Thursday, July 31, 2014

France's Illiad Makes Bid to Buy T-Mobile US

Illiad, the mobile service provider that has revolutionized the French mobile market, has made a bid to buy T-Mobile US, an unexpected move that might be a nightmare for the other U.S. mobile service providers.

Iliad has offered $15 billion in cash for 56.6 percent of T-Mobile US, at $33 per share. That is key to its bid, as Sprint has been seen paying $30 billion for all of T-Mobile US.

Illiad values the remaining 43.4 percent of T-Mobile US at $40.5 per share on the basis of
$10 billion of synergies to the benefit of the T-Mobile US shareholders.

This leads to an overall value of $36.20 per share, a premium of 42 percent over T-Mobile US’s
unaffected share price of $25.41, Illiad argues.

The cash portion would be financed via a combination of debt and equity. Iliad has the support of leading international banks for the acquisition debt. The equity portion would be approximately €2 billion.


In France, Illiad rapidly gained market share by slashing prices, and partly by relying on Wi-Fi access (“Wi-Fi First”) as a way of controlling its costs.


As T-Mobile US already is the successful attacking carrier in the U.S. market, succeeding in large part because T-Mobile US has slashed prices and radically simplified purchase decisions, T-Mobile US already operates in the mode of Illiad’s Free Mobile operation in France.


Should the bid move further, and eventually succeed, another strategic option awaits, namely a business tie-up of some kind with Comcast, one might argue, as that would allow Illiad to leverage the Wi-Fi-first access model broadly across U.S. markets.


The financials are not entirely clear, as Illiad is smaller than T-Mobile US. In its first quarter of 2014, Illiad reported revenues of about a billion euros ($1.34 billion). T-Mobile US reported second quarter revenues of about $1.45 billion.


Illiad had total first quarter 2014 subscribers of 14.3 million (8.6 million mobile subscribers and


5.7 million landline broadband subscribers). T-Mobile US had more than 50 million customer accounts in the second quarter.


T-Mobile US has a market value of about $24.8 billion. Iliad's market value is about €12 billion ($16 billion).

Nor is it so clear how, and whether, Illiad can line up financing for such a deal.

Best Buy CEO Says Tablet Sales are “Crashing”

"Tablets boomed and now are crashing, says Hubert Joly, Best Buy CEO. What that means is not entirely clear. As recently as 2011, Forrester Research analysts had been underestimating tablet sales growth.



And some recent forecasts have called for compound annual growth rates of about 37 percent through 2017. 



Over the next five years, the installed base of tablets in use will grow from 87 million in 2012 to 411.6 million in 2017, according to Daniel Research Group. 



Up to this point, virtually no researchers have forecast an actual decline in tablet sales. So the issue is whether the sales software is a Best Buy issue, a U.S. issue or a broader issue globally. 



Some might argue consumers who find tablets useful largely already have bought. 



Others will argue the "phablet," a smartphone with a large screen, provides much of the same functionality. 



And there is at least some evidence consumers are, in fact, finding much of the value of a tablet is provided by a phablet. That seems to be happening in India, for example. 




Wednesday, July 30, 2014

Telcos are not Dominant Fixed Network Services Providers Anymore

Are telcos still dominant providers of consumer communications services, requiring heavy regulation historically applied to such providers?

At the end of 2012, incumbent local exchange carriers (telcos) had 34 percent share of the consumer voice market, 14 percent of the high speed access market and 10 percent of the video subscription market.

And yet there is persistent thinking that firms including AT&T and Verizon need to be highly regulated as “dominant” providers.

If Comcast succeeds in buying Time Warner Cable, it will have 40 percent share of the U.S. high speed access market. Who is the “dominant” provider, for purposes of determining market power?

And with the caveat that traffic is not identical to revenue, The overwhelming majority of network traffic now is Internet Protocol, not legacy time division multiplex voice.

Consumer traffic now represents most of that IP traffic, according to Cisco. In 2012, total U.S. IP traffic was 157 exabytes and that is expected to triple in the next five years, so that total U.S. IP traffic in 2017 will be 445 exabytes.

Consumer U.S. IP traffic in 2012 was 136 exabytes and by 2017 is expected to increase
to 387 exabytes, roughly 86 percent of total IP traffic in each year.

And in a big shift, most of that consumer IP traffic is entertainment video, either
over the open Internet or managed video services.

In 2012, IP video accounted for 120 exabytes of traffic and by 2017 it is expected to grow to 359 exabytes, at which point video would represent roughly 80 percent of all U.S. IP traffic.

That traffic pattern shows why revenue models now have become such an issue for access providers. Voice, a managed service that traditionally drove revenues, is shrinking, while most of the video traffic does not have any direct revenue implications for access providers.
U.S. traditional switched traffic, which consists primarily of voice traffic, constituted less than one exabyte in 2012.

