of the TalkTalk customer numbers shows how difficult Carphone is finding it to grow the base organically. The big leap in customer numbers at the end of 2005 was due to an acquisition of 1.336m customers from Onetel and Tele2 for a combined £142.8m. The big leap in 2006 has been caused by the acquisition of 1.523m (excluding narrowband customers) from AOL for £370m.


Basically, TalkTalk has three product offerings: voice, data and double play.

Approx. 50% of TalkTalk’s Double Play customers are coming from the existing voice customer base, which means net around 215k voice only customers have left TalkTalk since broadband was launched in Mar ‘06. Carphone never mentions in any presentations the dreaded “c” word that bedevils telecoms profitability, but it looks to me like the pure voice business is starting to suffer from churn. As far as I’m concerned this puts a huge question mark over the £143m acquisition of Onetel/Tele2. Carphone already wrote-off below the line in the 0506 accounts £35.2m in costs, if churn continues on the present scale than more write-offs are inevitable.

Also, of note here is the 850k base on the Wholesale Line Rental (WLR) service which is a zero margin product designed to reduce churn. This is a £100m per annum turnover business which is basically a collection agent for BT.

The profitability of voice-only customers remains a mystery; Carphone only reports profitability at the “contribution” level which is a meaningless metric. In addition, Carphone never publicly discloses ARPUs, SACs or Churn figures and therefore reasonable analysis is impossible. I am totally surprised that the analyst community lets Carphone get away with it. In 2004 through 2006, TalkTalk UK Residential reported revenues of £30.2m, £159m, £306m and contributions of (£11m), £2.3m, £24.3m which gives in the first three years a turnover of £495m and a contribution of £15.6 – this is before support costs, depreciation and the £35m write-off in 2006.

Basically for all the talk of market share and acquisitions, I’m almost certain that Carphone has been losing money on “voice-only” services since day one in Feb 2003.

Carphone launched broadband in April 2006 and everything is claimed to be going to plan at least financially. The customer service issues are well-documented and it is not worth repeating them here. It is apparent that the rate of customer signup has sharply dropped in the last quarter, which is hardly surprising given the bad publicity. Post-Christmas, Carphone are starting to re-market the product again and is offering a 30-day trial period before the 18-month contract kicks-in. This is obviously a ploy to allay fears about poor service, however it could be extremely expensive, because I seriously doubt that Openreach will perform the LLU tasks for free.

This year was always forecast to be heavily loss making for Carphone with a cash investment of £110m in broadband. The key will be next year when broadband (before the AOL impact) is forecast to make £30m at the EBIT level (which is a very reasonable metric and I look forward to them publishing this) and the first 18-month contracts start to expire and therefore churn may or may not start to be material in Q4.

The AOL transaction is important is de-risking the LLU capacity issue – most of the original 1000 unbundled Carphone exchanges will now have a lot more than 250 customers which is the breakeven point for LLU deployment. This is incredibly good news and should not be underestimated. However, AOLs strategy was only to partially unbundle (ie still have voice on a BT line) which TalkTalk admit themselves is far less profitable than a fully unbundled line.

Carphone plan to communicate with all AOL customers at the end of January offering a transition to the TalkTalk almost-free-broadband offer or “some extra value” on the current package which almost certainly means a discount. Carphone would only be offering a discount if churn was material. This is the next problem in that the AOL brand is much stronger than the TalkTalk brand. I don’t believe that Carphone will continue to invest in the AOL brand in marketing promotions. If Carphone is not careful they could quite easily see a steadily declining AOL base. £380m is a lot of money to pay for a declining base.

In short, Carphone faces severe problems in all three residential divisions: voice (from churn), ex-AOL (from potential churn) and Unbundled Double Play (getting the process to work and starting to make money), personally I don’t envy their situation even before the impact of competition.

The key feature in recent history of telecommunications since privatisation (25 years) has been of a hugely capital intensive business where waves of innovation mean that returns from investments are difficult unless the company has huge scale. The investment in LLU has hardly begun before Carphone competitors are layering new features to the plain vanilla service Carphone is offering. The first bunch is the mobile operators, including Orange and Vodafone, who are bundling fixed and mobile service together in a way that Carphone can’t and causing tension with Carphone in their profitable retail business. BT, Sky, Tiscali and Orange are offering video services which Carphone could replicate with more investment. Any this is before Carphone’s most important retail customer, O2, enters the market.

The point is nine months on from the original TalkTalk not-so-free-broadband launch it is not standing out any more as particularly cheap, it is certainly not the most feature rich service and in every survey I’ve seen comes bottom of the list in customer service metrics. 2007 is going to be especially difficult for TalkTalk in the marketplace.

All told I guesstimate that Carphone has invested approximately £680m in Residential Communications (£142m for Onetel, £380m AOL, £110m Broadband and around £48m in Voice Capex and Losses) and that is before the investment in Opal Telecom of £85m and the various small investments in the business-to-business market over the last four years. This £680m is also the net debt position of Carphone which adds around another £35m of interest costs annually. I just can’t see the UK network being worth anywhere near the sums invested in it. Also, if things are going slightly wrong this year, I can see Carphone making another acquisition at Christmas next year to keep up the appearance of growth.

