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Saturday, March 31, 2007


I’ve been away for a few days at the Telco 2.0 event.

As most people who know me will attest, it is not normally my style to leave the Yorkshire Cave. Hopefully for eternity, I have now buried all those ridiculous rumours flying around about the source of my identity.

24 hours is a long time in the communications world, let alone a week and the world has moved on relentless pace since I last blogged, so I have plenty of ingredients to prepare.

Now, if I can just lift myself out of this weekend apathy…

Thursday, March 22, 2007

Blog New Features

Due to popular demand, I’ve added a Feed to the Hot Stuff Widget on the right toolbar. You can subscribe either via the Feed button in the Links section or via the Button below:

  • HotStuffBusillis feed

  • This Hot Stuff Widget is basically a feature offered by the excellent Google Reader tool which I use as my RSS reader. Basically, it is a one-click share button for articles to appear in the Hot Stuff Widget.

    The other item I’ve added as a “beta” is the ability for a daily email subscription. The content will be exactly the same as the blog, but is just another option for reading. It is basically a service from FeedBurner that I thought I’d give a go as an experiment.

    Enter your email address:

    Delivered by FeedBurner

    Apple TV in the UK PayTV market

    I’ve just been looking at the Apple TV box specifications all day and been scratching my head trying to figure out for what purpose the strange not-so-beastly device has been placed on planet earth. Well planet USA – Brits will have to wait a little longer to sample the delights.

    The specifications seem horribly basic for a modern consumer electronic device:
    • a tiny 40GB Hard Disk - I’ll have that in my non-Apple phone in a couple of years;
    • a limited set of supported Video Formats– H.264 with not-so-Fairplay DRM and MPEG-4 Simple Profile;
    • a limited set of outputs – HMDI + Component Video – what no European SCART?
    • No modem – just WiFi and Ethernet connectivity;
    • No TV record capability; and
    • No DVD play capabilities
    Of course, it is an esoterically pleasing little box, has a beautiful little remote and no doubt a jaw dropping user interface. One of the reasons that the user interface is so beautiful is because the functionality is so basic – it basically plays content that has been synched from a user’s computer which in turn Apple hopes has been bought from their i-Tunes store.

    It all makes sense if you look at it from a PC-centric point: AppleTV allows you to play your content on your TV as the iPod before it allows you to play your content on the go. Of course, Apple would prefer you to buy the content from its i-Tunes store, but I suspect that as with mp3’s before it – if you can manage to get the content onto your PC in a non-protected format from another source, then AppleTV will sync and play it.

    The interesting part for me is not in slagging off the vision of Steve Jobs, but the disruptive role of AppleTV in the payTV value chain.

    Although I whinge about the limited formats options, Apple puts GooTube to shame. The quality of the Apple solution is not only higher because of the formats, but because it is a download solution, it generally beats the best effort streaming network centric solution of GooTube. Also, it helps that you can play Apple content on the iPod and TV screen as well as the PC screen. The GooTube solution looks cheap and nasty compared to the Apple solution. The GooTube solution is also currently heavily subsidised by the Google search engine near-monopoly rents.

    Next comparing the solution to the BT Vision solution which is basically Freeview + PVR + IPTV. Well the BT Vision box is not-so-free (£90 for installation and connection and you have to be part of the BT broadband ecosystem) and you seem to pay for content on a on-demand basis or by subscription, but the box is closed to non-BT acquired source material. However, you can record DTT content onto the larger hard drive and share it with other wifi networked devices.

    The interesting part here is the relative costs of the end-to-end delivery mechanism - who has the cost advantage?
    • GooTube featuring the 100% in-house built Google Distributed SupaComputer and Advertising MegaNetwork with User provided access;
    • Apple featuring the Akamai provided Content Distribution Network and the in-house built i-Tunes store with User provided access; or
    • BT featuring the in-house owned IP-content network and the Microsoft IPTV platform with User provided access bought from BT.
    In terms of devices: GooTube accepts anything, Apple sells and makes a profit on each device, whereas BT subsidises the Vision box with the ISP access fees.

    The Virgin Media (cableTV) model is remarkably similar to the BT architecture and probably will be similar to the forthcoming O2, Orange and Vodafone clones – except theirs will no doubt feature some kind of mobile revenue cross-subsidy.

    Yet to be revealed is the BSkyB model: but it doesn’t take Albert Einstein to figure out the route the content will arrive and the place where it will be stored. It also isn’t difficult to figure out there is going to some sort of subsidy from the monthly subscription revenues and there will also be an attempt to get incremental advertising revenue. I’m not sure BSkyB will bother with a pay-as-you-download model, perhaps very limited as per current Sky Box Office and Live Events such as concerts, boxing and wrestling but they will probably use the satellite broadcast network as a delivery mechanism.

    It all makes for an interesting review of the UK PayTV market by OFCOM. From an economist point of view, how do you regulate a market where there is so much technological and value-chain disruption going on? It certainly smells like bonanza time for the crystal ball soothsaying industry…

    Brightview - A quality ISP

    Brightview are currently bathing in the glory of being consistently named as one of the UK’s top isps. The placing of their three main brands: Global, Madasafish and the vISP, Waitrose, in huge surveys from both Which? And Watchdog prove that they have a huge proportion of satisfied customers, more than any other ISP in the country, although Zen Internet are giving their agents a run for their money.

    This seems to be feeding through into repeat business with John Lewis launching another virtual ISP (they also own Waitrose) and Madasafish reporting a 30% increase in switchers since the new MAC scheme was introduced on Valentine’s Day. Most of this business seems to be generated by word of mouth and therefore are probably keeping Brightview marketing costs extremely low.

    Brightview is just emerging after a corporate restructuring as probably the only pure-play broadband stock on the AIM market and released results on the 27th Feb announcing 54k subscribers. One quick glance at their figures shows that excellence in customer service does not translate to financial excellence.

    On a turnover of £6.4m for the six months to 31dec'06, the internet division seem to have generated a net loss of £8k. The internet division also includes significant dial-up and other revenue, broadband turnover being £4.4m. BT Central Costs of £220k and investment in Broadband acquisition in the period was £676k of which the majority of goes straight to BT. These figures highlight how difficult it is for a small ISP to generate a return even for a well run one.

    In my heart, I really want small providers like Brightview who deliver excellent customer service to succeed; however the economics of the reseller market and more especially BT wholesale pricing work against them. This I believe is the great shame of the current wholesale broadband pricing scheme – it only works in favour of those providers who want to bulk up quickly and invest capital in unbundling. These are the exact same providers who are bottom in terms of customer satisfaction.

    The future is even more uncertain for the small providers with the development of the BT Next Generation Network. What is even more scandalous is that the pseudo-quango looking at the impact of the NGN and lobbying for a level playing field, the NGNuk, charge £40k pa for full membership. This is an old trick by telco industry bodies, especially on the equipment provider side, used to keep small innovative players out of the decision making process.

    It is patently obvious that the industry is heading rapidly towards an oligopoly, especially in the consumer sector and the OFCOM is actually encouraging this with its Wholesale Broadband Consultation. To quote:
    1.1 The importance of broadband continues to grow. It plays a central role in communications used by many consumers and businesses to keep in touch, access information and conduct business. Over the last few years the market has seen rapid improvements in availability, take-up, speeds and prices and this has put the UK near the top of international best practice. In line with its legal duties, Ofcom aims to ensure that we build on this significant progress.

    1.2 Competition has an important role to play in delivering what consumers and businesses need. Increased competition in certain parts of the retail market for broadband has led to a fall in prices and internet service providers (ISPs) have looked to offer different speeds and product bundles to attract customers. As a result take-up has grown, reaching more than 12 million broadband connections.

