TeleBusillis

Dawn of a New Era

2007-11-12T07:43:00.000Z

Well at least for me, as today I’m joining the Telco 2.0 team over at STLpartners. STLpartners share my appetite for dissecting industry business models and trying to discover where the economic benefit in communications and content industry product and services arises.

I’ll still be blogging but on an anonymous basis over at the Telco 2.0 blog. I’ll also be contributing towards paid for research work and consultancy assignments.

I want to thank all of my readers from over the past couple of years and hope that you will continue reading my work over at the new home.

Geo sells same network to both Carphone and Tiscali.

2007-11-06T14:26:00.000Z

It looks as if both Tiscali and Carphone Warehouse have bought an identical dark fibre backbone for the UK from Geo. Obviously, when lit this fibre adds plenty of capacity to both networks and more importantly provides plenty of PoPs for interconnection with their unbundled exchanges and presumably will involve a drastic reduction in backhaul costs.

Geo was originally built alongside old British Gas pipes and was called 186k, before being sold to Hutchison Whampoa and renamed Geo. They have an even more interesting London Metropolitian Network which is built in the sewers of Thames Water. Carphone have leased fibre in these sewers to connect up their core sites in the capital.

BSkyB – Bulking Up

2007-11-05T07:23:00.000Z

The sheer scale of BSkyB’s investment in broadband barely ever gets a mention, but I reckon it is currently around £720m. This is broken down into:

the two major acquisitions: Easynet of £223m and 365Media of £105m of which I estimate around £60m was broadband and the other being the betting assets.
the fixed capex of £130m and success-based capex of around £45m
the operating losses of £232m in Sky Broadband and £40m in Easynet, less around £10m of depreciation of the capex.

Losses and Investments are expected to continue until 2010, when I estimate that total investment will be around £1bn and that is a big number for people who think that access providers will be relegated to a future role of being mere bit shifters.

Broadband Progress

Net adds of both Sky Broadband and Sky Talk are currently doing extremely well in a very competitive market and if the current pace is continued the goals of 3m broadband and 1.5m Talk customers should be easily achieved. I estimate that at the current pace, Sky will have around 3.4m broadband and 2m talk customers. Although, these figures sound a lot they will still leave Sky in the #3 position behind BT and Virgin Media. I do not think it is in the DNA of Sky to languish in third place, so I expect the onslaught to continue post-2010.

Operating losses of £51m in Sky Broadband, which includes SkyTalk, are extremely high, but probably have peaked unless the pace of subscriber acquisition picks up. Sky writes off the approx. £80/customer SAC costs as they are incurred and with 233k net adds in the quarter the total SAC charge to P&L will be around £18m. Average ARPU of £16/customer is slightly ahead of target. However, what is not known is the rate of churn within the Sky Broadband service and this is the key statistic on such a low ARPU.

B2B

One element of the Easynet acquisition which is slightly disappointing is the seeming lack of progress on the Enterprise side. Easynet made losses of £6m on overall turnover of £40m in the quarter.

One thing that I have noticed is that David Rowe (the CEO of Easynet) is also now responsible for the Sky Business division which sells TV into pubs, clubs, hotels and businesses. I would imagine Easynet to start leveraging these relationships and cross selling voice and data into this customer base.

The frightening thing about the B2B voice and data market is that it isn’t very profitable; companies such as Colt and Thus have been around for years without making much money. I am really struggling to see where Easynet see that they have an edge in this market in the medium term. I wouldn’t be surprised to see the Enterprise division being sold in the medium term.

Massive Local Storage

The Sky platform architecture is not just about adding an always on broadband capability to the satellite download capability; it also requires a big fat hard disk with plenty of storage integrated into the set top box. This is delivered via either the new Sky+ boxes or the HD boxes. In total Sky have just over 3m homes with storage in the front room out of a total of 8.7m or just over 35% of homes.

This can be seen as another financial investment for Sky because every Sky+ box requires an approximate £100 SAC charge to P&L. The problem here is that for most customers it is not just a question of sending out a box, because a second feed is required from the satellite dish and this requires a visit from an engineer. The best solution for Sky would be if existing customers either purchase the Sky HD service or purchase a multiroom service and thereby reducing the payback period.

The Sky multiroom service is probably the only service that seems in danger of missing its target of 3m homes by 2010 at current takeup rates. I can imagine the pace picking up slightly as Digital Switchover occurs in the main populated regions and people start to discover that indoor coverage on second and third TV’s is poor without connection to an external aerial. However, I expect this service to miss its 2010 targets without further action such as a price drop.

Sky+ has already met its 2.5m homes target and I suspect that even Sky themselves are surprised at the popularity of the product. It has definitely crossed the chasm into a mainstream must-have consumer product and I suspect that demand in the next quarter will be extremely high. Some families this Christmas will be worried whether the Sky engineer will arrive before Santa.

Next year will present an interesting dilemma for Sky as the tired looking EPG gets a makeover. Customers with old Set Top Boxes will probably not have the capability of receiving an EPG upgrade and therefore they will need either a new box. Sky with its anti-churn policy of treating its most faithful and longest serving customers fairly will probably have to offer them a better deal on the Sky+ boxes which will involve an even greater subsidy. I expect this rollout to happen next summer when engineering demand is lightest.

All told, the investment in Sky+ will probably be a drag on earnings for the next couple of years. I can easily see Sky investing £25m per quarter in Sky+ until 2010.

DTH

DTH is on target for 10m homes by 2010, but it is not doing exceptionally well in the UK.

In Ireland, DTH is doing much better and I think Irish home penetration (approx 34%) is now higher than the UK (approx 32%). The reason for this is that Ireland still has a lot of analogue cable (268k) compared to digital cable (297k), whereas Sky had 513k subscribers as at Sept 2007. Analogue Cable is a bit of a misnomer because a lot of these analogue customers are actually rural and limited channels is delivered via a wireless technology called MMDS. It also helps that the Irish economy is growing at a greater pace than the UK and doesn’t currently have a DTT service.

In the UK competition is fierce with Virgin Media, Setanta on DTT and BT aiming for the low end Sky customers. The fact that Sky managed to add 67k in this environment is testament to the strength of the Sky brand. Although, it is hard to disentangle all the working parts of the Sky machine, the majority of the new adds seem to be See, Speak and Surf subscribers which probably add more weight to the timeliness of the broadband strategy.

Cost Base

Apart from the economies of scale inherent in the content business and more especially the premium sports, there are another couple of extras benefits which should start filtering through in the next couple of quarters. The first is the completion of the EDS trial, through this will probably be offset by extra costs from the regulatory and legal battles that Sky will need to keep fighting with OFCOM, Virgin Media and the rest. The second is that the USD:GBP exchange rate is definitely moving in Sky favour, currently because of their hedging strategy benefits (or costs) actually lag the actual exchange rate. Performance in the current quarter was a £3m gain with a hedged exchange rate of around 1.86.

Potential Downsides

The main potential downside is that Sky will lose its various regulatory battles handing an advantage to its competitors. Although a negative outcome in the ITV enquiry could cause some short term financial pain, the payTV DTT OFCOM is I believe of far more long term strategic importance. Also, I wouldn’t be at all surprised if Virgin Media drop their content carriage case with the appointment of a new CEO and some sort of face saving settlement is worked out.

However, an increase in investment could also spook the stock market and there are four main broad areas which could involve a lot of money:

launching broadband in Ireland
increase of exchange footprint above the current 70%
more investment in the B2B market; and most expensively
Fibre investment

All told, Sky is currently executing well on its plans and its plans should be a big concern for the rest of the market. Long term, the only really dark clouds on the horizon is the DTT enquiry and potentially a BT-led FTTH programme which could leave Sky with a lot of stranded assets unless they launch a fierce political and regulatory fight.

BT Regulated Accounts for 2006/7: Scary Stuff

2007-10-29T22:44:00.000Z

The results are finally published and hidden amongst the 126 pages are some potential time bombs for non-BT UK investors.

First, it is becoming apparent why no-one will publicly discuss broadband churn figures and that is because they are straight out of a Hammer Horror Movie:

MPF churn of 33% and assuming a mass migration Openreach charge of £27.54 gives monthly amortization of 75p/customer. If churn increases to 50% and a single standard line transfer for £34.86 is used then this equates to a huge monthly charge of £1.45 which needs to be amortised.

Of course, in some unbundlers accounts this hardly matters because in this “we-have-not-learnt-anything-from-the-tech-bubble” era amortization is below the EBITDA line and therefore does not count in some analyst eyes. In fact, churn is really, really crucial in a capex intensive game and there are far more charges than OpenReach connection charges to be factored in with broadband customer acquisition. In my broadband model, I factor in another £30/connection for marketing and another £10 for CPE, but that was before the era of “free broadband and free laptops”. And that is before the kit, backaul and back-office systems…

The next interesting snippet from the OpenReach accounts is the breakdown of revenues:

The recurring revenues are currently immaterial compared with the one-off revenues: not for BT the typical customer opex driven hosting model, BT has learnt over the years how to tempt customers into a spending spree with front loading of costs which the customers can capitalize and analysts can pretend they don’t affect the companies valuation.

OpenReach booked 4.4k hostel builds at an average cost of £17.2k and sold 88k tie cables at £500/100 copper pairs. When an unbundler abandons its retail strategy and decides to sell wholesale with a customer whose territory has a huge overlap with your unbundled area, it can’t be long before a huge write-off and loss of face is about to be forthcoming.

Even more interesting is that OpenReach is earning £3k/annum rental for the average hostel – it is pretty obvious that at the current low utilization rates the unbundlers need to scale fast. A certain marketing driven mobile operator plans to have the least aggressive approach to marketing broadband in the history of consumer launches whilst at the same time having a large exchange footprint - this is going to cost it dearly in ongoing losses. In fact, when the Post Office has more aggressive broadband marketing plans than the mobile operator, it just goes to show how rapidly someone can lose their mojo.

There is another line is the OpenReach accounts which is of interest to the unbundlers and that is the metro Ethernet business which is predominately used for broadband backhaul:

Here the breakdown of connections in 2006/7 is revealing:

100 meg – 1,854 connections
1 gig – 833 connections
Other – 117 connections

It doesn’t take a PhD in maths to figure out that in busy hour, it won’t take many punters browsing, streaming and p2p’ing to fill up a 100-meg backhaul pipe. I think once someone solves the problem of unbundlers misleading advertising with “up-to x-meg” claims, it is time to move onto forcing unbundlers to publish their backhaul capacity from each exchange. It is just too easy for some companies to blame poor peak hour speeds on excessive p2p’ers when in fact it is a feature of their failed-GCSE maths driven network design.

On a more serious note it is important to note that most of regulated revenues of OpenReach still is generated from 20th century analogue copper pipes. And most importantly there is only 10% (switching and transmission) of the asset base which could claim to be acquainted with Moores Law.

This last graphic should send shivers down the spine of every unbundler in the country and that is because OpenReach are declaring only an 8% return on mean capital employed; OFCOM guaranteed them a 10% return on the “Regulated Asset Value”. A mere £187m of profit shortfall.

I am 100% sure that there are definitional differences between the OpenReach 8% and the OFCOM 10%, but the fact of the matter is that BT have an obligation to their shareholders to get the required 10% return and if 1990s history is anything to go by can argue for years and years proving their point. I will need a lot more time and motivation to examine where the real differences are and the potential area where BT will look to raise prices.

However, I believe all this is just a mark in the sand from BT , before the debate over 21CN expenditure really kicks in… and we are entering a period where as a country unfortunately we need to grovel to BT to get FTTH rolled out… and even worse OFCOM is still gloating in the apparent regulatory brilliance of the creation of OpenReach and is busy running to Brussels saying how it is a model which needs to be forced on the rest of Europe. Meus Deus...

It is going to be a difficult couple of years for the unbundlers and I would advise them to hire some regulatory specialists and political lobbyists as soon as possible...

Hat Tip: YKWYA

Gobi Chipset: Raising the Temperature

2007-10-26T08:39:00.000+01:00

Qualcomm yesterday announced a new chipset, the MDM1000 (aka Gobi) which combines broadband modem technology (supporting both EV-DO Rev. A and HSPA) with GPS functionality. This product is aimed squarely at the embedded notebook and promises to be a market changing technology when shipping in 2Q2008.

The inclusion of GPS functionality is I believe a stroke of genius. This will not only generate a new generation of real time mapping applications for the corporate field force integrating with web based applications such as Google Earth, but also offers the potential of providing a new type of laptop security applications for misplaced notebooks or even their users which can phone home with location data.

The endorsement from both Vodafone and Verizon Wireless is noteworthy because the chipset combines their previously incompatible technologies (3GPP & 3GPP2) to no doubt make the different network technologies irrelevant for the end-user. Although roamers are a small part of the broadband notebook market providing a solution which deals with the Vodafone/Verizon roaming issue almost guarantees orders for Qualcomm from the largest players in the corporate market. Economies of Scale play a huge role in the chipset market and therefore I wouldn’t be surprised if Qualcomm is going to dominate this niche market for some time to come with this family of chipsets.

Finally, the chipset provides an early wake up call for those people who have been buying the embedded Wimax story. If people were expecting companies as powerful as Verizon, Vodafone and Qualcomm to roll over and cede market share to new players, especially in the developed markets of USA and Europe, they are basically living in cloud cuckoo land.

iPhone: US numbers and meaning for the UK.

2007-10-25T12:56:00.000+01:00

Apple in its earnings call revealed that 1.4m iPhones had been shipped in total and 1.1m in the quarter. Personally, I think this is a great start and makes the Apple estimate for 2008 of 10m shipped in total to look really, really conservative.

Also revealed was the estimate that 250k was bought for unlocking. I don’t think this is a problem for either Apple or AT&T. If the handset is bound for overseas markets then presumably once distribution is established then the unlocker will just sign up with th relevant Apple operator or buy a new handset. Also, if the unlocked handset stays within the US and the user really likes it then presumably next time they get around to buying one it will be on AT&T’s network. Given that the handset is not subsidised and AT&T only pay share of revenues on activated handsets then it is not causing any financial pain. I think this US data all bodes well for the imminent launch in the UK.

The Telegraph has regurgitated results of a YouGov survey in todays edition. Basically, they are trying to say only 1% of people are expressing a desire to buy the handset before any sort of marketing campaign kicks in is a bad thing. I think it is a testament to the product people in the UK will buy it even with the handset costing £269 and requiring a £35/month subscription. The sample was only 1,000 which yields a 95% confidence level of +/-3.1% on a population of 60m – in other words the survey is a load of rubbish. All the survey really tells us is that people prefer subsidised handsets which all the mobile operators have known since time immemorial.

The survey interestingly said only 4% of people were aware that Apple was a mobile phone supplier. I can honestly say that once the boys from Acton put their sales burners onto full throttle, there will be few people left on this green and pleasant Isle who won’t know about the iPhone.

Full Disclosure: The Author does not own an iPhone nor intends to buy one for personal consumption, but is getting serious earache from his teenage daughter about acquiring one.

AT&T + Satellite Buy = Huge Endorsement of BSkyB Model

2007-10-24T22:36:00.000+01:00

Rumours are flourishing across the pond that the next course on the menu for the 800lb gorilla of world telecoms is a satellite broadcaster (Echostar, DirectTV or both)

Personally, I think this is a huge endorsement of the BSkyB model triangulating Downstream Satellite Broadcasting, a broadband path for interactive and long tail content and a fancy featured Home Gateway with a big fat local storage array.

It also is huge nail in the coffin of IPTV which apart from the being the most over-hyped technology since WAP features a single channel being served with switching within the network. Verizon, another US-based 800lb gorilla, when faced with a choice of their architectures on their FIOS network decided to broadcast all channels on a dedicated fibre wavelength. It is noticeable that when BT is faced with a choice of architectures on their FTTH experimental networks also follow the Verizon path and not the current architecture of their BT Vision service.

Which brings us to the real question: which is the better solution FTTH or the hybrid BSkyB triangulated dsat/dsl/stb solution?

In terms of cost, I suspect the BSkyB model wins hands down.
In terms of speed to deployment, I also think the BSkyB model win hands down.
In terms of universal service, FTTH will provide a much more consistent service, however is much more expensive on a per home basis and therefore runs the risk of price discrimination in a much more extreme hit to pocket than the current unbundling regime.
In terms of upstream capability, FTTH will absolutely crucify the BSkyB model. It will be interesting to see across the world how FTTH operators leverage this capability, because it not only puts the BSkyB model to shame, but also the cable model. However, everything depends on the applications...
In terms of UK political acceptability – anything bar a model with “BSkyB” in the title seems to be preferable these days.

Carphone: Yet Another MVNO

2007-10-24T07:45:00.000+01:00

Carphone was in the news yesterday launching another MVNO onto the UK population.

If disclosure within Carphone’s fixed line services business is poor then disclosure within Carphone’s current prepaid MVNO’s, Fresh and MobileWorld, must rank as appalling. There are no publicly available statistics on churn, ARPU or SAC costs and in fact the metric used for determining what actually a customer is (eg 90 days of activity) is not even declared. In other words, it is just impossible to determine how the current MVNOs are performing.

It is therefore surprising that Carphone has actually launched a postpaid MVNO. I am of the impression that this is yet another step for Carphone in the direction of being a fully fledged Service Provider and away from being an independent retailer. It will be extremely interesting to see how much marketing effort Carphone put behind the new MVNO. I am surprised that Carphone say there is a gap in the market for shorter contracts, especially when Virgin Mobile tried shorter 6-month contracts and appear to have pulled pushing the deal. And anyway, if Carphone were so certain of demand for the 9-month contracts, they wouldn’t have launched 18-month contracts at the same time.

The other surprising aspect of the MVNO is that it is on Voda’s network and not on T-Mobile, who currently provide capacity for Fresh and Mobileworld. This MVNO deal in fact rather than being new could just be a reincarnation of the old onetel MVNO deal which has been lying dormant since Carphone acquired onetel. Also, I don’t think that it necessarily means the thawing of relations with Voda on the consumer distribution side. After all, Voda would be just complete morons to turn away some high margin wholesale business at very little risk to them. I would imagine however that T-Mobile would be feeling more than a little piqued and wondering why they haven’t got the wholesale business when they pay Carphone a lot more SAC’s than Voda and probably receive far less interconnect revenues from the AOL/TalkTalk fixed line operations.

All in all, an interesting development, but not one that means any fundamental reassessment of my bearish stance on Carphone is necessary.

Playlouder: The first "Media Service Provider"

2007-10-22T21:00:00.000+01:00

One of the more interesting people that I met at the recent Telco 2.0 event was Paul Sanders of Playlouder who are in the process of launching a specialised ISP targeting music lovers who want to stay on the right side of the law. The Unique Selling Point of the service is that for the price of your ISP connection (£18/month) you can legally download as much music as you like from the service.

Even better is that the format of the download is VBR (high quality MP3) and contains no DRM protection, so you can easily transfer it from your PC to your mobile or iPod or even burn to CD for listening on the go. This is a much better concept than the DRM loaded, only while you subscribe, Omnifone model. The only potential downside I can see for the service is if the music catalogue is limited: Playlouder has already licensed EMI back catalogue and Paul hinted at more deals in the pipeline.

This fits very much in with the general premise that the industry is on the verge of seeing niche focused ISPs emerging (see also the recent launch of a gaming service from Plusnet) and the explosion of wholesale opportunities in the BSP (Broadband Service Provider) space. In fact, Playlouder doesn't refer to themselves as an ISP, but a Media Service Provider (MSP). This obviously reflects the value-add Playlouder are providing in the sphere of digital music management.

First of all, Playlouder are the people dealing with licensing of music from the record companies and performing rights society. Although Paul was extremely diplomatic, I suspect this aspect of the business is about as pleasant as root canal treatment at the dentist - without the drugs to nullify the pain. Second, there is the problem of dealing with potentially a multi-million digital record collection. Here, Playlouder has past form and operate another company, State51, which deals with digital distribution for independent record labels. Finally, it appears that Playlouder are building community software for their punters with playlists, recommendations and chat facilities.

Playlouder performed an independent survey of 800 UK Broadband users to see if there was demand for the service:

75% agreed that the MSP service is “a great idea”
61% agreed “it is unique”
32% said that they “have been waiting for a service like this”
There was strong appeal across the board but some segments showed stronger intent (Younger females and students, Online purchasers, Early adopters and Regular file-sharers); and
Of those who found the service appealing, at least 25% regularly buy CDs, DVDs, gig tickets and music merchandise online

In terms of the price point:

£10 per month (€14.30) was considered to be the most reasonable price (using an unprompted analysis method)
Even at much higher price points a significant proportion said that they thought the price would be “reasonable”
15% said they would definitely or almost certainly sign up at a £10 per month premium to standard broadband cost
This equates to a current UK customer base of more than 2 million
This would generate £250 million per year (€360 million) in revenues for just the UK
70% said they would consider switching to another ISP that was offering the service
61% said that if their current ISP offered the service it would definitely/almost certainly keep them loyal

The last two points illustrate to me that there is potential for wholesaling of the service to other ISPs.

The beauty to me of the service is the timing - these days the Music Industry seems to be full of really desperate companies and therefore it should be of no surprise that it is a constant source of business model innovation. Usually Innovation brings its partner, the law of unintended consequences, along to the party. When Apple launched the iTunes store service in 2003, it was met with almost universal acclaim by the record companies as the perfect antidote to the free downloading curse. Four long years on and the record companies are feeling the effect of unbundling the album in their pockets - people are just now buying one or two tracks instead of the whole album.

The crazy part of the situation is that as the record companies suffer, music today seems to be more important than ever for consumers. In a great article which puts the case for flat price licensing, Gerd Leonard, explains the dilemma:

Basically, what’s happening is that a much higher percentage of the total population is actually buying music today (32% of the U.S. population in 2006, versus 20% in 1980), BUT (and this is a very big but) the amount spend per capita has been almost halved – and that does not even account for inflation since $100 is obviously worth a lot less now than it was in 1980. In fact, what cost $100 in 1980 would cost $267.76 in 2006 so $198 back in 1980 would be $530 today - I guess one could safely summarize that if we adjust for inflation it has actually shrunk by 75%!

Desperate Times = Radical Rethinking of the Business Model = Opportunity.

As an aside, the work on broadband business models is one of the more interesting pieces of work I have ever been involved with and I am particularly proud of the current work which is due to be published in Nov 2007.

Virgin Media: at last some sense…

2007-10-22T09:38:00.000+01:00

Neil Berkett, a candidate for the CEO post at Virgin Media, is actually making a lot of sense in interviews with the Times and Guardian.

"Despite our technical advantage we are still not really standing out from the crowd," admitted Mr Berkett. "I really do want to re-focus our energies onto the broadband platform."

If I was being a pendant, I say the advantage is really a theoretical technical advantage and encourage him to turn a theoretical advantage into a real one. This means investment in areas where the broadband cable network is currently overloaded, completing the conversion of old analogue TV customers into digital ones and thereby freeing up capacity to allow investment in supa-fast DOCSIS 3.0 technology.

I also agree with his idea of upselling cable TV into Freeview homes:

"Think of Freeview as a nursery and you have millions of kindergarten kids who once they have got the taste for multi-channel TV may upgrade an element of the service."

There are around 9.1m Freeview households in the UK and it will only take a small percentage of these to be converted to basic Cable TV to provide plenty of revenue upside and more importantly plenty of households to upsell additional broadband and telephony services. All investment in TV content should be aimed at differentiating the base cable TV product from Freeview and thereby increasing the gap in value and entertainment in the eyes of Freeview customers.

I cannot emphasise how much I agree with the strategy of focussing on improving broadband and upgrading Freeview customers, but I would also move forward on another initiative and withdraw from another.

I would start to extend the cable footprint again. It is ridiculous that mega new developments such as Ebbsfleet will only have BT Openreach facilities and not be served by cable. Similarly on smaller developments up and down the country within existing cable franchises only BT Openreach facilities are being built. If necessary Virgin Media should lobby the government at the national level to ensure that cable connectivity is part of the UK planning laws within existing franchises. Not only would this strategy increase the footprint to be sold, but also have a huge positive psychological impact on the workforce after years of stagnation and being on the back foot.

I would also give up on the off-net strategy – it is never going to be a significant profit centre and only serves to confuse the customer. Cable should be selling itself to customers as a premium technology and getting round the legacy baggage from the analogue and digital conversion days. I would sell the offnet base to an existing player and also negotiate a commission for leads generated from offnet cable movers.

This would be the basis of my quad play strategy: cement and extend broadband advantage; sell TV to Freeview upgraders; start to expand the cable coverage again; and terminate the offnet strategy.

Of course with Virgin Media there is the continual problem of funding for any new investments. If I didn’t have the balance sheet capacity available to invest in the cable network, I would seriously consider selling the prepaid mobile base to get a quick injection of cash. This to me would be far more preferable than selling the B2B or content sides of the group.

Carphone Trading Statement: iPhone & Distribution

2007-10-12T13:24:00.000+01:00

After an overseas business trip, I’ve finally got round to listening to the Carphone Trading Statement and I found the only interesting parts to be the comments on the iPhone and distribution in general. The real key for the broadband side of the business is the profitability which wasn’t disclosed.

Carphone securing some of the UK iPhone distribution rights was a huge feather in their cap and was not a total surprise for me. Personally, I think that Carphone will sell a lot more iPhones in their stores than either o2 or Apple; retailing is the core strength of Carphone and I think no-one doubts that Carphone are far more advanced and successful at phone retailing than anyone else in the UK market.

Charles Dunstone remained very tight lipped on the commercial details of the deal, but provided a few clues about the process. As in the US, activation of the IPhone will not be done in-store, but instead via the net at home. This effectively means that Carphone will not be performing any credit vetting at the Point of Sale and the transaction will be relatively simple to complete in store – Charles Dunstone himself compared it to a Prepaid sale.