As I see it, this is a big shame because the retail side is really outperforming the market and is probably being held back by TalkTalk.

Thursday, January 11, 2007

TDC in Hungary: HTCC/Invitel purchase

The strangest transaction of the year so far has to be TDC’s purchase of the altnet (Invitel an ex-Vivendi property) via its local subsidiary (HTCC) in Hungary for €470m.
I was really surprised about this given TDC’s desire to exit Polkomtel in Poland and the rumoured exit from Bite in Lithuania and Latvia. However, a little lateral thinking put me on the right tracks.

Meanwhile, the Hungarian regulator released November Mobile subscriber figures:
There were 9.763 million mobile phone subscribers in Hungary at the end of November 2006, 118,000 more than a month earlier, the National Communications Authority (NHH) said on Thursday. The number of subscribers per 100 Hungarians reached 96.9 in November from 95.8 in October.

T-Mobile's share of subscribers fell from 44.70% to 44.45% in November, while Pannon's rose from 33.86% to 34.28% and Vodafone's fell from 21.44% to 21.27%.
Perhaps, the TDC venture capitalists are planning an auction of HTCC to Vodafone and Telenor (aka Telenor) after a suitable gap?

If I was a Venture Capitalist and thinking of a coherent strategy to place a bit of cash in a 2-3 year time frame, I can think of a lot worse than buying and consolidating bombed out alt-nets in tertiary markets especially ones where Vodafone has a presence, lobbying like fury for equal access with the ex-national incumbent invariably with the EU’s backing and then playing the land-grab game for broadband in the consumer and SME sector. There is a ready buyer in Vodafone when they have the petty cash available to replicate the German and French experience with Arcor and Cegetel.

It is particularly efficient in you own an ex-national PTT and need some losses to avoid paying the local government any taxes on profits.

Wednesday, January 10, 2007

Carphone UK Sales Analysis

Before, Carphone release their vital Christmas Trading Update, I thought it would be useful to analyse the historical Carphone sales figures, especially with regard to the important of the Vodafone account. This analysis has been performed with publicly available statistics from the Carphone website.

Carphone Seasonal Sales

In terms of volume, there are huge seasonal spikes in prepaid sales in the Chirstmas quarter. New Contract Sales have been steadily increasing over the years with very little Christmas spikes. Contract Upgrades have been stable despite the big increase in the UK base of contract customers.

Carphone actually had a very good start to the Christmas quarter with volumes from the first four weeks showing a healthy increase on last year. However, in 0506 sales were skewed towards the final two months with only 30% of new sales and 16% of prepaid sales occurring in October.

Actual Vodafone Volumes

CPW-VodafoneGross Sales

Vodafone really was quite insignificant for Carphone for most of the 05/06 and 06/07 where it averaged only 8% of total Carphone new contract sales during the first 22 weeks of the year. However this all changed with the Vodafone tariff refresh in Sept where Vodafone balanced its post-paid tariffs with the other networks and in October when it refreshed the prepaid costs. New sales in September hit 27% of the total Carphone sales. Obviously they fell back with the announcement on Oct 12th that Phones4U was to be the not-so-exclusive partner.

This seems to tally with data at the time of the Phones4U deal saying that Vodafone was taking around 27% of the market. It does seem however that the alleged commitment of 30k/month by Phones4U would have looked quite a lot, but with the tariff refresh and the Vodafone Family deal launching in Nov - who knows? Anyway, Vodafone have always said the Phones4U deal was all about lifetime value and pure connection numbers only provide one variable in calculating customer profitability.

Another way to look at the Carphone figures is in the context of the overall post-paid Vodafone base which was around 6.5m at the end of September and with an annual churn rate of 18.8% gives a quarterly absolute churn figure of 305k. These are the new postpaid customers are required just to stand still. Normal, Carphone figures of around 15k are hardly significant and even with the tariff refresh of 35k probably reflect market share gains by Vodafone rather than an absolute increase in the Carphone distribution.

It does appear as neither Carphone nor Vodafone are really vital for each other. Carphone definitely seems to have a case when they say “Give us a competitive tariff and we can sell” – this is highlighted by the rises in Vodafone absolute volumes when consumer tariffs were made more competitive.

New vs Upgrade Percentages

One of the biggest complaints about Carphone (and to be fair other retailers) is that they encourage churn and a historical comparision of the absolute percentages of new contracts vs contract upgrades seem to give credence to this statement.


However, it could also be argued that network operators themselves actually encourage churn by offering better prices for new customers than for upgrades. It is a well-known dirty secret that the best upgrade price will only be given by the network operator when you ring up to cancel your service.

I definitely have some sympathy for Carphone here.

Other Network Sales at Carphone


There are three things which immediately spring to mind from this chart:
  • the domination of o2 in absolute numbers;
  • the huge leap of sales by T-Mobile when the Flext tariff was launched and the immediate drop when commissions were infamously slashed but the tariffs remained as extremely good value; and
  • the extremely poor and dropping share of 3UK.


Volumes are only one part of the equation: dealer commissions, handset prices and mix are even more important in determining the gross profit which really is the benchmark which Carphone should be judged.