    1.3 Competition at the retail level depends on ISPs having access to wholesale broadband services or local loop unbundling (LLU) to build their services. Ofcom has identified that competition between networks based on LLU, rather than just at the retail level based on wholesale broadband products, is crucial to maintaining the UK's broadband progress. Promoting competition based on LLU continues to be central to Ofcom’s approach in making sure that consumers can access the services they demand. There are now more than 850,000 unbundled lines in the UK and there is the prospect of further competition.
    Note, no mention on quality – just take-up, speeds and pricies – and also the emphasis on future policy being directed to LLU not resellers. OFCOM should take notice that customers are overwhelming asking for QUALITY SERVICE and this is being delivered by small players in the reseller market. OFCOM should act NOW before if is to late to allow the resellers to generate a fair and reasonable economic return and allow them a voice in the future of the industry.

    Wednesday, March 21, 2007

    Telenor: 1 out of 4 Turkeys come home to Roost

    Telenor shocked the markets post-Oslo close tonight by announcing that because of the fight with Alfa/Altimo they have decided to deconsolidate the Ukrainian operations.

    The following chart show the revised 2007 Telenor outlook given the new data:

    telenor kyivstar decon

    The deconsolidation of Kyivstar shows a drop of EBITDA even in the best scenario and approx. Cashflow shows an even more dramatic drop. Anyone using simple EBITDA/EV or FCF yield calculations will show a significant drop in overall valuation of the Telenor Empire and I expect this to be reflected with at least a 10% drop in the share price in morning.

    Of course, all of this is just financial trickery – Telenor still own 56.5% of Kyivstar – and if people were valuing Telenor on a “sum of the parts” basis and applying normal political risk factors to each country then nothing will have changed. We will see in the morning, but to give a hint TELN ADRs on the NASDAQ dropped by 6% after the announcement in Oslo.

    The big question this all brings to my mind is the credibility of the management. Only on the 15th Feb in Barcelona the CEO and CFO stood up and said the Alfa injunction in the Ukraine was more of a “formal” thing and they expected it to go away and doesn’t change any element of control. Well, it seems to me that either the auditors or the board non-executives disagreed with this statement. In the conference call tonight, the CFO (the CEO didn’t grace the call with his presence) stated that Telenor would only start consolidating Kyivstar again when Alfa started attending board meetings, which Alfa haven’t attended for the last two years and therefore two years of board meeting have never had a quorum - we are probably at an impasse of indefinite length. Of course, the simple solution is for Telenor to cash in its chips and sell out, especially given that the Ukraine market is probably about to go ex-growth. However, there is no guarantee that Alfa will pay a reasonable price.

    There is also the spill over of the fight with Alfa affecting the Russian/CIS operator, Vimpelcom. Alfa have recently increased their stake to 42.4% and the CFO brushed aside the question as to whether this would allow Alfa to nominate another director to the company. Although, Telenor make much of the arbitration proceedings ongoing in New York, all I can see is that Alfa keeping beating them in every round of the fight. If Telenor aren’t careful, the arbitrator may determines Telenor's health will be endangered by more blows and therefore stops the fight and awards the winner’s spoils to Alfa.

    Telenor also has problems in Thailand, Malaysia and Bangladesh. I suspect if just one more Turkey comes home to Roost this year, probably the Telenor senior executives will be looking for a new farm to manage.

    Spectrum and UK Budget 2007

    I don’t know if anyone else’s ears pricked up when Gordo mentioned Spectrum in his budget statement. The context was related to the government raising money from asset sales.

    £36bn of asset sales less £18bn already announced gives £18bn of new asset sales in the next three years from 2008/9 onwards. £6bn of this involves taking the Student Loans off-UK plc balance sheet and £12bn is made up of new spectrum sales / financial & corporate sales. No further breakdown was given, but the governmnet seems to taking the every little bit helps approach.

    In the Red Book Budget pdf's - there is a reference in section 6.43 that the government has published today "A Forward Look" of spectrum availability.

    Basically this is the refarming of spectrum used predominately by the MOD and other agencies, but the trouble is that this spectrum is not in "internationally" recognised bands and therefore will be worth a lot less than for instance: gsm, 3g, uhf, vhf, l-band spectrum.

    Furthermore it is said that the spectrum availability will be announced at the time of the comprehensive spending reviews of the departments for the 3 years for 2008/9 onwards, therefore it is all subject to the normal horse-trading rules that go on in the public sector.

    In summary, Gordo will probably need every MHz of the Digital Dividend Review and L Band Spectrum to get a good price to realise some decent cash from spectrum sales and therefore the possibility of the beeb and the rest of the public service broadcasters getting the taxpayers spectrum for "free" for HD services is reduced.

    It won't stop them trying though: the beeb got its begging bowl out yesterday for 33% of the Digital Dividend Revenue basically stating some report that not giving the beeb free spectrum would cause £4.1bn to £15.5bn of private and social losses.

    This should be music to ITV, five’s and anyone else interested on commercial broadcasting ears because as commercial enterprises they can go ahead and bid for the spectrum and somehow should still manage to create economic value for their shareholders. Unless of course, the report is a bit of a dodgy dossier and the beeb know all about the damage that dodgy dossiers can create – the beeb is promising publishing the dossier at some future later date – I wait with baited breath!!

    PayTV - Market Investigation

    The UK PayTV market has never been so competitive: we have the relaunched Virgin Media, the newly refinanced TopUpTV and Tiscali (aka Homechoice), the financial might of BT, Vodafone, Orange (France Telecom) and O2 (Telefonica) which have just launched or are about to launch IPTV services and of course 800lb reinvigourated gorilla, BSkyB.

    Therefore in terms of number of market players the PayTV market has never been healthier.

    If we look at the DTT market, OFCOM have only just ruled in Mar-2006 that PayTV was acceptable on the 3 of the muxes carried by Freeview platform and in that consultation neither the BBC, nor Five objected to PayTV services on the Freeview platform, however Channel 4 did and the ITV comments aren’t in the public domain. OFCOM currently have a consultation underway about Fair and Reasonable Access to the TopUpTV platform which is due to close in April.

    In both of these consultations, I can’t see any reference to the possibility of a second PayTV platform on DTT Freeview and therefore I expect the BSkyB proposals were a bolt out of the blue for OFCOM. Given that OFCOM is all about promoting competition and choice in communications, I think they are going to find it extremely hard to justify not allowing a second platform on PayTV especially if BSkyB agree to FRND (fair, Reasonable & Non-Discriminatory) access to whatever conditional access platform they build.

    Where there is a potential problem are BSkyB’s plans to transmit signals in MPEG-4 format rather than the current Freeview MPEG-2 and use its own encryption algorithms which will lead to the requirement for new set top boxes for the service and potentially cause problems with the old boxes. This is something that the people such as the BBC, ITV and National Grid Wireless (the owners of the DTT muxes) will be extremely wary of especially in the run-up to Digital Switch Over and the potential confusion it could cause customers.

    Balancing against this is the fact that MPEG-4 or some other compression algorithms are the way forward in the future and was in fact the format used by the BBC and National Grid in the recent HD trials. BSkyB is effectively once again trying to set the pace of innovation in the broadcasting market and some people don’t like it. Of course, it helps that BSkyB have the rights to the best premium content in the business and a TopUpTV/Setanta combination would look decidedly second rate and technologically inefficient in comparison. There is also the potential for BSkyB to build a dual-tuner set-top box for both DTT and Satellite and "force" that on people wanting any PayTV content.

    The next big problem which BSkyB has been shouting about loud and hard to anyone would listen is the VirginMedia monopoly over its platform and it being a closed system. Virgin Media allow the XXX industry to sell direct and we all know why that is, but no-one else is allowed direct customer contact either for TV, Broadband or Telephony services. Personally, I don’t think BT or the rest of ISP industry is that bothered that the cable system is closed, because they view it as inferior. In fact, the OFCOM approach to the wholesale broadband services where “markets” are categorised according to competition, whether BT Wholesale, Cable or LLU, implies to me that OFCOM will not look at cable as a monopoly, but as a competitive option to BT.