How Apple and O2 are going to ensure the phone is going to be activated on the O2 network and not unlocked is unsure, but it seems that Carphone will play little role in this activity. Also, how O2 and Apple will deal with people who fail credit checks is unsure, but again it appears that Carphone will play little role. It looks as if Carphone liability ends with the person walking out of the store.

The net effect for Carphone will surely be a lower margin for an iPhone sale than a traditional contract sale. In FY07, Carphone made a gross profit of £26 on prepay sales and £99 on subscription sales. I would be very surprised if Carphone was making more than average prepay margin on iPhone sales. However, there are other opportunities for Carphone to make margins – I think the insurance angle could be particularly lucrative.

The overall impact of the iPhone on the Carphone gross margin depends upon on the degree of cannabilisation of “normal” Carphone contract customers; Carphone will be hoping that iPhone buyers will be people who normally buy contracts direct from the operators and not from their stores. It is very simple to play with the variables: for instance 1m iPhones sold in the UK in the next 12-months, Carphone selling 50%, Cannabilisation 60% and loss of margin £75/sale (versus a gain of £25 on the 40% of new business) gives a loss of gross margin of £17.5m for Carphone.

The Distribution business made an EBIT of £141m in the FY07 so this scale of margin loss would have a impact on the overall business. It will take a lot of insurance policies, accessories and extra footfall (ie other non-iphone sales) to make up this shortfall. It should also not be forgotten that at first glance it appears to be far better for Carphone to have some iPhone business than none at all.

Whether having iPhone distribution is better than none at all is not only dependent on the gross margins and cannabilisation, but also on the pound of flesh that o2 has extracted in allowing Carphone to become a distributor. If I was in O2 shoes, I would have definitely looked at reducing my two biggest nightmares: churn and cashback.

The churn on O2 contract base (diagram from Voda) is much higher than Vodafone at 21.5%, furthermore the gap has grown despite the Vodafone exit from Carphone and the introduction of 18-month contracts. Vodafone is also outselling O2 on contract customers. Obviously, incentivising Carphone to reduce churn on O2 contracts will be seen as a current priority for O2.

The easiest way of doing this is to reduce the upfront cash commission and increase the share of on-going revenue. This not only moves the risks from O2 to Carphone but also alters the cash flow especially given that Carphone will pay for the handset cost upfront. There will become a point on the mix of upfront and ongoing commissions that Carphone effectively just becomes a Service Provider on the O2 – a very similar model to Germany.

The downside of Cashback is becoming more and more apparent to all operators. Carphone, especially through its online subsidiary, e2save, is still aggressively pushing cashbacks deals. In fact, its cashback terms are still more severe than the recommendations from operators which have been endorsed by OFCOM.

For example, in relation to a cash back offer, the following terms should be regarded as unreasonable:
a requirement that the customer submits their original statements – copies of statements should be acceptable proof;
charge for processing a cash back claim;
a requirement that cash back claims are submitted within an unreasonably short period (such as anything less than 60 days, for example);
terms stating that a cash back payment will not be made if the customer has an outstanding balance on their account.

Basically, the Carphone price match terms currently break every single condition, albeit you only get charged a processing fee if there is an error in your documentation.

I have a sneaking suspicion that the reason that off-the-page contract sales are falling is because cashback is being clamped down upon and therefore the deals just aren’t as appealing or more importantly affordable or it is simply a case of "once bitten twice shy". Probably ex-cashback customers are either returning to the prepaid market or going direct to the mobile operators.

As the Operator backoffice systems are becoming more and more sophisticated, Operators are becoming more sophisticated in retaining the high value customers inhouse and this leaves the average customers connecting via third parties becoming less and less valuable. The big risk for Carphone is that they enter a downward spiral where operators put off their most valuable customers, the remaining customers have a lower average value and therefore Carphone gets less commission.

I feel that this twin threat of shifting the risk to Carphone and the average customer being less valuable is much more threatening long term to the Carphone distribution business model than losing the Vodafone contract business.

Carphone Home Division – The wheels on bus...

2007-10-08T09:10:00.000+01:00

..appear to falling off.

Two interesting stories appearing in the press over the weekend.

First, we have the Daily Telegraph reporting from Charles Dunstones yacht in the South of France:

And this Tuesday, when Dunstone updates the City on trading, improved profitability in broadband should help soften concerns about lower numbers of sign-ups.

Hmmm that is interesting, because profitability was always planned to have a HUGE jump in this year, but sales were not planned to drop off.

Then we had the following comment in the Times:

is expected to disclose in a trading update on Wednesday that net additions for broadband in its second quarter have dropped to as little as 95,000, from 126,000 in the last quarter…
Carphone’s slowing customer numbers are expected to be offset by strong progress on transferring customers on to its own network – a key test of the profitability of the service. The communications group makes a loss of around £5 per month on each customer who takes on the BT wholesale product. It becomes profitable only when these customers are connected to Carphone’s own network.

These net add figures would be a huge disappointment to me especially as the Carphone broadband target is 3.5m customers by 2010. There has been much written this month about Carphone and its potential churn problem as the TalkTalk base start to come out of the 18-month contracts, but Carphone face a much bigger problem here and now and that is the churn on the AOL base. Carphone do not disclose the churn figure, but given that most of the AOL base is not unbundled, I expect the figure is huge. By huge, I mean much higher than mobile churn figures and of sufficient size to possibly make the acquisition of AOL look like a poor decision.

The other obvious question is how the Free Laptop offer is going for AOL? It is pretty obvious to me that it is not going as well as expected and I base this judgement on two key facts:

Carphone would not be investing as much in marketing if the offer was flying out of the door; and
Carphone would not be bundling a free laptop with mobile contracts if they were not worried about the stock levels.

Basically, if you cannot sell broadband with a free laptop with your premium brand (AOL) and with the lowest prices in the market on your value brand (TalkTalk) – how much trouble are you in?

If I was an investor in Carphone, I would be looking for real clarity in the home business going forward – not only with churn figures, but just as importantly with amortisation breakout of SAC costs and capitalised investments – because I would be extremely nervous.

OFCOM: DTT Headache

2007-10-05T11:02:00.000+01:00

Nearly all the UK population haven’t a clue about the UK DTT platform. They do know about the TV channels moving to digital and the choices available. In fact, there is only 15% of the population who remain with just analogue TV in the home. The UK, probably more than any other country in Europe, has a very healthy mix of consumer options for TV.

The problem for OFCOM is that most UK consumers associate the DTT platform with the traditional Public Sector Broadcasters (ie BBC, ITV, Channel 4 and five). This is completely borne out by the BARB statistics: 70% of viewing is for the five analogue channels (BBC1, BBC2, ITV, Channel 4 and five) and over 90% of viewing is the main PSB channels and their derivates in a “Free to Air” mode.

A detailed look at the evolution of channel line-up shows just how much PSB output dominates the DTT airwaves: in Oct 2002 when Freeview was launched there were 22 channels of which only 7 (Sky Travel, Sky Sports News, Sky News, TMF, The Hits, TV Travel Shop and QVC) were from non-PSB sources; whereas today there are 41 channels with only 12 being from non-PSB sources.

Please note, I am including the state funded Community Channel and Teachers TV in the PSB sources. I am also including the jointly owned BBC and Virgin Media channels, UKTV History and Bright Ideas in the PSB source.

Of the non-PSB channels, six fall into the t-commerce category (QVC, Thomas Cook TV, Ideal World, Smile TV, PriceDrop TV and Bid TV), two are music channels, TMF and The Hits, one is from the Virgin Media and three are from the Sky family.

Furthermore for non-PSB owners, it appears that life is really tough: The Disney owned general entertainment based abc1 channel has been withdrawn; emap has sold 50% of all its TV business to the allegedly skint and needing a further public subsidy, Channel 4, for £28m (this includes payTV channels The Box, Smash Hits, Kerrang!, Q, Kiss and Magic as well as the DTT channel the Hits) and Sky wouldn’t be considering withdrawing its channels if they were profitable.

It is appears to me that it is very difficult to make a channel pay on the basis of advertising funding alone, especially when you are competing against the PSB for advertising spend. ITV plays on this point in presentations to the City – advertisers pay a premium for mass market audiences. Of course, it helps even more when the PSBers are gifted their spectrum and non-PSBers have to pay for their capacity.

Basically, over time more and more of the DTT capacity is being used by the PSBers and diversity is shrinking rather than growing on the platform. OFCOM answer to this is to put its head in the sand and instead ask questions about whether Channel 4 needs yet more state subsidy, when it is using allegedly scarce and incredibly valuable capacity to run channels like C4+1, E4+1 and F4+1. Also, whoever regulates the BBC allow them to bleat about budget cuts (the actual licence fee increased) whilst they are busy buying travel content company, Lonely Planet, and blowing millions on an fatally flawed internet distribution platform.

The real problem is that OFCOM is absolutely terrified that 15% of digital refuseniks are going to kick-up a tremendous fuss when their analogue Tellies stop working over the next few years. Let’s be perfectly honest and state the chances are them running out before digital switch over and taking a DSat or Cable subscription are next to zero.

OFCOM and the BBC Trust are also really interested in rapidly pushing through plans for FreeSat, the DSat equivalent of Freeview on DTT. I’ve always been extremely baffled by this, especially when Sky offer an equivalent service which is fairly priced, but the recent furore in Whitby, which has piqued my interest but not hit the national press yet, provides a clue for the true motivation.

Basically refarming of any spectrum is difficult: even playing with power levels and mast position will not give the same coverage as before. This could develop into a huge PR nightmare as digital switch over occurs, especially as a lot of channels will just not be available outside of the main 80 DTT masts. DSat will basically be the only economic alternative for people suffering poor reception and the BBC just does not want BSkyB to be seen saving the DSO.

People should also not forget this use of the DTT spectrum is version 2. Version 1 was the bankrupt ondigital financed by ITV. It should also not be forgotten that BSkyB wanted to be part of ONdigital, but was barred on competition grounds. ITV has obviously admitted defeat on payTV and nowadays seems to take a 100% ad-funded model for all distribution channels including the internet.

However, Channel 4 is still confused: it sort of admitted that selling subscriptions for Film 4 was a big failure; it also seems to want to get out of the game of encrypting its other channels and therefore earning revenue from Sky; yet it is still trying to get consumers to pay for content on the internet.

It such also be remembered that for however much the PSBers whinge and whine, their past and continuing failures in PayTV are completely of their own making and the state subsidised channels have been cross-subsidising these failures for many a year.

Out of ashes of version 1 of DTT raised the fatally flawed TopUpTV service. TopUpTV require a different kind of Set Top box which is not compatible with the main Free To Air boxes. In fact, Set Top Boxes which have cracked the TopUpTV encryption are freely available on the internet and eBay if anyone does not want to pay the subscription charges. It should also be noted that the current version of TopUpTV is one that has just emerged from liquidation. Even with the addition of Setanta content, which is the best shot in the arm for TopUpTV for many a year, I suspect that TopUpTV will not around in the medium term with its current subscription/technology mix.

The lessons to OFCOM are clear: the DTT platform is currently unhealthily dominated by PSBers, there is a huge barrier to entry to new content ownerss and there is already a flawed PayTV platform using the DTT spectrum which is basically going nowhere fast.

Basically, I believe Sky is the last hope before the whole of the DTT platform becomes subsumed by the PSBers, which is the outcome that the BBC have wanted all along. This is the question that OFCOM should be considering; instead of wasting its time on preventing Sky’s entry it should be actively encouraging entry.

Telekom Austria Bags Another Risky Bargain

2007-10-03T09:21:00.000+01:00

Telekom Austria has completed the buy-in of the number #2 Belarusian mobile operator, Velcom. They have paid €730m for 70% with an option for the other 30% priced at €320m. There is a performance related deferred consideration which looks as if could be quite substantial based upon a multiple of 2010 earnings rather than the multiple of estimated 2008 earnings that the deal was based upon.

So for around €1bn, Telekom Austria has bought 100% of a mobile operator in an underpenetrated (77%) market with a market share of 42%, revenues of €262.6m and an EBITDA margin of €158.8m in 2006 for a price which is 6.6x 2006 Earnings. Of course, the capex/sales ratio is quite high at 29%, but this is to be expected in a fast growing market.

The real downside is that the operation is in Belarus. There is no telecoms regulatory framework and the state owns a controlling stake in the other 3 licensed mobile operators. The Russian mobile operator, MTS of Russia has a 49% stake in the largest operator with 54% of the market by customers.

Velcom has been up for sale for quite a while and I fully expected Vimpelcom to end up being the owners. However, all become clear when it was revealed that Martin Schlaff had an interest in Velcom. Martin Schlaff had been the previous owner of the Bularian operator which Telekom Austria took over. He had also tried to help Telekom Austria acquire an operator in Serbia until Telenor came along and ruined the party.

I am wondering where Telekom Austria will go next. Obviously Bosnia is a big hole in their map and I would expect something to happen there in 2008. Another possibility is in Lithuania and Latvia where the ex-TDC Bite operations are now owned by private equity and presumably will need refinancing in the medium term. Other than that, Telekom Austria will be running the risk of treading on the toes of its much larger partner footprint, Vodafone.

Nokia & Navteq – A Tricky Course to Steer

2007-10-01T22:12:00.000+01:00

A great ballsy, albeit expensive, move by Nokia today, in buying Navteq. I am a huge bull on the prospects for mapping products in general and mobile location based services in general.

I don’t suppose many of Nokia mapping competitors will be surprised, after all it appears that a hush-hush kind of auction was conducted and that probably accounts for Nokia paying top euro or to be more precise €5.4bn euros. The real question is what are the current and future Nokia competitors going to do about it?

For data aggregators and enhancers like Webraska and Networks in Motion, who use the Navteq data to supply services across a range of handsets to mobile operators such as Orange UK and Verizon Wireless respectively, it is probably time to have a long hard look at strategy and decide whether they have the stomach and deep pockets for a new course of action.

For the poster boy of the standalone GPS device market, TomTom, who is already in the process of acquiring the only real competitor to Navteq, TeleAtlas, for the relatively cheap €1.8bn, there is definitely a gap appearing in the market for mobile manufacturer independent mapping software and services.

For the internet mapping giants, Google and Microsoft, they’ll probably have to go and collect their own data, "improve" on TeleAtlas and Navteq collection quality and contextual richness and then cut a deal directly with the mobile operators. Vodafone UK already has a deal for Google Maps.

The added complication is that the optimal business model is nowhere near being decided:

is the profit going to be from bundling the software in with the handset?
is the profit going to be charging for service or bundling the service in with access?
is the profit going to be from advertising? or
perm any of the above?

However, despite the uncertainties of the business model, I am absolutely sure that there is a huge latent demand: maps on the PC have taken off in the last couple of years and PC’s are not generally available when people really need directions. The beauty is the timing with the handset rapidly catching up with the specification of PC not only in terms of internet bandwidth, but also in raw processing power. Perhaps the pc-handset lag is currently only a mere 3 years.

Even better for Nokia is that they will actually own the mapping content and not have to deal with the crazy intermediaries of content as with the other major OVI service already announced - music downloads.

Sky: Defensive Picnic

2007-10-01T15:31:00.001+01:00

Sky have released details of a forthcoming service called Picnic.

Much of the information about the TV element of the service is already in the public domain: Sky wants to encrypt its Freeview capacity and broadcast in MPEG4 to add extra capacity. This is already subject to a delayed OFCOM consultation and even with a fast tracked approval in 10 weeks. I can’t realistically envisage a customer launch before Christmas 2008.

Personally, I can’t see any reason why OFCOM would want to refuse anyone permission to use MPEG4 and encryption technology. Although MPEG4 is new to the UK DTT platform, OFCOM are actually suggesting that this is a potential solution for HD broadcasting. Encryption is not new and dates back to the original failed launch of ITV digital. I suspect the only reason for delay is that because the proposals come from BSkyB.

Unfortunately for Sky sometimes logic is of little relevance to broadcasting decisions as was witnessed by the EU decision to force the Premier League to have a minimum of two broadcasters for UK rights, whereas in Scotland and France one is suffice.

The new information is full details of the content: a 24-hours Sports Channel, an evening Movie Channel and an evening general entertainment channel from Sky’s own channel portfolio were pretty obvious choices. A daytime Children Channel and a daytime factual Channel were more surprising: however Sky already has within its joint ownership stable Nickelodeon UK, National Geographic and The History Channel. Dependent on MPEG4 adoption, 24 Hour Sky News for the fourth channel is also a pretty obvious choice.

Given that most content is already broadcast on the DTH platform, then incrementally the content costs have obviously been kept to a minimum and the main service costs are going to be the subscriber acquisition and ongoing management costs together with the transmission costs. The subscriber acquisition costs are going to be minimised with no Set-Top Box subsidy or distribution costs. Sky already has a long term contract for the transmission capacity and therefore no new money is required there.

The big question in my mind is whether the “Free to Air” advertiser funded model of the Freeview platform is under real strain and associated with this is whether some of the minor channels will survive and more immediately whether transmission capacity prices have peaked. There currently is very little programming outside of BBC, ITV, Ch4 and five: with three t-commerce channels (Virgin & QVC), two music (Viacom and Emap) and one “new” general entertainment (Virgin). Whatever happened to the original concept of Freeview encouraging new entrants to broadcasting?

Of course, the biggest risk for Sky is that it cannibalises DTH revenues: I think this is inevitable and where I’m struggling with the whole concept. I think there is a big percentage of the population who would never pay any extra subscription fees above and beyond the beeb’s annual telly tax. Admittedly this refusenik percentage is shrinking year by year and this is the natural target of growth that Sky will see in its subscriber numbers year on year.

However, the landscape is getting much more complex with the entry of a budget Sports payTV channel and budget movies available over the internet. Arguably, if Virgin Media ever get their act together they could also cause a little market disruption. I suppose the equation which drove the payTV DTT decision is how much cannibalisation would have occurred from these new entrants versus the self cannabilisation from launching their own services.

I also expect that standalone services for broadband and voice are also of dubious economical value for shareholders. To be fair, we have to wait for pricing, distribution and the all important bundling strategy before we can definitively deliver the thumbs down.

Virgin Mobile USA, Best Buy & Carphone Warehouse

2007-09-26T12:11:00.000+01:00

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.

TalkTalk: Plausible deniability

2007-09-20T21:25:00.000+01:00

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

2007-09-20T10:30:00.000+01:00

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

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.

Finally

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.

iPhone in the UK

2007-09-19T10:37:00.000+01:00

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.

Volumes

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.

Orange AnyTime about to become NoTime

2007-09-13T09:54:00.000+01:00

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.

SonyEricsson nicking more Sony brands

2007-09-11T23:55:00.000+01:00

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.

2007-09-11T23:29:00.000+01:00

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…

UK Fibre - Political Pressure Starts

2007-09-10T23:53:00.000+01:00

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

2007-09-10T15:01:00.000+01:00

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

2007-09-10T10:33:00.000+01:00

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.

Setanta: Squandered Opportunity?

2007-09-06T23:48:00.000+01:00

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.

Vodafone UK: No Niche Left Unturned

2007-09-03T21:53:00.000+01:00

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

2007-09-03T10:57:00.000+01:00

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.

Nokia Music Centre, Mobile Operators and iPhones/iPods

2007-08-31T15:19:00.000+01:00

One of features about the launch of the Nokia Music Centre (NMC) was that the various comments that Mobile Operators had failed in their attempts so sell music. Comments such as the one by Nomura analyst Richard Windsor in MobileToday are typical:

The operators have fiddled and prevaricated for the last three years in terms of bringing the internet to the mobile screen and now the opportunity for them to add value by integrating internet services looks to have been squandered. A utility-like, low margin, bit-pipe future where the value accrues to handset vendors and internet companies looks likely to result.

However, in the 1H 2007 results from Vivendi today owner of the biggest record company in the world, Universal Music Group, show a very different story.

Digital sales of €315m account for 15% of total revenues with 53% from online and 47% from mobile sales

The mobile operators must be doing something right.

The Nokia Music Centre is basically a rejig of the Loudeye/OD2 service with tighter integration on some Nokia handsets. The initial US$60m acquisition of Loudeye/OD2 by Nokia did not meet with universal approval mainly because of the worry for conflict with the mobile operators.

Also, it should not be forgotten the struggles of Loudeye/OD2 before the Nokia acquisition and the struggles of OD2 before purchase by Loudeye. In their last quarterly financial statement (2006Q2) there was a qualification whether Loudeye/OD2 would be able to continue as a going concern without the Nokia deal. In fact the biggest three customers were Microsoft (28%), KPN (16%) and France Telecom (14%), showing that Loudeye/OD2 had a history of partnering with the telcos. Loudeye/OD2 had also lost several of their early important customers such as Coca Cola to iTunes.

I would also point out that NMC appears to be a very much a me-too service with absolutely nothing to differentiate the service apart from the Nokia brand and integration with the handset operating system. I would argue that the mobile operators have been very inventive with pricing and bundling of their music offerings with companies such as 3 including downloads as part of the monthly bundle and Vodafone with its RadioDJ service. I would also add that at least here in the UK, all the operators seem to invest a lot of marketing spending in the music industry especially with sponsorship of live concerts.

There is also some interesting data from a recent OFCOM survey.

11% of mobile users in the UK download music onto their mobile phones. 11% of the mobile market may not seem a high percentage, but with near 100% population penetration, it is a very large number of around 7.5m people. The uptake is roughly tracking the number of 3G subscriptions sold. I wonder if iTunes have that many people actually downloading in the UK rather than ripping and sharing their CD record collections?

And this is before the number of people who are “sideloading” music from their personal music collections on the phones to listen to music. In fact, it is interesting that 34% of people actually see the mobile phone will reduce their use of MP3 players/iPods.

Perhaps, it was Steve Jobs who launched the iPhone from a weak position knowing that the iPod market would eventually be consumed by the locust like multi-purpose mobile device. The mobile phone has already done serious damage to the sale of analogue devices such as watches and alarm clocks in the UK. I actually think it is Steve Jobs brilliance that has allowed him to negotiate such ground breaking deals in partnerships with the mobile operators. Of course, it helps that Apple doesn’t have the legacy of the Nokia model for selling and distributing mobile phones.

I must admit to being totally confused as to why Nokia did not go down the partnership route with the operators. If Nokia were completely confident that the only potential successful path was without the operators, I would have expected them to launch the service in non-subsidised markets, where the operators do not have as much control over the software load on the handset and the moral right to demand preference to their favoured applications.

In summary, I don’t think the mobile operators are as in bad shape as many think, should not be too worried about the bad press in the week generated by the Nokia hype and keep on the current path playing for the long run. I also think on principle the mobile operators should block the Nokia Media Centre on all phones sold with a subsidy unless Nokia agree to a reasonable share of the revenues. If Nokia refuse to block the application, then the operators should have the confidence to not sell the product with a subsidy.

My other major comment is that people expecting huge margins from distributing copyrighted content in general and music specifically are living in cloud cuckoo land. As a real life telco example of a mature service, I would look to the premium call industry, where typically the content owner (eg TV show) gets 90% of the revenue, the distribution channel (eg the phone network) roughly 5% and the aggregator and campaign manager gets 5%. I agree margins are much higher in mobile premium calls than in fixed, but I think this will be only a temporary phenomena. Also, as far as I can make iTunes is a zero profit activity but generates huge profits on the device sales.

The only way someone outside of the record companies will make a lot of money in distributing music is if a fundamental rearchitecting of the music industry takes place.

UK Broadband: Coming Soon - 3m LLU lines

2007-08-29T23:08:00.000+01:00

The latest OpenReach kpi’s show that we are currently are at 2,943,414 unbundled lines as of 26th Aug which means that at current run rates we should be at over 3m sometime this week.

The fears that unbundling was slowing seem to been unfounded and current quarter net additions are running at 58k/week compared to 42k/week in Q2. Q3 is already at 519k net adds with a full month to go compared to 513k in the whole of Q2. Even better news for the unbundlers is that the churn rates appear to dropping: I estimate a full 3% in the current quarter to 27% annualised.

I suspect that the players with big ipstream (or BT Wholesale DSL in the graph) bases are very busy moving their customers onto LLU DSL. I’m expecting really good porting numbers this quarter from Carphone (AOL/TalkTalk), Tiscali and Orange.

I’m also expecting that smaller ISPs are really feeling the heat this summer from the cut price unbundlers and I wouldn’t be at all surprised to see further shrinkage in the “other” base. The light at the end of the tunnel for these players is BTs 21CN WBC product and the hope that a specialist wholesaler, such as Entanet, will be able to develop some niche products and aggregate enough demand with the smaller players to make it all worthwhile for everyone.

A cursory glance at the WBC product indicates that some scale is required (ballpark initial guess - a minimum of 100k customers) and therefore a wholesale/retail approach is probably optimal for the "others". In the first generation broadband era, Tiscali fulfilled this wholesale role, but I think second time around Tiscali will be too focused on fighting the behemoths in the consumer segment to make a real go of wholesaling. But then again, I always seem to underestimate Tiscali and remember Tiscali currently has around 300k wholesale customers which is a big chunk of the market.

The stand out offer so far this quarter was the Orange Free (or Discounted) LapTop deal with PCWorld – it seemed to sell out so fast that it is obvious there is huge demand for this type of product in the market. I suspect that Orange are being cautious and wanting to see the returns, fraud, usage rates and support costs on a small sample before committing to a huge investment.

As the graph below shows nearly all home computer users already have the internet and they nearly all have broadband connections. The “Free LapTop” offers have the potential to bring a lot more households into the market quicker than expected.

All the indications are that the AOL Free Laptop will be a huge success in terms of sales especially in the run rate to Christmas. I would imagine that Carphone could easy flog 250k if they were feeling really brave – I estimate that the SAC would be around £270 and 250k would be an £67.5m investment which is serious money for Carphone.