Having said that volumes have started well in the first four weeks of Q3. The Vodafone volumes do not seem critical for Carphone or Vodafone themselves. Carphone has also shown in the past they can cope with one network’s volumes (3UK) dropping off quickly. Really, the critical network for Carphone is o2 and if they drop their commissions than this would cause a lot more pain than the loss of Vodafone.

The debate is all about whether Carphone can claim to be offering independent advice when effectively two networks (Vodafone and 3UK) are not being sold.

Apple iPhone: Design Wins

EETimes are reporting the Chip Winners as:
According to a report from FBR Research, the winners are Samsung Electronics (applications/video processor), Marvell (802.11), Infineon Technologies (baseband), Broadcom Corp. (touch screen controller), and Cambridge Silicon Radio (Bluetooth).

FBR believes that Apple has contracted with Taiwan suppliers for six million units this year, with an option for another three million units if demand is good. The phone is slated to go on sale in Apple and Cingular Wireless stores in June, with a hefty price tag of $499 (4GByte) and $599 (8GByte) — and that apparently already includes the subsidy from Cingular based on a two-year contract.

I guess Infineon are breathing a huge sign of relief after the demise of BenQ-Siemens Mobile.

The most interesting win for me is the use of the Mac OS/X which when all is said and done is really just a flavour of UNIX with an extremely fancy front-end. I predict this will eventually give UNIX a huge kick forward in the mobile space. This is great news as the Mobile OS of the future will almost certainly now have three players rather than just Symbian and Windows.

Apple iPhone - Vapourware

The iPhone ships in the US in June and in Europe in the fourth quarter. Asia will have to wait until next year.

And also a word of warning from one of his old acquaintances:
“Motorola Chief Executive Ed Zander was baffled when he had just joined the world’s second biggest mobile phone maker and saw his company announcing cell phones that would not be in the shops until nine months later. “I was totally amazed. It was January 2004 and we were talking about products for the second half of the year,” Zander said in an interview on Wednesday”

“I watched how the competition was copying all our products and that’s when Ron Garriques (Motorola’s handset chief) and I put our foot down,” he said.

From now on, Motorola will not announce products until the first models are delivered to customers, Zander said. “We announce when we ship.” He dismissed suggestions that Motorola was taking a cue from Apple whose chief executive Steve Jobs often gets on stage to announce new products, like the iPod music player, and which are available in shops five minutes later.
Courtesy: Reuters Blogs

Ironic – I think so…

Why the delay? Perhaps they have one or two tiny bugs to iron out?

Looks very sexy though...

Tuesday, January 09, 2007

Sprint: Roadkill

Sprint revealed late last night the most well-known secret on Wall Street – it is performing appallingly and predicts 2007 is going to be even worse. Revenues in 2007 will be flat and OIBDA will be around US$1.5bn lower than 2006. In fact, I can quite envisage Sprints problems becoming even larger and the forecast OIBDA of US$11-US$11.5bn dropping even further.

The headline figure is a lost post-paid client base of 306k in Q4, but there is also a subtle change in the definition of customers which means that Sprint has restated its post-paid base inflating the figures by 450k of “cancellers in progress” at the beginning of 2006. How, this will filter through into Q4 figures is currently not known. I think this type of short term accounting gaming signifies the desperation of the management team.

The heart of its problem is the post-paid Nextel business: once the star of the mobile sector with its higher than average ARPUs and lower than average churn, now is a shadow of its former self being severely technologically challenged with no future roadmap and a distinct second class line up of handsets. To add to the woes, there seems to be capacity problems as well. Sprint have spent a long time trying to fix the capacity problems and plough through the re-banding efforts (in which it plans to spend US$800m of extremely short life capex in 2007), but the undeniable fact is that it is a dying technology with a very desirable customer base.

The other major league problem is that the traditional Long Distance business is in terminal decline. In 2006Q3 revenues were US$1,626m and OIDBA of US$206m – these represented y-o-y declines of 6% and 27%. The update seemed to indicate that things were going to get worse for the LD business in 2007. The LD business in the USA is not a very good place to be in at the moment.

At the end of 2005, it seemed that the Cable Industry would play the role of White Knight and rescue Sprint. The much mooted Cable VOIP replacement traffic does not seem to offsetting the decline in the traditional voice business: in 2006 Cable VOIP revenues were only US$300m and these are forecast to double in 2007. I’m not sure what the problems are in the MVNO business, which seems to have had the largest gestation period in the worldwide history of cellular MVNOs and the broader launch is now pushed out into 2007. In fact, the whole of this MVNO operation is under a cloud with the recent acquisition of spectrum by Cable companies.

It seems the plan for 2007 is to increase marketing spend, although not to the levels of Verizon and Cingular, increase third party dealer commissions and increase handset subsidies. The interesting part is that Sprint plan to launch a fixed calling rate plan on the Boost brand on the CDMA network – this is a direct attack on the Leap and MetroPCS business model and slips Sprint another couple of rungs in the market ladder, just above prepaid and well below the positioning of Verizon and Cingular. I see nothing in Sprints plans which will cause the slightest concern for Verizon or Cingular, in fact I think they will attack the lucractive iDen post-paid base with renewed vigour throughout 2007.

Sprint also plan to push forward with the much hyped potential technology saviour, Wimax, spending US$800m of Capex and US$300m of Opex in 2007. To say it is a risky strategy to bet the company on an untried technology is probably the understatement of the year, but the good news is that as time goes by Sprint has less and less postpaid customers to convert.