At the same time, because the TDM network carries less and less traffic, it becomes increasingly inefficient over time. That is why there are growing calls to prepare for a shutdown of the PSTN network.

Doing so would allow access providers to deploy capital and operating funds to support the single network that now carries the overwhelming majority of traffic.

While total voice lines in service are supplied by cable TV companies and other firms, telco consumer switched access lines have decreased by 66 percent since 1999, the
earliest period for which the FCC reports such numbers.

The clear implication is that is uneconomic to continue to support the TDM network. “Even if network operators are efficient and manage to make 50 percent of their cost variable, cost per subscriber at 30 percent penetration is more than twice what it was at 100 percent penetration, the study by Anna-Maria Kovacs, visiting senior policy scholar at Georgetown University’s Center for Business and Public Policy, indicates.

If only 20 percent of the cost is variable, then cost per subscriber is nearly tripled at 30 percent penetration. At 15 percent penetration, the level AT&T is approaching in some of its states, cost per subscriber quintuples for a network that has 20 percent variable cost and quadruples even for a network that has 50 percent variable cost.


By the end of 2012 only 34 percent of U.S. households purchased traditional switched
telephony service and only five percent of households relied on it exclusively.

The other 29 percent of households combined fixed voice with wireless services, while 28 percent of households used VOIP service, while four percent used VoIP exclusively.

In contrast, mobile phones have become the primary way people use voice services. About 90 percent of households in 2012 had mobile service, while 38 percent had no fixed network voice service.

About 16 percent of households mostly used mobile service. By the end of 2013, it is likely that more than 60 percent of households will be mobile-only or mobile-mostly.

The study also suggests why fiber-to-home upgrades have become more important. When relatively few consumers wanted to buy access at speeds of 50 Mbps or 100 Mbps, and when those services cost $100 or more, fiber-to-neighborhood access networks would work.

That no longer is the case for symmetrical gigabit networks selling for $70 or $80 a month. At such speeds, only a fiber-to-home works.

Whatever real concerns telcos have had about the business case for fiber-to-home networks, end user demand and competition have changed thinking.

A Nomura report of July 2014 shows that where ILECs have upgraded their networks with fiber to the home or to nodes close to the home, telcos gained high speed access share over cable TV suppliers.

From January 2011 to June 2013, ILEC fiber (primarily FIOS and U-verse) gained 7.3
million subscribers, while cable broadband gained only 5 million customers. And in positioning against Google Fiber, rather than cable operators, might have clear impact on market share.

Cable operators have had 57 percent to 59 percent share of the high speed access market since 2007. If telcos upgrade to gigabit speeds and fiber-to-home architectures, they likely will, where such services are available, be able to make market share gains.

Ironically, cable operator choices hinge largely on how much video share is lost, and how buyer preferences change.

At some point, as cable operators were able to do in converting analog TV signals to digital format, they might be able to allocate more bandwidth over the hybrid fiber coax networks to high speed access, and less bandwidth to video services.

It is not a trivial exercise, but reducing the amount of linear programming delivered will free up more bandwidth for high speed access.

Home broadband subscription is highest among non-Hispanic Whites, 74% of whom have home broadband. Among non-Hispanic Blacks, only 64% have home broadband and among Hispanics, only 53% have home broadband.

But when mobile Internet access is considered, some 80 percent of non-Hispanic Whites, 70 percent of non-Hispanic Blacks and 75 percent of Hispanics buy Internet access.

Among those who use a mobile phone to access the Internet, 60 percent of Hispanics describe themselves as mostly going online using their mobile phone, 43 percent of non-Hispanic
Blacks do so, while 29 percent of non-Hispanic Whites do so.


source: Internet Innovation Alliance

The point, argues Anna-Maria Kovacs, visiting senior policy scholar at Georgetown University’s Center for Business and Public Policy, is that mobile Internet access plays an important role in the overall Internet access supply.

Under many circumstances, mobile access supplies most of the value of such access, even if the fastest speeds will be provided by the fixed networks.

As always, there are two fundamentally-different ways of harmonizing regulations in markets that have crossed industry lines: apply the heaviest forms of regulation to the new providers, or free up former highly-regulated providers to the standard of the less-regulated new suppliers.

The answer matters in large part because investment implications follow.

A team led by Robert C. Atkinson of CITI estimated that from 2006 through 2011, 53 percent of the capital investment made by the three largest incumbent local exchange carriers was allocated to their legacy networks, while just 47 percent was spent on broadband infrastructure.

Assuming that ratio is typical of the industry during those six years, and given that the ILEC industry spent $154 billion in capex during those years, the ILECs spent $81 billion on legacy networks, while just $73 billion was spent on modern broadband infrastructure, argues Kovacs.


