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Wednesday, September 26, 2007

Virgin Mobile USA, Best Buy & Carphone Warehouse

One of the more interesting facts to come out of last nights IPO filing for Virgin Mobile USA is the extent of the Best Buy shareholding in the company: pre-IPO 4.82% and post-IPO 2.78% (assuming underwriting option not exercised). Best Buy is one of the key sales distribution outlets for Virgin Mobile USA.

Best Buy also recently purchased a near 3% shareholding in the UK’s Carphone Warehouse for US$183m. Best Buy has a joint venture with Carphone to launch mobile stores in the USA and another for Carphone to bring the Geek Squad to Europe.

Carphone as well as being a key distribution outlet for Virgin Mobile in the UK, also has a joint venture for the Virgin Mobile MVNO in France.

Obviously, the connections between the three groups: Virgin Group, Best Buy and Carphone Warehouse run deep and Best Buy is interested in a lot more than just mobile phone retailing in the USA.

It will be interesting to see how this plays out and of course sounds an alarm bell for all Carphone bears. Personally, I think Best Buy will take a look at the mobile and fixed telco services and realise that the grass is not greener on the other side of the fence.

I still think Carphone is overvalued.

Thursday, September 20, 2007

TalkTalk: Plausible deniability

After watching Yuvraj live smack 6x6’s off one of England’s most promising bowlers, I thought the only thing that could possibly cheer me up is by ringing TalkTalk to get the date which my 18-month sentence finishes and to fire up my broadband churn engine into standby mode.

After a pleasantly short amount of time in the call queue, I got through to an equally pleasant lady who informed me that my contract with TalkTalk started on the 6th Feb 2007 and therefore I had another 9 months to go. “Sorry,” I said “you must be mistaken I was one of those idiots, sorry pioneers, who signed up for service when nearly-free-broadband was launched in the spring of 2006”. She shot back “Ah yes, but you agreed a new verbal contract when you were unbundled in Feb 2007”. After picking myself up from the floor, I asked immediately to be connected with the retentions department.

After an annoying long chargeable wait, about 45 mins, in the queue for retentions during which I was offered the opportunity several times of hanging up, eventually I got through to another pleasant lady who informed me that my earliest release date was 28th October, unless I bought a £70 Get-Out-Of-Jail card. The call centre system had two dates on customer records: one was contract commencement and the other was the unbundling date, the other lady must have been confused.

I really wonder if this was genuine error or standard procedure for TalkTalk. To be honest and although it falls into the sharp practice category, I actually have a grudging respect for TalkTalk management – this goes to show they are really thinking about minimising churn.

The only reason I thought of ringing up TalkTalk in the first place for my release date was that I had received an offer through the post for a free 3-month subscription to LOVEFiLM apparently worth £29.97 and a free, unspecified but undoubtedly the Huawei HG520, wireless router worth £49.99. All I had to do was ring them up and agree to a new 18-month contract to claim the offer. Even if a tiny 1% of the base takes up this offer, it is well worth the effort for TalkTalk and again shows how TalkTalk are going to fight to retain their base.

I’d be surprised if the offer itself will cost TalkTalk anything: the wireless router probably cost them around £10-£15 wholesale and I wouldn’t be surprised if TalkTalk were actually earning decent money for every customer who stayed subscribed to the LOVEiFiLM service beyond the 3-month trial period. In addition, probably iLoveFilm are paying the cost of the direct marketing campaign.

Personally, I love the concept of a broadband ISP actually promoting a snail mail solution for downloading. I estimate that the LoveSomeFilms £9.99/month bundle, which is unlimited hires of 1 disc at a time, a user could without too much strain watch 5 hires in a month, which equates to around a 23GB/monthly limit on 5x4.7GB DVD's. Of course for P2Pers where downloads of films are taking too long on the throttled TalkTalk network, DVD Jon followers have seeded the net with software to allow copying of DVD's for addition into a more permanent personal collection.

After my experiences with TalkTalk, I thought I’d give Sky a ring and see if they were ready to accept my LLU business. First of all, Sky is missing a real trick by publishing a “0870” number for sales calls. They should be publishing a geographical number so that sales calls are part of any bundle from either mobiles or landlines. It really gets on my nerves to make sales calls which actually cost me money. Next, the poor customer attendant was confused because my number isn’t on the database – yes I’m unbundled. Basically, Sky aren’t ready to accept their own payTV customers who are about to start coming out of unbundled contracts.

So with TalkTalk already putting in the processes and procedures to deal with customers coming off contracts, no equivalent of the MAC process for LLU customers and my sneaking suspicion that only BT is ready to accept unbundlers back, I suspect that my 30% estimates of TalkTalk churn in 2008 might be a little high.

However, it doesn’t look like David Goldie who is in charge of the Telecoms division shares my optimism: CPW announced tonight he sold 824,375 of nil-cost options for a £3m payout. He still owns 823k shares so is not totally on a downer about CPW prospects.

PlusNet: Going for the Gaming Niche

In the suburban densely populated areas of the UK, broadband competition is red hot and the pricing extremely aggressive. It is hardly surprising therefore that we are starting to see the more advanced thinking ISPs starting to target market niches.

One niche that has always existed since the start of the internet, is geographically dispersed, extremely tech-savvy and would obviously benefit from a specialised service, is the hard-core online gaming community. Plusnet have designed a product just to serve this communities needs.

As at Mar 2007, OFCOM estimated that 32% of UK Broadband population participated in online gaming: with 12.4 residential broadband customers that is nearly 4m gaming homes in the UK. Obviously, not everyone plays games frequently enough to consider a specialised service, but PlusNet estimate their target market at 400k or 10% of the overall gamers.