I personally always saw the Wimax move as a way for Sprint to differentiate itself in the eyes of the only potential strategic buyer – the Cable Industry – and add a little gloss to a severely tarnished position. Unfortunately, the Cable Industry is full of executives who still bear the scars of the move to digital and know how difficult it is introduce revolutionary rather than evolutionary technologies. In fact, they also remember the John Malone brilliant manoeuvre of selling TCI to AT&T and letting the bigger company with deeper pockets sort out the mess. I don’t think that the Cable companies are stupid enough to fall for that trick themselves.

The even worse scenario for Sprint is that the Cable Industry has now a much cheaper option ready to roll – it could buy someone like Level3 for the national network, who doesn’t have anywhere near the LD voice problems of Sprint and can use their own spectrum to launch mobile services, if the experiment of Quad Play (adding the mobile element to TV, Internet & Home voice) appears to be working out.

The future looks really bleak for Sprint.

Verizon could lose US$0.5bn

Every now and again tiny tremours occur in the Latin American politics which can have a dramatic effect on business throughout the world. Tonight we saw that Chief Nutjob, Hugo Chavez, is going to privatize the local telephony incumbent amongst other infrastructure assets.

Verizon owned 28.5% of CANTV, the incumbent, and that is worth US$538bn even after a fall of 14% in late trading. It is a real shame as Verzion has been trying to sell to the Carlos Slim Empire since last April. I’m sure that part of the reason that the deal wasn’t completed was that the ever shrewd Slim will have smelt a rat. No-one is sure of the terms of the renationalisation, but it I’m also certain that it will not be at fair market value.

Personally, I think this trigger a fall a fall in all Venezuelan assets of which the next biggest investor is Telefonica who owns the alternative Mobile Operator as well as a smaller interest in CANTV.

I also would be extremely careful about investing elsewhere in Latin America where there is someone with a similar perverted outlook of the world to Chavez ie Morales in Bolivia. I’d be extremely nervous about Daniel Ortega returning to power in Nicaragua.

In short, political risk is rising in Latin America. The best hope for capitalists is to bunker down and wait for lower oil prices and Chavez to make a complete mess of the Venezuelan economy.

Saturday, January 06, 2007

Carphone: The Motorola Parallel

Reading about Motorola’s travails in the Financial Times this morning, especially the bit about “an unfavourable geographical and product-tier mix of sales” meant that earnings would be below analyst expectations; my thoughts immediately leaped forward to the highlight of this week – the Carphone Trading Update on Friday.

What is the point of making record volume sales if the profits do not follow?

The feature of the Carphone season was the 2 for £50 offer on the Motorola L6 on Orange. Now unless Orange was offering great commissions and Motorola were practically giving the phones away, I can’t see Carphone making much margin on that. Carphone had cheap handsets last year in the £20 range, but they weren’t pushed no where nearly as hard.

This time last year the Carphone was well on its way to selling 500k pink RAZRs which were priced at £130 on pre-pay. This year Carphone had the Cath Kidston exclusive which I don’t believe anyone thinks has done anyway nearly as well as the pink RAZR and to be fair no-one expected them to.

The above two points really highlight to me how important the mix is for Carphone, both in terms of Average Selling Prices and Average Margins.

Looking at past Carphone Christmas trading statements, I believe Carphone will only provide details on Total Distribution Revenues, which admittedly is more relevant than a pure connections figure.

I also note the big change this year is that Carphone will not report online and retail separately and this will be hugely beneficial for Carphone in the like-for-like comparisons. The growth area is online and Carphone probably only have a handful of “online stores” throughout Europe and any growth will be skewed to them rather than the smaller rural physical stores that Carphone are currently opening.

The growth in online actually destroys a myth that the offers are now so complex that people need guiding through them. And therefore destroys the uniqueness of the Carphone model.

I suspect that the analysts will be focusing on like-for-like connections growth which is a bit ridiculous to me. It is a bit like people focusing on how items of clothing Next sold in its recent trading update. In fact they didn’t even bother disclosing that information, what they did say was that sale on the high street was down, but this was more than compensated by online sales and overall profits were up, therefore the shareholders heaved a huge sigh of relief and the share price went up.

On Friday, I expect Carphone to report that volumes are up and sales are marginally up – nothing about margins and profitability. In other words there will not be enough information to value the retail operations.

Hutchison Essar: PreEmption Rights

I’ve been reading a lot recently about whether or not Essar has pre-emption rights on Hutchison’s stake in the Indian JV.

The big question is why is Hutchison even bothered?

In the Financial Times this morning it seems that “someone” pointed a journalist in the direction of the relevant clause in the JV agreement which shows a foreign bidder does not need to worry about pre-emption rights.

If Hutchison wanted maximum value for the Indian operations then they would publish that Essar maybe has pre-emption rights and push the bids up until Essar can’t afford to match the price of the maximum bidder.

Do Hutchison really care who buys the Indian operations as long as they get maximum value?

However if they were thinking of selling off a bundle of assets, such as India, Indonesia and Vietnam in the same package, then pre-emption rights would be extremely important.

It would also be a nice way for a company such as Vodafone to side step all the noise about the price in India being beyond their internal acquisition criteria.