You likely would expect an industry-focused group to call for a lighter regulatory touch But that doesn't mean the position is incorrect, where it comes to incentives for robust investment in future networks. 

Virgin Mobile Launches "Custom" Family Plan that Does Not Treat All Apps Equally

In a growing number of cases, the idea that “all Internet traffic or apps should be treated equally” is clashing with efforts to supply consumers with affordable mobile Internet access. The latest example is a new “Virgin Mobile Custom” ostensibly created for parents who want to control usage by their children.

Key to the plan is the extreme customization. Virgin Mobile Custom allows users to customize their talk, text and data options anytime they choose, directly from their phone, by sliding a bar on the app to control the number of minutes, texts and data the customer buys each month.

Virgin Mobile Custom users can see exactly how much changes to their plan will cost before committing, and change their plan as many times as they want throughout the month, Virgin Mobile USA says.

The new prepaid mobile plan can be used by as many as five accounts for each plan, with each line costing as little as $6.98 per month. The plans will be sold exclusively at Walmart stores.

The “Base plan” comes with 20 texts and 20 voice minutes. Customers can purchase unlimited texting only for $10 a month, or unlimited voice only for $18 a month.

“Add-ons” that provide unlimited access to such apps as Facebook or Pandora, or provide 30 minutes of international calling to specific countries, can be added on a recurring or non-recurring basis.

The “Unlimited plan” costs $35 with unlimited talk and text.

Virgin Mobile Custom also allows parents easy control over how their children use their phones, allowing them to limit the times of day talk or text can be used, and even limit certain apps or data use during inopportune times like during school hours, or when it may be unsafe to do so, such as while driving.

But the big strategic issue is the ability to create affordable plans that are centered on just one specific app, such as Facebook. That does not “treat all apps equally.” But such plans are a certifiable way to increase use of mobile Internet services and apps by cost-conscious consumers.

Is Global Smartphone Market Share Now Stable?

Is the global smartphone market now stable? With the rise of Chinese manufacturers and a slowing of growth rates for Apple, one might wonder.

Apple sales growth slowed by one percent in the second quarter of 2014, while Samsung sales dipped about four percent.

In the second quarter, Apple had 25 percent share, Samsung had 12 percent share and Huawei had seven percent.

That is almost a perfect example of the 4:2:1 pattern of share typical of stable markets. That might suggest the market is, in fact, stable, and that market share might not change from current patterns. 

Up to this point, Windows Mobile has been the wild card in the operating system market share battle, with a split among observers about how much share Windows would gain in the smartphone market. At least so far, Windows has not had the impact some had forecast.

To be sure, there is enough growth to support new challengers. 

The global smartphone market grew 23 percent year over year in the second quarter of 2014, a new single quarter record of 295.3 million shipments, according to International Data Corporation. 

The market grew 2.6 percent, quarter over quarter, with sales driven by purchases in developing markets. 

The issue is whether the manufacturer share of devices sold (separate from the issue of opertating system share) now is stable, or can change. 

Samsung sales dipped about four percent in the second quarter of 2014. Apple sales dropped about one percent as well. 

Huawei and Lenovo showed robust growth. 

Top Five Smartphone Vendors, Shipments, and Market Share, 2014Q2 Preliminary Results (Units in Millions) 
Vendor
2Q14 Shipment Volume
2Q14 Market Share
2Q13 Shipment Volume
2Q13 Market Share
2Q14/2Q13 Growth
1. Samsung
74.3
25.2%
77.3
32.3%
-3.9%
2. Apple
35.1
11.9%
31.2
13.0%
12.4%
3. Huawei
20.3
6.9%
10.4
4.3%
95.1%
4. Lenovo
15.8
5.4%
11.4
4.7%
38.7%
5. LG
14.5
4.9%
12.1
5.0%
19.8%
Others
135.3
45.8%
97.5
40.6%
38.7%
Total
295.3
100%
240.0
100%
23.1%

Tuesday, July 29, 2014

Are Usage Caps Inherently Unfair?

Attitudes about usage-based pricing of Internet usage seem always to be contentious, because significant revenues for ecosystem participants is involved. That isn’t to say there are no important consumer protection issues.

Transparency is always difficult, since most consumers cannot determine with precision the bandwidth implications of their usage patterns and preferences.

That is why some argue it is unfair and non-transparent for ISPs to sell today’s usage-based plans--with overage charges--especially since many consumers do not use much data, and buy the wrong plans, or because some consumers might rather routinely find themselves paying overage charges.

Overage charges might not be a big issue today. But some fear usage caps could become a bigger issue as user behavior changes, and more consumers start to bump up against the caps, no matter how those usage plans are constructed.

Transparency is a genuine problem. Most consumers can only tell how much data they use after a few billing cycles.