    Where BSkyB might have more success is arguing that VirginMedia do not carry the bundle of channels that BSkyB want them to carry. Obviously, the sports channels and movies are regulated and more about these later. However, for “competitive” consumer faced entertainment or news channels such as SkyOne, Two, SkyNews; BSkyB can legitimately claim that VirginMedia will not carry the bundle of channels thatBSkyB desires. VirginMedia have turned the recent debate into one of price, whereas BSkyB will turn it into one of access. Here, BSkyB potentially have a vast army of “niche” content providers to help them out, especially minority channels.

    A lot of people complain about the Sky EPG costs (such as the BBC) but it is in fact relatively cheap to run a channel on Sky, with music channel specialist, EMAP, publicly stating it is cheaper than running a magazine. I believe the transponder costs (payable to ASTRA not BSkyB) are around £0.25-£0.5m pa and then Sky’s EPG/encryption costs are on top of this but can actually be quite small for niche channels. A “medium” example is the Smash Hits channels which pays £137k in platform contribution and £15k in encryption charges. Of course there are channels paying a lot more than this, for instance the top channel payer is BBC1 which is charged a £3.9m per annum platform contribution (of course they don’t pay the encryption charge). However, BBC1 have the regional variance problem which BSkyB specifically designed a solution for. The Sky “SSSL” rate card is open and published on the Sky Corporate Web Site.

    However, all these charges should be countered against the Freeview charges where the capacity is much more limited than Satellite platform and I heard a jungle grapevine rumour that the last channel leased went at £15m p.a. National Grid Wireless and ITV are making a lot of money out of Freeview and transmission charges are a lot higher than Satellite equivalents. The bleating about extra “free” spectrum for HD services and not using the lastest and greatest encryption should be seen in this context.

    Of course, the situation is even worse in the cable world where despite the CEO boasting about the mythical 650MHz of free spectrum available the platform doesn’t actually offer anywhere near the hundreds of channels that are theoretically possible.

    I have also noticed in today’s Telegraph that the actual complaint went into OFCOM in January before the BSkyB/VirginMedia contract renewal became public and before BSkyB asked for a new PayTV platform on the DTT platform. This makes me think that perhaps BSkyB thought an investigation was always on the cards and they wanted to draw DTT and IPTV platforms into the mix.

    The other point in the Telegraph is that the part of the compliant relates to the BSkyB monopoly over movies and near monopoly over premium sports rights. The problem here is that this has been investigated time and time again and Sky has its rates controlled by the regulator. There is little chance of them being reduced especially given that Sky are investing more rather than less in content rights and the content owners, such as the Premier League will not want this changing in the near, medium or long term.

    BT, Orange, O2 and Vodafone should know as well as Sky that in a regulated environment all sorts of costs are allowable and in fact the regulation itself creates artificial barriers to entry that sometimes have the opposite effect that the complainant is looking for.

    Convergence is something that OFCOM is actually promoting; however it creates huge problems in a regulated environment. And also something that no regulator in the world has yet come to grips with.

    For instance Sky are going to start arguing that the huge termination fees allow the mobile operators such huge cashflows are subsidizing the entry of the mobile companies into the TV market, Virgin and BT could potentially back BSkyB up on that one. The mobile companies would counter will the huge access fees that BT are charging for copper the local loop and the monopoly rents that VirginMedia earn from fixed line telephony in fact are subsidizing BT and VirginMedia building content businesses. ITV, Channel 4 and five will argue that regulation is constraining them from competing in a converged world. The BBC will argue that everything will be okay if competition was eliminated and they were the monopoly supplier of everything. And of course, everyone will argue that BSkyB is the devil reincarnate and must be stopped for the sake of democracy.

    All these complex arguments point to huge problems for OFCOM, it is going to be a long and bruising consultation, they cannot please everyone and they will possibly create a lot of powerful enemies in the process. I wouldn’t be surprised if this mess takes a lot longer than 12 months to resolve and therefore is drawn firmly and squarely into the political cycle. Given that Ed Richards is effectively a New Labour appointee the last person he can annoy is his paymaster, especially if the paymaster continues to show Stalinist tendencies.

    Thursday, March 15, 2007

    Whitehaven Digital Switch Over

    Whitehaven DSO

    Only 216 days to go before Whitehaven loses analogue BBC2 and 244 days before they lose the rest of the analogue channels. Whitehaven is the first area to undergo DSO (Digital Switch Over) on 17th October and 14-November and is in The Borders region. The wonderfully anoracky Transmission Gallery has a map of the main transmitters and relay stations in the Eastern Border region. For a historical version of how the old analogue system was built out see here.

    There are five relay stations hanging off the main Calbeck transmitter: Whitehaven, St Bees and Bleachgreen, Gosforth, Eskdale Green and on the map there also appears to be a couple of self help masts for the richer remote communities in the Lakes.

    As far as I am aware, the current plans were for some regigging of the muxes at DSO. There still be 6 muxes, but they will have different coverage: PSB1 (BBC), PSB2 (ITV/C4), PSB3 (BBC, Ch5 and S4C) and COM1, COM2, COM3 which will be the commercial multiplexes used for non-public-services. Two of the commercial muxes are owned by National Grid Wireless and one by SDN which in turn is owned by ITV.

    All the muxes will operate at 64QAM initially at 2k but working towards 8k, which is different than today. By the completion of digital switchover in 2012 the PSB multiplexes will be broadcast via 1,160 transmitters while commercial multiplexes will be broadcast from 80 transmitters. By the end of 2012 the three PSB multiplexes will reach 98.5% of UK households (24.8m)—the same coverage the analogue television currently reaches—while all six multiplexes will reach 90.5% of households (22.8m).

    It looks as if Whitehaven will just get the PSB mux content which includes BBC One, BBC Two, BBC Three,BBC Four, CBBC, BBC News 24, ITV1, ITV2, ITV3, Channel4, More4, E4, ITV4, Film4 +1, CITV, CBeebies, BBC Parliament, The Community Channel, Channel Five and Various teletext and interactive services. They will also be able to receive the following digital radio stations – BBC1Xtra, BBC Radio 5 Live, BBC Five Live Sports Extra, BBC 6 Music, BBC7 and BBC Asian Network.

    If the Peter Lowther quote in today’s Telegraph is anything to go by the residents remain sceptical “They must think people round here will put up with anything because we put up with Sellafield."

    Apparently, BskyB have already starting marketing heavily in Whitehaven and complaints have already been received about some of the sales spin. There is no Virgin Media coverage.

    Wednesday, March 14, 2007

    Easynet / UKOnline

    The ever excellent, Think Broadband, is reporting that UKOnline are having a Spring sale and have slashed their broadband prices.

    UKOnline is the consumer brand of Easynet which was snapped up by BSkyB last year to form the basis of Sky’s broadband offering. I always thought that Sky would let UKOnline fade away into oblivion, but I’m now thinking that UKOnline will become the BSkyB non-TV broadband only brand.

    I also thought that Easynet would withdraw to the UK market, but with the opening of a Chinese office in December, I think I’ve got that one wrong as well…

    Roaming Moaning Reding spouting more nonsense

    Top EU apparatchik and general mobile industry pain-in-the-neck, Vyvyan Reding, has yet again proven that facts should not get in the way of attention grabbing headlines.

    In an interview yesterday, she proclaimed that DVB-H should be universally adopted within EuroTelcoLand and the mobile industry should get its finger out and implement it fast. It is mind blowing that she points towards China as a utopian land in the MobileTV world when they don’t even have a service launched and one of the EU member states, Italy, has probably the most flourishing and advanced mobileTV industry in the world based upon DVB-H technology.

    Despite the success of Italy, it is Commission policy that ALL spectrum should be allocated on a basis of technology and service neutrality – in other words the businesses themselves should decide which technology and services to deploy. If the British Bolshevik Corporation wins an auction for some spectrum why shouldn’t they be able to deploy a High Definition Free to Air channel if they so decide?