If we consider this market size against the SME market which is the other preferred ISP target niche which OFCOM estimates has 600k subscribers, we can see that the size of the Gaming opportunity is significant.

Product Design

Obviously in online gaming, speed of response from the server to console/ PC is vital. Absolute speed is measured by latency and is transparent to gamers by just typing a simple command “ping games.server.name” from their PC. Therefore, no ISP can hide their performance from gaming customers.

The biggest issue for gamers is when ping times are not stable and vary wildly. Obviously if a game server or PC is heavily loaded and performing badly, ping times deteriorate and this is outside of the control of the ISP. But more often than not, ping spikes are the fault of the network and are caused by heavy network load.

The two obvious ways for a network to avoid these spikes are to either build huge capacity for everyone, including people who are possibly using applications where near real time responses are not vital – this is uneconomical. Or, prioritise the applications which require fast responses – this is the approach of PlusNet.

Packet Inspection

I very rarely read in general forum broadband users applauding ISPs for installing Packet Inspection Equipment on their networks, however this type of equipment does have an upside. Packet Inspection basically means that Internet Traffic is tagged and put in an ISP defined stream according to the application. In normal uncontested hours this is irrelevant apart from the couple of extra milliseconds that it takes for the packet inspection process and streaming to occur. However, when the network is congested the “important” streams are prioritised and the “less-important” streams are de-prioritised.

Personally for me, I expect my internet voice calls to work perfectly 24x7 even if it downgrades my browsing experience slightly and really I can’t be that bothered if my ftp download of a 10-meg file takes double the time. However, and this is a big, if congested hours run to most of the evening or my browsing experience takes forever or my ftp speed is really slow, I have a big problem. In other words for me, some traffic shaping at peak times is acceptable, blatant overloading of the network is not. Plusnet have a rolling 24-hour view of the application traffic on their network which highlights the peak hour loading issue perfectly.

Plusnet are very transparent about their traffic management policies and ascribe the highest priority to voice (voip) and gaming traffic. It is interesting that the VOIP services mentioned in the gaming release are the gamers favourites, Ventrilo and Teamspeak, and not the one’s which generate the most amount of publicity, eg Skype and GoogleTalk, even though these are prioritised as well.

In order to prioritise traffic, Plusnet must have a dedicated team continuously analysing application signatures and programming the deep packet inspection equipment - in the plusnet network the DPI kit is Ellacoya’s (pdf)

I would guess that most games publishers would be eager to help Plusnet, especially now they are part of BT, prioritise their traffic whilst others software vendors, especially in the P2P and Binary Newsgroup fields, are less helpful. It is a well-know fact that some vendors go about cloaking and encrypting their applications in order to avoid being managed by a ISP. The Ellacoya platform can currently identify some encrypted applications, but I guess we are in the middle of a long running cat and mouse game which will probably go on for many decades to come.

My own personal opinion is that based upon the economics of broadband some form of traffic shaping and prioritisation is inevitable on ALL networks - even all the unbundled networks especially as they start to become loaded and even one day fibre networks. I would rather signup to an ISP who are transparent in their policies, rather than charlatans who hide behind vague legalistic gobbledygook.


Interleaving is a common form of error correction used in computer science going back many years before broadband was even invented. Obviously, because it relies on analysing blocks of data rather than individual elements, it adds delay or latency or increases ping times in all uses. On the positive side, it reduces higher level stack errors and reduces the chance of a line dropping in an DSL broadband environment.

Interleaving, I am led to believe, adds on average 20 milliseconds of latency and therefore a lot of gamers want it turned off. Plusnet offer this option to the users – it is even self provisioned from the internet.

The key here is “self-provisioning” which makes it economical for the ISP to offer this service – no calls to the call centre, no signing onto Openreach systems – a simple API request generated by the customer. Most ISPs have not made this type of investment in their online support/ self-provisioning platforms and more especially automated the links to OpenReach on the backend. This is an ongoing investment as Openreach platforms and functionality change frequently. I suspect this is going to be a key ISP differentiator in the future.

Hosted Game Servers

Some Games allow ISPs to place Game Servers in the core of their network, thereby reducing the number of hops for Gamers and thereby improving performance. Although, Plusnet are not currently advertising these, I know for a fact they have some PC and PS3 gaming servers on beta.

Urban Myth #1: All Gamers are Bandwidth Hogs

One of the reasons I have heard from some ISPs why they don’t actively pursue gamers is that they consume above average amounts of bandwidth and therefore are not very profitable to serve comapred to your average homeowner browsing the web and periodically downloading some spam (sorry emails). This may well be true, but I have always believed the low bandwidth user will nearly always decide on price and therefore go with the mass market ISPs.

Plusnet kindly provided me with the following data:
“Approx 5,000 of our current customers did more than 100MB of gaming traffic last month and ~80% of these did less than 10GB of all traffic types. Also usage overnight is not counted, so patches etc can be downloaded overnight.”
In other words the vast majority of current Plusnet gamers are not from the bandwidth hog species.

Of course, time is also on the Plusnet side with more and more people in the UK signing up for online game – the heavier early adopters will soon be outweighed by the lighter long tail.

Urban Myth #2: Gamers are Whingers who cost a fortune in Support.

This is a much harder myth to dispel, especially if the source is an ISP who offers p*ss-poor service. This type of ISP will generate support problems from across the base and not just from Gamers. The problem for these types of ISPs is that Gamers are harder to fob off with some non-answer.

