Tuesday, November 19, 2013

FTTH vs. HFC is about opex, capex and timing

The FTTH/HFC controversy continues. Our views are always in flux and here is an update.

  1. The government should stay out. And if they wish to interfere, there's only one way to justify this: nationalize the infrastructure, and separate the network from services.
  2. We assume that an all-fiber network requires 'high' capex, but saves 'considerably' on opex. Evidence is growing:
    • KPN states that FTTH opex is at least 30% less than copper opex.
    • FTTH capex is continuously falling, as best practices grow.
    • At Ziggo, opex and capex are continuously rising. Capex is doubling over the last 3 years.
    • UPC states that EBITDA (OCF in Liberty Global speak) margins will structurally head lower.
    • Small cable companies in the Netherlands, that have no shareholders demanding decent quarterly returns, all do FTTH. Some even skip Docsis 3 and go straight from Docsis 2 to FTTH.
    • Netflix is taking a toll. It simply must.
    • Better compression and other efficiency gains are nice, but even at a 50% improvement, they only buy 1 year of delay, since data traffic grows at roughly a 50% rate.
    • Stratix put out a report that calculates what the roadmap, as laid out by TNO, would cost in terms of capex. Stratix claims the TNO gigabit (!) roadmap would be more expensive than overbuilding with fiber.
  3. "Cable (HFC) will serve the market well beyond 2020". This statement from TNO must be read in 2 different ways:
    • To say this, is to state the obvious. Any network can last. But one network will require more work (HFC) than others (FTTH) in terms of opex.
    • Most importantly, it is a responce to an earlier TNO report, covering the 2010-2020 period. It suggested to some that cable companies would cease to exist on December 31, 2020. Which is of course total nonsense.
  4. What the opex/capex implications of infrastructure choices are, ...
    • ... is relevant to the cable operator. "Do we upgrade our old car, or do we buy a new one?", so to speak. It's a matter of timing.
    • ... is a priori irrelevant to the end user. It may translate into a slower network and/or higher tariffs, and then the end user hopefully has an alternative to go to.
    • ... is also irrelevant to the government (see 1.).
    • ... is not irrelevant to shareholders, which is why public cable operators claim that they have future-proof networks.
UPDATE December 3, 2013
  • Supply side: is about fiber (or 5G), future-proofing, skipping interim technologies (VDSL, Docsis 3, ...) versus legacy
  • Demand side: expected traffic growth and business model (scarcity or abundance)
  • Customer's role is limited to becoming a subscriber or quit.
  • Shareholder's role is limited to buy or sell shares.
  • Government role is to regulate, facilitate and when the market fails: intervene.
  • Management's role is to make a choice between scarcity/minimising capex and abundance/maximise capex; or strike a balance between customer interest (maximise capex) and shareholder interest (minimise capex).