I also wouldn’t be surprised if the initial results of the Orange Free LapTop “Beta test” programme give the UK management enough courage to put a lot of subsidy into the market: £67.5m is a lot of money for Carphone, but a drop in the Bay of Biscay for Orange.

The other recent interesting development is that Be* is back advertising with banner ads all across the net and has revised its tariffs and product specs. I suspect the new owner of Be, O2/Telefonica, are building demand to test systems and processes before a full launch. However, I think O2 will have to do something more exciting than the Be* tariffs to create even a flicker in the market.

The biggest news of the quarter so far is the biggest gossip which is that Sky are getting ready to launch a standalone broadband and broadband/home phone dual play targeting the Freeview homes. This was broken on the non-official SkyUser forum and came about because they recognized that SkyPicnic and variants of it were being registered as domains, unofficial comment apparently from within Sky seem to indicate that the product is a standalone broadband product with a new sexy-looking Netgear router.

While some people are getting excited about this product, I personally will see the launch, if it ever happens, as the first real chink in the armour of Sky. The original broadband business model was all based upon reduction in churn in the payTV business and upsale of new products thereby increasing the ARPU.

Of course, Sky Broadband is nearly one year old and a lot has been learnt about the economics of unbundling since that date – mainly that it will take around 2.5 million customers to make the effort worthwhile and that is with the majority taking both a voice and broadband product.

If Sky launches a Picnic product – the first question that I would ask is Sky worried about reaching the scale from its PayTV customers alone? The next question is whether there is a fall in demand from the PayTV base? It currently seems that Sky has capacity for around 250k additions/quarter. Are Sky adding extra provisioning and support capacity?

I would need a lot of convincing to be assured that a Sky Picnic type product isn’t the first hiccup in the BSkyB master plan.

OFCOM Communications Report: The BBC

2007-08-28T22:46:00.000+01:00

A brief look at BBC statistics contained within the 2007 OFCOM Communications Report highlight the following shocking facts:

a) Poor and Young Subsidising the Rich and Old

The flat tax approach of the licence fee has always seemed inequitable; the viewing figures of the main Entertainment channels seem to reinforce this view.

The OFCOM graph show the richer that you are the more likely you are to watch BBC One and Two. The same graph illustrates that the Young are also subsidising the Old. This is especially true when you consider that a household containing just ONE over-75 has its licence fee paid by the general taxpayer. These over-75 households accounts for 4.0m households out of a total of 25.1m license payers or £486.6m out of a total revenue of £3,242.9m.

b) PayTV Viewers Subsidising Analogue only viewers

The higher the programming choice, the less people watch the BBC.

c) Poor Performance Rewarded by Higher Revenues

As audience share declines…

…revenues increase

The only conclusion that can be drawn from the data is the date of reformation of BBC funding is drawing closer.

H3G UK – One Step Forward, Two Steps Back…

2007-08-28T12:26:00.001+01:00

Hutchison Whampoa reported last week and the 3G operations seems to have improved significantly on a cashflow basis in general and the UK in particular. The H3G UK & Ireland operations quoted “recurring LBITDA after all CACs reducing by 96% compared to the same period last year”. Hutchison Whampoa do not break out the financial results of the various 3G operations so it is impossible to determine the absolute number of the UK&Ireland outflows but suffice to say it is a vast improvement on the figures from last year.

Over the last twelve months 3UK has radically reshaped its distribution network moving as quickly as possible from a reliance on indirect distribution to direct distribution, whether by owned stores which have increased dramatically in number or by online and telesales channels. 3UK are sufficiently happy with the progress to announce postpaid churn of 2.5% which presumably is a dramatic improvement of churn rates in the past.

The standout headline figure was the reduction in SAC costs by £160m to £212m - some of this will have come from the lower level of contract net adds (139k vs 226k), but there will also be real savings from both the change in distribution strategy and reduction in churn. Whilst this is extremely healthy for 3UK going forward, it will put the independent distribution channels under even more intense pressure going forward.

I also think that the power of the X-Series offer is starting to show in the customer numbers – despite having a severely limited marketing budget and restricted distribution compared to the other mobile networks, the X-Series appears to be selling well. This to me shows the power of word of mouth, especially amongst the tech-savvy community of mobile users. I have yet to hear one person who is disappointed with an X-Series choice.

The prepaid base seems to be going nowhere with revenues only 10% of total H3G revenues of £811m for the half year. The prepaid “active” ARPU figure of £18.82/month and the inactive rate of 75% implies the active prepaid base is somewhere between 600k and 700k customers which is absolutely nothing in the overall scale of the UK market. In my opinion this is hardly surprising given that 3G is a premium service compared to 2G and something that should not worry people too much.

However, allied to the lack of presence in the corporate and fashion sector, it does show that H3G UK is heavily exposed to a single mobile market segment – Mobile Geeks. If another mobile operator wanted to cause H3G UK some serious pain, all they would have to do is to be ultra-aggressive in this market segment.

This really is the first of Hutchison’s strategic problems – how does H3G UK gain scale? Because they are still seriously sub-scale – the first half revenues were probably 50% of the smallest UK operator – T-Mobile and around 33% of the big two – Voda and O2. Hutch can probably halt the cashflow pain but they are never to going to generate a return on capital at current market share.

The second strategic problem is the forthcoming OFCOM termination rate settlement which will knock a huge dent in H3G profitability. The settlement will reduce H3G inbound revenue from around 11p/minute to 6p/minute while not having an associated reduction in outbound fees – this could easily take £100m per annum from H3G’s bottom line. I believe termination rates for H3G is basically a life or death situation and this will mean that every legal and lobbying avenue has to be fought to either reverse or delay OFCOMs decision.

All of which means that H3G destiny is basically out of the UK management control: they can’t attack another segment to gain market share, because which ever operator stands to lose the most will just fight back targeting the H3G geek customers; and although they can delay the imposition of termination rates through the courts, they really need to achieve the impossible by convincing the politicians to overturn the OFCOM termination decision.

For the other operators, they can just sit back and watch: they all know that one of the four buying H3G UK will radically improve the profitability of the overall UK market and they know that the termination rate settlement will probably reduce the value of H3G UK, but they also know that T-Mobile has the most to gain from buying H3G UK. A purchase of H3G by T-Mobile will probably put the UK market in oligopolistic heaven and allow a period of relative market calm and profit maximisation. However, others will be tempted to take a risk and give a little impetus to their UK operations - I can make a case for all of the other three buying H3G UK.

Personally, I suspect the market rumours from last year about a possible China Mobile bid were just an attempt to force the hand of one of the UK operators. Similarly, I expect the current round of conversations about network sharing is also an attempt to force one of the UK operators to get their wallets out. Hutchison seem to be in a bigger rush to say Goodbye to the UK mobile scene than the others are to bulk up their operations.

Virgin Media: Trouble at the Top

2007-08-27T21:47:00.000+01:00

Steve Burch has left the Virgin Media building. His ego might be slightly hurt, but I guess a reported US$7.5m payoff will alleviate the pain somewhat. If we add the payoff to the US$11.1m earnings in 2006 and the 125k shares (circa US$3.6m) he received in April 2007 equals a sum total of well over US$20m for 19 months work. I think this is great going for someone whose reign included a quad play loss of share in all core broadband, payTV, fixed and mobile telephony markets.

In an interview with the Financial Times this morning, the Acting CEO, Neil Berkett, said “I’m keen to treat this interim period as if I was chief executive…My focus is to accelerate delivery even more… We’re at an inflection point where we’ve rebranded and weathered the storm of Sky”. Personally, I can’t see any evidence of Virgin Media yet weathering the Sky storm, let alone the BT and TalkTalk storms and that is before the upcoming Digital Switch Over hurricane. Also being a little of a mathematical pedant, I would advise VMED shareholders that an inflection point could also imply things are about to get even worse.

I find it hilarious that The Sunday Times has been dishing out some free advice for the VMED board – more or less saying ignore the Chairman, James Mooney and let the business be run from the UK. I’m sure some VMED people will be thinking that if this is the advice of someone on Murdoch’s payroll, perhaps VMED should do exactly the opposite, which is maybe what Murdoch wants…

The most difficult part of Berkett’s job over the forthcoming months will be to keep the workforce focused whilst any boardroom shenanigans are fought out in private and future leadership is decided. The uncertainty of potential sale of the company will not help matters. The most important task is to keep on the cost reduction path, complete the synergy projects still outstanding from the ntl/telewest merger and find further ways of cutting costs. Regardless it is uncertain whether any of the synergies will ever find their way into shareholder pockets as the storm of competition is currently returning the synergies directly to customers in the form of cheaper cable bills.

Personally, I don’t envy the role of anyone at Virgin Media.

Off on a Break

2007-08-17T15:41:00.000+01:00

I'm off to Minorca for a few days Rest and Recuperation so I won't be posting until around the 27th August and I'm not taking my laptop with me.

Unfortunately my planned summer reading, Essentials of Modern Spectrum Management, has had its release date postponed by the publisher and therefore Amazon has not yet shipped the book.

I shall instead to have to amuse myself with the following reading list whilst sipping my San Miguel in the shade:

Brilliant Orange – nothing to do with the mobile operator, but instead a story about Dutch Football;
Andrew Marr's – History of Modern Britain; and
Kieran McCarthy's account of the battle for the sex.com domain.

Carphone: Full Court Press for iPhone Distribution

2007-08-16T12:11:00.000+01:00

Mobile Today is reporting that Carphone have opened an Apple store within a Carphone Warehouse store on Oxford Street in London.

Carphone's store staff are gearing up for the opening of the main attraction – the 'Apple house' – which will show consumers the concept of wireless living by displaying laptops, TV screens, iPods and music speaker systems in various rooms. The store offers Apple TV for £250 and the AirPort Extreme Base Station for £119.99, which creates wireless television displays of podcasts, pre-recorded YouTube content, movies, music and photos with an iPod-style menu on screen.

Carphone will basically do anything to convince Apple that it should be a UK distributor for the iPhone. My money is on Carphone winning the debate and making plenty of money out of the deal in the long run. For all their flaws in Telecoms Services, Carphone really are literally streets ahead of the rest of the crowd in retailing.

21CN, Bands and Regional Pricing

2007-08-15T00:10:00.000+01:00

Samknows is in the middle of producing an excellent introduction to BT’s mega rebuilding of its core network aka 21CN. Sam is much happier with a compiler than a spreadsheet, yet is immediately struck by some of the pricing differentials on the BT product sets – for example, on a QoS product BT is proposing charging 3x the amount in a rural area compared to suburbia.

To understand what is going on it is necessary to understand the new UK network topology:

Roughly speaking, most serious nationwide unbundlers (Carphone, Sky, Tiscali, O2 and Orange) will eventually unbundle down to the Tier 1 MSAN level at a minimum which is around 1200 exchanges and covers around 70% or 17.7m of the 25.3m UK homes. Again roughly speaking, most of them will backhaul using BT Ethernet products to the MetroPOPs where they will offload traffic onto their own backbones. In other words because of the BT network architecture most of the unbundlers will be using a blueprint which will be very, very similar.

The Tier 1 area is bigger than the UK cable coverage of around 11.8m homes or 47% of total UK homes, but nearly all the cable area will overlap with the unbundled or Tier-1 areas.

In order words without further industry consolidation we have:

7 companies fighting for 11.8m homes or 47% of the UK
6 companies fighting for 5.9m homes or 23% of the UK
1 company fighting for 7.6m homes or 30% of the UK

This is a pretty controversial analysis because it ignores the plethora of resellers currently using the IPStream product who will be transitioned onto the new 21CN products of either IPStream Connect or Wholesale Broadband Connect (WBC). However, it is almost impossible to make money on ipstream in retail given current pricing and churn rates and therefore the only player with any margin is BT through its wholesale revenues or the relatively small number of ISPs who charge a premium for SME products.

I plan on starting crunching the numbers for the new 21CN products after my holidays, but basically I don’t hold out much hope for the non-infrastructure based ISP community and therefore really there is just one company, BT, fighting for the 30% Tier-2 homes or to be more precise the profit on serving the 30%. I suspect all of the BT wholesale pricing will appear competitive in the Tier 1 or Unbundled areas (ie where BT faces plenty of infrastructure based competition) and extremely expensive in the Tier 2 or non unbundled areas (ie where BT faces zero infrastructure based competition)

This equation spells a grim future in the medium term for the rural communities, not only will speed be lower because of higher than average line lengths, but they will be charged a higher price for the pleasure compared to the ultra-competitive urban areas. I think regional pricing is going to be a feature for the next few years.

The only potential beacon of light for these communities, apart from state subsidies, is Sky. After all, Sky probably has lots of high yielding ARPU customers scattered across rural UK where they currently face zero competition from Virgin Media. Here things will start to get really strange because the key ongoing variable cost is the backhaul and in some ultra-rural communities such as North Yorkshire and parts of Scotland there are initiatives laying non-BT owned fibre which will make backhaul cheaper on a wholesale basis and possibly make medium sized remote exchanges economic to unbundle. This will actually encourage Sky to unbundle exchanges where they have a known number of customers already signed up for the payTV service. In other words, Tier 2 or Band 2 exchanges will probably be unbundled on a case-by-case basis which will be all the more confusing to the Great British Public.

As this sub-par broadband future starts to dawn on the 30% of the UK who on average tend to be quite wealthy and politically vociferous, I see huge pressure being applied to the regulator, OFCOM, to do something about the perceived inequality. I for one will be leading the charge that it is not BT’s fault, but OFCOMs and the inevitable outcome of the dodgy settlement at the time of the conception of OpenReach.

40 years ago: Pirate Radio RIP

2007-08-14T13:46:00.001+01:00

Fourty years ago on the August 14th, 1967 the party of party poopers, Labour, introduced the Marine Broadcasting Act which effectively banned the offshore pirate radio industry from broadcasting subversive material to the nations youth, thereby handing back a monopoly to the state broadcaster, the BBC. The UK Number One in the singles chart was the seriously subversive Scott McKenzie with San Francisco (Be Sure To Wear Flowers In Your Hair)

The end result was that the BBC, who has never missed an opportunity to keep in tune with and brainwash the future generation of licence tax payers, decided to launch Radio 1 and kicked off on Sept 30th with Flowers in the Rain by the Move spun by Tony Blackburn. The initial line-up of DJs proved to far more destructive to the nations ears than even the wildest dreams of the BBC board of Governors, although a couple, such as John Peel and Kenny Everett did manage to sneak through the interview process.

And so the charade of Radio 1 continues to this day costing the poor beleaguered licence tax payer £42.8m in 2006/7 alone. In the build-up to the Radio 1 40 year anniversary, I expect a whole load of sycophantic nonsense exaggerating its own self importance and role in society. The fact of the matter is that commercial radio would have quite happily provided a similar if not better service than Radio 1 at a far lower cost; comically the commercial sector would even have paid money to use the Radio 1 airwares. The only role that Radio 1 has fulfilled in 40 years is in consuming the oxygen which would have allowed the commercial sector to flourish. Admittedly, they have also provided a free of charge promotion service to the record industry, but I don’t think in the grand scheme of things this is where public funds should be allocated either.

BSkyB / NDS : Further Innovation in the Pipeline

2007-08-14T09:49:00.000+01:00

The OFT inquiry into the BSkyB purchase of Amstrad couldn’t be any further wide of the mark in finding the real competitive advantage that BSkyB has over all the other players in the UK TV market. One of the consistent advantages, but not the only advantage, is the innovation that NDS has developed for BSkyB.

Conditional Access is a pretty boring dinner party subject but absolutely core for payTV operations – NDS provides the technology that secures the BSkyB business model. ITV digital found out how expensive it was to make the wrong choice when its cards were cloned and being sold in pubs up and down the UK. A little known fact is that the Virgin Media Conditional Access has also been comprised and limited bootleg versions are available as we speak on the net. NDS has never been cracked and the technology has actually been successfully implemented in Scandinavia and Italy to stop mass pirating of satellite signals.

News Corp was one of seed financers of the businesses when encryption was even less fashionable than it is today. On the back of its start in Conditional Access, NDS has spread its technological wings into other vitally important parts of the BSkyB service.

An important feature of the Sky Sports service is the interactivity. The Red Button feature is designed with NDS technology and still to this day, seven years after launch is not available to Sky Sports subscribers on Virgin Media, a compelling reason for some people to choose satellite over cable TV for some.

Betting on the TV may not be everyone’s cup of tea, but some like it and SkyBet is becoming an useful profit contributor to BSkyB profits. The multiplatform technology underpinning the SkyBet service is from a company called Orbis who NDS acquired in 2000.

Games on the TV have always been part of the BSkyB service even in the analogue days and the key partner is a Danish company called Visionik who were acquired by, you guessed it, NDS in 2002. Visionik themselves in 2006 have since bought another Danish Games developer called ITE.

When interactiveTV was first launched one of supposed key benefits was extra income generated by personalized and interactive adverts. In the first generation these were a complete flop not only because of the early smaller audience size of payTV, but more importantly because of the extra costs of production were not deemed to be justified. Step forward NDS in 2003 with its RapiAd template technology which allegedly allows agencies to build ads from the desktop in under an hour. Quite a few ads these days on BkyB appear with a red button next to them with some sort of interactivity feature.

All of these applications were revenue enhancing to the BSkyB operation, but the next product was such a step forward that it has literally changed TV viewing in the UK forever and is more addictive to the average Couch Potatoe than the Crackberry is to the average City Trader. Yes, we are talking about Sky+ in the UK. I am sure there are hundreds of City Traders whose idea of weekend recreation time is fast forwarding through adverts in the middle of recorded programmes from the week with the left hand whilst simultaneously replying to overdue emails on the Crackberry with the right. Sky+ is an absolute phenomenon and has exceeded all commentators’ expectations and NDS technology underpins it.

Once the Sky+ boxes had been seeded onto the market another new groundbreaking service was launched. Push VOD services into a hidden eighty hours worth of space on the Sky+ v2+ boxes named Sky Anytime and again supported by NDS technology. Currently the content is limited to programmes that have been shown on the Satellite channels, but I don’t suspect it will be too long before Hollywood starts using Sky Anytime as a mechanism for distributing relatively new movies for rental. I can’t think of a cheaper distribution mechanism than using overnight spare satellite capacity to millions of homes.

Assuming a rental price of £4/movie with a 50:50 revenue share with the movies studios works out to be £1.70 revenue/movie share to Sky. Assuming an average 1% take-up per week for the Sky households of 8.5m works out to be £7.23m additional high margin turnover both to Sky and the Movie studios per annum with very little risk of pirating. Sky Anytime could be quite a nice profit centre for BSkyB in the future.

Of course the million dollar question is where the Sky/NDS partnership is heading next.

As with the hidden storage, I believe there is also a chance that a new service will spring to life with the less hidden USB port on the front of the Sky+ boxes. This is only a software download away from being really useful output device for copying content from the hard disk to a portable memory stick which can then be played on other types of devices (eg laptops). Of course, the security will be a concern, but for a company such as NDS with security embedded in its DNA it shouldn’t be too high a hurdle to overcome. I would expect in the future Sky+ boxes to have memory card reader/writers contained within them.

Despite the efficiency of broadcast networks and the capacity of broadband networks, I still believe that reusable physical media has a big role to play in future media distribution. It should be remembered that there is as much innovation going on in physical media as in any other means of distribution – the industry has moved on a lot from the write once unprotected CD’s that have created such anarchy in the music market.

One recent acquisition in Dec 2006 by NDS of Jungo Ltd, brings a lot of expertise in USB interfaces. However, the real reason for the acquisition is the Jungo expertise in producing out-of-box software platforms for home gateways. These gateways are the fundamental means for broadband customers to access the network and are becoming more and more complex over time – not only including the DSL modems, but also routing and firewall capabilities, wireless access points, remote management, storage and print facilities. NDS are pretty open in their belief that support for a hybrid set-top box and home gateway for both ip and broadcast video is the next evolution of their software set and Jungo gets them all the capabilities they require.

This hybrid solution NDS calls the Xspace architecture. It offers fantastic revenue opportunities not only in the long tail of content, but also in targeting ad-insertion and a decent quality return path rather than the current dial-up modem based solution that the current generation of set-top boxes uses.

It is interesting that last weeks acquisition of CastUp provides NDS the capability in the final missing piece of the jigsaw: a CDN. CastUp is not currently on the radar of most industry observers, but it is quite successful in distributing content around Israel, I don’t suppose it will be too long before a CastUp CDN for the UK is built tightly integrated with the BSkyB/Easynet internet backbone.

NDS although quoted on the NASDAQ is majority owned by News Corporation and reported great results for FY0707 last week with revenues of US$709m, Operating Income of
US$160m and Cash Balances of US$593m. Although quoted in the USA, NDS is actually based in West Drayton, Greater London just up the road from BSkyB’s HQ in Isleworth, Greater London. NDS has a lot of other customers worldwide apart from BSkyB and openly markets its software to all cable and satellite companies.

BSkyB derives a lot of its technological advantage through the symbiotic relationship with NDS and only a fool would bet against their view of a hybrid broadband and satellite future. Virgin Media, BT and the other broadband players are going to have their work cut out to keep up with the innovation already on the way.

iPlayer going to be Throttled

2007-08-13T08:46:00.000+01:00

The current debate that has started between the ISP Industry and the BBC over the iPlayer highlights a fundamental flaw in the Public Value Assessment (PVA) by the BBC Trust for the on-demand services – it basically ignored the costs of internet video delivery and in fact rather naively stated:

How the networks adjust and how the costs are met is ultimately a matter for the market. Undoubtedly, the BBC Executive may be involved in discussions with ISPs and network providers but we do not consider it appropriate to issue any directions to management on this issue in this approval.

Effectively, the BBC regulator buried its hand in the sand hoping that the “market” and the BBC Executive would come to some sort of amicable solution not realising that a sinister market solution might be deployed. eg mass blocking of the service.

The other major flaw with the PVA was that it built demand forecasts based upon two incorrect assumptions:

i) that the service would be “incrementally” free; and
ii) the service would be available for peak-hour viewing.

A user consuming loads of bandwidth by watching loads of video may have to pay for a more expensive broadband service in order for it to work. In this mornings FT, this is a potential solution proposed by Mary Turner, CEO of Tiscali. Another “nuclear” option was suggested in the Daily Mail where tagging of the BBC traffic and throttling it was suggested.

I’m sure the BBC demand forecasts would have turned out completely different if the question was “If you had to pay your ISP £2/month extra to use the iPlayer would you use the service?” or even “If it took you 48-hours to download the latest Eastenders programme would you still want to watch it on your PC?” or even worse "If it took 48-hours to download a legit copy, would you prefer for a non-DRMed bootleg copy that you could burn to DVD and watch on your TV?"

This is a crucial battleground for the ISP industry and one in which I believe the BBC does not have the moral highground. After all, it pays huge fees to Arqiva/National Grid Wireless to transmit its Terrestrial digital TV signals and it also pays huge fees to Astra to rent satellite capacity for transmission of its content by Satellite – why did it expect to transmit its content for free over the internet?

The ISPs are fighting a Public Sector Broadcaster and the results of the fight will be able to be applied to other commercial video content providers, such as ITV, Channel4, Sky, Google and the rest of the emergent video crowd. It is a vitally important fight that the ISP industry needs to win or at worse get a compromise draw that can be imposed on the rest of the commercial sector.

The BBC Trust has already got its knickers in a twist with the lobbying by the Open Source Community for a non-Microsoft solution, I suspect this time around a more potent force is about to be deployed to strangle the iPlayer at birth. After all, most large ISPs (BT, Tiscali, Orange & Sky) already have video business plans of their own - why should they roll-over, let the BBC solution dominate and ruin their business plans?

Virgin Media – Refinanced in the nick of time...

2007-08-10T14:35:00.000+01:00

From the 10-Q SEC filing just released, it looks as if the CFO has refinanced just in the nick of time…

In April 2007, we amended the senior credit facility and borrowed an additional £890 million under a 5½ year bullet Tranche B5 term loan facility and a 5½ year Tranche B6 term loan facility. We used the net proceeds to repay some of our obligations under the Tranche A and Tranche A1 term loan facilities.

After giving effect to the refinancing in April 2007, the principal payments are scheduled as follows:

March 31, 2009 - £2.5m
September 30, 2009 - £474.5m
March 31, 2010 £526.5m
September 30, 2010 - £579.4m
March 3, 2011 - £966.0m
September 3, 2012 - £-2,203.7m
March 3, 2013 - £300.0m

Even if Virgin Media don't generate the £475m needed to refinance between now and Sept 2009, the credit squeeze will be more than likely over and they can continue limping along.

Q2: UK Mobile Market Wrap-Up

2007-08-10T13:48:00.000+01:00

I knocked up a quick chart showing the trends in the UK Mobile Market, but before the analysis a couple of notes of caution:

3UK figures are not released yet and these are more important to the UK market than Virgin Mobile
Voda have stopped recording the inactive numbers, so have a different way of counting the base than the rest
Voda and O2 exclude their MVNO operations from the subscriber count
I have assumed all the Virgin Mobile base, both prepaid and contract, are counted within the T-Mobi prepaid numbers. The T-Mobi numbers will also include figures from their smaller MVNOs such as Fresh.
O2 and T-Mobi only state their revenue figures in €’s and therefore I have converted them using the average exchange rate used by Orange during the quarter.

What is apparent is the speed that O2 service revenues are catching up to Voda's. However with Voda taking much more market share in net adds for both pre and post paid for the half year, I’d be extremely surprised if Voda didn’t finish 2008 still in the lead on the service revenue front.