Support is going to be a crucial battlefield going forward for the ISPs and I have never spoken to anyone who thinks they have gotten it right. To be fair to Plusnet with their online portal and transparency, they appear to me to try harder than the rest. I doubt many ISPs have online call queue and performance statistics.

Of course, this openness gives the press ammunition to have a field day when the fat-fingered monster of Plusnet strikes. Plusnet have had severe problems with email services in the past, but it would be churlish of me to joke about the sorry sagas here.

Urban Myth #3: Gamers do not Use Email.

I couldn't resist ;-)

Other Gaming ISPs

I’m sure there are a few out there on the net, the one that I keep hearing about is Jolt who seem to be well regarding the gaming community. I believe Jolt was formed as a spin-off from Nildram and still uses its network. Nildram was of course bought by Pipex who have just been purchased by Tiscali. Tiscali will need to keep its eyes on the ball if it is to see off the forthcoming threat from Plusnet.


I believe targeting niches is the way forward for smaller ipstream based ISPs – gaming is a perfect reasonable sized niche to build a differentiated service.

A lot of ISPs are trying to gain market share in the SME market which again offers the opportunity for differentiation and big value with products for home workers, VPN and hosting services. The business market has the double bonus of not only usually having a higher ARPU, but also a different time of day usage profile to the residential market.

One big niche for which I not yet seen a satisfactory solution is the richer rural home with long line lengths and therefore poor connection speeds. There must be plenty of these who are currently dissatisfied and despite the size of their wallets are becoming part of the digital divide.

Wednesday, September 19, 2007

iPhone in the UK

The iPhone has nearly arrived on the UK shores and there are a few twists in the UK flavour compared to the US favour. Now we have the pricing and distribution details confirmed it is worthwhile looking at the potential impact on the UK market.


Apples stated aim is 10 million iPhones shipped in the first twelve months. A few weeks ago, Apple announced the first million iPhones, so they have 9m to go in around 9 months.

I am assuming that take-up and targets will be roughly in line with overall country population. My estimation of the total market is around 550m based upon the current population estimations in Wikipedia (USA-302m, Germany-82m, France-61m, UK-61m, Spain-45m). This gives ball park figures for the next nine months sales as Germany-1.3m, France-1.0m, UK-1.0m, Spain-0.7m, USA-4.9m (plus 1m already sold).

It will be extremely hard to track these sales on a country by country basis as inventory at the operators will have to be factored in and I would be surprised if most operators separate out iPhone sales from normal contract sales.

Undoubtedly, Apple will also roll out across the EU during the year and a big notable exclusion from the current list in Italy with a population of 59m. Also, T-Mobile is rumoured to have secured the Dutch, Austrian, Hungarian and Croatian markets.

It is interesting that the whole of EU with a population of 494m and far higher mobile penetration is potentially a much bigger market for Apple in volume terms than the USA. Of course, market fragmentation and lower GDP probably mean overall dollar market potential is probably around the same for the EU and USA.

Overall UK Market

According to the OFCOM Q4 2006 market data, there were 21.5m contract SIMs amongst the big four networks compared to 64.4 SIMs in total (including prepay). The growth of contract SIMs throughout 2006 was a quite healthy 1.8m. If we add in 3UK contract base and assume some growth throughout 2007 so far, we have around 25m contract customers in the UK.

Given that the atypical Apple customer more than likely already has a contract mobile phone then a 1m iPhone target will imply around 4% of the total contract market which I believe is an extremely high figure for a top end luxury product to gain in 9 months. This is especially true when we look at contract churn which is around 20% per annum or 5 million contract SIMs. This is an aggressive target for the iPhone given the majority of these contract SIMs will be niches that Apple are not targeting eg business, low use, price sensitive.

Also interesting is that O2 has 28% of the contract market which will imply at a minimum 280k will come from the o2 base. I say at a minimum because the O2 base is more skewed towards the young consumer than the business sectors. It also helps that the iPhone will find it easier to churn an existing o2 customer than a other network customers especially given some of the retention efforts the other networks will put in.

Voice and Text Pricing

The iPhone business model is completely different than the current UK cellular business and deserves more attention but that is for another day and another post. Suffice it is to say that recent attention grabbing headlines of 40% revenue share between the operator and Apple are not the critical factors in any analysis of profitability impact for o2 and apple. It is the profits that matter to shareholders not the headlines.

I am surprised at the low amount of minutes and text in the published iPhone bundles:
  • £35 – 200mins/200texts
  • £45 – 600mins/500texts
  • £55 – 1200mins/500texts
If we compare these to the O2 SIM Only (No Lengthy Contract) Deals:
  • £15 – 200mins/400texts
  • £25 - 600mins/1000texts
  • £35 - 1200mins/1000texts
The £25 and £35 bundles include either free weekend texts or onnet/fixed line calls so the actual volumes are considerably larger than in the iPhone bundles. If we take into account the volume and the fact that SIM deals do not have an 18-month contract, I would expect non-voice/text elements of the iphone deal amount to a minimum of £25/month.

Data Element

The other element in the deal in the deal is the “unlimited” Edge and Wifi data. “Unlimited” is little porky, but the CEO of O2 said the fair use policy equated to 1400 web pages per day. Assuming an average Web Page of 20KB, this equates to a 1GB/month “unlimited” option.