    As Dean Bubley points out her maths also leaves a little to be desired: she forecasts MobileTV revenues in 2009 of €11.4bn on 50m users worldwide, that is €19 per user per month. Nearly every mobile operator would immediately deploy mobileTV if they were guaranteed that sort of monthly revenues.

    My personal theory on this is that Nokia and Ericsson have been busy brainwashing (oops sorry lobbying) her and they feel that some European wide diktat is necessary in favour of DVB-H technology to keep the European airwaves free from Korean (DAB) and USA (MediaFlo) technology. My experience is that companies only resort to diktats when they are losing the technological arguments.

    I’m also surprised Roaming Reding didn’t stipulate the requirement that each mobile operator should broadcast every single European TV channel from all 27 member states. This would mean that every single person in Europe when travelling can have the comfort of their home telly available on the mobile phone – of course this service should be free to everyone.

    Tuesday, March 13, 2007

    Telenor: Pot Calling the Kettle Black

    I’ve just spent the last five minutes rolling on the floor laughing about the International Herald Tribune article about Telenor accusing Altimo of paying for negative press in the Ukraine.

    It doesn’t take the intellect of Alfred Nobel to realize that the Western European PR industry is far more sophisticated than their Eastern European counterparts. In fact, I’m willing to take bets that Western European Companies (on average) spend far more than Eastern European Companies (on average) on PR. Also, I’m willing to bet that spend on negative spin on competitors is far higher in Western Europe than in Eastern Europe.

    I’d love to know how much Telenor is spending on PR convincing that the opinion of the Nobel Peace Prize Winner that a "social" cellular company in one of the poorest countries in the world is incorrect.

    Also, I wonder how much Telenor is spending in Thailand and Malaysia convincing the governments that despite Telenor owning a larger equity share than appears to be legally permissible is perfectly legitimate.

    Moving onto the Telenor African ventures…too funny

    Michael Grade: Still working his Repertoire

    Now, he is asking for public funds for ITN News:
    He warned MPs on Tuesday that the switch from analogue to digital televison will leave a £100m "funding gap" in regional news and "public funding might be worth seriously considering".
    I’m still willing to put it down to Post-Traumatic BBC Stress Disorder and Grade has not yet fully adjusted to being back in the commercial world. I think he should just go cold turkey and throw the begging bowl away.

    Mind you, there should be no such excuses for the ex-Soap Marketeer, Andy Duncan of Channel 4 to the same group of MPs:
    "Whilst Channel 4 News is a flagship public service programme on the Channel, it is expensive to make and has limited potential for revenue raising. "As such it is unlikely to survive in its present form - a one hour peak time programme, containing 40 per cent international news - in a purely commercial environment."
    What a surprise! – It is unprofitable to have the sanctimonious Jon Snow lecture the Great British Public every evening in prime time. To be honest, I'd prefer Big Brother to Jon Snow depressing me.

    I am starting to hear quite a few conspiracy theories about all this spin building up to the Digital Switch Over and spectrum auctions. I personally think it just a negotiating stance – bid ridiculously high and you’ll settle for less. This was exactly the Grade strategy the BBC followed in the License Fee Renewal – even to this day the BBC are claiming poverty, whilst my personal conspiracy is that champagne corks are still to this day popping behind the walled garden of White City.

    The other telly news of the day was the on-going participation TV saga and the stunning earth shattering front page news from The Sun that some nobody was incorrectly voted out of an Australian Jungle.

    Michael Grade was very quick to deny this and said this incorrect story was spun from a disgruntled ex-employee from the ITV outsourcing partner, Eckoh. Unbelievably, Grade added he was going to sue the WhistleBlower. It is tough to be a WhistleBlower these days. The front of Grade is amazing – he should be focused on discovering what went wrong on the ITV side, how to fix it and if necessary getting rid of any bad apples.

    Even better was his answer to MPs about the “trick” question on the controversial ITV Play saying that viewers should develop a sense of humour.

    For what it is worth, the game asked viewers to add Two Pounds, 25p, £1.47, 16p and fifty pence. No-one won the £30,000 prize. ITV revealed the answer to be 506p, but gave no explanation. ITV later released a highly complicated solution which couldn’t even be solved by an Oxford Professor of Mathematics.

    Personally, I think the solution to all this participationTV rubbish is for ITV to build websites around the programmes and allow people to vote from them for “free” – one vote per id. ITV could give the websites sticky social engineering functionality with exclusive content and support them with advertising revenues. Of course, it’ll never happen…

    Monday, March 12, 2007

    Sprint: MobileTV Plans

    I’ve been trying to figure out over the last couple of weeks the Sprint plans in the mobileTV arena now that both Verizon Wireless and Cingular have committed to Qualcomm’s MediaFlo technology.

    The options are as follows:
    1. Do Nothing - because Sprint does not believe in the economics of MobileTV. This would be an extremely brave decision for the Sprint executives to take, especially since the Verizon and Cingular executives are fully committed.
    2. Don’t Want Qualcomm to take the role of Content Aggregator. I can see this as possible especially given the Sprint ties to the Cable industry. Nobody in their right mind would deliberately go and upset a group of companies who are probably biggest customer.
    3. Don’t believe in the MediaFlo technology. I see this as possible especially given their commitment to WiMax technology.
    In this context, I thought this Press Release from Nortel about building a Wimax network in Brasil with MobileTV capabilities for a local Pay-TV company, TVA, especially interesting.

    However, it should be stressed that TVA is relatively speaking quite a small PayTV operator. The largest operator is Net which is ultimately owned by the Mexican giant, Telmex, who also owns one of the largest cellular operators in Brasil.

    I suspect ultimately Sprint will do something similar in the Wimax spectrum with the cable companies providing the content. However, I can’t see the Wimax offer being as technically efficient as MediaFlo, especially given MediaFlo was specifically engineered for broadcast. Also, I’d prefer a high powered broadcast UHF band service to a service in 2.5GHz of spectrum any day of the week. It will extremely interesting to see if Nokia will add WiMax MobileTv technology to its handsets, especially given their historical addiction to DVB-H technology.

    Friday, March 09, 2007

    Q4 reporting season fizzling out

    The nominations for this quarters awards are as follows:
    "Biggest Positive Surprise"
    Award - Neuf Cegetel
    It causes me great personal pain to admit that France is streets ahead of the UK in the broadband market: both Neuf Cegetel and Iliad are showing great innovation not only in services and speed but also in equipment.

    "The future looks Bright" Award – British Telecom
    The powerhouse that is BT Global Services continues to rumble on and with the new Chairman being a world expert in building successful global services companies we can see where the future lies. The rumoured buy of Dimension Data would be extremely interesting at the right price.

    "In deep Doo-dah" Award - Deutsche Telekom
    The poor new CEO has been given a real hospital pass: really needs a young Margaret Thatcher to solve long term problems in the home market of Germany.

    "Chickens are about to come home to roost" Award – Telenor
    Risk, risk, risk, risk and overvaluation of overseas assets.

    "Something doesn't smell right" Award – FastWeb
    Enough Said

    Overall a great quarter and it looks as if the Rev. Enck much discussed M.A.D strategy is drawing to a rapid conclusion. However, rather than a WWII style of war ending through victory, it is more a WWI style of ending through economic exhaustion. Remember the seeds for WWII were sown in the settlement of WWI…

    Things are not completely quiet and we always have the BSkyB-Virgin Media battle to keep us entertained, which should move into “Round 3 – My Brand is Bigger Than Yours” phase next week with the BSkyB brand positioning event on Wednesday.

    Thursday, March 08, 2007

    P2P Generation

    Another classic from the bLaugh crew....