Vodafone can’t buy HTIL outright as Orascom definitely has pre-emption rights over a sale of a stake by Hutchison Whampoa, but they can buy assets leaving a cash rich shell with a couple of operating assets in say Hong Kong & Israel.

In fact, Vodafone did this before when they bought the Romanian and Czech assets from TIW.

I suspect the abacuses in Hong Kong are red-hot computing the various permutations.

I also suspect the cunning and guile of Sir John Bond is at work here.

Friday, January 05, 2007

Tower Business: Do Sale and Leaseback Deals

Cell Sites are a key competitive advantage for Mobile Operators and they are always caught in a quandary – they don’t want the cost of cell-sites tying up capital on their balance sheets and don’t want to sell them to someone who will rent space to every last man and his dog.

I think a little lateral thinking is required and would recommend investigating turning the cell sites into property assets and do a sale and leaseback deal similar to the Tesco property deal announced this morning. Effectively, they are parking the assets in a 50:50 Joint Venture with a pension fund, presumably the resultant vehicle will be heavily geared and has secured financing of 4.5% per annum. Tesco has agreed to a 20 year rent with rent rises geared to inflation, cap and collared at 0%-3.5%.

This sounds like a perfect strategy to partner with long term holders who want a guaranteed return (ie the pension funds), satisfy the stock market in using capital more efficiently, keep the private equity barbarians at bay and most importantly not sell the asset to some cowboy who will rent space to your competitors at the first opportunity.

Also, it has triggered some rusty part of the brain cells and I think there is some additional tax benefits which Gordon Brown created in his most recent taxpayer rip-off plans, better known as the UK Annual Budget, but I will have to speak to a tax expert to get confirmation of that.

I am going to investigate further, because I can think of another great use for a vehicle in holding back the creeping onslaught of communistic practices in the UK telecoms market. But more of this later, after a little more research…

UK Mobile Networks 2007

Whilst the results are not in for 2006, it is more or less certain that O2 was the star market share performer with y-o-y revenues growth of around 15%. T-Mobile also did extremely well with revenue y-o-y growth which also should come in around 15% from a lower base. T-Mobile had the star product launch which was Flext which attracted over 1 million 18 month contract subscribers – zero technology and all pricing innovation. Vodafone and Orange had miserable years with revenue static and cost cutting featuring heavily. The only bright spot for Vodafone was the relaunch into the consumer sector in the 2nd Half – early signs of improvements are eagerly awaited in the 3Q KPIs. 3UK’s data is extremely limited and although revenue grew by 16% in the first half, £700m is not enough to sustain a nationwide operator. It also looks as if 3UK has completely reinvented its market (again) with the launch of the X-Series. Full year results are eagerly awaited, but we’ll have to wait until March. Under new ownership, Virgin Mobile again punched above its MVNO weight and put its toe into the contract market – results are unknown but parent company ntl is forecasting a big drop in profitability in the final quarter. Overall, Orange estimate the UK mobile market grew by 8% with 15% price deflation.

In 2007, I think the market will develop as follows:

3UK will successfully reinvent itself as the innovators network: the X-Series will be a big success, perhaps even matching the 2006 success of Flext. The transition will be tough as its current price conscious base move to find a cheaper home. 3UK will also finally launch into the business market and get little traction in Year 1. 3UK will continue to be a drain on Hutchison Whampoa finances and the parent company will face a difficult decision at year end whether to cut its losses and run.

T-Mobile will continue to be successful with the consumer Flext tariff and will cut prices if necessary to keep it the price leader. We also might see them trying to do something with the Sidekick or a similar device to try and make T-Mobile a little trendier (aka T-Mobile USA) strategy. T-Mobile will continue to gain market revenue share.

Vodafone will re-emerge in the consumer segment – the family tariff will be a really big success in the most boring, but most profitable end of the market. The business segment will be more difficult to maintain margins as price cutting bites. Vodafone will probably maintain overall market share.

O2 will struggle to repeat its success from last year. T-Mobile, 3UK, Virgin and O2 are all fighting for that large youth market, although I don’t believe it will be a disaster especially given the supa-strength of the O2 brand. I believe O2 will maintain market share.

Orange will be the struggler. I believe they will focus their efforts on fixed-mobile products like Unik and cross selling broadband into the mobile base which will be a big flop. I also believe the organisation must still be under strain after the redundancies from last year. In fact, Orange is showing signs that they are being run like an incumbent with a large fixed line base to protect. More akin to France Telecom in France than a challenger in the UK. If things begin to look bad in the second half, Orange might be one to trigger yet another price war.

Virgin Mobile is the wildcard – I can see their profits being completely wiped out by the push into contracts, however I can’t see ntl changing strategy in 2007. Perhaps, they might withdraw from paying third party dealer commissions. Overall, I’m neutral on market share.

In terms of technology, I see the dual mode WiFi/GSM phones being a big flop. I can see them being a niche product for local authorities and at a stretch SMEs, but this is BT’s MVNO playground and not traditional networks. I see a lot more potential in Femtocells and believe that O2 and perhaps Vodafone will launch products in 2007.