Unlimited WiFi access on The Cloud network for a single device is priced at £7/month direct from The Cloud. I can’t imagine for a second that O2 is paying anywhere near this given that currently WiFi networks are probably operating at nowhere near capacity and many iPhone users will probably use next to nothing. I would guess that TheCloud would be delirious at a guaranteed £1m/per annum if O2 drove a really hard bargain which only equates to 10p/user/month on a 1m base. But let’s be generous and say the average consumer equates WiFi worth at £5/month.

Next is the EDGE access which someone told me they would have to paid to downgrade from a HSDPA bearer. I can’t imagine with web ‘n’ walk running a £7.50month/1GB for 3G access with 90% coverage that EDGE access with 30% coverage is worth more than £3/month.

In other words at an absolute maximum the data bundle would be worth £8/month leaving an £17/month “iphone” premium after the voice/data calculation.

It should also be noted that this data provisioning on a third party network is something new to O2 and could lead to some to some support headaches. The auto-sensing of the "optimal" network between EDGE and WiFi also seems to be pushing the boat out as well.

Achilles Heel

This premium on the monthly tariffs, the pathetic data service and the upfront handset price is undoubtedly the Achilles heel of the iPhone offering. I would expect the other operators to target this viciously.

For example, Vodafone has three very functionally rich handsets in its Christmas line-up:
  • Samsung F700 (with a touchscreen and keyboard)
  • Sony Ericsson W910i (with the Music brand and SensMe technology)
  • Nokia N95 (with WiFi and 5MP camera)
These may not have the allure of the iPhone but when heavily subsidised and placed in an attractive bundle could provide stiff competition for the iPhone.

Voda also has the full MusicStation service which it could put in the bundle for unlimited songs and PC/WiFi downloads for £12.50/month – admittedly this will be low margin for Vodafone with the record companies to pay, but could be a real differentiator compared to the iTune 99p/track option. It could also be a Nokia OVI killer, after all who would use the Nokia service, if the Voda service was bundled?

At much higher gross margins than reselling content, the other operators have 3G networks with wider coverage and fast bitrates than the weird EDGE/TheCloud WiFi combination. For instance, just look at the T-Mobile web ‘n’ walk £7.50/month offer. On a stand alone basis, this puts the o2 data offer to shame.

However, the problem for all the other operators is the amount of money current paid to independent retailers for connections - here I feel that Carphone has shot itself in the foot. I don’t know what the Carphone gross margin is on an iPhone, but I suspect they will struggle to match the £100 gross margin /connection that are their published target. Also, I strongly suspect that Carphone will not be able to get up its normal pricing tricks to gain an advantage eg offering cashback or bundling someone’s else product in their offer (eg a PSP) – I am sure that both Orange and T-Mobile will put huge pressure on Carphone for similar terms to the o2 iPhone deal. The potential solution for both Orange and T-Mobile is of course to offer big value in direct deals (or through for example Phones4U on a reduced commission) and cut Carphone out of the equation.

The biggest surprise for me is that UK launch is so far away with 49 days to go to November 7th – all the other operators have plenty of time to fine tune their plans.

All told, there are plenty of options and time for the operators to cause chaos to the apple/o2/cpw plans and I suspect this Christmas will be one of most hard fought battles on record, especially when you consider that Christmas is normally all about prepaid handsets.

Thursday, September 13, 2007

Orange AnyTime about to become NoTime

Bigish breaking news from ISP Review that Orange is about to sunset their Unmetered Dialup service, AnyTime. It looks like a pretty compelling offer to me – reduce your charges by £3/month and get a much faster DSL offering.

The process is quite interesting – AnyTime customers have 2 weeks to refuse to move or else they will receive a self install package in the post within 3 weeks and then the AnyTime service is turned off. Obviously, people still on dial-up are not going to be in the ultra-geek category and therefore customer support is probably going to be crucial in guiding the customers through the process. I suppose customers, who have ancient PCs which will not support broadband connections, can be “upgraded” to a free laptop type of offer to help retentions.

Orange state that the final switch-off is in December which probably means that Orange UK broadband subscriptions will receive a healthy shot in the arm during the whole of Q4. This is especially true when you consider that Orange still had 915k dial-up customers at the end of Q2 and that is compared to the DSL base of 1,004k. Admittedly quite a few of this 915k base will be PAYG dial-up and the Orange strategy for sunsetting these customers are yet to be revealed.

Update: Those narrowband and broadband customer figures were for 2q2006 not 2q2007, the relevant figures for 2007 are 471k narrowband and 1,090k broadband which still is statistically significant but highlights how quickly the narrowband is churning and it looks as if they didn’t churn to the Orange broadband service.

The rate of decline of this dial-up base has been quite rapid going to 471k from 915k and 1,497k twelve months and 24 months previously. Orange must have decided it is now time to move them over before they are lost to alternatives such as BT, Talktalk or Sky.

I would imagine that Orange have also a lot of legacy infrastructure services with which they will be able cancel the service contracts. These will include dialup modem bank ports, backhaul capacity and 0800 charges. I believe that the unlucky loser of all this revenue is Energis - now part of C&W.

The most interesting part will be to look at the Orange base and revenues in the New Year to see how the sunset operation has impacted.

Tuesday, September 11, 2007

SonyEricsson nicking more Sony brands

After the Success of the Walkman (Music) and Cybershot (Camera) phones, it was inevitable that we’d have Bravia (Video) and PlayStation (Gaming) phones.

So what is next? How about the tinny sound from the original Sony 1950’s radio receivers?

After all SonyEricsson are already fitting analogue FM radio tuners in selected handsets which seem to provide a sound quality from 60 years ago… they could even be marketed as some weird kind of retro device.