The promotion of the quarter is definitely the O2 Simplicity deal which appears to be pushing its prepaid base into taking sim-only contracts. Personally, I think this is a great idea and will undoubtedly be copied by the other networks. I think the offer could also be slightly developed and offer tenure-based discounts on new handsets – this will drive traffic into the operator stores and promote loyalty. This is the approach that Sky is taking on flogging HD boxes and every operator in the UK would love for Sky-like churn figures.

The other interesting development in the quarter was the axing of the BT Movio mobileTV service as retailed by Virgin Mobile. Personally, I think this is a shame and is probably an indicator that DVB-H will eventually win out as the standard in the UK. For the other operators, they will be grateful to one less potential buyer of spectrum in the forthcoming L-Band auction.

Virgin Mobile has a new boss, but I think he will have his work cut out to improve margins and the customer base at the company. It is easy to provide a short term impetus to earnings by effectively shutting down a vast swathe of distribution to concentrate on direct sales to the cableTV base. Virgin Mobile is probably facing a long decline in the base unless they start pushing prepaid again.

The big surprise to me was Carphone’s continued growth in distribution despite nearly all the operators claiming direct connections are at a high. All I can think of to explain this phenomena is that Carphone is taking market share from the other mobile retailers such as Phones4U. It just goes to show the continued excellence of Carphone in retailing both on the High Street and Online. I did have to laugh at the Rene Obermann comments about one UK retailer being exceptionally aggressive in the quarter.

T-Mobile are a bit of an enigma at the moment with them cutting the value in the Flext package and also facing the initial wave of Flext contracts from the launch 18-months ago starting to expire. I suppose if things get really scary and they start losing some of the contract base, Carphone will gladly help them out in acquiring new customers at the right commission level.

3UK have also been quite quiet in the marketplace, but I think this is more a feature of the success of the X-Series and them not having to put other offers into the market. The key focus for them is the battle with OFCOM over termination fees, a victory in this is an absolute must.

Virgin Media: Credit Squeeze

2007-08-09T18:55:00.000+01:00

Pity the poor Virgin Media shareholders: just as it looked as if the Gods of Private Equity were smiling down on them the credit markets have taken a turn for the worse and the chances of quick exit seem to be diminishing by the day.

Partially soothing the pain, there were a couple of positives in yesterday’s Q2 results: net debt had only increased by £19m in the quarter to £5,786m and OCF grew to £315m from £306m in the previous quarter. People can debate the customer numbers until they are blue in the teeth but these are the most important two figures that Virgin Media release every quarter. This is because the gigantic £4,970m credit facility has certain stringent covenants attached: one of which is the leverage covenant which currently stands at 5.25x – with a rolling 12-month OCF of £1,252m, the ratio currently stands at 4.62x. This gives Virgin Media a certain amount of breathing space – the rolling 12-month OCF figure would have to drop by approx. £150m to breach the covenants at current debt levels. In other words, things would have to get a lot worse in the marketplace for Virgin Media to be in any danger.

However the credit facility has a repayment schedule attached to it and unfortunately for Virgin Media shareholders £237m has to be repaid on 30th September 2007, followed by another £237m in March 2008, followed by another £237m in September 2008 and so on until 2011. As at 30th June 2007, Virgin Media had £277m of cash so can probably make the first repayment in September, but the Mar 2008 payment? I seriously doubt it with the current cashflows and I’m not expecting the marketplace is going to get any easier in the short or medium term.

All this means that sometime soon Virgin Media will have to sit down with the bankers and rearrange the credit facility – not a nice prospect when there currently is a credit squeeze. For sure, the bankers won’t let Virgin Media go under for a second time, but I expect they will want a pound of flesh – interest rates and facility fees are bound to increase.

The only other real option for Virgin Media is to sell out to probably a trade buyer and John Malone, the Darth Vader of the Cable Industry is waiting in the wings and will probably buy any Euro Cable Asset if the price is right. In fact, he is probably the only person on the planet who could give the BSkyB juggernaut a run for its money. Come to think about it, wasn’t Darth Vader and the Death Star on the same side?

UK Broadband Market Summary Q2 2007

2007-08-08T11:00:00.000+01:00

I can’t think of anything simpler than counting an ADSL customer: only one company at a time can use a copper pair and the final provisioning is controlled by a third party - either Openreach (LLU) or BT Wholesale (ipstream). However, the Q2 figures almost certainly show that an element of double counting is going on:

As far as I aware, Sky has not declared whether their figures include the UKOnline base which was 32k at the end of Q1. If the figures don’t than Sky net adds are even more remarkable.

BT despite pricing their services at a premium is still attracting a very good share of the overall market. I’m sure that this is not just because of the quality image, but also because competition in the rural areas is a lot less fierce, especially in non-LLUed and Cabled areas.

The Virgin Media share just keeps on drifting and this is despite the “claimed” top end package of 20-meg and the bargain basement £10/month 2-meg service without having to pay a line rental.

Carphone/TalkTalk/AOL appears to held their own during the month. Although the premium priced AOL seems to have faired a lot less well than the competitively priced TalkTalk. With the Free Laptop not kicking in until September and AOL priced extremely high in the non-LLU areas, I expect to see further drift in the AOL base in Q3.

Be is basically going nowhere and needs the brand relaunch by O2 which is due in October. O2 must be burning cash by the bucketload on this operation currently.

The lack of conversion of narrowband customers to broadband must also be a worry for both Orange and AOL. AOL narrowband base dropped 58k in the quarter to 447k and Orange by 124k to 915k. Neither of these drops were mirrored by increases in the broadband base. Remember that the Narrowband customers should be delivering huge margins at this period of their life cycle and it will be worrying the rapid drop off without going onto broadband.

Also, a big worry for the market will be the current lack of scale for Sky. I estimate that Sky need around 3m customers to make economic sense. At a run rate of 250k /quarter, Sky will continue piling the pressure for another 2-3 years and the Sky strategy is one of churning payTV customers from the other networks. Remember the majority of high income payTV customers will probably already be computer users and almost certainly will have some form of internet from another supplier.

With Sky’s strategy and the general dissatisfaction in the marketplace, I will be extremely surprised if overall market churn drops below 30% for the foreseeable future. The Openreach LLU stats show churn at around 30% for the LLU which is incredible give the high percentage which will still be in contract. I dread to think the current ipstream churn but current speculation puts it a lot higher than 30%.

Given the churn and the fact that deep-pocketed players such as O2 and Orange are still seriously sub-scale, I can’t see Broadband margins increasing for the foreseeable future…

Amstrad / BSkyB deal

2007-08-06T15:57:00.000+01:00

I must admit to being a little blindsided by the BSkyB purchase of Amstrad. I think the deal makes sense financially, although is probably a lot less of a quantum jump strategically than most people think.

The 150p/share offer values the equity of Amstrad at £125m. The latest published balance sheet information highlighted cash balances of £28.3m as at the interims as at 31st Dec 2006. This would give an Enterprise Value of around £100m. We also have to consider adjustments for other working capital items such as inventories, trade and tax receivables and payables and provisions. Overall, the Amstrad balance sheet looks pretty strong and the EV is probably closer to £90m than £100m at 30th June.

Amstrad itself consists of 3 main parts: the Set Top Box business whose customers are BSkyB and Sky Italia; a marginally profitable (and therefore can be ignored) audio business; and the E-mailer phone business which has ceased manufacturer but provides on-going and declining profits.

In the six-months to June 2006, the email business contributed just over 30% of pre-tax profits with £3.3m out of £10.5m. This will obviously given the business model be highly cash generative but also be declining rapidly. I modelled this business declining steadily over 3-5 years and having cash conversion of between 50% and 80% and I get an upper value of around £9.5m and lower value of £2m. In around words it is insignificant compared to the overall set-top box business.

The next key variable on the deal is the relationship with Sky Italia: turnover in the 12months to June 2006 and 2005 was £18.3m and £24.5m respectively. This is a key relationship and really important to keep production volumes up and help in the economies of scale. Obviously BSkyB and Sky Italia have different shareholders and therefore probably a new mutually beneficial contract will have to b negotiated between the two.

If we use the same analysis of revenues by geographical destination and subtract the emailer revenues we get steady revenue in the UK of around £56m in 2005 and 2006 with BSkyB. Remember Amstrad only supplies currently around 30% of BSkyB Set-Top Boxes. Also, remember the higher end (and therefore more expensive) HD/PVR boxes are supplied by Thomson.

This probably means that with Amstrad Operating Margins of around 20% of Set-top boxes, BSkyB will save around £10m annum on current volumes. Obviously with an inhouse capability, BSkyB might push more volumes into the old Amstrad operations, but I seriously doubt that they would want to go the whole way and single source Set-Top boxes from an inhouse operation. Perhaps, BSkyB could go to 50% which would mean saving of around £15m/annum.

It is very easy looking at the Set-top box equation for BSkyB and adding in economies of scale with Sky Italia to produce a pretty compelling argument for the acquisition merely on a cost reduction basis.

Strategically, I am a little confused as to why BSkyB feels it necessary to add an ODM string to its bow. Currently, BSkyB effectively tightly controls the functionality of all its set top boxes through the issue of reference designs. I’m also sure that Sky keeps tight control of the software loads on the boxes through its key partnerships with OpenTV (Middleware and Interactive TV), NDS (Conditional Access and PVR functionality) and Gemstar (EPG patents). Most of the key (and complex) software drivers will be written not by Amstrad but by its Chipset partners of which the most important is Conexant who seem to provide the crucial video stream processor for the current generation of Amstrad boxes. I’m sure that BSkyB also provides most of the testing of the hardware and certainly periodically updates the software stacks through automatic flash updates.

There is also the risk with the next generation of set-top boxes which will almost certainly include some sort of home networking functionality: connecting all the home PCs and TVs and providing external connectivity whether via cable, adsl, dtt or satellite. This is exactly the market that some of computing giants such as Microsoft and Apple are targeting as well as usual plethora of home entertainment brands (Sony, Samsung and Panasonic) as well as the usual set-top box manufacturers (Thomson, Pace, Scientific Atlanta) I’m not convinced that BskyB can play and win against this crowd in the long run.

Overall, I’m not convinced at all with the acquisition and while it is certainly fickle to suggest so, I suspect the whole deal might be some sort of retirement present for Alan Sugar for all his years of help in building BSkyB into the juggernaut it is today.

O2: The Tide is Turning

2007-07-24T01:22:00.000+01:00

When an archetypical company is in expansion mode, the staff is happy and has the freedom to take controlled risks and sometimes a risk pays off big time and a general positive cycle of performance through enthusiasm plays out to everyone’s benefit.

When there is a general economic slowdown or sharp competition, staff tends to withdraw into their shells, become more risk averse and paranoid about their jobs. Staff knows especially the front line and accounting teams, when a company is struggling in the marketplace and a destructive circle of underperformance tends to set in.

The result of this circle of underperformance usually ends in cost cutting, redundancies, further paranoia and loss of momentum.

O2 Germany seems to be in this category now announcing 15% redundancies of staff. And this is despite being the stellar performer in the O2 group since O2 was created and very few back in the day thought o2 Germany had the steam to make it on its own. Admittedly Germany is currently a tough market and O2 are sub-scale, but all the problems could be solved by taking out kpn’s e-plus – something that is currently even beyond the wallet of o2’s parent company, Telefonica. Tellingly the redundancy announcement was preceded by a change of the senior executive from old school O2 to new school Telefonica appointees.

The crucial market for O2 is the UK and I personally think that there are embryonic signs that the tide is also turning in the UK. O2 technological innovation over the last few years, apart from a few non-deployed highly publicized controlled experiments with Manx Telecom, appear to have been extremely limited and more importantly part of a high level strategy of minimizing capex. O2 has invested all its money in a slick brand appealing to the addicted to texting youth.

Unfortunately for O2 the market in 2007 is moving away from them:

H3G is cornering the market for geek friendliness and although showing limited signs of future profits are at least less cash consuming than in the previous incarnations;
T-Mobile is actually currently the mass market punters friends – they dream up appealing market changing deals like Flext and Web ‘n’ Walk, but unfortunately for T-Mobile UK the head office back in Bonn never seem to provide the investment to keep a constant message (and more importantly commissions) across any channel for any length of time and therefore only the minority attentive observers can jump aboard the T-Mobile train; and
Voda is back in an aggressive manner and they are fighting on two new fronts in the consumer market. The Vodafone Family on-net pre, postpaid mix package shifts the paying field for price plans - if we are all honest the Voda brand appeals to the older and bill paying members of the family who actually make mobile decisions for a big percentage of the population. Next on the Voda target is the mobile internet niche, which despite a completely incomprehensible marketing campaign appears to be playing exactly into the Voda strengths of “imagined” technical strength; and
Orange is still comatose and inward looking but the life support machine is showing signs of activity. Any effort from planet Orange is an improvement from their current state.

Crucially, I think that the recent decision by O2 to dump imode in the uk is the start of a cash conservative phase. It is not important on the pluses or minuses of the imode technology but more that o2 have started to fail, again, in the UK market. The last time O2 failed was when they were called Cellnet and part of an UK incumbent called BT. Now they are part of a Spanish incumbent, bureaucracy will seem the same as with BT and blood is bound to flow. It was also noticeable from a Telefonica statement that o2 would be a lot less aggressive in the uk market in the second half.

Obviously a potential ace up the sleeve for O2 UK from recent press murmurs is that O2 have won the iPhone contract in the UK. Personally, I see this as more of a sign of weakness for O2 than strength. However, I appreciate that the jury is still out and that I am part of the awkward squad who dare to question the iPhone economics for the MNO.

Rather than the announcement of a iPhone contract, investors should be looking for a changing of the guard at O2 and then adding 6-12 months while they get their feet under the table and plans potentially turn into reality before O2 will be King of the EuroOperator growth league again.

Carphone AOL Free Laptop Offer

2007-07-23T08:52:00.000+01:00

What ever anyone thinks of Charles Dunstone and his Carphone Warehouse Empire, no one, even the biggest cynics, can doubt their ability to change the rules of the game overnight, disrupt the status quo and most importantly shift a huge amount of hardware and contracts. I believe the AOL Free Laptop Offer will do this in the broadband industry.

I can just imagine a pretend chat with his old trading partner, Ron 'Motorola' Garriques, now with Dell.

“Do you remember the old days when we ripped up the UK market for your ex-employer with the spectacular pink RAZR, why don’t we do something similar for your new employer with laptops?”

Allegedly, Carphone have stockpiled 100k Dell laptops ready to be given away alongside a 24-month contract for £19.99 AOL Broadband and a mandatory “Pay As You Go” cps-based voice service.

This is basically, Carphone turning the broadband game into a cellular game, one with expensive equipment apparently given away, but the cost is clawed back over a long contract with excessive service fees. This model has proved incredibly successful in the cellular business and I see no reason why it won’t be successful in the broadband industry.

I estimate the economics of the offer to work out as follows – this is with cost data from 2.5m customer/1.5k exchange unbundling model I prepared ealier with Jonathan Lishawa:

£270 of SAC: £200 for laptop which admittedly is a decent spec, £15 for the wireless router, £27 for the Openreach data & CPS connection and £28 for marketing. This equates to £11.25/month.
I assume that the distribution costs are covered by the £19.99 postage and packing fee.
£72.80 for addition SMPF non-recurring costs, relating to line cards, colo/cable ties, OSS, Backhaul & Core Capex. This equates to another £3/month
Ongoing Costs of £2.61/month. This includes SMPF line rental, support costs and other ongoing expenses.
This gives monthly costs of £16.89 vs £17.01 of revenue, which means the offer isn’t too appealing on a data only basis.
The money is made on the voice element of the package which is mandatory. No details are available of the new AOL “Pay As You Go” package, but I would assume standard sort of industry ARPU’s of £10/month and profit of £5/month are easily attainable.
So I guess around £5.10 profit/month is achievable or £120/customer over the length of the contract.

Obviously with any model there are upsides and downsides:

A new line card will not be needed for all connections. This depends on the amount of churn on the existing unbundled AOL base and the availability of “used” cards in the exchange.
This does not include any revenues from Geek Squad. Many people will require assistance is setting up the computer and home network especially if they are new to broadband and have limited computing skills.
This does not include any revenues from Software & Hardware Sales. I would expect Microsoft Office, Security Packages and Printers etc are upsides to the model. I’m not sure whether these incremental items will flow to Dell or Carphone.
The above assumes an internet distribution model. Additional costs will be incurred on direct commissions and indirect costs if sold through the Carphone retail network.
Most importantly, the above doesn’t include the “Can’t and Won’t” pay element. 24-months is a lot of credit risk and I hope that Carphone have all the vetting systems in place because undoubtedly an offer of this type will attract every “won’t pay” scamster in the UK likes bees to a honey pot. Also, the end of the market who are attracted to these types of offers are the type who are most prone to economic shocks and to fall into the “Can’t pay” category.

This offer will have the effect of either re-invigorating the AOL brand and providing fresh impetus in the marketplace or bringing it down if there are problems with provisioning and support. It should not be underestimated how difficult the task that Carphone is attempting will be to pull off.

Even the more obvious item like demand management can be difficult, because there is the risk of a lot of unsatisfied customers who either fail the credit check, are outside of the unbundled area or are tied to a current contract possibly even with TalkTalk. Provisioning is also a big worry even with Carphone going down the SMPF route, there are lot of moving parts that can wrong and also a lot of initial load on the AOL support centres.

Finally, there is bigger risk to the Carphone business and that is they will be completely upsetting probably their second biggest customer in the UK shops – Orange. Carphone have stolen the thunder from the Orange / Curry deal - £300 discount on a laptop. Personally, I think the Carphone deal is better designed, appealing and easier to understand, but that is besides the point. The Orange deal will have required a lot of internal approvals, been a long time in development and will be designed at reviving the fortunes of the Broadband service – if the offer is not successful, I can guarantee that the poor proposition or marketing will not take the blame – it will be Carphone on its spoiler tactics.

In true Carphone style, they also used their opportunity of being in the limelight to bury a little bit of bad news.

The first item in the Press Release was the interesting factoid that AOL had “over 1.4m customers on broadband and 2.1m customers in total”. On announcing the AOL acquisition in Oct 2006, Carphone said “…approximately 2.1m ISP customers. On completion, it is anticipated that this will comprise 1.5m broadband customers and 0.6m dial-up customers.”
In other words the base appears to have gone nowhere is a growing market since the Carphone purchase. Particularly worrying is that the broadband base appears to have declined from the 1.535m announced at the end of March 2007.

The second was announced on the quiet on Friday afternoon that one of Carphones Internet Properties, OneStopPhoneShop, was to be closed and some of the traffic sent to the E2Save site. OneStopPhoneShop was bought in Mar 2005 for £15m with £6.7m of that deferred according to performance. At the time Carphone capitalised £12.5m of Goodwill. It is not sure whether Carphone will have to write-off any of this goodwill in the current year. Also, I am unsure of the status of the orginal £9.5m of Hugh Symons goodwill which has also been experiencing some difficulties of late.

Overall, I think the Carphone Free Broadband looks quite good for Carphone if the execution is spot on, with the biggest risk being the “can’t pay, won’t pay” brigade.

Sky Right of Reply

2007-07-20T11:00:00.000+01:00

James Murdoch has had a response published in The Guardian to a generally positive leader article they published on the Sky KPIs released the other week.

One of the points that James Murdoch makes is worth repeating:

Sometimes this means we do things differently from other broadcasters. For example, we chose not to launch a quiz TV channel, and we use participation TV as an enhancement to the viewing experience rather than a money-making venture in its own right. Public trust in TV has never been higher on the agenda, and Ofcom has commended Sky's approach and suggested that others could learn from our example.

I am in the process of writing about the current participation TV saga, but it noticeable that Sky and Virgin Media are really the only companies who are not having their names dragged through the mud. The companies that actually have a direct billing relationship with their customers seem to take customers a lot more serious than the rest.

Anyway, I have my own confession on an erroneous flippant comment I made the other day which annoyed more than one of my readers:

Also, it doesn’t specific how much of the amount is basically taking money out of one pocket and putting back in another with spending on own channel TV adverts and NewsCorp publications.

The shareholders of BSkyB and NewsCorp are different (although at least one family appears on both share registers) and I’m sure that any investment made by BSkyB in adverts in NewsCorp publications is done on a purely commercial and arms length basis.

Apologies for any offence caused.

LUI: episode V – Return of the Voice Margin

2007-07-19T23:30:00.000+01:00

Jeremy described our main broadband product set in episode IV, what was missing was the description of our voice services and our plans for video. This article covers the current state of LUIs voice offer.

In preparation for our voice launch we played the find the money game in the UK residential voice market:

We were really surprised that although the volume was with uk geographic calls, nearly 50% of the value was with access charges (monthly line rental) that most Communications Providers sell line rental at zero margin matching BT’s price. One of our first voice decisions was that we didn’t want to be a zero profit collection agent for BT while taking all the bad debt risk. Therefore we decided to price our line rental at above market pricing - £11.50/month. Despite this pricing policy 16% of our base has taken the line rental option and despite the price it is still only marginally profitable. Apparently people do place a value on receiving just one bill.

Something even more surprising happened when we performed market research with focus groups consisting of existing users of our broadband product on potential voice products:

people, especially youngsters and students, thought text messaging is an integral part of voice service (yes we know that is nonsensical technically, but LUI only exists to serve) and wanted a cheap way of sending and receiving them from their home as well as from their mobiles;
people thought the most equitable way to bundle by far was the "T-Mobile Flext" method where different elements were combined and interchangeable in a monthly price with an overall usage limit;
people were totally confused by non-geographical call pricing and felt like they were being ripped off; and
people thought calling overseas was really expensive and something to be avoided.

As a result of these focus group sessions we decided we wanted to be as transparent as possible on non-geographic calls and decided to market the calls to our base with a pledge - “LUI will only charge our non-geographic calls at cost with a 2.5p/call transaction processing fee”. At least our customers know we are not the people doing the rip-off.

We also decided to tie in our mail services with a mobile operators SMS gateway, so that we can offer outbound texting. We were really surprised how easy and potentially profitable this was to do and how helpful the tools our mobile operator already had available were. We are experimenting with some voice to text convertors to make the service even more user friendly but to perfectly honest the software seems to have big problems handling the Yorkshire accent and isn’t ready for the mainstream yet. We also white label the BT Text-to-Voice wholesale service to allow people to text our fixed lines and allow our customers to listen to the message if the home handset doesn’t have a SMS client built into it.

We also decided to design a “Flext”-like tariff plan for voice, which currently looks like:

All components in the bundle are interchangeable. Once people reach their bundle limit for the month we send an email informing them of the situation. In this way we are not over exposed to heavy consumption by a group of individuals and people do not suffer from "first bill shock". We provide online tools for viewing the progress of the bundle through the month and also permit our users to receive completely automated email alerts when they reach 50% and 75% of their monthly allowance. We find that people's consumption patterns are pretty stable after an initial couple of months.

The beauty of the plan is that it looks really good value for the customers compared to other offers in the market and our customers are happy effectively managing a monthly budget. We make most margin on Evening and Weekend Calls which is when the majority of our customers are at home. But, basically make our money with what is left over in the bundle every month.

For an example of the profitability of our services, see the attached summary management accounts for June. Please note our advertised prices include UK Sales Tax at 17.5%:

We would love to bundle in the line rental with the service, unfortunately we feel that adding a zero margin product of £11.50 actually detracts from the value message we are offering. However, once we fully unbundle we can cut the umbilical cord from BT and offer a much better package for overall voice, broadband and hopefully video services.

We are currently testing our softswitch for deployment of the full unbundled voice service. We are negotiating with the other Communications Providers to maximise our share of incoming call termination. Also, we feel that the community effect of our ISP will kick in: we have a lot of calls that are already on-net which we effectively in the future we won’t have to pay BT wholesale charges. We feel confident for a launch of fully unbundled product in Q4 2007.

Episode 6 - video bits and bytes is available from Jeremy’s blog for Monday
Lunchtime consumption ;-)"

Sir Christpher Bland exit interview with the FT

2007-07-19T09:44:00.000+01:00

There is a wonderful interview with Sir Christopher Bland, Chairman of BT, in todays Financial Times. He deals with Openreach performance with a couple of lovely put downs:

Sir Christopher insists Openreach has performed "outstandingly", and describes Mr Pluthero as a "serial complainer". He says Mr Dunstone's problems with his broadband business "have been largely of his own making".

But more importantly, he let the cat out the bag with regard to BTs thinking on a post-ADSL2+ uk– it is VDSL2 and I’m disappointed. FttH is the most obvious to me and not some intermediary measure that will require upgrading in a 10-year horizon. I would urge BT to study the Verizon and AT&T situation in the US before making their final decision.

LUI: episode III – The ISP Empires have Technical Advantages

2007-07-19T01:42:00.000+01:00

Following on from Jeremy’s second episode of our journey into the life of an imaginary small ISP, I thought I’d explain how technically challenged we are compared to the larger brethren.

The major challenge with software development is that incremental costs of delivery are very slight and having a large user base is actually very good for rapid bug finding and diagnostics. In an ISP this results in favouring those ISPs with a large customer base who can spread development costs over a large number of customers. This assumes that ISPs are equally proficient at software development which is not always the case: there are some very good case studies from the ISP community on how not to develop software and the distribution of these disaster projects seem to be proportional to ISP size. However, even with occasional cock-ups the dice are firmly loaded in the favour of the larger ISPs.

For this reason, LUI has always taken the approach using third parties wherever possible for software services. We bring to the party our customers and our trusted relationship with them. We tend to focus on integrating our customer database and billing software with the third party software, so provisioning and billing are transparent to the end user.

Our software development team is only six strong and that includes a manager who we force to get his hands dirty with periodic bug squashing as well as playing with project plans on Excel and practicing motivational speeches in front of the mirror. One of the golden rules of our product lifecycle is that apps are only launched when self-provisioning is possible and integrated with our portals and all the tools for app monitoring are available online for remote use by our NOC.