Friday, November 15, 2013

Amazon in 2013: innovation at break-neck speed

The Amazon innvation factory is spinning at full speed. Just take a look at the sheer number of 2013 press releases. They can be ordered in this fashion:
  • New stores:
    • US: Entertainment Collectibles, 50+ Active and Healthy Living, Art, AmazonSmile (dedicated store where portion of purchase price goes to charity)
    • Canada: Beauty, Health & Personal Care, Toys & Games, Groceries, Auto, 
  • Delivery:
    • Physical:
      • Opening several large fulfillment centers across the US (1 in NJ, 2 in Cal, 3 in Texas, 2 in Florida, 1 in Maryland, 1 in Wisconsin)
      • AmazonFresh (grocery delivery) trial in the US
      • Sunday delivery in selected cities for Prime members
    • Combining physical and digital delivery:
      • AutoRip (free MP3 versions of CDs and LPs bought from Amazon)
      • Kindle MatchBook (low-cost Kindle editions of books bought on Amazon)
  • Print:
    • licensing deals with Valiant
    • own imprints (Jet City Comics, Kindle Singles Interview)
    • Day One (weekly digital magazine, 20 $/yr)
  • Streaming music:
    • Cloud Player for Ford cars
    • for iPad
  • Streaming video:
    • content deals for Prime Instant Video members (A+E, PBS, CBS, FX, Scripps, MGM, NBCUniversal, Viacom, Disney, Warner Bros, Oceanhouse, Houghton Mifflin Harcourt)
    • distribution deals (Nintendo Wii)
    • original content production
  • Games:
    • licensing deals with EA
  • Devices (Kindle):
    • Paperwhite (gen 6 r-reader)
    • Fire HD and Fire HDX (tablets).
    • OS: Fire OS 3.0 (Mojito)
  • Other:
    • Amazon Coins (virtual currency for apps, games, in-app purchases)
    • Login with Amazon (single sign-in)
    • Amazon Storyteller (turns script into storyboard)
    • Second screen: X-Ray for Movies (based on IMDb)
    • Kindle Worlds (UGC based on licensed characters and stories)
    • Mayday Button (free live, on-device tech support for Kindle Fire users)
    • Login and Pay with Amazon (for partners sites)
    • Amazon Source (wholesale for book stores)
  • Many developer services from Amazon Web Services
  • Acquisitions:
    • IVONA Software
    • Goodreads (books social net)
    • TenMarks (web-based math programs)
    • Liquavista (screen tech)
    • Evi (speech recognition)
The unsurprising conclusions:
  • Innovation at break-neck speed. For physical and digital goods: print, music, video and games. Focus is on e-books and streaming video. So, expect more streaming audio (music subscription) and games?
  • Infrastructure provider for its own but also wholesale (developers, 3rd-party sellers).
  • Growing list of services and subscription-based services, many around Amazon Prime. On last count, there were 215 mln active Amazon customers and 10 mln Prime subs.
  • Devices are limited now, possible additions: smartphone (project Smith), STB (code name Cinnamon), gaming console, etc.
  • Expansion focuses on existing markets (Canada, Australia, Mexico). When will a new market be added?
  • More acquisitions coming?
    • Streaming audio service?
    • Intel's connected STB unit Intel Media?
    • Non-US e-commerce company?

UPDATE December 27, 2013:
  • Delivery:
    • fulfillment centers in Windsor (CT), Wroclaw (Poland)
    • plans Prime Air (aerial 30 minute delivery by drone)
    • pop-up stores in malls
    • AmazonFresh expands to San Francisco
  • Payments:
    • launches 1c shipping for wine in the US (direct-to-consumer)
    • credit card patent
    • expands Amazon Coins to UK, Germany
    • Amazon Coins can now be gifted
    • Fire tablets can now be paid in installments
  • Print:
    • launches StoryFront imprint (shorts)
  • Streaming music:
    • launches Cloud Player for BMW and Mini
  • Streaming video:
    • distribution deal Lovefilm for Xbox One
    • content deals Prime Video with PBS, A24
    • launches Prime Instant Video in Japan
    • all original content to be shot in 4K from 2014
    • launches Storybuilder (digital notecards and virtual corkboard for writers)
  • Devices:
    • Fire OS 3.1 for tablets
  • Membership:
    • Prime adds 1m subs in 3rd week of December
  • AWS:
    • launches WorkSpaces (virtual desktop)
    • expands to China
  • Acquisitions:
    • GoPago (partly: tech and team only)

Monday, November 11, 2013

Cable companies getting ready for IP and FTTH

According to Sandvine, Netflix is starting to have an impact in Europe. With traffic growing so rapidly, network operators must be worried.

In the cable sector, upgrades only buy so much time, as does the new HEVC standard. A 50% efficiency or capacity gain is nice, but it's wiped out after two years of traffic growth.

Looking at Ziggo and UPC Netherlands, we indeed see things moving:
  • At UPC NL, capex almost doubled in 4 years time.
  • UPC NL is stating publicly that EBITDA (OCF) margins are permanently going down. 
  • At 13Q3, UPC NL's revenue was down 4.0%, while 'opex' (content rights, network ops, interconnect, customer ops) was up 7.4%.
  • At Ziggo, capex is doubling in 3 years time.
What could be happening underneath, is cable companies preparing for the inevitable: IP (besides DVB) and FTTH (fiber deep). UPC has its Horizon smart STB out, which is fully IP-ready. And when adding homes passed in newly built areas (roughly 10k per annum at UPC and 15k at Ziggo), they have started laying empty ducts besides the coaxial local tails.