With data access, I see 3G completely nailing WiFi as prices of data access tumble. Vodafone will remain king in the corporate arena, but one of the operators will break ranks offer a deeply discounted 3G data card tariff for PCs. This will ruin many a Wimax business plan. Download Speed and coverage will increase, but people will start complaining about upload speeds.

Blackberry style messaging products will move into the mainstream in the SME sector and for high end consumers. Blackberry and the operators will miss out on this and instead the biggest beneficiaries will be Data Specialist resellers who will provide all sorts of interesting hosted solutions.

will start to reinvent the consumer messaging world as early adopters start to abandon SMS for MSN style Instant Messaging. This will cause a major rethink towards the end of the year.

Content will be the biggest disappointment for the operators as most music and graphics will be sourced from kids PCs and Bluetooth. 3UK will only operator who really makes an interesting environment for user generated content. MobileTV will be the exception and the media hype machine will go into overdrive with the “L” band auctions.

In terms of distribution, the first half of the year will be extremely tough as operators offer specials to drive traffic to their own stores and justify the big expense in their store opening programmes. Towards, the second half an operator will break ranks, probably Orange, and the power will shift back to a humbler Charles Dunstone. I expect to see the shift to online rather retail buying continue - real tensions will emerge as networks offer the best prices online exclusively on their websites.

The interesting aspect of distribution will be in the SME reseller sector and several companies will build decent business on the back of new data markets. Some new multi-multi-mobile-millionaires will emerge in a few years when the network operators notice they are being outmanoeuvred yet again and buy a few out.

In terms of regulation, I believe the operators will get a “draw” in the fight with Brussels - retail roaming prices will not be regulated. OFCOM will at their most gentlest for many a year focussing instead on shenanigans in the broadband market.

A word of caution in all of the above, I’ve been wrong in the past and the only certainty is that I’ll be wrong in the future, but periodicallyI get a couple of things right.

Keep smiling and Good luck to all the operators in 2007 – may it be a clean fight.

Thursday, January 04, 2007

4oD: Some technical architecture details

The newly launched Channel 4 Video on Demand service uses the following technology components:
  • encoding : Windows Media @ 1Mbps
  • drm : Microsoft
  • size of files : 450MB/hour
  • player : Flash 9
  • p2p distribution : Kontiki
So Channel4 have the same Microsoft encoding & drm solution as Sky Anytime and the BBC proposal. Also, Channel4 are using the same Kontiki software for p2p distribution.

The key difference in the Channel4 proposal is that it includes paid for content (£1 for TV shows and £2 for films) whereas the Sky Anytime and BBC service are part of their various subscription bundles. I would imagine that this would add some slight complications to the DRM solution, but after all this is exactly the type of use case that the Microsoft DRM is designed to cope with and it is difficult to believe the Microsoft software wouldn't work as advertised.

What is the betting that ITV and Five use the same technology solutions for their forthcoming PC VoD solutions?

It will be interesting to see how a fully loaded PC performed with the various p2p services fully functioning: Skype, The Venice Project, Limewire and Kontiki. I can see some real compatibility problems occurring in the future if several flavours of p2p and service providers within the same p2p application are on home networks. Inevitably, the end-user is going to become even more confused and frustrated about performance (or lack thereof) on their home computer.

It has to be also remembered that your average punter is on an ISP who is traffic shaping (more than likely by constraining the overall amount of p2p traffic) and also imposes download limits.

I forecast in 2007, ISPs will start blaming p2p applications for end-user lack of performance. This will be #2 in their rolodex of excuses after the perennial winner: “It’s a BT problem that we can do nothing about, do you want me to request a BT engineer visit at a potential cost of £75/visit?”

I also forecast, Sky will release a non-p2p video on demand service integrated with its PVR and EPG for their premium subscribers to view on either PC or TV. As with Sky+, I also think that Sky won’t mention the soon to be cursed VoD acronym and instead show that a hassle free environment is synonymous with Sky.

Entertainment Industry: Stop Whinging and Start Planning

It really is quite pathetic to see The Daily Telegraph turned in a lobbying sheet for the Entertainment Industry for access to free or discounted spectrum. They have now published two articles in recent days threatening a complete imminent collapse of civilisation, if free spectrum isn’t handed out on a platter to more undeserving causes.

I would recommend people in the entertainment industry should think how lucky they have been in the past to get access to spectrum for so little cost and start planning how they can minimise costs in the future. OFCOM are quite explicit in that the fees raised don’t even cover the bureaucratic cost. So not only does the entertainment industry get free spectrum, but the bureaucracy is subsidised by the average UK taxpayer. This seems an obviously untenable situation to me.

Basically, OFCOM are proposing the privatisation of the functions currently held by the privately owned (ITV and some Commercial Radio Stations) JFMG. I don’t have any theoretical problem with this. Some entrepreneur somewhere will realise that expensive contiguous spectrum is not necessary and “cheaper” interleaved low-power spectrum will work just fine for individual theatres and venues. Some theatres and venues will be worrying about potential overcharging for the spectrum if a single bidder captures the entire spectrum. An embryonic market will emerge rather than the current bureaucratic nightmare…

I love that Lord Lloyd-Weber is getting involved with the lobbying effort. This multi-multi-millionaire will be really usefully struggling in explaining away the dichotomy between theatres running on a knife edge and rapidly growing size of his wallet. If he cares so much about free spectrum to theatres then perhaps he should personally subsidise it, because I don’t want to as a UK taxpayer.