Short Alert: Telenor on the launch pad.

When senior people start abandoning ship, my antennae goes into full listening mode:
Executive Vice President and Head of Telenor Broadcast, Stig Eide Sivertsen, has handed in his notice of resignation.
Prior to the expiry of his three year contract as CEO of Grameenphone, Mr Erik Aas has informed the Board of Directors that he will not extend his contract beyond this term. Mr. Aas will leave his position on October 1st 2007. The Grameenphone Board will appoint a new CEO in due time.
Mind you, who can blame Mr Aas given the current operating environment in Bangladesh?
The military-backed government imposed an indefinite curfew in six major cities Wednesday, clearing the streets and temporarily shutting down cellphones in a bid to quell three days of unrest by students demanding an end to emergency rule.

An official at the country's largest mobile operator, GrameenPhone, said the government ordered all cellphone service temporarily shut down.

The emergency was imposed in January when President Iajuddin Ahmed canceled scheduled elections, outlawed demonstrations, and curtailed press freedoms.
Bangladesh is not the Asian country where Telenor has problems:
Telenor has received a 12-month reprieve to cut its stake in DiGi from 61% to 49% until the end of this year. However, Telenor’s exact plans on the stake remain hazy. Earlier yesterday, newswire reports quoted Turman saying that it was still too early to determine if Telenor would deconsolidate DiGi in its accounting.
I’m not even going to mention the Altimo/Alfa dispute, where Telenor have about as much chance of winning as England has in retaining the Rugby World Cup.

If and when the CEO, Baksaas, leaves the building - all the shorting stars will be aligned…

Monday, September 10, 2007

UK Fibre - Political Pressure Starts

I have managed to get my hands on a few tickets on what promises to be a lively debate around “Next Generation Broadband Britain” presented by the Broadband Stakeholder Group on Tuesday September 18th at 6:30pm @ The Commonwealth Club in WC2, London.

The debate features Rt Hon. Mr Stephen Timms MP - Minister of State for Competitiveness, Kip Meek - Chair of Broadband Stakeholder Group and Antony Walker - CEO of Broadband Stakeholder Group addressing the following key questions:
  • why the UK lags with fibre deployment?
  • is UK competitiveness negatively impacted and what is its "public-value"? and,
  • how and who pays?
This debate is the start of a campaign which coincides with a new report from OFCOM "Next Generation Access" expected in October.

Personally, I believe there is no more important communications question facing the UK than “How can UK plc finance FTTH?” and it appears that this view is starting to gain a little momentum.

If you require a seat (or two) email me - first come, first served for the tickets…

Voda MusicStation

Vodafone announced their MusicStation product this morning and better people than me have already written about it.

My immediate thoughts run to what would be a considered a success to the Vodafone UK Monster. In Q2 (Apr-Jun) Vodafone had a turnover of £1,209m and a customer base of 17.6m. Even if Voda managed to sign up 1m customers or 5.6% of the base with a 50:50 split between mobile & PC connections (ie £2.12/week net revenue), the quarterly turnover only runs to £9m/quarter or 0.7% of turnover.

Bear in mind that the revenue is also going to be split three ways between the content provider (Record Company), platform (Omnifone) and distributor + billing company (Vodafone), we can see that the offer is also going to be pretty insignificant on the profit front. Especially when you consider Voda UK made £511m in operating profits for the whole of the 06/07 year. Also, the service attracts zero carriage costs and doesn’t require a data service subscription.

However, I believe the service is far more important, especially in the short term, than numbers would otherwise indicate:
  • Music is seen as the current pathway to youth subscriptions and Voda UK currently has the lowest market share of the main four operators in the youth segment and the other operator is by far and away the strongest operator in the music space. Currently, the Omnifone platform is an exclusive to Voda in the UK.
  • Music files are several meg in size: quality of network, coverage and download speed will start becoming a factor again and becoming a differentiator for people other data card users. Again, this gives a network a capability of differentiating and most importantly
  • Voda has to prove to the world that their platform can be used for distributing content with Voda having a bigger role than a mere bit shifter. Funnily enough, I think that the payforit service is a more important building block than a music service.
Basically, music offers the potential for Voda to start differentiating again both in service and quality in the youth segment. It is a far better and more profitable strategy than giving away x-net minutes in the prepaid arena. But best of all, once again Voda has a chance to prove the naysayers wrong and prove that high speed mobile networks have an economic future.

Even though, I'm don't count as a Youth anymore, I'm going to give it a go when it is finally released.

Future Broadband Business Models

I’m currently doing some very interesting work with the team over at Telco2.0 on “Future Broadband Business Models”. We have prepared an online survey which not only will give the brain cells a little exercise, but also offers a great payback – a free summary of the results for all completed questionnaires.

The results will be launched at the Telco2 event in London on 17th October. On a side note, I am planning to leave my Northern Cave and head down to the metropolis for this event, if anyone fancies meeting up and sharing a beer and a chat.

Thursday, September 06, 2007

Setanta: Squandered Opportunity?

Whilst I’m sat in my daily traffic jam having my eyeballs assaulted by a huge yellow signage offering yet more English Premiership Football (FAPL) for an additional £10/month with no long term contractual commitment, I am drawn to whether the Setanta move into the FAPL is some sort of kamikaze manoeuvre or a long term attempt to overcome the barriers to entry in a potentially lucrative market.