    Huge Software Sale

    Virgin VOD, Analogue, Mobile and Slug Fest Stuff

    I did a little more digging on the Virgin Media network

    I believe the VOD (Video On Demand aka Virgin Central) service is being delivered from the hubs at mpeg-4 encoding of 1.5 meg. This to me implies that assuming the broadband 256-QAM multiplexing gives around 25 concurrent users in 6Hz of spectrum. VOD is a much bigger consumer of spectrum than Broadband, especially when you consider the peak hour is consistently around 8-10pm and people tend to watch a 30min-1hour programme. If you consider the full mythical spare 650MHz of Virgin Media cable spectrum than that just equates to 2,708 concurrent users in a hub. Once penetration shoots up, perhaps the Sky+ approach of vast local storage might be the correct approach in the long run. However, once the penetration gets up to levels that would saturate the bandwidth then perhaps V+ will also be mass-deployed in the home and Virgin Media will have a similar home caching solution as the ones that BSkyB are studying.

    In the recently filed 10-K, Virgin also divulged a couple of facts about their analogue to digital conversion plan. It seems that they are focused on London with 230k homes converted in 2005, 239k homes in 2006 and they forecast 80k in 2007. A couple of hat tippers also revealed that the networks in Milton Keynes and Southampton were also still analogue only. I also believe that the majority of networks are still a mix of analogue and digital rather than digital only with the already legendary 650Mhz of spectrum spare. If any knows of any 100% digital networks, you know my email.

    Another gem in the 10-K was the branding deal with Virgin is 0.25% of revenues subject to a minimum of £8.7m p.a on a 30-year deal with a poison pill (oops sorry early termination fee) On 2006 turnover of £3.6bn that would equate to around £9m. This doesn’t seem too extortionate to me. Virgin Media also has a deal for capacity and commissions with Virgin Megastores. In 2006, they paid £1.8m which given Virgin Mobile only came on the books on July 4th annualized runs to £3.6m. Virgin Mobile is in 75 megastores who provide space and staff so averaging out at £48k pa for City Centre presence also doesn’t seem too bad to me especially given the commissions that Carphone demand.

    Also, the total cost of the Virgin Mobile deal was £952.2m which was paid with £418.2m in cash, £518.8m in shares and the balance of £15.2m covered the transaction fees. It is also worth considering that £200m of long term debt came with Virgin Mobile as well net current liabilities. Unfortunately most of the purchase price went to intangible assets on the balance sheet. The depreciation and amortization charge accounted to £41.7m in the 2006 which meant a total mobile OCF of £30.2m turned into a net loss of £11.5m. It is going to be incredibly hard for a MVNO to generate around £83m of profits per annum to cover the amortization element of the purchase price. What is interesting here is that Virgin Media only put around £300m as an “amortizable” expense, they also added £970m of intangibles as an asset of indefinite length. A billion pounds of indefinite value for Virgin Mobile – I don’t think so. I suspect that Virgin Media have acquired a bit of a dog here and a drain on overall profitability for years to come. However, there is really good news on the mobile front and it is clear that Virgin Media write off customer acquisition cost immediately for both prepaid and postpaid and therefore they don’t have hidden capitalized costs on the balance sheet for mobile.

    Virgin Media is definitely feeling the pain in current round of the Slug Fest:
    • The Business has a mega-article reporting that a YouGov Brand survey shows the Virgin Media losing all the gains made from relaunch;
    • The Guardian (top rated Murdoch hater rag, but best “Media” coverage) is reporting a return to NT Hell levels of customer (non)care and more or less saying all anyone has to do is to pick up the phone, whinge and they will get a £10pm discount or additional services for free.
    • Tomorrows Economist however is reporting that the whole situation is a classic win-win for Branson.

    After all that, all that is left is to say good night and leave a classic James Murdoch quote:
    We are going to reschedule a whole weekend of programming just for them and I think that is going to resonate with viewers; at Virgin they reschedule so they can show their major shareholder in a glass box.

    Five – Latest to be Hit

    Five have halted all Premium Rate Quiz shows after their daytime show, Brainteaser, was found to be involved in shenanigans.

    Anyone with half-a-brain cell would know that a game run by a company with the name of Cheetah was to be viewed suspiciously. Cheetah productions is apparently a subsid of Endermol productions who famously had to give a tonne of dosh back to punters last year in another Big Brother fiasco when after paying to evict someone Endermol promptly threw them back in the house in a desperate attempt to inflate viewing figures.

    Seriously, I am not making this up.

    Michael Grade – Great Comedian of Our Time

    I actually wrote on the ITV results and challenges for The Motley Fool, so I won’t repeat myself here.

    However in browsing this mornings Financial Times, I thought I’d share with you a couple of jokes from the Sir Michael Grade portfolio:

    The first is on spectrum for HD TV:
    [We’re asking the Treasury to hold some spectrum back from Ofcom’s planned auction] It doesn’t follow that if there’s a demand and you reduce the supply the price goes down…Reducing the supply, I would have thought, would put the price up.
    In other words give us the stuff for free or sub-market price and then the mug telco’s will pay you a premium for what is left and you might even get more money than you expect. Notice that he doesn’t even bother lobbying the industry regulator, OFCOM, he goes straight to Gordon Brown.

    Even better is the logic on BSkyB stake:
    It is a fact that we get around 63 or 64% turnout at our elections, so if you’re looking for a 75% majority of votes cast, with 17.9% you could well be in a position to block something.
    In other words, because our shareholders are too lazy to vote, I think the Murdoch clause should be reduced from 19.9% to 13.4% - we could even call it the Bone Idle Shareholder clause (BIS). Unbelievable…

    Personally, I think he should have a word with his new best mate, Gordon Brown, and apply the same logic to general elections: because quite a few of the Great British Public are too lazy to vote, the Nanny State Socialists are over-represented in those actually bothering to vote and the Free-Marketeers are outnumbered, therefore for the good of the nation we should only allow in total the Socialists to have 13.4% of the total votes cast. That'll make the General Elections more interesting...

    UK Mobile: Airtime Only Deals

    Both, Vodafone and O2 have started offering (and more importantly promoting) Airtime only deals for the first time in at least a decade. This is a very interesting market development.

    Not to be outdone, Carphone have immediately countered with perhaps the most mental deal of the year so far.

    It does not take a genius to figure out that if Carphone works on a Gross Margin of around £100 per connection, either the o2 commissions are huge or the non-take-up of cashbacks is
    huge. I cannot for the life of me imagine the quality of customers signing up to these deals.

    OpenReach LLU KPIs

    OpenReach publish a weekly spreadsheet on the various LLU stats. Although two weeks do not make a certain trend, the rate of unbundling has dropped now for two consecutive weeks and last weeks stood at 58k lines down from a peak of 66k lines. The total number of lines unbundled now stands at 1.7m.

    Even more worrying for unbundlers is the rate of faults, represented by the First Touch, Last touch statistic, remains worryingly high especially on fully unbundled lines and does not seem to be improving:
    • Partial Bulk - 96.27%
    • Partial Single - 88.91%
    • Full New Line - 18.09%
    • Full Transfer Bulk - 36.96%
    Everybody who sells “double play” or “triple play” services will ultimately want a fully unbundled line just because of the economics. With the demise of Bulldog the only current high volume full unbundler is TalkTalk and the stats must indicate a lot of ongoing problems with TalkTalk transferring customers from the unprofitable CPS + resold broadband to the theoretically more profitable unbundled services. AOL, Orange, Tiscali and Sky who are moving people to partial unbundling (and therefore not risking loss of voice service) will be suffering a lot less.


    The high priest of tipsters has just gotten in touch with me and said my usual eagle eye has missed the most relevant statistic hidden within the OpenReach statistics is the amount of churn going on within the LLU community.

    This gem is revealed by subtracting the difference between the current and previous weeks “Working System Size” ie the net adds and comparing to the total number of orders processed ie the gross adds. For the last 5 weeks this has been running at over 10k. As a ball park figure (averaging the last 4 weeks figures and annualising) this equates to around 40% per annum churn.

    It is true that the original Bulldog unbundlers should now be out of contract and a lot of Tiscali and Orange customers were partially unbundled without being made aware and signing new contracts. Orange also recently said that broadband churn was running around 25% and they expected (in France) home churn in the end to be as significant a factor as mobile churn. As an aside, I love the French term for churn is washing machine.