LUI also has an allergy for paying for software and prefer to engage in revenue sharing deals when services are sold to our base, open source apps when we need to host our own services and as a last resort we roll our own. LUI buys plenty of hardware, but it is normally off the shelf last quarter’s model rather than the latest, greatest and most expensive bits of kit. LUI even stretch this philosophy to our routers and switches where we have no alternative but to buy proprietary kit. Even with this approach, because of our lack of purchasing power compared to the larger ISPs we know LUI still pays a premium for hardware.

Our Sysadm team is a mere seven strong and includes specialist support for our radius/ldap, proxy, provisioning, billing and traffic management apps. We also have to deal with our third party interfaces and have a specialist in core network traffic planning. The obligatory manager comes along for the ride and who strangely seems to spend most of his time with our third parties doing lunch and discussing theoretical issues.

Our lack of scale also works against us in Operations: our NOC team is seven strong and that includes a manager and a scheduler. Somehow we manage to eke out 24/7 coverage. We have to train multi-skilled engineers who not only can sit and monitor machine performance and occasionally fix problems, but also they need to double up as field engineers who can visit PoPs and upgrade equipment.

A larger ISP doesn’t have these problems and can easily afford specialists in their NOC covering UK wide networks and even have the scale to economically outsource field engineering.

LUI’s twenty strong technical team may not sound like a lot, but costs us plenty: the average salary of the managers is £50k/annum and the other seventeen averages out at £30k/annum. This is £660k per annum just for team, before a training budget of £100k and team equipment and consumables of another £100k. In addition, we tend to spend just on IT hardware for our server farm of around £300k per annum and our server farm incurs maintenance and colo costs of around £40k per annum.

The opex element of these costs (£900k) come straight off our bottom line and work out costing us far more than our backhaul costs on the unbundled side of the operation. When we spread the costs equally over our 47k unbundled and around 53k ipstream customer – it works out at 75p/customer/month. With the capex costs being more or less continuous every year we can add another 25p/customer/month for these.

Basically the only way of reducing our unit technical costs is to gain scale quickly.

T-Mobile comits to BT BNS product for its backhaul

2007-07-18T20:40:00.000+01:00

Funny that as soon as our hypothetical ISP, LUI, starts using the BT BNS product then T-Mobile responds by committing to the product for backhaul of all of its Radio Network. Of course, it won’t do anything to improve T-Mobile patchy coverage in certain areas of the country, but it will more importantly provide the bandwidth at a decent price to allow decent mobile internet speeds for the masses. All I can say is that the T-Mobile exec team must have supreme confidence in the take-up of the Web 'n' Walk product to commit to such a deal so early.

BT has cleverly designed a product which provides plenty of upgradeable bandwidth at low opex provided by Openreach and will build a managed service on top of it provided by BT Wholesale which will keep the T-Mobile cost above the EBITDA line under control and lead to plenty of depreciation below the EBITDA line and out of mind of most analysts. The BT offer will also blow away the alternatives which were a build and outsource operations to an equipment vendor perhaps using microwave technology or make a risky committment with the patchwork coverage of the altnets.

I expect to see other wins announced soon from BT with the other Mobile Operators. The Orange and Voda 3G network sharing deal is almost a perfect fit with the BT product. It is also the type of deal that fits with the already heavily outsource H3G UK business model. I'm not sure what O2 are up to these days but they seem to be a laggard in the race to a mobile internet future.

I wouldn't be in the least bit surprised if in a years time, BT have shiny new mobile contracts for all the operators for the forseeable future.

Sky & Virgin Media Ad Spend

2007-07-18T11:51:00.000+01:00

According to Nielsen, Sky spent £70m on ads in the first six months of year compared to £37m from Virgin Media which includes its rebrand costs. In the same period last year, Sky spent £50m and NTL spent £16m. These amounts doen’t include online search and display spend. Also, it doesn’t specific how much of the amount is basically taking money out of one pocket and putting back in another with spending on own channel TV adverts and NewsCorp publications.

Nevertheless, the amounts involved will send shudders down the spines of all but the biggest communications companies: Sky has basically outspent even the mobile networks. There can’t be many people left in the country who don't know that you can buy the triple play “Speak, Surf, See” from Sky. Meanwhile, Virgin Media will also have gained a few brownie points with the army of Uma Thurman fans out there in the country.

As the broadband market moves into one of churn and attracting the non-geeks, brand becomes more and more important and there are few brands in the UK as strong as Sky.

LUI(Leeds Unbundled ISP) - part I Backhaul

2007-07-18T00:02:00.000+01:00

Whilst discussing life’s rich tapestry and the shortcomings of generic ISP economic models with my cyberbuddy, Jeremy Penston of IPDev.net, we rapidly came to the conclusion that what was really needed was a real life example and so the Leeds Unbundled ISP was born.

As well as being a wonderful place to live, Leeds has the distinct modelling advantage of being home to a manageable number of BT exchanges (34), a decent mix of residential homes (328k) and business premises (17k) and most importantly a dense urban sprawl with smaller conurbations on the outskirts of the city and good fibre connectivity with the rest of the universe. The ever useful Google Maps presents a geographical view of the city and the BT Exchanges.

The first design consideration for our ISP was that any BT exchange serving more than 5k homes would be unbundled – therefore we plan for only 21 out of the 34 BT exchanges to be unbundled. This straightforward size variable led us to unbundle Ilkey, Otley and Wetherby which although being a considerable distance from the centre of Leeds have the advantage of having high average household disposable income and very few unbundlers currently present.

Upon closer examination of the map it is pretty apparent that in phase II we would look to expansion into Bradford and Wakefield and some of the exchanges would probably cost us less than the outer regions of the Leeds Postal region. We also might consider daisy chaining some of the outlying exchanges.

Another design consideration was that we would use 1-gig links back to a central hub using the relatively new Openreach BNS1000 product. The Central Hub is the main Leeds Exchange which fortunately is only 430m from our main PoP which is situated next to the Train Station at Leeds where a surplus of fibre is currently available to connect with the main UK backbones.

The main link from the BT exchanges to our PoP is a redundant 2.5-gig link which ensures that this key link will keep our customers happy with its availability. This provides a Main Link Aggregation Factor of 8:1 from the 20 spoke exchanges with 1-gig links into the main BT exchange.

The maximum length of these spoke links is 22.7km out to Otley and we have 6 links under 5km with a minimum distance from Chapeltown at 2.5km. We have an average link length of 7.9km and a total radial distance of fibre used of 158.258km.

The price of backhaul is proportional to spoke bandwidth, spoke distance, hub distance from PoP and redundant bandwidth to PoP. In order to minimize prices we have taken the maximum contract length which is five years and leads to the following bills from Openreach:

Capex - £457,090
Annual Running Cost - £167,791

Whilst this may seem like a lot of money, it is a dramatic reduction from previous Openreach products and certainly should give us a competitive edge over some of our so-called competitors who unbundled early and alledgely have overloaded 100-meg links, especially at the Moortown exchange.

It is also worth noting that our PoP is extremely close to the Leeds Exchange and this reduces our ongoing bill dramatically. A link of only 15km would push up the Annual Running Cost to £200k per annum.

All this bandwidth without a shedload of customers is pretty much a wasted resource and therefore we have carefully examined our demographics to provide a model of future demand. Although our ISP will undoubtedly be the best in the universe, we have tried to be realistic with our estimates and think we will attract users in proportion to the current number of unbundlers at each exchange + BT + Virgin Media.

Without going into the detail of the model we think that after a period of build-up we expect to finish with a residential market share of 16% of total homes or 47k customers. We have no plans to enter the business market although realize that is an upside to the model. In terms of per exchange data our share varies between 12.5% and 35%. The maximum number of homes who become customers at an individual exchange are 3.6k, the minimum are 1.3k and the average is 2.2k.

The important use of all this demand modelling is to calculate that the average capex per customer is £9.71 and opex per customer per month is £0.35. Of course our sugar daddy is the archetypical manic depressive financier and has insisted that we halve our forecasts and even with capex of £20 per customer and opex of £0.70 per month we think our backhaul costs are under control certainly compared to Openreach quotes of only 12 months ago.

Over the coming weeks, both blogs will be building on this initial model, hopefully with a little help from our friends, to provide insight to other key areas of ISP operations.

Over to you Jeremy…

Truphone: Full Judgment

2007-07-17T18:08:00.000+01:00

Truphone have posted the full document on the web – fair play to them.

The interconnect rates agreed that T-Mobile have been ordered to pay are:

Day: 0.3536 pence; Evening: 0.1619 pence; Weekend: 0.1275 pence

And T-Mobile is free to charge Truphone minutes at whatever price they determine – I’ll wonder if it will take them the eight weeks they claimed to alter the price plans?

As I said before a pyrrhic victory for Truphone, but T-Mobile doesn’t come out of it smelling of roses either. To put a message when dialing a Truphone number

"You have dialled an incorrect number. Please check it & try again"

as my cyberbuddy Dean Bubley pointed out is beyond stupid.

Truphone – Pyrrhic Victory

2007-07-17T12:52:00.000+01:00

Truphone is claiming victory in the court battle against T-Mobile saying that T-Mobile is now forced by the injunction to interconnect by next week. T-Mobile will undoubtedly argue that it was never refusing to interconnect just complaining about the price and method of connection. Truphone never mentions this in its statement or mentions if the price and method of interconnect has been ruled on in the injunction.

The price of the connection is the most important element of the court case.

If we look at the table the first entry is the standard rate that BT Wholesale applies for connections to Truphone numbers. In the T-Mobile court skeletal they said T-Mobile offered Truphone a reduced rate, which MobileEurope is now saying was as low as 0.21p/minute.

If Truphone have been forced to accept this rate as a temporary measure, until either a full interconnect agreement is negotiated or the court case is resolved or Truphone changes course of action and decides to go to OFCOM for arbitration – it will seriously undermine their business model. After all now, revenues expected from calls to Truphone numbers will be around 30x lower than Truphone originally expected.

I have included for comparison in the rate table how much BT Wholesale charge for:

Calls to T-Mobile numbers;
Calls to Gamma Telecom fixed line numbers, which include part of the SkypeIn range. ie an example of fixed-VOIP termination;
Calls to TalkTalk numbers; and
Calls to Standard UK Geographical Numbers with transit of one local tandem (ie multiple physical connections are required onto the BT network)

Of course, in practice very few companies actually pay these rates as it is much cheaper to establish a direct connection with these third parties. This is exactly what T-Mobile wanted to do with Truphone, but Truphone refused saying the work would take too long and delay their launch (which has been in beta for goodness knows how long)

According to the T-Mobile legal skeleton, Truphone instead wanted a connection through BT Wholesale and a rebate scheme organised specifically for T-Mobile. It is almost certain the Voda, Orange and Hutch 3G will have been following the court proceedings and will call Truphone asking for a similar rebate on their interconnect rates. O2 is much more complicated because of course they actually own Manx Telecom and presumably has been making money all along from their relationship with Truphone and has not providing them with "test" numbers and interconnect for charity.

Truphone is also silent on the bundle issue. I cannot see how ANY court will force T-Mobile to give away free calls to Truphone customers. Almost certainly Truphone is facing its number range being outside the T-Mobile bundle. In other words, if a T-Mobile customer calls a Truphone customer they will be charged at a new rate yet to be determined by T-Mobile. Again, Vodafone and Orange will be awoken to the fact that billing for these types of calls are permissible and they were including them free.

This is a real downside for any Truphone customer – will they give out their Truphone number when they know their friends and business associates will be charged extra for the privilege of calling them? Or will the Truphone customers just give out their standard mobile number? Remember, in the Truphone setup, customers actually have two mobile numbers for each device. Again, this really damages the Truphone business model – reduced inbound termination volumes along with reduced rates will blow a big hole in the business model.

So Truphone will get its connection, but the big question is at what cost to its business model? and was this the T-Mobile strategy all along?

Private Equity Takeover of Telecoms

2007-07-14T20:04:00.000+01:00

There is a very interesting case study of the Private Equity takeover of TDC – the state PTT in Denmark. The Abstract more or less sums the situation up:

The debate over the implications of private equity leveraged buyouts revolves primarily around one central issue, the extent to which private equity ownership promotes efficient long-term investment and operational management in the target firms, or the maximisation of short-term returns to private equity investors to the detriment of the target firm’s long-term development. Supporters of private equity buyouts claim they introduce a longer term planning horizon for firms with public shareholders who have demanded that management be preoccupied with quarterly earnings improvements and short-term movements of the stock price. Critics claim private equity groups maximize the short-term cash value of the assets for payouts to investors and impose unsustainable debt structures that preclude investment in long-term growth opportunities. It would appear from the evidence to date that the objective of the leveraged buyout of TDC is not to invest in TDC’s growth and development, but rather to withdraw as much cash as possible from TDC through the combination of special dividend payments, management and financing fees, and finally the sale of a much smaller residual company.

The full paper can be found at Regulate Online.
Hat Tip: The High Priest of EuroFibre, Dirk van der Woude.

Truphone & T-Mobile: Interconnect Battle

2007-07-14T18:13:00.000+01:00

Basically, T-Mobile will not allow its customers to call Truphone customers because T-Mobile believes that Truphone is asking far too much money to connect the calls. Truphone and T-Mobile can’t seem to reach an agreement and therefore Truphone is seeking an court injunction. The decision should be delivered on Monday.

Truphone is asking the court to:

force T-Mobile to connect the calls;
do so via BT’s network; and
include the calls within T-Mobile’s bundle.

T-Mobile is forced by OFCOM to allow every 3rd party to connect to its network and make calls to its customers if the 3rd party so desires. This is because T-Mobile is deemed to have SMP (Significant Market Power) on termination of calls to its network and furthermore OFCOM regulates the blended day, evening and weekend rate.

It is important to differentiate between termination and origination calls: in the case of origination, T-Mobile is not deemed to have SMP. Therefore, Truphone customers can make calls to T-Mobile customers and they do so via the BT Wholesale network at the rates below:

T-Mobile to BT Wholesale – 8.146p/min
BT Wholesale to Truphone - 8.7138p/min (category fm3)
Truphone to Customer – 15p/min (ex-VAT)

For simplicity I am just quoting the daytime rate. It is worth noting that Truphone charges 15p/minute for weekend calls while T-Mobile wholesales the calls at 4p/minute. If T-Mobile is forced by the court to connect calls to the Truphone network using the method proposed by Truphone then T-Mobile will be forced to pay BT Wholesale 9.6282p/min for daytime calls.

In my opinion, the Truphone court request for T-Mobile to include the calls within the T-Mobile bundle is patent nonsense. T-Mobile, or any operator, must be permitted to include whatever it wants within its own bundle and charge whatever it likes for services. Truphone is not forced by anyone to charge a fee for its on-net calls and is free to determine its own pricing model.

BT itself includes all these new WiFi based companies in a new category of tariff (Fixed to WiFi) and the Truphone number range is in the "fw3" category. BT Retail charges ex-VAT 11.84p for calls to Truphone numbers and 13.06p to T-Mobile numbers despite BT Wholesale rates for T-Mobile being cheaper and much, much larger volumes than calls to Truphone numbers. Also, BT Retail offers for bundles of Mobile minutes do not include Truphone calls specifically and fixed to wifi calls in general. This is not just BT, TalkTalk have a seperate tariff for "fw3" calls.

I also think the argument that T-Mobile must connect via BT’s network is weak. T-Mobile would never interconnect with, for instance, Vodafone via BT Wholesale – they would interconnect directly and save the BT Wholesale margin. In certain circumstances T-Mobile would connect to companies via BT Wholesale, but only because the cost of negotiating and providing a physical link does not make a direct link economic. It is basically T-Mobile’s decision.

The real question is whether T-Mobile should be forced to connect calls to the Truphone network. I actually think that they should be forced to do so, but I don’t think that Telecommunications law currently states that they must and I certainly don’t think that T-Mobile should be forced to accept any price determined by Truphone and BT Wholesale.

I’m unsure how the current deadlock situation could be resolved, but it would probably involve some sort of arbitration proceedings. From the skeleton legal arguments put forward by both parties, there appears to a wide difference of opinion as to who did what when and what the current state of negotiation is.

I’m also unsure of why Truphone did not go down the OFCOM route. In fact the T-Mobile skeleton states:

…T-Mobile notes whilst OFCOM has the power to grant interim relief (and Truphone’s legal advisers are specialists in telecommunications, well aware of the powers of OFCOM). Truphone is silent on whether it has approached OFCOM for relief…

This hints that either Truphone have approached OFCOM already and been rejected or is reluctant to do so, because OFCOM will reject them.

Truphone states in its skeleton that the real reason T-Mobile is refusing to interconnect is that:

Truphone offers a new and innovative VoIP product which would provide fresh competition in the retail mobile market and benefit customers through its low cost services. Truphone seeks to compete with T-Mobile, amongst others, on the retail market.

Personally, I’m all in favour of new services and price arbitration; however I can’t see Truphone gaining an injunction in this round of arguments in court. I can see T-Mobile offering interconnect agreement but at rates that will do serious damage to the Truphone business model, which I guess has been the T-Mobile’s strategy all along. Ultimately, I would guess that T-Mobile would prefer a scenario where Truphone’s customers are charging a monthly fee to make up for the loss in interconnect “profits”

Truphone have a lot further hurdles to overcome once the interconnect argument is solved. The first of which is the recent OMTP ruling, which ironically Truphone will require OFCOMs assistance to solve.

T-Mobiles legal skeleton is here and the Truphone legal skeleton is here. Hat Tip: The Register.

Tiscali and Pipex: A Bleak Future

2007-07-14T14:39:00.000+01:00

I am not surprised that Tiscali has bought the broadband and voice division of Pipex, but I am extremely surprised at the price - £210m. Tiscali annonced the acquisition yesterday, (3 page pdf) along with a new debt facility of €650m. I consider this a huge premium basically for a business which has at best stalled and needs a lot of work to integrate into Tiscali existing business.

In 2005, the Pipex division had a turnover of £76.5m, in 2006 this had grew to £231.8m and Tiscali forecast that the standalone business would have a £300m turnover in 2007 with £20m EBITDA. This looks quite healthy apart from the fact that nearly all of the growth comes from the big three acquisitions in 2006 of Homecall (Mar), Bulldog (Sept) and Toucan (Oct). It has not been divulged how much of the growth in 2007 is from the effect of full year contribution from these businesses.

In its 2006 Annual Reports, Pipex reported 570k broadband customers; in the Tiscali press release they revealed they had acquired 570k broadband customers. In other words, there has been no net growth in the first six months of 2007 in a market that is still exhibiting good growth rates – Pipex has been losing market share. We could do a similar calculation on the voice base, but the figures are even more opaque.

Even worse is the effort required to integrate the Pipex base onto the Tiscali network and back office systems. Mary Turner, the Tiscali Uk head honcho claims:

Over a four-year period, we estimate cumulated synergies in the region of £150 million at EBITDA level ca £50 million to secure the synergies and efficiencies.

Personally, I think £50m is slightly optimistic and also certainly doesn’t include the porting cost of moving the customers onto Tiscali’s ULL network. There is a huge integration risk and churn point for the Pipex base. Even the normally indefatigable Charles Dunstone of Carphone Warehouse described the potential acquisition of Pipex as a step too far in terms of integration effort.

Tiscali itself seems to be slowing down in its organic growth. Tiscali reported its customer numbers of 1.54m at the end of Q2 compared to 1.48m at the end of Q1 and 1.42m at the end of 2006. This is despite offering some of the most aggressive prices on the market for double play unbundled customers. Either nobody is taking up the offer or Tiscali is experiencing a lot of churn on its legacy base, neither of which is a good sign for Tiscali. In terms of the unbundled base, Tiscali is reporting 500k compared to 437k a quarter ago or about 10% of the net adds and only 32% of the total base. Tiscali currently has 800 exchanges unbundled and is targeting 1,000 in total.

In the 1H07 Tiscali UK revenues stood at EUR 253 million, + 23% YoY. EBITDA stood at
EUR 36 million (14% of revenues), +21% YoY. The equivalent revenue growth rate in 2006 was 39%. In 1H2006 Tiscali added 266k ADSL customers wheras in 1H2007 the growth rate is around 120k.

I think this slowdown in the Tiscali growth rate is the real rationale for the deal. I cannot see in the short term the competitive threat lessening and I can’t figure any “unique selling point” for the Tiscali services compared to the competition. BT and Sky are going to prove formidable competitors with strong brands and a decent reputation. I suspect that Carphone/TalkTalk will never be beaten on price. All this is before the scale and cost advantages of Virgin Media.

The future looks bleak for Tiscali UK. The only real hope for Tiscali investors is that LLU Company valuations will increase in the future as they become scarcer.

Carphone Swap.It deal

2007-07-13T14:29:00.000+01:00

Carphone Warehouse has just announced a new type of deal whereby you get two handsets during an 18-month contract. Basically, you get an handset upfront and a new one after 9-months of the contract.

The example here is for a £35/month contract with o2 and a D600 handset from Samsung. I’m assuming that the swapper handset is an equivalent handset. A brand new U600 retail costs £210 from Expansys. So actually the offer is effectively in the eyes of the consumer a £210 discount.

However, if they take the same bundle from the OneStopPhoneShop which is a Carphone online brand, there is a £340 cashback offer with the first 10-months of the contract being at £1/month. Therefore the discount is better for the end user in a cashback deal rather than a swap.it deal if they can be bothered with all the bureaucracy that a cashback deal entails.

Given that Carphone works on a wholesale price for the handsets and not the retail price quoted by Expansys, it illustrates that the whole concept of cashback is that not everyone reclaims the money. There must be a lot of dissatisfied customers who took cashback deals out there.

BSkyB Trading Update: Mild Disappointment

2007-07-11T15:12:00.000+01:00

The Broadband adds were boringly in line: Sky unbundled 205k which was 40% of total uk unbundled lines of 514k for the quarter. Personally, I was hoping for an improvement on last quarters effort of 207k and taking the total over 50% of uk unbundling. The fact that the numbers are extremely similar implies to me that Sky is up against some sort of unbundling processing limit of around 3k/working day. Having said that, Sky now accounts for 24% of total uk unbundled lines, 580k out of 2,424k, which is a pretty impressive achievement in a year.

The Sky offnet base is standing at 136k or 19% of the total broadband base and demand is also pretty consistent with 54k added in the quarter. I’m not sure whether this reflects the power of the bundle or the power of the Sky brand, because Sky is actually relatively expensive for offnet broadband.

In terms of voice, it looks as if Sky has performed well in a declining market. The recent OTA2 figures showed a decline to 6.13m from 6.21m CPS customers a quarter before, whereas Sky added 171k to go 526k. Sky has plenty of options with this product to cut costs further, especially as scale is realised and network effects start to kick-in.

The scary factoid for the competition was that it was made crystal clear that churning people off the other broadband networks was the target. There was no talk of growing the market as with payTV, the raw message was basically:

“We have built it, we are better than the rest and they will come”

The 90k expansion in payTV was made up of 77k in the UK and 13k in Ireland which is more than I expected. The interesting fact was that it was mentioned that 33% of broadband customers were new to Sky – in other words 86k. On face value, it looks as if the See, Surf and Speak triple play campaign is starting to pay dividends in customer acquisition.

Also it is heartening to see the annualised churn reducing to 12.1% from 13.7% the quarter previously. In the short term, I think a reduction in churn is the justification for the investment in broadband. In fact most of the presentation was spent highlighting how big a competitive advantage Sky believe their customer service is. Only time will prove this advantage, but Sky makes a pretty compelling case.

The most disappointing part of the presentation was the lack of new product announcements – no news on MPF, no news on linking the Sky+ box with the broadband modem and no new internet content or application deals. As an aside, it was mentioned that a WLR product was to be launched, but given that it will be basically zero margin and just serves to cut the umbilical chord to BT, it is hardly groundbreaking. I think the marketing guy slipped up when he said he had the product at home and it worked. WLR is just a billing product and doesn’t affect the physical line. I suspect he must have been speaking about a MPF product and been a little dazed and confused.

The lack of launching a MPF product could be because:

the Sky back-office systems and voice platform isn’t ready for the mainstream;
Sky can just think the Openreach process is too error prone; or more likely
Sky could be keeping its powder dry for later when more value is needed to be introduced on the entry level triple play product if and when the SMPF demand dries up.

What is certain is that with only 8.3% of the Sky base signed up for Broadband and 6.1% signed up for Telephony, there is a lot of upselling opportunities remaining even before the general increase in penetration of payTV. Sky has a really bright future and from the share price movement today more and more people are starting to buy into the story.

UK LLU Economics

2007-07-10T18:10:00.000+01:00

Over the past month I have been a busy bee developing a generic model for LLU economics and trying to work out if there is a sting or honey for shareholders. I have based my work on detailed models developed by Jonathan Lishawa who to be perfectly fair has provided most of the brainpower. Jonathan has in the past held senior positions in the LLU industry and consults on broadband strategy for merchant banks and investment funds so knows what he is on about.

Here is the ten thousand mile view for three "example" services:

A key assumption in the example above is that it is based upon 2.5m customers spread across 1,500 exchanges. It also assumes that none of the capex is acquired via M&A and therefore is apportioned to each customer. It is also assumed that churn will be lower for the triple play than MPF or SMPF double plays. Also included in the SAC costs for the triple play bundle is a set top box, wireless modem and site visit.

By playing with the variables, it is also noticeable that the recent TalkTalk £16 package will be cutting the margin extremely close to bone, especially given that an assumption in the model is that the backhaul circuits are provided using the new Openreach BNS1000 product which is extremely cheap and really only of use to companies with a reasonable sized backbone. ie not TalkTalk.