And, as with many other products, predictable cost is preferred. Most mobile consumers buy bigger data plans than they actually believe they will use in full, to avoid overage charges.

Unlimited usage plans provide that assurance, but few ISPs believe they can offer such plans indefinitely, as usage continues to climb. Usage caps are a compromise between full metered plans consumers dislike and unlimited plans ISPs will, at some point, not be able to afford to offer.

The issue for high speed access services is that application usage profiles have changed. Even heavy use of dial-up access, in an app environment optimized for limited bandwidth, did not cause much strain on access networks.

That is not the case for today’s visual apps, especially when full-motion video is commonplace.

The new problem is that “heavy usage” really does have much more serious capital investment implications.

Usage plans can be unfair, if users do not have an understanding of roughly how much data they use, without an order or two of magnitude.

But most fixed network Internet service providers tell the Government Accountability Office that only one percent to two percent of users exceeded their data caps. That essentially is an argument that metered usage plans generally work well, and are not unfair.

On the other hand, lack of transparency can lead to overage charges that, in some businesses, have been a significant source of revenue for some providers. One thinks back to video rental providers such as Blockbuster Video, which earned a sizable proportion of its revenue from late charges.

That, in principle, is similar to “overage charges” incurred by Internet access customers who exceed their usage caps. To be sure, most ISPs have gotten better at warning users when their usage is approaching a usage cap.

And, for most users, caps do not seem to be a major issue.

The GAO report on usage-based pricing, to be released in November 2014, apparently notes that users typically do not understand how much data they actually use. The implication is that usage caps are at the very least non-transparent, and might be unfair, since people buy usage plans far larger than they actually require.

Sandvine data suggest that many consumers, especially those who watch lots of Internet-delivered television or video, consume an average of 212 gigabytes of data a month, which is close to many existing data allowances, the GAO will report.

On the other hand, consumers do seem to understand that they use much more data at home than they do on their mobiles.

Consumers in eight focus groups reportedly expressed few serious concerns about usage-based pricing of mobile Internet plans, but had "strong negative reactions" to such pricing of fixed network ISPs. That suggests consumers do have an understanding about the volume of their data usage, at a high level.

The GAO's preliminary observations stated that usage-based pricing could limit innovation or creation of data-heavy apps because some consumers may restrict their Internet use to save money.

Some, including many ISPs, would argue that there is a simple, consumer-transparent way to deal with such issues. TV, radio and other content made available to consumers routinely has relied on advertising to defray cost.

Providers of cable, satellite and telco TV do the same thing, in essence, bundling the network bandwidth costs into the retail price of entertainment video services. In principle, that could be applied for bandwidth-intensive video entertainment as well.

Predictably, content app providers oppose that notion, as it could raise their costs of doing business, if app providers wind up subsidizing bandwidth consumption of their customers.

ISPs argue they cannot indefinitely increase network capacity without raising prices, and that therefore some way for consumers to correlate usage and price is necessary.

If Internet apps were not loosely-coupled, there would not be a problem. Suppliers would simply embed network costs into the retail cost of products. So the problem likely will become more manageable over time. But usage plans are unlikely to stop being an issue. Revenue models are at stake.

Is Windstream REIT the Beginning of a Trend?

Windstream is spinning off its fiber and copper networks and other real estate into a new real estate investment trust, and then lease use of the assets to support its communications business.

Basically, creation of the REIT allows Windstream to deleverage.

Windstream expects to retire approximately $3.2 billion of debt as part of the transaction, resulting in the company deleveraging to 3.3 times “debt to adjusted operating income before depreciation and amortization” immediately at closing.

So the new speculation is whether other larger service providers, such as Comcast, AT&T or Verizon Communications, not to mention likely candidates Frontier Communications and CenturyLink, might also take such a route.

In part, the value comes from shifting leverage to the REIT operations, thus reducing leverage for the retail operating part of the business. Also, in part, the value comes from tax benefits that should lead to higher cash flow available to the non-REIT company that remains.

The tricky part is that the core network becomes something like a master limited partnership. Are executives comfortable with that arrangement?

Such moves to spin off network assets into separate REITs are not precisely the same as creating structurally separated “network” companies. Those sorts of proposals would turn the network into a wholesale supplier of connectivity to all who wished to pay the network company for services.

U.S. telcos and cable companies traditionally have been loathe to do so. A REIT presumably would have the ability to avoid wholesale obligations greater than would have been the case under the existing arrangements.

But there would be at least some uncertainty.

Still, any chance to significantly deleverage would be helpful to most service providers looking to boost cash flow and ability to invest in strategic growth opportunities, something Windstream touts as a key benefit of its REIT move.

Generative AI Will NOT have the Impact Many Expect

Generative artificial intelligence, to say nothing of machine learning or neural networks (and eventually general AI), might collectively re...