    If this is true, it is a truly horrific figure for the LLU community and the unbundlers P&L accounts will weeping in red ink for a many a year. However, the figure is so high, there must be something wrong in either the OpenReach spreadsheet, my assumptions or broadband satisfaction.

    My excuse for missing this gem is a combination of stupidity and a raging hangover brought on by consuming copious quantities of Vino Collapso.

    Tuesday, March 06, 2007

    State of LLU Britain

    The hardest working mapper of Broadband Britain has been busy beavering away updating his databases.

    Sky had an amazing Feb unbundling a total of 57 exchanges in the month to take its homes passed to 14.4 million and a total of 836 exchanges, which is now a larger footprint than Virgin Media.

    O2 is also busy and now has uploaded its plans for a total of 833 exchanges of which 557 have been unbundled. Peter Erksine said a launch of the O2 Home would take place in Q2 and given yesterdays news from the Czech Republic I’d be amazed that if IPTV services wasn’t on the menu as well as telephony and data.

    Although Carphone keeps its data extremely close to its chest, it is well known that they are also busy bees unbundling as fast as budgets and Openreach permit - the current state of the Carphone network is unknown.

    The rest of the LLU crew seem extremely quiet which makes me think who Virgin Media will pick as its wholesale partner. There is a problem with picking people with a small footprint as it will mainly overlap with the cable coverage. They need someone with as wide as possible coverage of rural Britain.

    Could we be awaiting a shock link up of Virgin Media and BT?

    ITV & Premium Rate Calling

    The strategist in me thinks that Michael Grade has made an excellent decision in halting premium rate lines, subject to an independent audit. ITV now appear in the public eyes (well at least mine) to be taking the high ground, especially when compared to the publicly funded and owned Channel 4.

    The moralist in me thinks that TV Call Ins are just another way of milking money from people who can ill afford it.

    The free marketeer thinks that it is personal choice.

    The cynic in me thinks ITV will have been up to some really shady practices in the past to take this extreme step.

    The irony is that if Michael Grade cleans up ITV and gets rid of some of the more ridiculous programming such as ITV Play, makes its back catalogue available on multi-channel and the internet and makes a return to investing in quality light entertainment shows then the BSkyB stake might work out to be a brilliant investment in the long run.

    The scale and growth of the Premium Rate industry is amazing - this from the ICSTIS annual budget:
    For years the UK premium rate sector was defined by a small range of service
    categories. It had a fairly steady turnover of £200m in 2000 and £400m in 2001.
    Since then the market for services paid for by premium rate charging has grown
    dramatically to roughly four times the size. The UK public spend £1.6billion – the
    equivalent of about £35 per year by every adult in the country – on an ever widening range of services and goods across every communications platform.

    Sunday, March 04, 2007

    TV Market: Virgin Media & Sky Battle


    Reading through the Sunday newspapers, I’m struck by how few focus on the strategic considerations of the deal. I still believe the main reason for the withdrawal of Sky channels is that Sky wants to differentiate its service against the Virgin Media service.

    Even before the Virgin pullout of Sky News and the proposed pullout from Freeview, Sky Satellite is the platform of choice for news junkies. It not only has Sky News and BBC News 24, but CNN, Foxnews, all the financial news networks or even the obscure networks such as Al-Jazeera, Chinese State News and the new French News network. I believe if you are a serious news junkie and are allowed to put up a satellite dish, you will already be a Satellite user – even if you belong to the Murdoch hating brigade.

    The general Sky Entertainment channels are a completely different matter and although content quality is a very personal matter, I don’t believe that the Sky Entertainment quality even stand up to the poorest of the UK Free-to-Air terrestrial networks – Five. I do believe that Sky are quite successful in targeting the UK SciFi community and these are pretty loyal and heavily addicted beasts. I’m sure there is more people thinking about swapping because of losing Battlestar Gallactica, Stargate, Star Trek and the rest of Sky SciFi menu than because of 24, Lost and The Simpsons. It is also noticeable that the big Sky in-house production of last year was an adaptation of a Terry Pratchett novel – again niche programming targeting the significant SciFi community.

    The Sunday Telegraph reports that the current level of cancellations is very low at 100 / day. To be honest, I’m not surprised at this level, but I was surprised that Steve Burch admitted that the retention team on the call centre was keeping 95% of callers – that means that Virgin Media are probably handing out 1,950 package discounts /day. I do think that one of the best actions taken during the whole sordid affair was when Virgin Media said they would allow people to exit contracts up till the end of March – very reasonable, mature and fair.

    However, as I said I don’t believe the Sky One move was meant as a short term fillip to the Satellite subscribers. It is extremely noticeable that the Sky adverts are aimed at 24, Lost and Simpsons viewers – these are all content that have and regularly appear on Free to Air TV and attract large audiences. Sky in its advertising is more or less saying that if you want to watch first run quality TV Entertainment Content – you need to sign up to Satellite. Of course, the content is nowhere near as appealing as some of the ITV and BBC one-off dramas, but it is a start and the Mudoch play the long run in the content game. I believe Sky is targeting the vast number of people who are going to make the switch from analogue to digital and have a choice – a basic package such Freeview which gives more than analogue or a basic Sky Satellite package which offers first run TV programs or Virgin Media with limited “basic” content.

    In order for Sky to be successful in this strategy, first of all it must broadcast “must watch event” based TV. The sort of series that people are going to stand round the Tea Urn in the morning saying “Did you see watch Jack Bauer save the planet, again, last night?” or “Isn’t that Homer Simpson just like our Boss?” In reality, Sky only needs to get exclusivity on these events for a short period of time, because the value drops off quite quickly after that initial Tea Urn moment.

    This brings us to the next element of differentiation which is On Demand programming. Here we definitely have huge differentiation between the Sky and Virgin Media offerings. Currently, the respective PVR offerings (Sky+ and V+) aren’t that much differentiated to the average punter, especially when you consider the latest models in Japan have 1TB (not 80GB or 160GB) of storage and have an in-built DVD burner to transfer the collection to a more permanent home. The big differentiator is that Sky+ has over 2 million users whereas V+ has around 77 thousand. In the PVR world Sky was first and its subscribers have bought into the service is vast numbers; I see nothing to indicate that this innovation will not continue into the future.

    There are only two problems with PVR as a means to deliver the on demand fix of the TV addict: the first is that it requires the viewer to be semi-organised and order content in advance and the second is that it doesn’t deal with those impulse or long tail moments. It is difficult to deal with the problem of people who are completely disorganised – Sky+ has tried to solve it by making the Sky+ available via the internet and mobile ie when someone is on the street and has that “Damm, I’ve forgot to record The World TiddlyWinks championship” moment.

    The long tail is where Virgin Media actually have currently a huge advantage over Sky and that is with true Video-On-Demand programming. Virgin Media has a VOD solution from SeaChange which places programming storage at the Regional Head Ends and viewers make a special connection to a Remote Server which deliver the programs on a “as is required” basis – I’d love to know how much bandwidth is required and if anyone knows the detail of the technology feel free to email off-line. This is something that Sky can’t replicate currently until they have a critical mass of Sky Broadband subscribers and even then they have to integrate the PVR into the service. This is why Virgin Media are plugging the Virgin Central service, as it is the current differentiator.

    The best short term strategy for Sky is to keep content off the service. I would imagine this is easy with Fox owned content (such as The Simpsons, 24, Prison Break) but is nigh on impossible with other content owners. It is really interesting that Comcast, the mega-US cable company, is having huge success with its VOD offering (from SeaChange as well) especially as a retention tool. As I understand it, the boffins at Sky and their suppliers are working hard in linking the Sky+ local storage and User Interface to remote long tail content, but a product is still a while off. The current plan of downloading content overnight is only a partial solution at best, but gives Sky an opportunity with first run movies to put a huge dent in the video rental market.