Similarly, the Sky broadband products are also hard to justify on a standalone basis and I can only get them to work by significant reductions in churn on the core payTV product for existing customers. However, a Triple play customer is quite attractive if they are new to payTV.

Sky and TalkTalk both have 18-month contracts and therefore the capital is paid back over the length of the contract. However, in the case of Tiscali which is a 12-month contract and a SMPF/CPS service there is a much bigger risk. The promotional pricing of £9.99 for 3 months and £12.99 for twelve months does not appear to cover the capital costs within a twelve month contract even with a £7.50 gross additional voice revenue.

BT Retail does not provide a LLU service, but instead uses ipstream and cps. Having said that with a £13.99 price for 6 months and £22.99 for the next 12 months, BT would be much more profitable than the rest – even with a much more expensive CPE – the Home Hub is much higher spec than the traditional bundled modem offered by the rest.

One of the key variables which is in the model is the support costs which are estimated at £1.57/month/customer. This could be said to be slightly optimistic and only be valid if the customer very infrequently calls the help line. In order words, the service itself would have be of an extremely high quality with low network failures and more importantly very accurate billing.

The Bill&Collect processes in general and the systems to support billing (OSS) are normally where Communication Providers struggle to keep costs under control. Nearly everyone who moves from a fixed tariff environment (ie monthly rentals) to variable tariff environment (ie rating individual calls) are always surprised by how expensive it is to produce bills and collect the money. Most of the OSS costs are in capex rather than opex and therefore the costs are hidden when looking just at EBITDA figures.

Vodacom Back to Work Tactics

2007-07-06T12:45:00.000+01:00

Vodacom in south Africa are experimenting with novel strike breaking tactics . This is the first time I have heard of this tactic being used in the world.

The service provider blocked the strikers' cellphones, citing a "no work, no pay, and no benefits" policy.

CWU spokesperson Mfanafuthi Sithebe said: "Vodacom confirms our long held view that the company has employed reactionary expatriates with no knowledge of the labour laws and the supreme law of the country."

Reactionary Expatriates? Last time, I heard all of Vodacom senior executives were South African.

Hat Tip: DizzyThinks

BT hoovers up Brightview

2007-07-06T08:29:00.000+01:00

BT have announced this morning the purchase of Brightview. I'm sure that Brightview with its plethora of Customer Service awards will be a welcome addition to BT’s growing portfolio of internet brands. As well as Plus.net, Metronet, Force9 and Free Online from the Plusnet acquisition, it can now add Madasafish and Global Internet. In addition BT will now be in the virtual ISP market serving JohnLewis with its Waitrose and GreenBee products.

Brightview comes along with around 62k customers, which whilst not sounding much actually takes a lot of pressure of Q3 net additions for a net price of £15.8m. With an EBITDA of £3m, BT is only paying just over 5x Earnings. In addition, I’m sure a huge chunk of the costs was already being paid to BT wholesale not only in BT Central costs and other ISP costs, but also BT Wholesale was Brightview’s telephony provider.

BT has allowed Plusnet to continue as a standalone ISP, I wonder with the smaller size of Brightview whether this strategy is feasible. BT has two options it can either roll Brightview into the main BT Retail operation or it can roll it into Plusnet.

The ISP Market, especially the consumer end, is becoming harder and harder for smaller ISPs to continue to earn a decent living and I expect the next couple of years to feature either bankruptcy or sale of most of the remaining small consumer ISPs.

The big question is now whether BT will change the direction of its hovering operation to focus upon the SME market. I think there are two tasty morsels in Zen Internet and Demon Internet (owned by Thus) which would be for sale at the right price.

Of course, the biggest old school consumer ISP still up for grabs is Pipex, but I think BT has decided to bow out of the bidding for this and itself will leave it to Tiscali.

Surprise Sky Broadband Presentation Scheduled

2007-07-05T14:41:00.000+01:00

BSkyB have surprisingly today announced a presentation about broadband for next week. This is just two weeks before full year results are planned.

The presentation will focus on a general update, including broadband and telephony after 10-months of operation, and priorities for the next 12 months.

Normally, Sky doesn’t do Trading Updates, so I can only suspect that Sky have some new products and/or services to announce. The original broadband launch was announced at this time last year (16th July)

Personally, I’m expecting Sky to announce:

a move into Full Unbundling for people on-net and Wholesale Line Rental for people off-net, thereby cutting the umbilical chord to BT;
connecting the Sky+ and the Wireless Router/Modem to allow long tail on-demand downloaded video viewed through the TV; and
more Sky branded online services with perhaps a link with the News Corp owned MySpace.

I’ve also been keeping an eye on the exchange coverage and Sky has been particularly busy over the last month. According to the invaluable Samknows, Sky unbundled 128 exchanges in June to take them currently to 1127 unbundled exchanges. It will be extremely close with Carphone Warehouse as to who has unbundled the most at the current moment. It wouldn’t surprise me in the least if Sky also plan to announce a slight expansion to the exchange coverage.

Also, if as I suspect, Sky have had a stellar quarter in terms of broadband net additions and account for over 50% of the total industry unbundled net adds, it will put the rest of the key unbundlers (Carphone, Tiscali, Orange and O2) under tremendous strain. I also expect an element of gloating with forecasts of having a larger broadband base than AOL with the 2007/8 year without having paid the £370m pricetag.

Bad Quarter for Unbundling Volumes

2007-07-05T12:28:00.000+01:00

The OpenReach statistics for 2007Q2 have been prepared and 2,423,567 lines in the UK are now unbundled.

This represents 678k orders processed for the quarter and a net increase in lines of 514k. This implies an annualised churn of 30.3% using an average base for the quarter of 2,167k.

The Q1 comparatives were 762k orders processed and 615k lines added with an annualised churn of 36.9%.

Obviously volumes have dropped and either one or all of the main unbundlers are suffering.

The quality indicators still seem to be wildly erratic with shared LLU (SMPF) still vastly outperforming fully unbundled (MPF) lines. For instance the key error rate (28-day ELF) indicator is 0.79% for SMPF and 6.64% for MPF. Order performance has vastly improved with 99.8% of SMPF and 98.1% of MPF orders delivered on time.

Apple Plays the EuroOperators for Fools

2007-07-05T08:34:00.000+01:00

Rumours in the press are rife this morning that Apple is going to pick as its initial launch partners: O2 in the UK, T-Mobile in Germany and Orange in France. Personally, I think the whole saga runs the risks of undermining the three most vital mobile strategies which have underpinned their "return to growth" story since most European mobile markets have become saturated:

1. Pan European Efficiencies

Most mobile operators have spent many billions claiming that economics of scale and European reach is vital – the Apple deal makes this argument look ridiculous.

Furthermore what o2 will gain in the UK will be offset by losses in Germany; what T-Mobile gains in Germany will be offset by losses in the UK; and what Orange gains in France will be offset by losses in the UK.

Of course, it is not a zero sum game and the biggest "loser" will be Vodafone, so the rest will be happy.

2. Shift in Value Chain

Most operators have been fighting for an ever big share of the mobile value chain: for instance keeping third party retailer commissions under control and keeping handset manufacturers out of the mobile services market.

The Apple deal fundamentally undermines this model with distribution only available via Operator and Apple stores; Apple taking a share of ongoing revenues; and probably leading to overall higher industry network churn.

Of course, it is not a zero sum game and the biggest "loser" will be the independent retailers, so there is a crumb of comfort to the operators.

3. Undermines Advanced Wireless Network Services

Worst of all for the Mobile Operators is that the iPhone uses the slow as a snail EDGE network, prefers WiFi connections for internet access and prefers, pardon the swearing, physical cables for side loading of content.

What was the rationale for pumping many billions into 3G networks again?

Conclusion

I think it ridiculous that a whole industry would undermine its fundamental strategies with a short term panic reaction to a trendy handset.

But there you go…

uSwitch and Comparator Websites

2007-07-03T09:34:00.000+01:00

I’m getting more and more fed up by the mass media reporting of uSwitch and other comparator site surveys. I think all these surveys should carry a huge health warning:

“The only purpose of this survey and the company who financed it is to get you to change suppliers and earn a profit for the financiers of the survey”.

These surveys are so biased as to be unbelievable and do not deserve any free publicity. If uSwitch want to advertise they should do like the rest of the internet sites.

If the surveys were run by YouGov and financed by Tory party and ran questions such as “How many people are dissatisfied with the current government?” They would be laughed at by the media and given zero exposure.

I’m not even going to give the company any more oxygen by mentioning the results of its latest survey, but suffice to say one of one companies who regularly come bottom for customer service in broadband, also is one of the heaviest advertisers when it comes to mobile phone contracts.

In fact, it is ridiculous that uSwitch on page after page of offers in the mobile area show e2save, OneStopPhoneShop, ThePhoneSpot and Carphone Warehouse offers – the customer presumably thinks they are being given choice of suppliers, when in fact they are one and the same company.

As uSwitch themselves explain:

uSwitch.com has agreed deals with some suppliers across all our services to receive a small commission payment when a customer chooses to switch or apply for a product through us.

The business model is one of harvesting of lead generation for companies which is incredibly profitable not only because of the inherent low costs of the internet, but also but the fact that the site awareness is generated by negative publicity on industries spread in the mass media for free.

Virgin Mobile Minorities right to take the Cash

2007-07-03T08:50:00.000+01:00

When Virgin Mobile was bought by the company formally known as NTL and now known as Virgin Media back in July 2006, the options were as follows:

Cash Only - 372p
Shares Only - 0.23245 shares in NTL (valued roughly at 351p)
Cash & Shares - 67p Cash and 0.18596 Shares in NTL (valued roughly at 281p)

The Cash & Shares option was really the “Branson option” as it was pitched well below the Cash only or Shares only options which were aimed at the minority 28.8% shareholders. Richard Branson through Morstan Nominees owned 71.2% or 184,238,328 shares in Virgin Mobile.

In fact this was a great return for the minority shareholders: compared to the cash offer the share price had risen 86% in the two years since ipo in July 2004 and an increase of 48% from the average share price in the twelve months preceding the offer.

Press are speculating that the offer from Carlyle is pitched at around US$32.50 which equates to 377p/share in the equivalent Virgin Mobile share price. An increase of 5p is hardly a decent return taking into account the cost of money and presumed increased transaction costs with a NASDAQ stock denominated in US$. The Virgin Mobile Minorities with the benefit of hindsight appear to have better served by taking the cash.

In fact most of the minorities appeared to take the cash and run. NTL issued stock worth £518.8m in the transaction or approx. 34.4m shares of which the Richard Branson allotment was 34.2m shares. These shares were valued at £15.07 or US$26.59. The Cash Cost to NTL was £418.2m.

For Richard Branson himself, he took the cash and shares offer which resulted in £123.4m cash payment in July 2006 and 34,260,959 shares. Branson current position with the NTL/Virgin Media shares is complicated by the cap ‘n’ collar transaction he has recently taken out for 12,847,860 shares or 37.5% of his shareholding. The collar element is $31.98/share and resulted with a prepayment of US$224.9m. Assuming that any buy-out price would be greater than US$31.98, this would leave Branson with an additional payment being due of US$192.7m minus some cost-of-money adjustment.

Outside of this derivatives transaction, Branson has 21,413,099 shares remaining in NTL/Virgin Media with a value of around US$696m at a buyout price of US$32.50. I’m guessing that he will want to roll-over all or part of this shareholding into the new (and presumably even more highly leveraged) Virgin Media. Once the effect of the increase in debt is taken into account, he might even be able to maintain his approx. 10% shareholding in the new company and thus protect his brand, oops sorry annual royalty payment of 0.25% of Virgin Media consumer revenues.

The big question is what is Branson going to do with all this cash – it certainly gives him more flexibility with regard to Virgin Mobile USA and the proposed IPO.

IPOs of MVNOs in the USA will be tough at the moment after the failure of amp’d. Overnight it appears as Helio has secured another US$200m in financing from the deep pocketed parents, SK Telecom and Earthlink.

I’m wondering if there is an opportunity for Branson to do a Virgin Mobile UK on Virgin Mobile USA. The original terms of the Virgin Mobile UK network deal between one2one and Richard Branson in retrospect turned out to be heavily skewed in favour of Virgin Mobile. Once, one2one was sold to T-Mobile, the new management were not too happy about the situation and renegotiated the contract with Richard Branson taking 100% ownership of Virgin Mobile, a new wholesale deal between Virgin Mobile and T-Mobile and some return due to T-Mobile if Virgin Mobile was subsequently IPOed.

Now that Sprint is struggling and probably reluctant to put more equity into Virgin Mobile USA, I’m wondering if Branson can put some more cash in with the hope of a better wholesale agreement and increased shareholding. Thereby, Branson would avoid the need for an immediate need for an IPO of an unprofitable company at a difficult time.

Mind you, Branson could also just as easily have seen the bubble on the MVNO game is fast deflating and it is best not to put any more cash in. He also has embryonic and cash hungry MVNOs in France, South Africa and India to worry about.

TalkTalk Double Play Entry Price Reduced

2007-07-02T11:17:00.000+01:00

The TalkTalk entry price is now down to £16.39/month. The big difference between this and the previous £20.49/month is that Unlimited Daytime Calls to UK Geographical number are included on the £20.49/month package.

Amazingly, this is not the cheapest entry price on the market which goes to Tiscali with its £14.99/month offer which to be fair is for only a 2-meg connection and includes weekend geographic calls. Tiscali also has a smaller LLU footprint claiming to cover only 52% of the country compared to TalkTalk claims of 70% coverage.

I’m not sure whether the reduction in prices reflect a smaller amount of net adds for both companies in Q2. From the Openreach KPIs released so far, it appears that there has been a slowdown in both gross and net adds from Q1.

Murdoch Musings On Broadband

2007-06-29T09:07:00.001+01:00

There is a fascinating interview in the recent edition of Time magazine about the WSJ acquisition process, but a particular paragraph stood out for me:

When Murdoch talks about the future of newspapers, you get a sense of how contemporary he really is. Circulation and advertising revenues are ebbing away everywhere, he notes, proportional to broadband penetration. "You've really got to worry," he says. "Tribune Co.'s revenues [in May] dropped 11% across broadcasting and newspapers. That's huge. The Times dropped 8.5%. Half of men under 30 aren't reading print newspapers, and there's no sign that they come back as they age."

If you think about the Murdoch Snr musings on broadband, you can see immediately why Murdoch Jnr is investing huge sums on developing a broadband future in the UK.

Now look at the recent Q1 estimate of UK Advertising Spend:

The surge in internet spending in incredible and while I am the first to admit that the growth cannot go on for much longer at these levels it certainly is impressive.

Even more impressive is when we look at the Google UK revenues which were £290m (US$578m) in Q1 2007 compared to £171m (US$343m) in Q1 2006 a y-o-y growth rate of 70%. Remember this is before the DoubleClick acquisition and accounts for a huge 45% of UK Internet Ad market if the WARC estimates are correct.

No wonder the Murdoch empire is scheming of ways to take traffic off the Google platform and onto his - witness the recent launch of MySpace.tv as direct competition to YouTube. Also, it will be extremely interesting to follow the BSkyB acquisition strategy in internet content rather than access. The acquisitions of 365Media, MyKindaPlace and the Aura Sports Ad Sales Agency together with the Google alliance and the beefed up SkyNews site are a very interesting start.

PSP Boondoggle Miraculously Finds a Leader

2007-06-27T20:32:00.000+01:00

Tom Loosemore is the lucky appointed one.

For those not in the know he is currently Project Director for Web 2.0 at the beeb, including responsibility for the iPlayer. As per normal, MediaGuardian have some great quotes:

"I think it is healthy to have public media produced natively, and I have been interested in the idea of a public service publisher from the outset. It is my dream gig."

I think anyone would love to swap a job with responsibility for actually having to deliver something for a job playing Santa Claus giving away £50m -£100m of tax payers money per YEAR.

However, the best quote is left to Ashley Highfield his old boss at the beeb:

“I hope to continue discussions with Tom over the PSP and work with Ofcom over whether the PSP is a workable proposition."

Ouch, even his old boss at the taxpayer funded beeb seems to think that the PSP might be a gravy train too far.

Iliad and Differentiation

2007-06-27T11:26:00.000+01:00

Dave Burnstein produces without doubt the must read newsletter for the worldwide broadband industry, which has the added bonus of being free and available via an email subscription. In the most recent edition, he reveals that the French broadband operator, Iliad, has integrated some Broadcom software, called DSLSafe into its network.

Iliad explain the benefits of the technology in its Press Release:

The quality of a broadband connection mainly depends on the intrinsic quality of the telephone lines: the distance between the subscriber and the telephone exchange, the quality of the cabling and parasitic sources such as the electro-magnetic environment. All such factors cause errors in data transmission on telephone lines that in turn interfere with the signal quality and slow down the connection.

With the new software based on Broadcom’s Phy-R (TM) technology, the error rate measured on lines has been reduced by a factor of 10 - the connection speed has improved considerably without any increase in latency (ping). By contrast, whilst prior to the introduction of this software solution 50% of lines used to record around 10 errors per hour, with this new protocol the residual error rate has dropped to 5%

Iliad is very interesting, well at least to me, because they take a huge amount of technology risks compared to the average broadband operator. They actually develop and deploy their own dslams and customer modems/routers/set-top boxes based upon leading manufacturers’ silicon, linux, other other open source software and contract manufacturing. Although risky, this strategy has the advantage that Iliad can easily differentiate their network compared the other operators “pipes”. Top download speed for Iliad is in fact 28-meg as opposed to ADSL2+ speeds of 24-meg and now they have a “quality differentiator”.

Obviously, any advantage is only temporary as the big equipment providers usually catch-up, but leads to Iliad being seen as the market “technical innovator” which obviously helps the brand out considerably with a certain segment of broadband users.

It is a real shame that we do not see similar examples of technical innovation in the UK broadband sector.

Fortress Europe: MobileTV

2007-06-27T09:41:00.000+01:00

It should come to no surprise to anyone that are reports that Viviane Reding is about to recommend the use of DVB-H technology across Europe.

In a speech given in March at the CeBIT conference, she laid out the official EU stance:

I am convinced that the use of widely recognised open standards is of paramount importance to achieve economies of scale. Only with economies of scale will we have an efficient use of spectrum, affordable handsets and rapid consumer take-up. Therefore, I am prepared to give strong support to European standardised solutions, such as DVB-H, on the condition that they provide certainty about technology licensing terms and conditions. Without this certainty and predictability, it will be impossible to invest with confidence in new innovative technologies. Industry should therefore foster work in this direction.

European industry has developed and exported worldwide successful standards already in the past, as we currently do in South America and Asia to export DVB-T as the best open standard for digital television. I am therefore confident that on the basis of DVB-H, economies of scale will develop for the take-up of Mobile TV in Europe and around the world.

For all practical purposes this is going to firmly shut the door on alternative technologies such as MediaFlo and DMB-T. How this will be achieved is not necessarily via the route used in getting universal adoption of GSM technology in 1990s throughout Europe – ie tying spectrum to a specific technology. It would take an extremely brave and foolhardy mobile operator to go against the grain and choose some other technology whatever the perceived advantages are.

Given the powerful forces behind MediaFlo technology (Qualcomm of the US) and T-DMB (South Korean Manufacturers), I am fully expecting the issue to develop into another Airbus – Boeing type brawl ending up at the World Trade Organisation. The WTO will not change anything, because it will take years for the saga to be resolved and by then DVB-H will be deployed and the game will be over, but the WTO will set a precedent for future technology decisions and therefore the process will be important.

The UK here is a complete laggard and because of our sin of sloth for clearing and licensing spectrum the UK people were always going to be dealt with at a minimum a de-facto standard rather than a variety of technology choices or even one technology determined by the market which is best for the UK economy and population in general.

For instance, although T-DMB is seen as a South Korean promoted technology, important patents are held by the BBC and various British Universities and of course BT has spent, no doubt, a fortune in developing and deploying their own variant of the technology.

Qualcomm’s MediaFlo is a totally different kettle of fish, but results of trials in the UK, USA and Japan seen to indicate that it is far more spectrally efficient than DVB-H with lower cost to deploy and more capacity. The recent decision of AT&T in the USA to deploy in a WCDMA network and it looks as if Softbank in Japan will deploy in another WCDMA network shows to me at least that MediaFlo is a really viable option.

The window is still fractionally ajar for Qualcomm in the UK, but that involve them bidding for spectrum and finding local partners with the content, brand and bravery to do something different – realistically BSkyB is the only potential premium partner. The other potential ally would be National Grid Wireless / Arguiva would have the sites to allow a quick rollout of the technology if any spectrum is acquired. However, it would cost Qualcomm a lot of money just to establish a beachhead in Europe with a potentially long payback.

The wider debate is whether it is beneficial for EU citizens for the unelected EU commissioners to be setting de-jure standards and promoting EU industry champions.

In the UK, we have tried these types of policies in the past and they have been disastrous for our economy. In other EU countries, such as France, this has been a major part of industrial policy for many years and many French would argue the policy has been extremely successful.

Sky: More Cunning than a Fox

2007-06-26T13:02:00.000+01:00

OFCOM announced the Sky DTT investigation this morning – there were two surprises and an element of shame:

The first surprise is that Sky has convinced National Grid Wireless (NGW) to come on board. Although largely unknown to the general public, National Grid Wireless is a key stakeholder in the UK communications industry. Basically, once the Macquarie merger with Arquiva gets the go ahead the combined NGW/Arquiva is the monopoly supplier of transmission sites and engineering services to the whole of the UK Broadcast industry with huge contracts for DTT transmission until 2025-2030. More importantly, it also owns leases for 33% of the UK DTT Spectrum.

Both Sky and NGW own 20% each in the DTT marketing venture, Freeview. The other 20% shareholders being ITV, C4 and the BBC. If Sky makes ITV an offer they can't refuse to come aboard the Sky/NGW DTT payTV train, then the majority of the Freeview shareholders will be in favour of DTT PayTV and this would be a killer consortium.

Top-Up TV and Setanta can whinge as much as they want to OFCOM, but basically they have zero rights to become a monopoly provider of a PayTV platform. BT and Tiscali will be in an even worse position than Top-Up TV & Setanta not even owning any spectrum.

In addition another complaint about the use of MPEG-4 technology has been taken out of the equation, because both Sky/NGW have said they will not use it initially.

The element of shame is that OFCOM will not start the consultation until the autumn and the consultation is due to last 10 weeks. Clearly this is anti-competitive and gives TopUpTV/Setanta a unfair head start in launching subscription services for the next Premier League season. If I was Sky/NGW, I would seek an injunction on the TopUpTV/Setanta product to prevent launch until the OFCOM consultation is completed.

I look forward to reading the responses in the fullness of time, but they won’t change anything – basically yet again Sky has yet again outsmarted the rest of the TV industry.

T-Mobile UK – Swimming against the Tide

2007-06-26T08:14:00.000+01:00

Unbelievably, T-Mobile UK is actually increasing their prepaid tariffs:

The basic X-net tariff (Everyone) goes up from 12p to 15p /minute and their flavour of on-net pricing (Mates rates) goes up from 5p to 8p /minute;
Text prices remain static; and
Browsing (Web ‘n’ Walk) charges are increased to a flat £1/day, rather than being usage based up to £1/day.

T-Mobile has recently been very aggressive in prepaid pricing, however I think it is too early to call an end to the overall industry deflationary price spiral in UK Cellular.

I think T-Mobile's current advantages lie in the relative strength of the Flext package and their first mover advantage in the Web 'n' Walk initiative. I'm not sure that they are abandoning the prepay market, but more treating the base as a bit of a cash cow.

I’m guessing that the real reason for these price rises is that T-Mobile UK is under severe pressure from the parent to deliver substantial increased cash based earnings this year. A more obvious sign that this is the case is the reduced presence in the indirect contract acquisition market.

It will be extremely interesting to see if any of the other major players react.

Not-so-TruePhone-Interconnect-PR

2007-06-21T00:52:00.000+01:00

You just have to love James Tagg, CEO of Truphone, and his over the top rhetoric:

"This affects every new entrant into mobile telecommunications because the only company that can facilitate interconnection with T-Mobile is T-Mobile. To refuse is therefore an abuse of its position. It amounts to T-Mobile being able to veto a new entrant into the market. This would put telephony back 100 years, to a time when interconnections were not assured."

Telephony back a hundred years, when interconnections were not assured?

I’m sorry but even today; the biggest UK VOIP telephony players, Skype and MSN Messenger, do not allow any Tom, Dick and Harry to connect to their networks at any rate which any third party deem to pay.

Perhaps if we look at the Truphone request in a slightly different context it becomes more obvious: SPAMcity want to connect to the whole of the Truphone meager mobile VOIP UK base with SMS messages – averaging 1 message per minute to every Truphone customer and SPAMcity is willing to pay £100 per month for that access, however Truphone must guarantee delivery of the messages. Does anyone really believe that Truphone would allow SPAMcity to connect to their network?

It is not the case that ANY new entrant is allowed to connect to ANY telephony network in the world today, let alone 100-years ago. I honestly don’t believe any mobile operator in the UK is required to connect to any network. The only network required to connect to anyone “authorized” by OFCOM is BT.

Normally, mobile operators come to some sort of mutually beneficial agreement with other networks. In effect, James Tagg and his embryonic not-so-Truphone company can “facilitate interconnection” just as easily as T-Mobile, by agreeing to the T-Mobile proposed rates. I believe that if Truphone can’t negotiate an interconnect agreement then T-Mobile are not under any legal obligation whatsoever to interconnect. And I think Truphone will find that OFCOM will agree with me. If they want to spend tonnes of dosh arguing the case then they should brief their lawyers, fight the current UK telecommunications law and good luck to them and their shareholders.