Thursday, November 07, 2013

No more rubbish about failing IPOs, please

The Twitter IPO is drawing a lot of interest. A link to earlier IPOs is easily made. But people who claim that the Facebook IPO was a failure, have no clue about investing or the rules of the stock market.

In this otherwise interesting post, the author writes: "Facebook floated at $104b (massively overvalued, it took 15mo to return to that level)".

This fails on several levels:
  • Facebook went public and hence its IPO was a success. Trading or IT systems failing, is an entirely different matter.
  • The share price going down directly after the first trades doesn't change that either. And its subsequent reversal couldn't make an IPO right.
  • Why would Facebook be overvalued? Where are the DCF calculations to support this claim?
  • Has the value increased over the last 15 months? Is Facebook not overvalued now, just because the share price is above the IPO level?
The market value doesn't equal the 'true' value. Nobody knows the 'true' value. 'True' value is a personal valuation and depends on personal assumptions in ones personal DCF model.

The stock market works in two different ways. First, there is the game only professional investors play:
  1. Fully understand the business to make the best possible estimates for growth and margins. This is the hard part and it is entirely personal.
  2. Translate this into a valuation, using a standard DCF model. This is the easy part. Excel does the job. The value you arrive at, is your true personal value.
  3. Compare this to the market value. The assumption is that the market will in due course recognise that you have the best assumptions (see 1) and hence the best valuation (see 2). If your valuation is lower than the market value, you are a buyer of the stock. If it is higher, you are a seller.
Second, one must remember that the stock market is a second hand market. Immediately after the IPO (or a new share issue), stocks are bought and sold in a closed market system. Investors are looking for the greater fool to sell stock to or to buy stocks from. DCF-based valuation doesn't come into play in this game, possibly only in the longer term or as a long-term beacon signalling excessive over- or undervaluation. There are lots of methods to play this game, most notably quantitative analysis and technical analysis. This game is played by both professional and non-professional investors. Obviously, professionals bank on finding these greater fools among non-professional investors.

Finally, let me ask you this. You walk into a computer store and buy a EUR 1,000 laptop. What is the true value 5 minutes after you leave the store?
  • The wrong answer is: a lot less, because second hand laptops cost much less than new ones. This is not the true value, but the market value.
  • The right answer is: this is a personal matter and depends entirely on the cash flows you expect to be generating from using this laptop (DCF approach, as above). And thus, to the buyer the value of this laptop is probably a lot more than EUR 1,000. After all, his job depends on it.
Put differently, there is a big difference between market value and true value. And it is not just that the market value is real-time available, whereas true value is a personal thing. That's only the beginning.

Tuesday, November 05, 2013

Twitter IPO is about innovation, advertising, Big Data and growth

Twitter's IPO is about a number of issues:

  • Innovation. The service should not grow old with its user base. There has been some innovation recently (DM among non-followers, previews). It could use innovation to compete with Facebook, Instagram (via Vine), WhatsApp. The trouble is that Twitter by nature is a simple service, and hence innovation is more or less ruled out. Same as Netflix. (However, Netflix has passed a point of no return where it is quickly becoming too large to be overtaken by any competitor.)
  • Advertising. So far, we have seen few formats (3), but when Google acquired YouTube, markets were equally skeptic over options to expand advertising on YouTube. Further, Twitter acquired MoPub.
  • Big Data. Twitter sits on a ton of data. Apparently, tweets about TV shows make Twitter especially interesting to TV advertisers.
  • Growth. Can Twitter accelerate?

Focus and natural ownership drive asset sales

Rationale to recent asset sales:

  • Vivendi sells Maroc Telecom to Etisalat: sector focus for Vivendi and Etisalat is probably more of a natural owner of this asset.
  • Deutsche Telekom to sell Scout24: not the natural owner.
  • Telefonica sells O2 Ireland to 3 Ireland and Telefonica CR to PPF: geographic focus for Telefonica, reduce debt.
  • Hrvatski Telekom sells infrastructure to Ericsson: operational focus (on services), reduce debt.
  • Liberty Global sells Chellomedia to AMC Networks: operational focus (on broadband), away from content.
  • Tele2 sells fixed-line network in Sweden to Telenor: operational focus (on mobile).