    The other thing that is missing in the analysis is the economies of scale that Sky enjoy. In the year 2000 cable had 3,352,000 subscribers, now cable has 3,301,000. In the year 2000 Sky had 3,963,000 subscribers, now Sky has 8,437,000. This is why Sky can reduce unit costs with content owners, because the base is increasing and therefore overall they get offer the content owners more revenue and also the content owners are also getting more advertising revenue. Virgin Media with a fairly static base does not enjoy the economies of scale.

    So to sum up, Sky has the current advantage in terms of overall audience, PVR users and therefore negotiating power with content owners. Virgin Media has the advantage of a much better VOD platform for impulse viewers.


    There is also much talk in the papers about the excellence of the Virgin brand, whilst I agree that loads of people actually know the brand – is it better known than the Sky brand? I don’t think so. If we look at the Top UK Brands surveys, I think Sky is normally more predominant than Virgin. For sure, Sky is nowhere near as popular a brand as the BBC, but nevertheless I think it is the second “entertainment” brand.

    There is a certain element in the media that absolutely despise Murdoch, but I don’t believe that flows into the Sky brand and certainly not the Sky subscribers. Personally, I think that Virgin Media face an uphill battle to even match the Sky brand in the long run.

    It is difficult to estimate which brand has suffered most from the last week’s brouhaha and I do believe that both brands will have suffered. Probably, the only gainers are the BBC, ITV and Freeview; Channel 4 is currently on brand-double-secret-probation after the Big Brother and Phone Call-In rip-off fiascos.

    An examination of Virgin Mobile brand show that it is far behind the o2 and Vodafone brands and these have been around in the consumer eye for a lot less time than Virgin. Although, Virgin Mobile has done well, especially considering it a mere MVNO, the network brands power over it especially when it comes to converting brand into cash flow performance.

    Next Moves

    I notice in a couple of papers hints that Virgin Media is going to appeal to the regulators as their next move. I would advise them to think long and hard before taking this move, because it will completely take the argument over a couple of channels into a completely different direction.

    The very best outcome for Virgin would be that carriage would be regulated and someone like OFCOM would decide pricing. However, the vast majority of other channels would also try to get their carriage regulated and guaranteed – channels that Virgin Media don’t want to carry or don’t have the capacity to carry. What needs to be regulated for one also needs to be regulated to another. OFCOM nowadays takes a more "free market" approach than any of the past "great and good" regulators.

    I also think there are more than one or two ISPs who would like the same wholesale access to the Virgin Broadband as they currently enjoy with BT. This would be a huge loss of differentiation to Virgin. The smaller ISPs will definitely be able to get away with a portrayal of themselves as a consumer champion against the huge bully of the Virgin Media empire. In fact, I know a couple who would do it just for the free publicity even if they thought they had zippo chance of success. Oops, wasn't that the Branson marketing strategy in days bygone?

    The next problem is that I think Sky are gearing towards an “We want to bill direct for our customers like Virgin Media currently allow other content providers and we allow other people to bill direct on our network” argument. This is a very powerful argument and one that Virgin Media will struggle to argue the toss against. Sky will argue it is their choice as a content owner whether they make content advertising funded or subscription funded. I spoke to someone about this possibility last night and they said “Don’t be ridiculous, it won’t be worth the effort for Sky to charge someone 3p/day for Sky One, Two, Three, Arts, Sky New, Sky Sports News and HD content. Virgin Media would be able to charge Sky a fortune for conditional access”. Of course, Sky wouldn’t put these channels together in a single bundle – they would bundle Sky Movies, Sky Sports and Sky basics together as one. And they would get the list of customers that they could churn onto their triple play offering.

    If Virgin Media ask OFCOM to investigate the content carriage market, they could get a result which would make their life hell. It is a huge gamble that they shouldn’t be making. Funnily enough, this is outcome that BSkyB are pushing for.

    Friday, March 02, 2007

    Virgin Media Broadband

    There was a couple of comments on the Virgin Media results conference call that raised my eyebrows and put my overhype antennae in full detection mode: first that Virgin Media had 650MHz of spare capacity and the second that they were rolling out 20meg broadband nationwide, soon to be followed by 50meg which is currently on trial. Let’s put this nonsense in full context…

    First, despite the shiny new brand Virgin Media is still a veritable hot-potch of cable systems glued together over the years with wave after wave of acquisitions. Today, Virgin still has portions of its network in which broadband is still NOT available. In fact despite being predominately located in suburban areas, broadband is only available to 94.5% of homes passed whereas DSL technology is available to 99% of ALL UK homes including some very rural areas. Virgin Media doesn’t publish the plans for complete digitization of their network, if fact I don’t believe there is a plan because it would cost too much capex. So to say that 10meg is available to all is slightly disingenuous - saying the vast majority ie 11.8m out of 12.5m homes passed - I could quite accept if there wasn’t another limiting factor.

    Cable broadband has its own set of acronym spaghetti, such as Docsis 1.0, 1,1, 2.0, 3.0 and Eurodocsis. As I understand it, the Virgin Media is not completely using the same standard throughout the whole UK network. Again this could be fixed, but again it costs capex and again I’m not sure if a Virgin Media plan exists. As per normal in the comms game, the higher the version number, the higher the SHARED bandwidth and although Docsis shares the bandwidth ultra-efficiently and transparently to the user this is the next limiting factor.

    Cable systems are architected in a typical branch manner: Super Head Ends feed Regional Head Ends which in turn feed Hubs which in turn feed Nodes which in turn feed Distribution Points which in turn feed Homes. In the Virgin Media network, the CMTS (Cable Modem Termination System, the cable equivalent of DSLAMs, also known as uBRs – universal Broadband Routers) are placed at Hubs.

    If we take DOCSIS 2.0 as an example which uses a 36-meg shared pipe of a 6MHz channel, the calculation of peak hour bandwidth required is:
    • Homes passed * Broadband Penetration * Peak Hours Percentage * Average Download = Bandwidth Required
    Or as a worked example:
    • 50,000 Home Passed * 0.4 Penetration * 1 in 15 using * 20kb/sec = 27-meg which fits quite nicely in a 36-meg pipe.
    It is pretty obvious to see why any network operator hates p2p traffic which consistently uses bandwidth throughout the day even when a human is not present at the computer and also finds video streaming at high bandwidth expensive to deliver.

    It is also pretty obvious that to allow Virgin Media to sell 10-meg and 20-meg pipes, the economics only work because people do not consistently use the 10-meg or 20-meg capacity. To be fair, this is not specific to cable, but the way all networks including voice and wireless are designed.

    However, it is also pretty clear that Virgin Media can oversell connections in a particular hub and reading the various forums it is also pretty obvious that some hubs in the Virgin Media are overloaded and people are noticing that available bandwidth is severely limited in peak hours. One solution of course is to implement traffic shaping and pick on the biggest hog, p2p. This is currently being tested in the Preston area and I’d be extremely surprised if it is not rolled out across the UK network – all DSL networks do it, so why not? – especially if it saves some capex.

    The other solution is to add more downstream channels and I know quite a few UK hubs already have multiple 36-meg pipes with individual users allocated to each pipe. Again implementing this is pretty simple if the capex is available and has the added bonus of the possibility for creating good-boy and bad-boy pipes.

    It doesn’t take Albert Einstein to figure out that to further increase bandwidth, one route is to bond pipes together to create one pipe to rule them all. This is in fact exactly what DOCSIS 3.0 does and how Virgin Media plan have the capability to deliver 50-meg to the home. However, a slight problem is that the standard hasn’t been agreed yet and therefore we are talking in reality current activity is a combination of lab work and field trials. Despite, the hype Virgin Media is only playing with 50-meg with ARRIS as a supplier of pre-Docsis 3.0 equipment in Kent: there is basically zero probability of DOCSIS 3.0 being rolled out across the UK in the short term.