I think the problem is that there is a certain amount of scaremongering going-on about the potential for a runaway auction. And even if there is a runaway auction, then there is plenty of other spectrum about which could potentially provide a solution. There is even 1.2Mhz of unlicensed spectrum available in the VHF band. This could provide huge amounts of audio bandwidth with properly designed DIGITAL equipment.

If we distinguish the lobbying noise from the reality:
"Approximately 64,000 individual PMSE frequency assignments are made to around 1,300 different organisations and individuals each year. The usage is skewed towards larger users. Just 50 of these account for 50% of all spectrum, with the BBC alone accounting for 13%."
I love the comment from JFMG’s managing director:
''There will not be a hope in hell's chance of doing a TV show like How Do You Solve a Problem Like Maria and then resourcing the show at the London Palladium."
What a nerve from the guy whose current state-subsidised existence is under threat to draw a parallel with trash like “How do you Solve a Problem Like Maria” which has already benefited from vast sums of state subsidy in cast selection and free publicity from that more well-known pseudo-public benefit company, the BBC. Did he mention the biggest consumer of PMSE spectrum is the outside broadcasts for the large media companies? No, of course not. The ownership of JFMG should give a clue about who is the main recipient of this partcular gravy train.

I can guarantee that if you ask your average Joe Bloggs whether he would prefer cheaper mobile calls, cheaper wireless broadband, more choice on TV & Radio or cheaper West End Shows for Tourists, he wouldn’t pick cheaper West End Shows.

For people interested in a less sensationalist discussion of the issues involved, there is a rather large pdf document from Quotient Associates called "Supply and Demand of spectrum for Programme Making and Special Events in the UK" which is available from the OFCOM Digital Dividend Review Site

PVR pickup

BSkyB announced that their Sky+ PVR system has more than 2 million customers, which is just under 25% of its customer base of 8.2m. PVR is definitely a technology that is going to cross the chasm in 2007 into mainstream adoption. Well, at least for Sky viewers.

The beauty of the Sky+ system is that most of the non-nerds I speak to aren’t aware of the technology behind it or more importantly don’t seem to be aware that ntl and Freeview have equivalent products. It is basically magic that makes recording and viewing programmes an absolute dream, so much so that it actually seems to encourage recording of programmes. Nearly everyone, I speak to say they record much, much more than in the video recorder era and everyone skips the ads (or goes and makes a cuppa)

Some of the stats released by Sky are absolutely terrifying for non-subscription based channels.
Across all channels, time-shifting accounts for an average of 12.2% of total viewing through Sky+ boxes.

Drama is the genre of programming most frequently recorded by Sky+ customers, accounting for 39.3% of all time-shifted viewing. Other popular genres are documentaries (14.9%), entertainment (13.0%) and movies (9.5%). In contrast, some genres of content remain at their most popular when consumed live. News and weather account for just 0.6% of time-shifted viewing by Sky+ viewers, while current affairs programmes account for 1.2%. (Source: Sky View)

It will be interesting to see if people start buying PVR capabilities with their freeview tuners. The irony of the situation is that I suspect that a lot of the digital refuseniks would actually be the biggest beneficiaries of a simpler way to record and playback programmes, but with no-one to promote the capabilities on the freeview platform and more importantly no-one to provide a subsidy, PVR will remain a “mistaken” differentiator for Sky with the great British public.

A little known secret is that nearly every home in the UK (around 25m) has a video recorder with an in-built analogue tuner and these will not work (without an adapter) at the time of the digital switchover. When this information becomes widely known, will it kick start the freeview PVR market, annoy the refuseniks even more or just highlight the long tail of apathy towards the TV market in the UK?

Interestingly, ntl/Telewest do not seem to release subscriber figures for its PVR service or promote it at anywhere near the level of Sky+. The new BT V-box also contains PVR functionality.

The various Video-on-demand services which are in the "early-adopter" phase of uptake will attract the publicity in 2007, but the device/service that will do most damage to the advertising funded TV business model is Sky+.

Wednesday, January 03, 2007

Carphone Warehouse: A Challenging Year Ahead

Carphone announced yesterday that they had completed the purchase of AOL UK just in time for the year end.

The short term focus of the market will be on the AOL numbers which are due to be released on 12th Jan with the Carphone Christmas Trading Update. At the announcement of the acquisition, Carphone thought there would be 1.5m broadband and 0.6m dial-up customers which would be acquired. I don’t expect Carphone to release financials for the business and the only we have is from 2005 where the business had revenue’s of £442m and Operating Profit of £14m.

2007 Challenge #1 – Integrate AOL Business

The most important result of this integration effort is to improve the overall broadband scale and reliability. Carphone will have acquired a reasonable amount of unbundled exchanges (with different technology), different back office applications and a reasonable amount of engineers. Carphone has to rapidly integrate these assets with its’ own business without upsetting too many AOL customers.

Carphone at the time of acquisition said they planned to continue the AOL brand as the stand-alone access brand. I’ll be quite interested to see how this strategy plays out as I would imagine one of big upsides of the deal is to convert dial-up to broadband customers and broadband customers to voice+data unbundled customers. I would imagine quite a few other broadband networks have plans for churning AOL customers onto their networks. It will be quite hard to see how successful Carphone are in retaining the AOL base, unless they start to include churn figures in their reporting KPIs.