However, the story gets more complicated when you look at the numbering schemes that Truphone currently use – 07624 - these numbers actually don’t belong to Truphone but belong to Manx Telecom which is the Isle of Man subsidiary of O2. Of course, wholesaling of numbers and capacity is nothing new – in fact o2 themselves has a huge arrangement with Tesco Mobile which involves well over a million numbers.

The perplexing part to me is that Manx Telecom although strictly speaking being offshore and attracting different rates than calling UK numbers and definitely being outside of the normal mobile X-net bundles will have interconnect agreements with O2 (obviously), Voda, Orange, T-Mobile and Three. I believe the 07624 numbers are in fact “beta” numbers.

However, Truphone want to launch with 07978 numbers which are not currently listed on the OFCOM website as an allocated set of numbers. I wonder how many of the operators that Truphone actually have an interconnect agreement with?

BT is mandatory but I can’t find a list of rates on the BT Wholesale site. T-Mobile is obviously in the news. But, I actually wonder if Truphone have agreements with the other operators such as O2, Voda, Orange, TalkTalk and the rest of the motley crew.

Obviously, Truphone generated a little publicity by claiming Voda and Orange crippled the Nokia N95 and is now moving onto the next target, T-Mobile interconnect rates. As far as I know, Truphone have made zero advances with the N95 publicity and are probably not going to advance any further with this interconnection noise.

The real question is when are the backers of Truphone going to realize that lining the pockets of PR agencies are going to generate less than zero returns on their investment.

Plusnet Adds more BT Central Capacity

2007-06-20T11:34:00.000+01:00

Plusnet, which is now part of BT, has announced that it has added a STM-1 BT Central to compliment its current five STM-4’s. This gives a raw capacity of 3,265-meg of BT Centrals. Of course all of this is not usable to end-users because of the overhead which I explained in more detail here.

A STM-4 central costs on the new BT pricing £1,162.6k per annum rental in addition to the £175k install charge and a STM-1 (actually a STM-4 set at STM-1 speeds) costs £290.2k per annum rental in addition to the £175k install charge; this means that Plusnet is paying BT Wholesale £6.1m per annum in BT Central costs alone.

In addition to this, Plusnet will be paying £7.63 per month line rental per customer with a £1.24 per month per customer rebate for customers using the busiest 1,016 BT exchanges. Installation costs for each customer stands at £34.86.

Plusnet in its last reported accounts (Jun-06) said that it had 196k broadband customers some of which would have been unbundled on the Tiscali LLU deal.

I have worked out some scenario’s allowing for growth in the Plusnet base since Jun-06 for average BT Wholesale charges per customer and assuming a 70% line rebate take-up:

200k customers - £9.31/month (ex-VAT) - BT Wholesale Annual Revenues - £22.3m
250k customers - £8.80/month (ex-VAT) - BT Wholesale Annual Revenues - £26.4m
300k customers - £8.46/month (ex-VAT) - BT Wholesale Annual Revenues - £30.4m

This is before any IP-Transit costs, own Internet Infrastructure, Customer Acquisition Costs, Back Office or Admin Costs.

In other words, life is still extremely tough for IPStream and no doubt DataStream communications providers.

Goldman Sachs, UBS and Pipex

2007-06-20T08:35:00.000+01:00

Goldman Sachs have issued a buy note on Pipex saying:

“The market is taking too bearish a view of the company’s strategic value in a consolidating broadband market, while its solid operating performance and potential for cost savings limit the downside risk.” Goldman also noted that Ofcom had proposed lifting restrictions on a rival wireless internet operator, making Pipex’s competing unit more valuable. Shares rose ½p to 13p.”

Personally I’ve not read the research, but I’m sure it is full of the normal plethora of caveats that come with any research reports. However, the most important fact about Pipex is that UBS (16.01%) and Goldman Sachs (11.19%) are two of the largest shareholders. The other important pressure point for Pipex is the £91.5m convertible bonds of which I’m currently unsure of the ownership. In fact UBS has so much influence that it is running the current strategic review of the group which will determine the sale or not of certain of the Pipex assets.

Basically, I have no problems with Goldman Sachs or UBS issuing research, but I do think that The Times or any other paper should disclose in their articles that Goldman Sachs own 11.19% of Pipex. Similary, when newspapers, such as the Telegraph describe UBS as Pipex's adviser, I think they also should describe them as a major shareholder.

Carphone denies unbundling Voice only Services… deliberately

2007-06-19T21:56:00.001+01:00

Carphone Warehouse (TalkTalk) have issued a statement to the consumers friend, Thinkbroadband, basically denying that they are unbundling voice only services

“We naturally take reports of customer 'poaching' extremely seriously. We don't connect anyone to our unbundled network unless our records how that they have ordered TalkTalk broadband and we can confirm that we don't migrate voice-only customers to our unbundled network.”

Fair enough and looks very clear. However the fact remains that two ISPs Zen and PlusNet, now part of BT, are reporting that TalkTalk voice only customers are being ported to their LLU platform and their resold ADSL broadband is cut in the process. In replies to the Register and Thinkbroadband articles individuals have claimed that they have been affected by this type of process. So either:

Zen and PlusNet are wrong; or
Someone at TalkTalk cocked up provisioning the CPS services and instead entered it as a LLU order on the TalkTalk systems.

Hmmm, I know where my money is. Any Communications Provider can issue a standard API call to BT Wholesale checking the status of any non-LLUed line, whether broadband is provisioned and who the ISP is, so there is really no excuses.

TalkTalk then go on to blow any sort of credibility in the rest of the reply.

"Our network is based on a more advanced technology of Next Generation Network (NGN), similar to BT's 21CN."

I can personally testify that TalkTalk’s network does indeed look like a 21CN on a powerpoint slide, however the actual performance is somewhat lacking especially with regard to availability and performance of basic data services. It is more a late 1980’s network than a 21CN.

"This technology (known as MPF) means that broadband services can be transferred between one provider and another without the need for a MAC code, as detailed by OFCOM in General Condition 14."

General Condition 14 is actually about code of practice and dispute resolution and there was a specific consultation back in 2004 which dealt with slamming or mis-selling or poaching CPS customers but it didn’t mention broadband once.

General Condition 22 is actually the one that deals with broadband migrations and is the result of a lengthy consultation. Here is the relevant bit about full unbundling

1.17 Where the MAC process does not apply (for example, for migrations to and from connections based on MPF, for home moves, or where there is no live broadband connection), the high-level obligations in General Condition 22.2 will require broadband providers to:
a) facilitate the migration (or where applicable, connection) of the Broadband Service in a manner that is fair and reasonable;
b) ensure that the migration (or where applicable, connection) of the Broadband Service is carried out within a reasonable period;
c) ensure that the migration (or where applicable, connection) of the Broadband Service is carried out with minimal loss of the Broadband Service; and
d) assist with, and facilitate requests for, the migration (or where applicable, connection) of a Broadband Service provided by another Communications Provider, in instances where the other Communications Provider has failed to, or
refused to, comply with the MAC Broadband Migrations Process, in a manner
that is fair and reasonable.

Whereas the MAC process is defined and well understood by all ISPs, there is in fact nothing but the above woolly statement about full unbundling (MPF)

In my personal interpretation, TalkTalk or any other full unbundler, would be fully justified in just provisioning the line if a customer has ordered “Free Broadband” without any communication whatsoever with the existing voice (BT or CPS) or data (resold ADSL).

Currently the majority of traffic one-way ie onto the TalkTalk service, I have a feeling that the real fun and games will start in Oct when people start coming out of the 18-month contracts and decide to go for Sky, the upcoming O2 service or even back to BT. Would it perfectly legitimate for the migrations team at TalkTalk to consist of one person on the plains of Outer Mongolia? Or would it perfectly legitimate for Sky/O2/BT or whatever to just grab the line in the same manner as TalkTalk is currently doing?

I predict chaos in 2008 and our light touch regulator, OFCOM, will once again be in the firing line over broadband migrations.

"However, we reiterate that we don't connect anyone to our unbundled network without an order for the broadband service."

Well not on purpose at least…

"TalkTalk currently operates at significantly below the industry average for alleged incidents of this kind and we are working with our industry partners to address these concerns and will undertake a full investigation of any issues raised with us."

I’m not sure what the “incidents of this kind” actually mean. It can’t possibly mean error in MPF line provision because currently TalkTalk are the only player and therefore by definition they ARE the industry average. TalkTalk however are probably below the industry average in slamming data, but we don’t know because despite OFCOM preparing a slamming blacklist they keep the data safely under lock and key and away from the prying eyes of actual consumers. And this is despite being hit by various Freedom of Information notices.

However, Carphone Warehouse was found to be in contravention of General Condition 1.2 back in 2005 (pdf) relating to preventing churn in their CPS line of business:

Carphone Warehouse has used and is using this information (the identity of transferring customers) which is acquired from another communications provider in connection with the provision of CPS for a purpose other than that for which that information was supplied (facilitating CPS transfer), namely undertaking CPS Save Activity which could provide Carphone Warehouse with a competitive advantage.

Hmmm, it is going to get really interesting in October.

ps: my internet services have been up and down all night (not voice and not adsl line problems) so I'll be one of the first fighting the TalkTalk migration process.

Mobile Broadband in the UK

2007-06-19T00:03:00.000+01:00

Vodafone announced today a reduction in Data Card pricing to £25/month for 3GB/month from around £45/month. Whilst not exactly coming close to the "free" home broadband pricing depths, data cards are starting to become affordable especially for the SME and fat personal wallet segments.

In the Press Release, Voda claim over 280k UK Data Cards which if average ARPU is £21.27 (ex-VAT) equates to a £64m/annum business. This scale of revenues is barely more than a blip on the Voda UK revenue radar (2006/7 - £5,124m) However with the Voda UK’s 2006/7 Free Cash Flow being £794m and revenue growth in voice drying up – data could either be a significant growth or protection story going forward.

Voda does not mention speed anywhere in the press release. Obviously with wireless spectrum being a shared resource, rates being proportional to distance from the cell site and rates varying with type and quantity of obstacles whether natural or manmade, any sort of quality of service is hard to guarantee. There is definitively fun to be had for some well resourced magazines to do bake-offs comparing data rates between the various mobile networks and wifi providers.

Network coverage is mentioned at 80% of the population which is pretty naff and probably means that outside of the major conurbations snail like and unusable GPRS is the only carrier.

The other side of the coin which some people will remember from the early days of mobile voice services in the UK is that you needed the muscles of Arnold Alois Schwarzenegger and the wallet of a City Trader to sign up for a mobile contract. It took three years after launch before Voda UK managed in 1986/7 to turnover £67m and five for voda uk to break the 300k subscriber count and become the largest cellular operator in the world in 1988/9.

In this historical perspective, the mobile data access business isn’t doing too badly at all.

The growth rate for data card subscriptions and revenues are not in the public domain, but voda uk publish the number of 3G devices connected as 190k by March 2005, 1,033k by Mar 2006 and 1,938k by 2007. Obviously the majority of these devices are handset rather than data cards, but I suspect 100% overall annual growth is not far short of the mark.

The billion dollar question is how big can the mobile broadband market be in the UK?

This is important not only for industry anoraks, but also for shareholders and most importantly for the value placed upon the spectrum about to be released and auctioned which has the potential of providing the bandwidth to take mobile broadband mainstream.

I can see the laptop market growing for the foreseeable future and my own gut feel is that once the £10/month access fee is reached then mobile broadband will become a mainstream proposition which (eventually) 10% of the population will take up. Even if we account for average fees being (ex-vat) £15/month taking into account heavy users – this only yields a total market of £1bn to be shared across all the mobile operators.

It is relatively simple to play with market penetration, ARPU and player variables but the truth is that standalone mobile broadband access will only represent a small proportion compared to the overall mobile market which includes both voice and data.

Of course there is the far bigger market, which is also less bandwidth intensive, of people occasionally accessing the internet with their primary voice, texting and timing device – the mobile handset. Here we have a totally different dynamic because I honestly believe the end game is that access will be ultimately be unlimited for all services whether voice, messaging or browsing. Content acquisition whether by broadcast, streaming or download is a totally different equation.

So the pertinent economics are how fast voice, messaging, device and operating costs can be reduced to ensure that browsing can be added to the “monthly bundle” rather than modeling browsing as additional revenues.

This is my own personal apocalyptic vision for the embryonic Wimax / WiFi industry – I just can’t see how on earth they can buy the spectrum, build a network with decent coverage, reach economies of scale with device costs and then sell and market differentiating services from the mobile industry.

TalkTalk: Why Unbundle VoiceOnly Customers?

2007-06-18T08:29:00.001+01:00

A couple of readers were confused as to why TalkTalk would begin unbundling voice only customers – the answer of course is in (potential) profit.

Monthly Rental for a Fully Unbundled Line is £6.67/month whereas Wholesale Line Rental is £8.39/month. TalkTalk charge £8.51/month line rental (£10 inc.VAT) so the ongoing margins are quite different.

Additionally, TalkTalk will get:
• all the voice termination fees if the line is unbundled – this can be as much as £1/month;
• retain all the call feature revenues (eg 1471 services) at a nearly 100% margin; and
• presumably the cost of operation of the TalkTalk VOIP platform is lower than circuit switched one.

I would estimate the cost of back office support of the customer would be broadly similar. Therefore the approximate profit difference would be about £3/month on an average spend of about £18/month.

On the downside, TalkTalk have to make some upfront investments: the Openreach cost of line provision is £34.86 as opposed to £2 for WLR. Also, an unbundled line will use a tie-cable and a line card in the TalkTalk MSAN. I would estimate that the incremental setup fees are around £60.

In other words, I guesstimate the breakeven for the service is around 20 months. This is quite a bit in excess of the normal TalkTalk voice contract length of 12 months.

And this assumes everything goes perfectly and the customer doesn’t become upset and cancels within the 30-day period and doesn’t ask for the money back. The Openreach price for MPF is a minimum 12-month period.

Of course, this discounts the biggest benefit which is TalkTalk on an unbundled line becomes the ONLY potential supplier of broadband - a customer can’t go to a third party for broadband services.

Personally, I can how TalkTalk would believe the economics would work. However, they run a big risk in a big churn environment and also are running the risk of a big backlash in the press. It will also be extremely interesting to see what if anything OFCOM does about this.

TalkTalk – extremely sharp unbundling practices

2007-06-15T14:39:00.000+01:00

PlusNet are reporting that TalkTalk are porting people over to LLU even when they only sign up for WLR. This effectively kills any ADSL service on the line if it is provided by a reseller. Effectively, TalkTalk are using the fact that LLU is currently outside of the MAC process to the extreme. This is going to cause a lot of bad feeling in the ISP community and further damage the TalkTalk brand.

I feel an OFCOM ruling coming along after about 12-months of consultations.

Vodacom – Promising Outlook

2007-06-15T13:14:00.000+01:00

Vodacom South Africa (50% owned by Vodafone, 50% owned by state PTT, Telkom) presented its results for the year to Mar 2007 the other day. The results showed spectacular growth for the #1 mobile operator in #1 African market by GDP: Revenues up 21% y-o-y to ZAR41,146m (£2,9bn), EBITDA up 20% to ZAR14,227m (£998m), Net Profit up 28% to ZAR6,560m (£460m), Dividends up to ZAR5.4bn (£380m), Free Cash Flow up 14% to ZAR3.7bn (£260m). Basically Vodacom is a star performer with everything moving in the right direction at a good speed.

The vast chunk of revenues and profits came from the South African market but with mobile penetration standing at 84% the mobile business must be getting close to penetration and so the way forward to keep growth going involves moving into adjacent markets.

Obviously, Vodacom plan on expanding its data services and it claims that its HSDPA (139k customers) services are the most heavily used in terms of volume in the world which implies to me that the customers are using wireless as the primary mechanism for accessing the internet. Vodacom plans to expand way beyond WCDMA and they have investments in WiMax and WiFi companies. In the conference call, the jovial CEO, Alan Knott-Craig mentioned that probably the next step was buying an ISP as this was the logical way in rapidly acquiring the skills and services needed to play in the data game. This puts Vodacom on a collision course with its 50% operator, Telkom.

Vodacom also plan on leveraging its entry into MobileTV (33k customers) by reselling the #1 satellite TV service. Vodacom say this is a natural progression for the company, but it would be a stretch for European Cellular Companies. Obviously, fixed companies in Europe are in various states of entry into the broadcast TV market and again the 50% shareholder is planning on launching its own broadcast TV in competition with #1 South African payTV company, Multichoice. Multichoice is Vodacoms partner and again this puts Vodacom on a collision course with its 50% shareholder.

The sale of payTV highlights Vodacoms two great competitive strengths: the #2 brand in South Africa behind Coca Cola; and the best distribution channel is the whole of South Africa. The quality of Vodacom’s distribution channel makes it a natural partner for anyone in the consumer space. In Europe, analysts typically undervalue distribution networks and I continually hear analysts questioning the logic and expense of building out MNO owned shops and online properties. Carphone Warehouse and Tesco Mobile continually show the value of distribution networks and my only surprise is that it is taken the MNOs in the UK so long to place serious investments in their own stores.

Even more scarily for Telkom is that Vodacom have now acquired an international gateway licence for overseas calls and a fixed licence. Vodacom plan on starting building metropolitan fibre rings this year not only solving Vodacoms own requirement for backhaul, but allowing the resale of the capacity for the corporate market. This should scare Telkom a lot: Vodacom have the Free Cash Flow to invest huge sums in infrastructure, it also has the internal traffic to justify the investment on a standalone basis; and it can cherry pick the high value customers and telco services to target.

There was a lovely moment in the results presentation who the CEO said on presenting a typically busy slide showing all the adjacent services that were possible: “I don’t understand the slide, but I basically think it means that there is a whole bunch on things that we can do. Next”

Vodacom didn’t mention in the presentation its own credit card business or a movement into cellular supported micro-payments. But it obvious that financial services is another area that Vodacom is planning on moving into.

My conclusion is two fold: Vodacom see no business as off limits and despite saturation approaching there is plenty of opportunity for further growth; Telkom will not stay a shareholder for long; and the relationship will probably end up in tears with Vodafone picking up the baton, probably with some element of a local float thereby appeasing the politicals.

In terms of non-South African markets Vodacom seems to be doing really well in Tanzania, DRC and Lesotho. Mozambique is still a problem area in terms of losses although growth looks good in the current year. Of course, no mention was made of the recent sale of part of Mozambique business to local businessmen who are allegedly extremely close to the President. Despite, South Afica still being the engine overseas properties are now accounting for around 10% of revenues and profits.

What I like about the Vodacom approach is that they are being extremely patient in their approach to acquisitions in other African markets. I do believe that businesses will start to become available at reasonable rates once the Middle Eastern investors, who have recently spent a fortune, become disappointed at the lack of returns.

In summary, I think Vodacom is going to be a great investment for Vodafone is the coming years.

Singing Phone Salesman

2007-06-14T22:18:00.000+01:00

Carphone Warehouse has a singing phone salesman, Paul Potts, from the Valleys. He seems pretty good to me and I wish him all the best in the competition.

Virgin Mobile – More Exits

2007-06-14T12:55:00.000+01:00

As the one year anniversary of the takeover by ntl approaches – Virgin Mobile has lost Alan Gow (one of the original staff seconded from one2one) and Joe Steel who was the commercial director. This means that more or less all the senior executive team from the independent days has gone.

Alan Gow admitted in an interview with Mobile Today:

'The market has gone more downhill than we thought which is why being part of a big group is good.'

In other words, the competition from O2, Orange and Voda is proving extremely tough at the moment in the prepaid segment that Virgin Mobile target. Anybody let alone a MVNO would struggle with some of the on-net deals currently being offered.

Unlike some, I think there is zero possibility that the pressure from the MNOs will be released over the rest of the year. I also don’t think that additional subscribers from the quad play will make up for the prepay losses. Apart from the sales channel into the cable base, Virgin Mobile's distribution is extremely weak and opening up a few stores here and there won't make a big difference. The only potential bright spot is the recent Comet deal.

I expect Virgin Mobile to continue losing subscribers throughout 2007.

OFCOM PSP BoonDoggle still being designed by committee

2007-06-13T12:19:00.000+01:00

The usual array of sycophants has wasted a huge amount of brain power replying to the OFCON PSP paper. Most of the 76 responses were basically a refinement of OFCOMs vision with the aim of giving the respondents more than their fair share of the taxpayers bounty; OFCON is a happy bunny and gives the respondants a general thumbs up.

Anyway here are my personal favourite extracts:

An extract from Saul Albert about a gathering down at OFCOMs palatial offices down at the Riverside:

I worked out what my civic duty was going to be when the 'creative' director at Wanadoo suggested that the PSP's 100M budget should be given to the telcos and ISPs for their wonderful PSP-like job of carrying peer to peer network traffic, and nobody batted an eyelid.

WEL Jackson can’t resist having a pop at one of the editors of the UK few new media success stories (The Register) which didn't get a penny of the taxpayers bounty to help them out when times were tough:

As a self-actualizing media node, I welcome this redistribution of government funds from provincial luddites to new media 'creative' Sohoites.
Cool Britannia lives! The creative industries initiative was good but didn't radically empower young creatives and their 360-degree thinking. Unleash the collective wisdom of new media and see us swarm!
If Tony had done this when he first got in (and I know how hard you tried, Ed) then thousands of people could already be employed - let's use those redundant factories to turn out polyphonic ringtones.
Critics - like Orlowski at The Register - will complain that this is pork-barrel politics for tech. utopians. That this has no relevance to' 'ordinary' people and their lives.
Well, I've had enough of that patronising rubbish. I've launched a post-ironic web brand - nar.ciss.us - that was created using the competitively-priced labour of redundant industrial workers. It shows that anyone can 'get' asynchronous java - even people from the North.
If anyone wants to brainstorm this - then twitter/IM/SMS/Skype/email me. I'm up for an 'emergent conference'.
Ed Richards's initiative 'gets' new media on so many levels. Let's flashmob this bitch up to escape velocity.

Dr Stephen Jones hits OFCOM with brute logic:
The consultation document is founded on several dubious premises.
The report states that new media displaces old media, and that public service material should therefore be targeted at new platforms. However, as commentators have pointed out, new media enhances old media. Nor is there a rationale for public investment in platforms where the barriers to entry are already low,and where private investment is plentiful. The PSP idea in its current form is little more than a taxpayer-funded subsidy for web production houses. OFCOM should instead fulfill its commitment to strengthening public service broadcast material.

I didn’t know we had a King, but it didn’t stop him having a totally unrelated pop at Sky, which although completely irrelevant OFCOM decided to give the Public Service Publishing treatment:
I read that Sky are seeking to run pay per view services on the Digital terrestrial platform. I strongly believe that Sky have enough means to broadcast at the moment and I think this is anti choice and competition. I also think that we all should have access to quality High Definition content without the need to subscribe to the sky service. This would create real choice and real competition.
A career limiting move by Mark Splinter - too truthful for any bureaucrat to agree with:
A horse designed by committee
As a freelance designer working in the music industry since 1999, I have plenty of experience of listening to clueless executives struggling to understand the complexities of the internet. It is an ancient problem for creative people that they require the approval of the incumbent bureaucracy in order to disseminate their work widely. The internet has only partially solved this problem, and is dominated anyway by large corporations who own the very blogging and social networking services that are supposedly destroying them.
I will be brief, and summarise the problem as follows:
The Suits don't know how to create, but they try anyway.
Good for Teletext - the last cries of a dying beast past its sell by date:
Teletext does not believe that there is currently enough evidence that there is need or public desire for a new media Public Service Publisher.
Styles managed to sum up my personal feelings admirably:
I am vigorously opposed to:
a) the setting up of a boondoggle financing the new media
and
b) the continued existence of Channel 4, never mind it getting any money from this new boondoggle.
The only appropriate approach to Channel 4 is to salt the earth and flog off the freqencies. The justification for Channel 4 in its genesis in the Open Channel mentioned in the Annan report no longer applies, and there is nothing in the nonsense it broadcasts that justifies a privileged status and government ownership.
It is ironic that this nonsense is being touted at roughly the same time that the BBC Trust has suspended BBC Jam, presumably because its use of licence payers money is viewed as 'unfair' by the same people hoping to benefit from this pot of taxpayers' money

Anyway, if someone has a spare hour or two to kill and wants a laugh especially at the amount of effort that Channel 4 obviously put in its reply check the responses out here.

A good week for Virgin Media

2007-06-10T11:57:00.000+01:00

Virgin Media have updated its guidance for Q2 saying that TV subscribers would be flat. Although the cost of retentions deals hasn’t been revealed, I think this is good news for the beleaguered Virgin Media shareholders. Usually, it is far more expensive to acquire a subscriber than hold onto one.

Even better news is that it seems as if Virgin Media plan to invest in content differentiation. I was totally amazed when I looked at the BARB viewing figures that Sky Sports News had better figures than Sky News, so it is hardly surprising that Virgin Media are planning on launching a Sports News channel.

It is also interesting to see that Virgin Media are considering a tie-up with Warner for first dibs on their TV output. This represents a growing trend with the big US TV Networks: ITV have a deal with NBC; C4 with ABC; Sky’s has an obvious association with Fox; and Five have a big deal with the #1 CBS show, CSI. It doesn’t take a mathematical genius to calculate that the big five US networks can find a partner with the major five UK networks – freezing BBC out in the cold. Personally, I don’t think this would be a bad thing for UK TV effectively forcing BBC to do joint productions with the cable TV innovators such as HBO and the Discovery Channel.

On PayTV it looks as if the biggest differentiators (excluding price) are Virgin Media with its on-demand service and Sky with coverage and interactive TV. Virgin Media is obviously investing a lot in trying to address the brand and content advantage of Sky.