    In thinking about all this I decided it was best to speak to the uber-guru of the broadband world Dave Burnstein of the ultra-vital-read DSLprime newsletter fame. In his typical low-key and modest fashion he claimed he was too busy trying to keep up with the DSL and FTTH scene to get into DOCSIS, but then added he knew that 160-meg down, 400-meg down and even 1-gig down were working fine in the labs. Think about that for a moment: sharing 1-gig downstream - that would easily support 100-meg to the home in a reasonably loaded Hub branch - that would easily download a 1GB mpeg4 encoded 90 minute movie in 80 seconds. Then think about how long it takes to visit the local video store and how frustrated you are when they don't carry some obscure movie that tickles your fancy.

    Of course, 1-gig would involve bonding around 28 channels (6MHz) at 36-meg each which is around 168MHz of capacity. This brings us back to the Steve Burch comment that he had 650MHz of frequency available - well, I just don’t believe that he has around 650MHz of capacity available. Perhaps if every network was digital only with limited TV channels, but frequency usage of cable networks is a story for another day.

    This brings us to back to the overhype antennae – yes theoretically Virgin Media could have 650MHz spare across the network and yes theoretically they could deliver 50-meg to every home on the network. However, it would cost a huge amount of capital and this is one thing that Virgin Media doesn’t have. If we super-optimistically add £100/home to roll out Docsis 3.0 (remember a new modem is needed in every home) that’s £1.3bn to roll-out 50-meg across the Virgin Media network. And that is before capex to complete digitisation of the network, additional capacity in current overloaded areas and limited expansion of the network for new homes in current coverage.

    One thing that was also stated and stressed in the conference call was that capex was expected to remain constant compared to 2006 (approx. £575m) for the foreseeable future. Given that capex covers software, such as the back office integration projects and maintenance capex such as normal wear and tear and upgrade of kit – I really doubt that Virgin Media have much more than £300m available for new projects, such as network expansion and new services.

    The next problem that Virgin Media have is the war with BSkyB – the longer and bloodier it becomes the less cash flow the operations will generate and given the Chairman has committed to increasing Free Cash Flow by 50% year-on-year for the next couple of years – the balancing item is of course Capex, which by my reckoning is reducing with every punch that Murdoch connects with. Of course, Virgin Media could go to Wall St and announce a complete change of direction and then again pigs might fly.

    All of this makes the delivery of 50-meg to the cable home less and less likely.

    Cable Users should not be completely in tears: there is a reason why Virgin Media won the best UK Consumer Broadband provider and that is because cable in the UK really is currently much better than the current DSL offerings for the average Joe Public. DSL is suffering because of the hype created by 8-meg claims and 24-meg claims by DSL providers when they are perfectly aware that they deliver on average nowhere near this bandwidth to the Great British Public. Survey after survey shows that people are completely sick and tired of the hype and lack of delivery in bandwidth, availability and support in the DSL world.

    I cannot for the life of me figure out why Virgin Media are trying to join the overhype game.

    Thursday, March 01, 2007

    Virgin Mobile Q4 2006

    Virgin Mobile had a Christmas from hell, however due to appalling lack of transparency in the results comparatives are hard.

    First of all, let us deal with the revenue growth which was spun as a positive with revenue increasing to £151.7m in Q4 compared to £140.4m in Q3. Of course, mobile is a seasonal business and therefore comparisons with 2005Q4 would be more appropriate, however we do not have this figure as Virgin Mobile never released full accounts for 2005/6 when they were an independent company. To be factored in here is that Virgin Mobile is predominately a prepaid consumer business and these tend not to be heavy callers during the summer holiday season and unlike business customers continue to call over the Christmas festivities. Also, Virgin Media was only acquired on July 4th so Q3 was actually 88 days compared to 91 days in Q4. In other words, the underlying growth in revenues is hard to determine, but not as big as Virgin Media made out.

    Next, profits actually dropped on an OCF basis to £14.2m in Q4 from £16.0m in Q3. Here, seasonality is definitely at play because the Christmas period is normally the time of huge customer acquisitions. These sales generate large absolute commissions and handset subsidies especially on the prepaid side which is normally immediately expensed into the P&L account and therefore Q4 is not normally a good quarter for profitability for the prepaid business. At Q3, Q4 OCF was forecasted to drop to £6m and therefore the Q4 has turned out much better than expected.

    The source of this positive turn is Virgin Mobile only managed 11.1k net adds for the Quarter which frankly is appalling. Given Virgin Mobile added 71k contract customers means that there was a net loss of 60k subscribers in prepaid at their busiest period of the year. Virgin Mobile did release subscriber numbers in 2005Q4 which were net adds of 193k which were almost all prepaid and in 2006Q3 net adds were 123k.

    However, the indicators were around early in December that Virgin Mobile was suffering. In addition, Virgin Media was more aggressive than anyone else in pushing subsidies into the prepaid market. In true Mobile Pricing Geek style, I still have a copy of the Carphone 2006 Christmas catalogue and I can prove this. I’m not sure how much reliance Virgin Mobile put into the Cath Kidston range but it looks like the whole of the Christmas 2006 campaign was a complete disaster.

    The situation gets even worse when you take into account the 90 day active rule which means that Christmas prepaid churners usually show up as churners in Q1 and Q2 of the following year. Virgin Media are forecasting “substantial” net losses in Q1 and I believe this figure could be huge – upwards of 250k. The CFO will know exactly how SIMs has gone inactive in the 0-30days, 30-60days and 60-90days windows. He will also know how many SIMs have stopped being topped-up and are in incoming calls only mode.

    The spin put on the prepaid losses is that Virgin Mobile sees more value in the contract mobile segment. This may be true, but what if the scenario really is that prices have dropped so far that the prepaid MVNO model is just not profitable? As I have explained before, network operators can drop prices below termination rates for on-net traffic – a classic case is the Voda family plans which led to significant market share gains in Q3 and Q4. Allegedly and according to the jungle grapevine, these are to be “copied” by T-Mobile in 2007Q2. Similarly, O2 and Orange have plans which encourage prepaid loyalty and on-net traffic. I think the truth is that tariffs are becoming far more important in the prepaid market than handset subsidies. Very few people know the contents of the T-Mobile/Virgin Mobile MVNO deal, but I suspect prepaid is now extremely marginal to Virgin Mobile, but of course still extremely profitable for T-Mobile.

    I loved the comment in the Sky Basic negotiation from Jeremy Darroch, BSkyB's CFO, that the cost for the Sky channels was the same as Virgin Mobile was charging for an on-net text message. The truth is that Virgin Mobile doesn’t own a network and 3p is probably more or less what Virgin Mobile are handing over to T-Mobile for every text message.

    Intriguingly, Virgin Mobile do not release churn figures despite them being a major target for the old ntl and telewest operations. All I can say is that they must be really, really bad. It was also noticeable that an old buddy of the Chairman’s from the Nextel days has been brought in to run Virgin Mobile.

    Again and again on the call, the Chairman and CEO placed the emphasis on contract sales especially the Quad Play. Fair play to Virgin Media and I’m really surprised that they have managed to sell 60k “4 for £40” bundle since its launch on 27th Sept. This is a really good start for a new “converged” product especially when it is compared to the BT Mobile performance in the consumer segment. I’d love to know how many of those are “new” to Virgin customers or are just “old” ntl/telewest customers moving to contracts with better value.

    The “4 for £40” bundle was only available from the Virgin Media channels and not third parties. This leaves net sales figures for contracts of around 11k for single play product which I reckon won’t even cover the Kate Moss advertising fees. The “infamous” Carphone Sales Spreadsheet shows that Carphone sold 8,252 Virgin contracts in 2006Q3 so I suppose most of the single play contract sales came from the Carphone channel. Even more interesting was that from Apr ’05 to Apr ’06, Carphone managed to sell 71,943 new contracts for Virgin Mobile. In other words, the absolute volume of single play contracts has probably gone down as well.

    Under the new Virgin Media the standalone Virgin Mobile business seems to be falling apart.