News that Carphone plan to start traffic shaping on the AOL network will immediately not endear them to the tech-savvy element of the AOL base.

In the trading update, Shareholders will be looking for Carphone to deliver the customer numbers and make positive noises about synergies and integration plans.

2007 Challenge #2 – Turnaround TalkTalk business

This may sound ridiculous given the customer acquisition numbers that TalkTalk broadband have had since launching almost-free broadband, but in survey after survey TalkTalk is bottom of customer service heap. Somehow, Carphone has to either convince its userbase to expect a lower level of service for a rock bottom price or improve customer service without affecting margins. It risks starting to suffer from large churn especially in 2008 as the 18-month contracts begin to expire. Carphone has basically 12 months to solve this problem. Charles Dunstone always stresses the importance of queue time in customer care as a key metric which is undoubtedly improving – I’m not so sure myself. However, I’m hearing good news on the jungle grape vine which should improve performance dramatically to the end-user, such as the recent upgrading of 100MB backhaul from each unbundled exchange to 1000MB and the plans to use dark fibre in the London area. Having sufficient capacity is an absolute minimum for the provision of a half-decent broadband service.

Carphone also has to solve the problem of its backlog. Given that Carphone admits it loses money on non-LLUed customers, a key metric to follow is how many customers are waiting to be converted to a LLU exchange. This is another potential point of pain for the customer base as it is well documented that the conversion to full unbundled at each exchange is riddled with problems. I am hearing that mass migrations are planned for Feburary – watch this space.

Carphone also has to manage the decline of its CPS base. At Sep-06, Carphone had 819k CPS + WLR & 1,322k CPS only customers. These have been declining by approx. 250k a quarter since the acquisition of one.tel and tele2 bases. Although, Carphone doesn’t split out the revenue by services, it will undoubtedly be losing significant revenues from this base decline.

Most importantly, Carphone has to haemorrhage the losses in the division. The true extent of the losses is hard to determine given the details in the CPW financial reporting. It appears that whole of the Fixed division in the first six months of the year made £12m of contribution on turnover of £523m and that is before support costs or depreciation is taken into account. Personally, I think it is time for Carphone to start presenting its Telecom business results in a standard telecom manner.

The other difficulty that Carphone is going to face is that the other broadband providers look to moving onto a different plane with the offering of video services. Carphone will have to invest substantially in product development to keep up with the broadband Joneses.

2007 Challenge #3 – Grow Distribution

The only blot for Carphone Shareholders in 2006 was the announcement that it had lost the UK Vodafone postpaid contract. The drop in shareprice on this announcement of 50p showed the sensitivity to bad news in the retail operations. The problem for Carphone is that all its biggest paymasters (the networks) across all of Europe are looking at reducing churn and reducing commissions to dealers. This is going to make growth difficult.

Mobile Today reported on Dec 12th that sales were up 5% in the UK on the previous year which actually sounds exceptional performance especially given that overall industry sales were down by 21%. However, there is no doubt that in the UK Carphone made a big push into the low end of the prepaid market which has much lower margins than on postpay sales. It will be extremely interesting to see the mix of Carphone connections and the associated gross profit margins.

I am also not sure how much Carphone overheads have increased during the year – there is the ongoing store opening programme and general uk cost inflation to take into consideration. Unfortunately, we are not going to see the impact on the bottom line until full year results are released in June. Carphone distribution EBIT margins are already wafer thin at 4.7%.

Also people forget the scale of Carphone operations in mainland Europe: they only have 696 stores out of 1921 in the UK and made 2,319k connections out of a total of 4,340 in the UK. It is also noticeable that the second largest market is Spain which is actually the fastest growing market in Europe. But, overall European markets are stagnating.

In the short term, growth in Europe can only be achieved via market share gains or an increase in dealer commissions. I see the second extremely unlikely, whereas the former is a distinct possibility. A key feature in the UK market was the disappearance of The Link from the High Streets, Carphones big push into Online and clawing back market share in the prepaid market from non-specialists.

In the wider market, Carphone has place a toe in the US market with its joint venture with Best Buy. This could be an extremely important growth market in the long term.

2007 Challenge #4 – Manage the Balance Sheet

As Carphone has moved into the M&A game and is trying to build an infrastructure business, the borrowings have shot up. Net Debt was £411m at Sept before the £370m acquisition of AOL. It would not surprise me in the slightest if any improvement in underlying business performance is completely consumed by increased financing charges.

In short, it is going to be an extremely challenging year for Carphone. Personally, I think there is a high probability that they will succeed on the distribution side, but fail on the telecom services side. With a market capitalisation of £2.84bn, significant debt and insignificant net profits there is a big risk that if anything goes slightly wrong the shares could be radically revised downwards.

The trading statement on the 12th Jan will be analysed with a fine tooth comb and will provide clues as to how growth is going, however will not provide more important details on underlying profitability or cashflows. The more worrying date for Carphone shareholders is the release of Vodafone KPIs at the end of the month. If Vodafone has been successful is growing its UK contract base without the help of Carphone, other operators may consider Carphone superfluous to requirements.