My initial thinking of the basic economics of the FAPL deal goes along the lines of:
  • £10/month gross revenue equals £8.51 per subscriber per month net of VAT
  • Sky Conditional Access change is £0.99/sub/month as per Annex 3 of their regulated rate card
  • Assume that Billing and Customer Support charges are approx. £1/sub/month which is lower than typical ISP support costs.
  • This leaves net revenue of £6.52/sub/month.
  • The content deal with the Premier League (FAPL) was £392m for three seasons with 46 games per season.
  • This works out at an amazing average of £2.84m per game and this is for second rate fixtures on Saturday Evening (ie no local derbies) and Monday Evening (ie no top notch clubs involved in playing midweek European games).
  • On top of the FAPL content deal is the live production costs which I would guess at a minimum will have to at least match Sky’s quality and I estimate to be around £100k/match given the multitude of cameramen, mixing, editing, commentary and uplinks. Ergo, another £4.6m per annum.
  • On top of the content rights & live production, there are the shows talking about the show. In other words, the production of the talking shops programmes and all the countless highlights packages. I would estimate that this would cost around half as much as the actual live football productions or another £2.3m.
  • Therefore football costs are content rights - £130.7m/year, live production - £4.6m and other shows - £4.6m giving a total of around £137.6m/year
  • The total breakeven number of subscribers is an additional 1,758k just on the FAPL rights and assuming Satellite platform like costs of distribution.
I’ll eat my hat if Setanta get anywhere this level of subscribers on the Satellite platform over the length of the FAPL contract without Sky assistance, whereas with Sky assistance it would be simple.

However the overall economics of Setanta are far more complicated that just the FAPL deal with multiple content rights and multiple distribution platforms.

The complications are as follows:
  • Setanta offers a bundle of up to 9 channels with other less expensive content rights such as the FA Cup, Scottish Premier League, USPGA Golf and the rest.
  • Setanta has corporate expenses such as Marketing, Transmission Costs and G&A (overheads) and to factor in.
  • Setanta has wholesale deals with Virgin Media for cable distribution and Sky for Pubs and Clubs which are significant deals. It also has wholesale IPTV deals with BT and Tiscali which are probably not-so-significant.
  • Revenue Sharing – some of the Setanta bundle such as NASN (North American Sports Network owned by ESPN), RacingTV (owned by 30 racecourses), Celtic and Rangers TV probably have some sort of revenue share.
  • Setanta also has a not-so-Freeview distribution option and a Broadband channel
  • The twin temples of doom – Subscriber Acquisition Costs and Churn – also need to be factored in.
Overall Content Rights & Production Costs


Corporate Costs

Some of the Marketing budgets in the TV Industry are absolutely immense: Sky spent £70m in the first six months of this year and Virgin Media spent £37m. Obviously, I wouldn’t expect Setanta to be able to afford anywhere near those sums of money, but I wouldn’t be surprised if they planned on spending £10m in this year. Channel 4 spent £29.7m on marketing its main channel and £15.7m on marketing its three digital franchises (E4, More4 and Film4) in 2006/7. £10m won’t buy a lot of promotion for Setanta in 2007.

The Transmission Costs at Setanta will also be heavy with the cost of a DTT channel to pay for. The current market price of these channels is about £10m per annum, but Setanta might have a “deal” with TopUpTV to promote their payTV platform. Setanta also has 9 satellite channels and has to pay fees to Astra for this capacity, although nowhere near as expensive as DTT capacity. I suspect this could be another £2m. The wholesale deals on Virgin Media and the iptv channels are probably “carriage included” so there will be nothing to pay there. However, the internet costs could add up if the Setanta Broadband solution takes off with 600kbps streams. All told I expect the transmission costs to be around £12m/annum.

G&A (General & Administration aka overheads) is another figure which is difficult to estimate, but given some of the heavyweights on the Setanta management team, the high costs of negotiating overseas sports rights and the cost of London operations - £8m per annum would be absolute minimum.

This would give a run-rate of £30m per annum or £2.5m/month. On the Satellite Revenue per Subscriber this equates to 383k subscribers just to cover the Corporate Bill. Allegedly, Setanta only had 170k subscribers in the UK before this season and this gives yet another indicator of the size of the mountain that Setanta have to scale.

Wholesale Deals

Setanta has a wholesale deal with Virgin Media for the supply of its channels. Virgin Media fulfils all sales, marketing and support costs for these customers. Virgin Media have bundled six of the nine channels as part of its XL TV package which currently has around 1.4m customers. Obviously, Virgin Media will have given Setanta a substantial discount on the retail price, in the press wholesale prices have been estimated around £2.00 - £2.50/month. I would add to this that Setanta probably has some revenue share agreements in place which I guessestimate at 30p/sub (see below), so my guess on top-end return of the deal is £2.20/month.

The potential upside for Virgin Media is to upsell to its existing base of non-TV subscribers and non-XL subscribers – this is a potential market of over 2.5m customers. Personally, I think it is a difficult sell and Virgin Media will have done well to convert 10% of their potential market by the end of the 2007/8 season.

So my top end estimate for the value of the Virgin Media wholesale deal is £3.63m/month or approx £44m/annum.

Setanta also has a significant wholesale deal with Sky for supply of its channels to pubs and clubs. The Sky monthly revenue on these business contracts is significantly higher than in retail and I’d heard estimates on the jungle grapevine ranging from £70/month to £2,400/month. I’ve also heard that Sky have around 40k business customers across the UK – this is significant revenue.

Sky actually is in a really unenviable position with this contract, because it has to be perceived as playing extremely fair with Setanta who is only playing in the FAPL game because of a last minute adjudication by an EU referee. I am wildly guessing here that the average revenue to Setanta is around £50/pub/month which would give a monthly run rate of £2m or annual turnover of £24m.