Sky presented a high level view of the UK TV market in a recent Merrill Lynch Media Conference and it shows to me that there is plenty of growth available for both Sky and Virgin Media – payTV penetration is still at less than 50% of UK homes.

Even with only 20% of the current payTV refuseniks being converted in the run up to Digital Switch Over, it would only represent a 55% payTV penetration of UK homes. This additional 20% would yield 2.4m homes or 100k new payTV subscribers per quarter for the next six years for the payTV industry. In a six year timeframe it is very difficult to believe that Virgin Media won’t get its act together and start adding new TV subscribers.

Virgin Media are still forecasting a net loss of overall customers in the Q2 quarter and this is more a reflection on the weaknesses with telephony only customers than either broadband or TV. There is a telephony tariff refresh promised at the end of the summer which will probably finally halt the decline and will probably see Virgin Media in Q4 move to overall net customer additions.

Orange & T-Mobile Asset Trade

2007-06-07T12:17:00.000+01:00

T-Mobile Netherlands has acquired Orange Netherlands and Orange Espana has acquired Deutsche Telekom’s Spanish DSL business, ya.com. I had a little problem a couple of weeks ago with premature blogging not realising the value of the bundle in the Eurotelco M&A world.

A couple of points spring to mind:

In the space of a couple of years, the ultra-competitive Dutch (both mobile and fixed) market has evolved into an oligopolists field of dreams. I can see the same trend developing with a slight British flavour in our green and pleasant land.

The converged PTT monopolies are not going to allow Voda build a pan-euroDSL network with the same ease that they built a pan-euroGSM network. Currently, the Voda pan-euroDSL network is strong in Germany and France and expansion plans in Italy (Fastweb) and Spain (Ya.com) have both now been railroaded by ex-PTTs with larger chequebooks.

OFCOM spiralling out of control

2007-06-07T09:42:00.000+01:00

The news in the Guardian that H3G, O2 and BT are unhappy about mobile termination fees and taken the ruling to the competition appeal tribunal is hardly surprising given the amount of money at stake; however it illustrates the growing trend of industry dissent at the UK Communications regulator and basically ignoring its judgements.

Personally, I think the most radical recent example was Virgin Media’s decision to resort to law even before OFCOM had published its verdict on the PayTV market; this is despite OFCOM publicly stating that a vibrant cable industry is needed to counterbalance the powers of the copper and satellite networks.

Even more amazingly, it is not just the big boys who decide to go to court rather than listen to the regulator; the miniscule Rapture TV has decided to ignore the OFCOM rulings that Sky’s £80k annual access charges are reasonable and decided to pursue it further at the Competition Tribunal. (pdf CAT summary).

Also, I feel OFCOM has lost control of the outcome of “Digital Dividend Review” and the key players are already ignoring their process and instead directly lobbying the politicians. I feel whatever outcome OFCOM decides upon will inenvitably end up in the Courts of Law.

OFCOM presents an image of being a light touch regulator which is free from political influence. This is patent nonsense; anyone spending more than a nanosecond looking at the volume and content of its output will bear witness that OFCOM crawls over the every breath that the Communications Industry takes. The background of the OFCOM senior executives and direct politician lobbying translates into politics playing just as bigger role as it always has in deciding the future of the UK communications industry. Unfortunately, light touch non-political regulation is pure spin.

Most people would advise any government quango riding a huge gravy train is to keep out of the glare of the Great British Public. Unfortunately, OFCOM seems to love throwing fuel onto the fires of public opinion, with notable controversial interventions into Big Brother, Participation TV and Junk Food advertising. All of these polarise opinion and therefore any judgement is bound to annoy around half of the public. It only takes three or four decisions for OFCOM to have completely annoyed the whole of the UK.

Even worse, I think OFCOM is actively creating huge barriers to entry to anyone wishing to provide telephony and broadband services. It seems to me that unless someone has the large amounts of capital required to invest in unbundling with a decent coverage that they face a limited lifespan as a player in the residential market. The other side of this coin is that people choosing to live in a rural area will face a much more limited and more expensive choice of services – equivalence and universal service is about to bite the dust as a general concept.

Things wouldn’t be all bad if OFCOM kept a tight leash on the de-facto rural monopolist and forced them to keep prices reasonable and invest in vital new technologies. Unfortunately, OFCOM takes the exact opposite approach allowing BT to set whatever prices it dreams up and even more unbelievably echoes the sentiment of BT that fibre is only possible with a huge investment by UK plc ie the uk taxpayer.

Bouygues Telecom

2007-06-06T11:40:00.000+01:00

The perennial change of ownership favourite and the smallest of the three French cellular operators has just reported Q1 results:

Bouygues Telecom's net profit in the first quarter of 2007 stood at 143 million euros (up 55%) and EBITDA came to 360 million euros, up 18% compared with the first quarter of 2006, when the Neo and Exprima call plans were successfully launched.
This improved profitability was due to growth in sales (up 5%) which outstripped that of the market and lower subscriber acquisition costs.

In addition the operating profit came in at €217m which is a 53% increase y-o-y. Annualising the Q1 EBITDA and using a 8.5x EV/EBITDA valuation metric gives an approximate value of €12.2bn.

Bloomberg is reporting Sawiris owner of Wind in Italy and part owner with Orange of Mobinil in Egypt is considering a bid.

An auction for Bouygues Telecom would certainly add some spice to the quiet summer months: I could almost guarantee that Deutsche Telekom, Telefonica and KPN would also get involved in any auction. However, I don’t think a sale will occur and even if did it would be conducted far away from the public glaze.

iPhone in Europe

2007-06-06T09:36:00.000+01:00

There was an interesting revelation by Charles Dunstone, CEO of Carphone Warehouse, in the annual results webcast yesterday regarding the iPhone. That is in order for the iPhone to function correctly there is a requirement for Apple servers to be placed deep in the operators network.

My personal guess is that these will be used for authentication and email services rather than doing any clever music or video content distribution. Music and Video distribution may come later with future models upgrading to HSPA capabilities. I think this is quite a clever move by Apple, because network services will justify a share of the ongoing revenues in much the same way as Blackberry has justified a share of the ongoing messaging revenues with the operators acting as collection agents. Also by building in effect a walled garden within GSM, Apple will keep a much tighter control on the operator network distribution model.

This also guards against the standard European market tricks of unlocking and reflashing phone operating systems to get around operator device tie-ins. If Apple have got a non-GSM non-standard way of authenticating the device then operators will be much more comfortable in subsidising the handset sale price than the equivalent Nokia, SonyEricsson, Samsung or Motorola devices. This will be a key competitive advantage in the future when the device is less unique and has to duke it out around a dozen or so functionality and style matching devices.

This is probably one of reasons that Carphone has tempered its enthusiasm for the device, but the main reason is the chosen sales channels that at&t/Apple have chosen for their route to market: ie own stores, internet and at&t call centres. There is a distinct possibility that whatever operator(s) Apple choses to partner with in Europe, Carphone will be frozen out of retail distribution of what is beginning to look like the 2007 must-have Christmas Stocking Filler.

Carphone is already noting that fashion phones are going to have a huge impact going forward and this is proven with the success of low spec good looking phones such as the LG Prada and Nokia 6300. He also noted with typical bravado that the “white coats” in the operators do not understand the value of fashion brands and this is a key current advantage for Carphone is grabbing retail market share. However, if the operators partner with the techno-style icon of the 21st century…

Much more on Carphone's results at the weekend, if I can ever get my mind round the dynamics in voice pricing, unbundling and offnet broadbrand.

Sky Content Acquisition

2007-06-05T13:06:00.000+01:00

Surprise, surprise Sky has acquired the rights to Prison Break from Fox in the States. I actually am quite in awe of this strategy of buying rights from popular TV series shown on terrestrial TV. It certainly creates another good reason for some of the refuseniks to move over to the paid side. Of course, I say this theoretically because every eyeball seems to have a price in the TV content game and the price of the Prison Break deal was undisclosed. But for the sake of all BSkyB shareholders, I hope that James Murdoch got a good family discount.

On a less flippant note, content acquisition is one of reasons why I believe that Sky will never earn some of mega-operating profit margins that some analysts have in their future earnings models for Sky. I honestly believe that Sky will surely and steadily keep investing in content until they have become the #1 group of entertainment channels. This is a long run strategy and may only be accomplished once James Murdoch reaches his pensionable age, but I think that Sky will persist.

The first reason that I believe Sky will keep margins within acceptable levels is political expediency. Sky will probably be under regulatory pressure for ever in the highly politicised UK TV industry and high margins attract long, turgid and expensive competition commission inquiries. It is a better strategy to grow the revenues through organic expansion keeping margins at a reasonable level.

The second reason is historical behaviour: Fox have over the years grown from being the worst US network to being on equal footing with the orginal networks these days. This has been accomplished in the old fashioned way by commissioning more hit shows than the rest. I expect Sky to use a combination of buying in shows from the US and commissioning shows in the UK to accomplish the same. I think the critically successful Hogfather and Kemp on Gangs is the start of the journey rather the end.

The third reason is digital switch over: the viewing behavioural change that this will bring to the UK market is immense and almost certainly will be value destroying for ITV, C4 and Five. I think in the medium term Sky will have an ad-supported general entertainment channel which will certainly rival C4 and Five. I also think that this will be used as the sampler and promotion engine for the satellite payTV service which will steadily increase penetration in a similar way as the US cable TV industry. Demographics and the Long Tail of public taste work in favour of the payTV model and against the public service broadcasting model.

All of this makes me wonder if Sky will be shedding crocodile tears if the politicians rule against them launching a DTT payTV service and make them dispose of the ITV stake. By the time the appeals will have run through the UK and European Courts we will probably be knocking on the door of the next decade, DSO will be in full swing, Virgin Media will still be limping along and BT will be on their third attempt to design a working alternative business model for payTV market.

BT nukes UK residential telephony market.

2007-06-04T11:10:00.000+01:00

There are 6.2m CPS customers in the UK and BT is chasing these customers with a vengeance with its latest offer of twelve months free evening and weekend calls to uk geographical numbers for all returning customers. After that the cost is just £3.45/month for six months.

TalkTalk has immediately responded by offering 12-months free to all churners and £3.89/month thereafter. Tesco is offering a similar package at £3.87/month, but with no free 12-months.

In the broader market of unlimited UK geographical calls, BT has reduced its package to £7.95/month with three months free out of a 12 month contract. The equivalents are: TalkTalk - £8.99/month; Tesco - £9.87/month and Sky - £5/month.

BT has three main advantages in this market and is playing its advantage to the maximum:

biggest network of users – BT incurs zero termination rates for most calls, other networks will all be net termination payers. Even though the rates are a lot lower than in the mobile world, the effect is identical – favouring the latest network with a multiplier effect.
largest and most loyal base – BT has 11.4m customers who have not signed up a cheaper package either because of extremely low call volumes or extreme laziness. The probabilty of these people moving to another tariff or supplier is low. BT is actually punishing this base has actually increased the prices. In comparison, BT only has 2.3m lines of unlimited evening/weekend calls and 835k on unlimited calls. BT is targeting the majority of customers who shop around for the best deal here.
moment of weakness for competitors – the adverse publicity surrounding “free broadband” has created a lot of negativity for non-BT home telephony. BT will be calculating that there is a lot of pent of demand for a return to “quality”, if the price is right.

I think the biggest loser in the market will be TalkTalk who has nearly 2m voice-only customers alone – most of which will not be within a contract period. The revenue loss will be quite severe because a line loss will involve the loss of line rental at £11/month and incremental calls to mobile, non-geographical and other add-ons. On a more important note with the cost of calls being now so low and the margins so limited, I cannot see how anyone can make a decent return with a standalone non-bundled voice product.

Also, it should be noticed that several Virgin Media customers will now be thinking about their telephony only deals with BT now cheaper than the equivalent Virgin Media M, L and XL packages. Again, the answer is lowering prices, just at the time Virgin Media needs all the margin they can muster.

The bigger question was whether this was what OFCOM had in mind when it freed of BT from regulatory constraints on pricing. I cannot for the life of me see how BT is going to make any money on these returning customers over 18-month contract even with the incremental add-ons. This is very, very close to predatory pricing and I suspect that several companies with nothing to lose may be thinking of taking BT to the competition commission.

In fact if I was Sky, I would be giving careful consideration to doing just that – if BT can take Sky to the competition commission for the PayTV market with the reasons still be kept secret, Sky probably has a stronger case in the residential telephony market. This would also increase the possibility of people looking at a more complete “converged” market rather than just a standalone telephony, broadband or PayTV market.

Companies with much more to lose such as Carphone and Vonage UK may just pre-empt any possible Sky move and decide the last rites of the residential voice market may just be best served by litigation.

I am reminded of one of the more famous Sir Christopher Bland quotes relating to the settlement with OFCOM:

“We sued for peace and won…”

Amp’d – Rectif’d

2007-06-04T08:10:00.000+01:00

So, it looks as if the Amp’d investors who pumped in $360m have decided to throw in the towel and file for bankruptcy. Amp’d themselves are claiming not all is lost and they plan to continue the good fight. I would suspect that the whole future of Amp’d is now in the hands of its biggest creditor and airtime provider, Verizon Wireless, who is listed at being owed US$33m. A normal MVNO agreement will have clauses to deal with bankruptcy and basically it shouldn't be looking good for Amp’d. I expect to see Verizon Wireless picking up the customer base and brand for literally microcents on the dollar. In the absence of new money, realistically it will be a Verizon Wireless decision whether to continue the brand by beefing up the backoffice and distribution by integrating Amp'd into Verizon Wireless.

In the wider scheme of things it is hardly surprising and something, MVNO doommeister, Telebusillis has been publicly predicting since last year. The big question now is what will happen to the other three reasonably sized USA MVNOs:

Virgin Mobile USA – the ipo has been filed and they need a cash injection. The failure of amp’d will probably mean the ipo will be much more difficult to get away at a reasonable price.

Helio – the next financing of this amp’d lookalike is probably only just around the corner and the appetite from the owners, SK Telecom and Earthlink, is probably going to be seriously tested.

Tracfone is probably the only MVNO in the USA making any money and therefore is not under any short term pressure. The owner, Americas Movil, is also bigger than most players in US telecoms and has by far the deepest pockets of any MVNO owner. It owns the #1 mobile network in Latin America and therefore understands the wireless game better than most. Personally, I guess there will be quite a few people in Mexico City studying how to transform Tracfone from a MVNO to a MNO with an appropriate acquisition or two.

Milan, Italy: TI, Metroweb & Fastweb - Strange Goings On

2007-05-31T21:33:00.000+01:00

Telecom Italia announced today a 15-year deal to use the metro fibre of Metroweb to deploy its next generation 50-meg VDSL service to 70k homes in the city of Milan.

This isn’t so funny for Fastweb investors who use the same fibre to deliver triple play services to the same residencies in Milan that TI are targetting. I hear on the jungle grapevine that the Fastweb CPE only allow a max of 20-meg internet to the home. In some areas of Milan Fastweb has a market share in excess of 50% and that is a lot of customers for TI to churn. The Italian triple play is especially attractive because there is no CableTV competition; the only other PayTV is from Sky Satellite and mighty News Corporation.

The Metroweb network does not enter the buildings. It is safely buried under the pavement in ducts about two metres away from the buildings. Fastweb connects the fibre/duct network to the risers in the building – if there is enough demand. The barrier to entry to the rest of the industry players has always been the acquisition of permits to hook up the buildings and of course access to the Metroweb network. However Telecom Italia appears now to have broken that stranglehold.

It should not be a surprise to any student of the Italian communications market that the history of Metroweb and Fastweb is a tangled affair bringing together private entrepreneurs and the city of Milan.

Fastweb originally started as a brand name of e.Biscom which was 66% owned and led by a group of Italian entrepreneurs including Silvio Scaglia (ex-Vodafone Omnitel and now owner of Babelgum), Alberto Trondoli and Francesco Micheli. The other 33% owner was the City of Milan through its electric utility, AEM.

Fibre was laid throughout the City of Milan and this fibre was owned by Metroweb which in turn was owned 66% by AEM and 33% by e.Biscom. The fibre was leased to Fastweb and others, although Fastweb made up 80% of the revenues of Metroweb. e.Biscom was hit hard by the bubble and eventually plans had to be scaled back.

Eventually in a complicated transaction AEM exited Fastweb and bought Fastweb out of Metroweb. By this time, Metroweb had built a 3,200 km fibre optic network spanning every street in Metro Milan and selected backbone routes throughout Northern Italy. In Aug 2006, Private Equity in the form of Sterling Square took majority control of Metroweb for €230m and surprise, surprise Alberto Trondoli returned to head the company.

At around this time it was rumoured that Fastweb was up for sale: Vodafone and Sky although presumably having huge synergies allegedly looked at the company and decided not to bid. Eventually, Fastweb found a buyer offering a decent price in the form of the Swisscom who offered €3.1bn plus the assumption of another €1.1bn of debt for 82.4% of the company. The Swiss PTT had money literally burning a hole in their pockets after being turned down by their main shareholder the Swiss government in several Euro acquisitions. The deal was completed on 18th May with Swisscom taking 82.4% ownership and Silvio Scaglia exits with his millions.

It strikes me as more than a slight coincidence that less than two weeks later the stranglehold of Milanese Fibre held by Fastweb was broken. Someone has won out big time here and my guess it is not the shareholders of Swisscom or the Milanese citizens. Fastweb is currently trading at €40.74 well below the €47 that Swisscom paid.

Hat Tip to Stefano Quintarelli for his more than valuable recent assistance and by the way his campaign for FTTH in Italy is more than brilliant.

As an aside, one of the more interesting characters for UK readers to emerge out of Fastweb was the ex-CEO of Bulldog Emanuele Angelidis who I presume was recruited to solve the customer service issues and launch IPTV.

Private vs Public Mapping

2007-05-31T11:45:00.000+01:00

There is a very interesting story in the Guardian about the rise of Google and fall of Ordnance Survey (OS) in mapping for the public sector. I suspect the picture in the private sector is even grimmer for OS.

For as long as I can remember, I have always thought that the price of OS hard copy maps has been overpriced. I think that OS also seems to have missed out on a huge opportunity to digitise the data and make it available on the net for a reasonable price to the public. It is hardly surprising that Google is steeping into the void with an ad-funded model, albeit currently subsidised by annoying little search adverts.

OS is effectively the government’s preferred cartographic service owned by the Great British Public. In the 2005/6 OS accounts turnover was £118m with a surplus of £5m. OS had net assets of £60m. As far as I am aware no direct subsidy is provided and OS instead relies on trading to keep the wolves from the door.

Of course, the Guardian being the Guardian has a socialist view on the brewing troubles – make the data opensource and fund OS by general taxation. However, I have a more simple market-based solution – privatise Ordnance Survey and run periodic Dutch auctions for the any data collection which is still deemed necessary by the government or local authorities.

I suspect that many of the OS current problems are going to impossible to address whilst it remains as a slow moving quango – the likes of Google will always run rings round it commercially.

Connecting the unconnected

2007-05-30T15:27:00.001+01:00

A great cartoon from this weeks Mobile Today:

Nokia and Motorola have pledged to 'connect the unconnected' in the developing world with low-cost handsets.

Cheapest Broadband in (lucky parts of) Britain

2007-05-30T11:38:00.000+01:00

Virgin Media is currently offering 2-meg broadband for £10/month on a twelve month contract with no line rental and a free modem. It is the perfect home communications package for someone who makes the majority of calls from mobiles and just needs broadband or is willing to experiment for VOIP.

A self-install also means the £25 installation fee is waived, although an up-front advance payment is required. A self-install is only possible for houses who already have the Virgin Media coax to their homes, but has the added bonus that you do not need a ticket for the "decent installer" lottery. Although, unpublished it also means that the unencrypted TV channels can be viewed on the parts of the Virgin Media network that still carry the analogue signals ie the majority.

All I can guess is that Virgin Media must be desperate for the headline customer numbers before reporting figures to the end of June.

C&W UK – Still a Disaster Zone

2007-05-28T22:14:00.000+01:00

C&W released their results last week and it looks to me as if C&W UK had a complete nightmare of a year, despite dispatches to the contrary.

The presented results looked as if the revenues were holding up with a reported £2,119m in 2006/7 vs £2,028m in 2005/6. However 2005/6 included only 4 months of Energis figures. If we included the full year of Energis revenues (£709m), the comparison would be £2,119m in 2006/7 vs £2,471m in 2005/6 or a drop of 14%.

A drop of 14% in revenues sounds a lot, but when the stated policy is the axing of as many so-called unprofitable customers as possible, it could be justified. However, the drop in revenues has been accompanied by an even greater fall in EBITDA. Again on the surface all looks good with declared EBITDA growing from £149m in 2005/6 to £159m in 2006/7. It is necessary to strip out the 4 months Energis EBITDA of £35m and replacing with full year EBITDA of £93m.

We also have to add in the less than transparent attempt of reducing staff costs by £17m by placing the LTIP charge below the EBITDA line. So the net EBITDA for 2006/7 was £142m vs £207m in 2005/6 or a truly awesome drop of 31.4% in a single year.

Things do not look much better, when we look at the substantially reduced depreciation charge of £104m in 2006/7 vs £123m in 2005/6. Obviously we have the Energis effect, but we also have to take into account that C&W UK wrote off £237m of assets in the 2005/6 accounts, so of course the depreciation would fall in the following years.

Even stranger rather than cleaning the accounts being a one-off in 2005/6, C&W UK is at it again in 2006/7 this time writing off another £60m which amazingly includes £28m for the exit of the Energis HQ in Reading. Surely someone should have realized at the time of acquisition that only one HQ would be needed and the appropriate charge made then and there.

It is noticeable that C&W is still spending far more on capital expenditure than the depreciation and amortization charge: £204m vs £104m in 2006/7 and this is reflected in cash outflow for the year of £162m. I seriously doubt that C&W UK has much value operationally until this cash burn is reversed.

This would not be too much of a problem if the future was looking really bright, but it isn’t. By C&W UK own admission in the 2H2006/7 figures, 57% of the C&W UK revenues were legacy voice and 9% were legacy data. There is a huge balancing act to accomplish in transitioning these to new wave products and services. Seemingly every operator in Western Europe apart from BT with a huge legacy base is struggling to make this transition. Personally, I see zero evidence that gives me even the slightest confidence that C&W UK will manage to jump the growing void in anything other than a painful manner.

The future risk is made even worse with the forthcoming event of the whole of UK interconnect regime being reworked with the advent of the BT 21CN. I don’t think anyone is seriously analyzing how much this could cost the UK altnet sector and specifically C&W UK. Also, I suspect that BT is far more advanced in analyzing the profit opportunity (for BT) than the regulator OFCOM or the altnets.

C&W UK are forecasting a leap in EBITDA to £210-£220m in 2007/8, however for me the important metric is that a cash outflow of £80m is still planned. Admittedly, this is less than in 2006/7 but this still means that operationally C&W UK is worth very little.

Things look even worse at C&W Access with EBITDA losses of £75m in 2006/7 and a forecasted drop to £35-45m in 2007/8. The first thing that is mysterious about the C&W Access business is the Pipex contract. At the time of the deal on 7th Sept 2006, it was announced to be worth £250m over 5 years. However in 2H 2006/7, which represented a full six months of the deal, total revenues at C&W Access were only £14m which is a run rate of £140m over 5 years. Of course, if the Pipex broadband business were to grow things would look better: but Bulldog is not being marketed as a brand, Pipex is unbundling its own exchanges independently of the C&W wholesale deal and the company is on the auction block. Pluthero even admitted to the Guardian that there was very little protection if a takeover takes place and C&W would probably lose the business. This does not attract a lot of confidence in the new management’s ability to negotiate contracts.

The next problem is the new latest and greatest contract with Virgin Media. Pluthero admitted that the revenues from this will not kick-in until 4Q2007/8 which sounds a long time to get ready to me. The other thing that surprises me is that C&W UK seems to be planning to still be putting more capital into C&W Access – approx £30m. This could either be for more coverage or new equipment and the only possible equipment that I can think of Video-On-Demand or IPTV kit. My hunch is committing more capital is seriously questionable, especially given the force of the competition that Virgin Media is going to be facing in the future. I just hope that C&W UK have negotiated a better contract than with Pipex.

To me the writing on the wall for C&W Access was when they lost the Vodafone and Post Office contracts to BT. I also guess that given the historical links between Pluthero, Freeserve, Energis and Orange that there was a lot of effort to convince Orange to use C&W wholesale services rather than build out their own LLU network.

Theoretically, C&W UK could get the access business to pay with an assault on the business market. But, I suspect they don’t have a strong enough reseller channel to attack the SME market. Also, the problem with the larger corporates is that they want guaranteed bandwidth, something that is unknown until an ADSL circuit is provisioned. ADSL is a difficult sell for the CIO.

I don’t see a light at the end of the tunnel for C&W Access.

However all is not lost for C&W shareholders. There is £3.8bn of tax losses which has a potential benefit of £1.1bn for some acquirer who is paying a big tax bill and I suppose puts a floor on the value of the UK business. Unfortunately, the obvious purchaser – Virgin Media - has tonnes of its own tax losses. This leaves the remaining possible purchasers as Vodafone and O2 who could potentially utilize the tax losses.

In the valuations used for the LTIP estimates, the UK business was valued at £1,620m and the international business at £2,140m. Obviously I think the UK business is overvalued, however I have a hunch that the International business is undervalued.

In 2006/7, International net cash inflow was £220m after proceeds of £256m for the Bahrain disposal. I suspect that the assets in the Caribbean would demand a high price from Vodafone’s partner, Americas Movil & Carlos Slim, if they were put up for sale. In fact, I wouldn’t be surprised if more than one investment bank was exercising their slide rule in trying to solve the conundrum that is C&W.