The other wholesale deals with the iptv vendors (BT & Tiscali) will probably be insignificant in both the short and medium terms. Setanta will be lucky to get a couple of million a year from them.

In other words wholesale deals will bring in around £70m of total annual running costs of £230m (content = £200m and corporate = £30m) which is not bad given that most of this money is guaranteed and easy to collection.

Revenue Sharing


I have not included the cost of the content on the Racing Channels, Celtic & Ranger TV and NASN on the Content Rights Calculation; this is because I suspect that these are run in some form of partnership agreement with the ultimate owners of the content.

Revenue sharing deals are notoriously complex and usually they are not just as easy as a standard price per subscriber. People like NASN, Celtic, Rangers and Racing UK will be looking to cover their costs with some sort of upside. The theory for Setanta is that the Racing nuts will be quite happy to pay an additional £10/month for their sport and will see the rest of the content as a bonus.

The other problem to factor into the equation is that NASN, which holds the rights to MLB and various American Sports was owned by Setanta but was sold late in 2006 to ESPN, owned by Disney, for €70m (including debt). This is a big number for a channel basically serving a very, very niche market in Europe and with some heavy content being bundled.

Some of the content channels deals in the USA within the cable family are legendary for both their complexity and almost magical sleights of hands to the financial community. The Irish are extremely quick learners and this Setanta/ESPN deal may be modelled on previous US deals.

The net effect is that I’m going to ballpark 10p/month/subscriber for the four channel deals, but I could be wildly wayward.

Customer Acquisition and Churn

The big surprise to me was that there was no contract and this worry has probably been ingrained into me from predominately dealing with oligopolistic markets such as mobile and broadband where the consumer is currently faced with a more or less similar product from various suppliers.

Setanta is not in that type of market. I think it is basically playing to three types of customers:
  • Your typical sports fan who already pays for the range of Sky Sports content through either Sky or Virgin and wanting a £10/month with Sky or Free with Virgin top-up for some new content;
  • Your niche sports fan who would take a sports package if only their favourite flavour of sport was covered. This is the market that Gaelic Sport, BTCC, Aussie Sport, US sport & UFC fans are being catered for; and
  • Your sports fan that is economically challenged, but can afford to go down the pub and watch it on a big screen.
I really don’t see a lot of people thinking “Should I take Sky Sports or Setanta?” – more like “Should I take the both” or “I have to subscribe to Setanta because they have all the BTCC events live all day!!”

I subscribed to SkySports for the 1994 England tour of the West Indies – I could not take another series in the West Indies after the 1990 tour and my time spent in the local hostelry nearly caused permanent liver damage. For approximately 11 years, I had been out of contract with Sky until the recent acquisition of a Sky+ box. In fact, I’ve been through two moves where I just re-signed without knowing of the contract length.

Setanta has Trevor East who has been on TV sports, including a stint at Sky, for basically ever guided the path and he will understand the UK Sports PayTV market as well as anyone. Currently we are at only a £160m shortfall for Setanta which is actually only 2.2m SkySports at £6.12/month (after a 50p revenue sharing deal) out of a base of around 5m Skysports subscribers. Obviously, Setanta doesn’t think they can achieve these numbers and that is why they are pushing so heavily in the not-so-Freeview space.

Personally, I think Freeview as a distribution platform is a huge mistake: not only because it is an expensive choice because of the scarcity and of DTT spectrum and poor coverage; not only because Setanta will be holding the innovation torch by trying to acquire customers on a yet to be scaled platform; not only because of a cracked encryption scheme in the marketplace; not only because the majority of the potential additional 9m customers don’t have set-top boxes able to view the Setanta channels; but mainly because the people who are willing to pay for Sport are already on SkySports. Additionally, Sky are not standing still and are busy targeting the niche Sports fan yet to come onboard – witness the improved coverage of Tennis in recent years, the ramping up of Yachting coverage and the addition of Squash and Badminton to the schedule.

Personally, I think the Freeview experiment will be the undoing of Setanta without Sky even having to turn the screw. Bad publicity is potentially the death of any business and I don’t see anything positive coming soon from the newly and expensively acquired Freeview base.

Wrapping Up

It doesn’t take Sigmund Freud to figure out a future for Setanta if they concentrate on wholesale deals, the SkySports satellite customer base and supplying cheap niche content for niche customers yet to sign up to large expensive sports bundles. Instead the Setanta Executive Management Team Testerone levels seem to have gone into full turbocharged mode. Setanta should have been far more honest in their psychoanalysis and admitted that the job of secondary rights holders is to profitably piggy back on the primary rights holders.

A duopoly in the provision of payTV sports in the UK would be almost certainly very acceptable to every EU regulator, especially when practices in other countries are examined.
The current Duopolists have been presented with a relatively simple and idiot proof task of purchasing further sporting rights, viewing figures and thereby undermining further the Free-to-Air business model.

However, I think Setanta have blown it by trying to accelerate the unconverted onto an untried payTV platform without offering the full range of payTV sports ie SkySports + Setanta Sports – this could have been a workable solution.

A £160m shortfall sounds quite a lot, but spread across the 5m SkySports retail viewers it is only a drop in the ocean at an extra £2.66 per month wholesale. Remember, that the Sky ARPU for the 12-months to Jun-07 was £412.

For me the solution to the business model conundrum was for Setanta to get BSkyB to realise that two players in the Sports content business in the UK is the perfect solution for all stakeholders: regulators, sporting bodies and viewers and much better than one.

Personally given the current practices, I can’t see a scenario whereby Setanta will cover its costs over the current 3-year length of the FAPL contact, especially given that things are going to get far tougher next year with the additional FA contract costs of around £41.6m.

Monday, September 03, 2007

Vodafone UK: No Niche Left Unturned

Vodafone has turned its sights on the international community in the UK:
Pre-pay customers will be able to make the 5p per minute calls from the UK to landlines in China, Croatia, Czech Republic, Hong Kong, Hungary, India, Lithuania, Latvia, Nigeria, Pakistan, Poland, Romania, Russia, Slovakia, Thailand and Turkey. Calls made to mobiles in these same countries will cost 15p per minute.
The approach is spot on: no special MVNO with limited handsets and distribution, no special tariff plans – just a normal prepaid tariff option with calls home cheaper than calls on UK networks during the day (30p/minute) and slightly more expensive than calls in the evening and weekend (10p/minute)

The currently UK MVNO which targets the International Community is the Carphone Warehouse subsidiary, MobileWorld, which provides service to all the Vodafone countries (except Nigeria) and is significantly more expensive on fixed line calls and mostly more expensive on mobile calls than the Vodafone tariffs.

For an overall mobile market fully penetrated this is a significant play: there are estimated to be between five and seven million people from international communities living in the UK. MobileWorld themselves have around 500k users.

The days where MVNOs can target a particular niche and expect it to be too small for the MNOs to compete in with has long gone. In some other countries, the MNOs themselves are setting up MVNOs to target international communities. I think this approach is flawed, it is better to invest MVNO set up costs on expanding sales distribution and investing in co-op marketing with specialist dealers. It should be remembered that every prepay customer of today is possibly tomorrows heavy contract customer.

While we are speaking of distribution, it looks as if the big non-specialist retailers are getting backing into the UK prepay market with a vengeance. According to MobileToday:
Mobile understands that Woolworths saw its sales grow by almost a fifth last month, while Argos has overtaken Tesco, since the publication of its latest catalogue and is now the number two in the market for prepay sales.

Operators are also willing to back non-specialist retailers because they have improved their systems. Argos, once a soft target for box breakers, has improved its processes and has become a favoured acquisition tool for operators.
I’m not so sure such confidence is justified: I can already imagine a box-breakers Christmas Cracker with mobile operators chasing market share, non-specialists cutting margins to the bone to get the punters in the door for Christmas shopping and the non-specialists not having the time to stick with their “processes”.

Knowing how Carphone operates, the traders in Acton will already be scratching their heads dreaming up a new niche for their MVNO and a counter thrust to keep prepay market share.

Brightview - A small ISP examined

Brightview plc owned the small ISP which included Madasafish, Global Internet and operated several virtual ISPs for John Lewis & Waitrose. The ISP was sold to BT on 31st July for £17.23m. Brightview plc this morning released its annual accounts for the year ending 30th June 2007 and these accounts provide a little insight into the P&L of a small ISP.

Revenue and the customer base has been steadily increasing with broadband customers growing from 40.5k (Jun 2006) to 50.5k (Dec 2006) to 61.2k (Jun 2007) and revenues £11.0m (12m Jun 2006) compared to £13.9m (12m Jun 2007). The growth in broadband customers is ahead of the growth in total revenues and this is primarily because of a decline is dial-up revenues from £4.0m (12m Jun 2006) to £2.5m (12m Jun 2007).

This phenomenon of at least some of the growth in broadband being offset by a decline in dialup revenues will be a growing feature of the accounts of the three ISPs with the largest dialup bases (BT, AOL and Orange). It is made even worse by the fact that the margin of dialup is typically much higher than that on broadband.

The Brightview accounts highlight the effect of this margin mix quite clearly: overall EBITDA fell from £2.1m in 2006 to £1.3m in 2007. A few notes on this EBITDA figure: it is before central or plc costs, before equipment depreciation, goodwill amoritisation arising from the purchase of the ISP and after broadband SAC amortisation. SAC amortisation is quite interesting for Brightview because they depreciate over 24-months and not the length of contract which would involve a much higher charge. In 2007 SAC amortisation was £1.4k compared to SAC capitalised of £1.4m in 2006 these figures were £0.9m for SAC amortisation compared to £1.5m SAC capitalised.

It should be remembered that Brightview spent very little on marketing – most of the customer acquisition came through recommendations. Capitalised Broadband SAC of £1,391k for 20.7k only works out at £67 sac/customers and most of that would have been paid to BT Wholesale. Brightview consistently won awards for the quality of its customer service and probably the churn rate was a lot lower than other resellers.

Brightview was a 100% BT ipstream reseller for its broadband services and as such had very few tangible fixed assets (around £0.4m); most of assets were intangible in the form of either capitalised SAC or the amount remaining for the original purchase of the ISP by the plc (£7.8m).

Therefore, Brightview faced an unenviable decision:
  • continue as is, probably facing declining profits in the future as dial-up customers transfer to a lower margin broadband product which currently is under severe pricing pressure from the unbundlers;
  • invest in local unbundling – Brightview was always a national ISP and probably doesn’t have the local scale of a Newnet or Zen to unbundled a few exchanges; or
  • sell-up.
Obviously, they chose the sell-up option and achieved what appears to be a reasonable price. BT protects its wholesale revenues and gets effectively a months customer growth at BT retail. The rough purchase metrics by BT were £265/customer and 12.2x EBITDA – obviously depending upon the final £1m adjustment calculations for working capital and July net adds.