Tele2 Capital Markets Day: highlights

Overall: moving from Discounter to Best Deal and now to Value Champion.

Sweden:

• Comviq discounter brand, Tele2 Value Champion brand.
• 3P on OA networks by YE 2013: 600k households.

Norway:

• Focus on network roll-out. Coverage 75% mid 2013.
• Auction (800, 900, 1800) coming 13Q1.

Kazakhstan (Tele2 51%, Asianet Holding 49%):

• EBITDA-breakeven by 13H2.
• Network coverage 92% in 2015 (today 80%).

Russia:

• Tele2 leads in 9 regions, is a challenger in 21 and a newcomer in 8.
• Focus on 2G; quotes:
• "maximize the 2G opportunity
• make progress on technology neutrality
• absence of MBB will not be critical in approx. 2 years
• >90% of data usage is social networks, where EDGE speed is enough for good user experience"
• "Evaluate possibilities to expand carefully through new licenses as well as by complementary acquisitions."
• Tele2 (and others) aims to launch LTE in 1800 band. 58% of its base stations are LTE-ready and 67% of its transport network.
• MNP is coming to Russia Dec. 1 2013.

Deutsche Telekom Capital Markets Day (3): highlights Germany

General:

• "We believe highspeed network quality will be key differentiator".
• Rev stabilisation in 2014.

LTE:

• Coverage to 85% by 2016 (from 38% now).
• Peak performance 75 Mb/s in 800, 150 Mb/s in 1800 band.
• Capex 1800 70% lower than HSPA (in terms of capex per Mb/s)

Fiber (FTTC):

• Speed FTTC max 50/10 Mb/s, with vectoring 100/40 Mb/s
• Capex FTTC + vectoring 70% lower than FTTH (in terms of capex per home).

Hybrid access (FTTC with vectoring and LTE in 1800 band):

• Down: FTTC + LTE 200 Mb/s (100 each), ADSL + LTE 116 Mb/s (16 + 100).
• Up: FTTC + LTE 90 Mb/s (40 + 50), ADSL + LTE 51 Mb/s (1 + 50).
• Vectoring and hybrid prolong copper lifecycle up to 10 years.

Mobile targets 2015:

• Smartphone LTE sales 67% share (now 4%).
• 10m contract subs (+47%) (now 6.8m).
• Service rev EUR 7bn (+ 2-3%), market share 35%.

Fixed:

• Focus on wholesale to secure network utilization.
• Targets 2015:
• 2.7m fiber subs (+240%), market share 43%
• 3.0m Entertain subs (+60%)
• Connected home rev EUR 5.4bn (+2%).
• Growth initiatives (cloud, intelligent networks, De-Mail, M2M) rev EUR 0.7bn.
• Total growing rev EUR 9.2bn (+1.7%)
• Total rev EUR 22.2bn (from 22.7 in 2012), o/w >40% from growth.

                              2012  2013  2014  2015

REVENUE TEL DLD               22.7              22.2

          BASIC               15.2              13.0

          GROWTH               7.5               9.2

            CONNECTED HOME     5.3               5.4

            MOBILE DATA        2.0               3.0

            INITIATIVES        0.2               0.7

OPEX                          13.9              13.8

  DIRECT COST                  4.8               5.1

  INDIRECT COST                9.1               8.7

EBITDA MARGIN                   40    40    40    40

CAPEX   TEL DLD                3.6   3.4   4.1   4.3

          BASIC                                  3.2

          FTTC                                   1.1

Deutsche Telekom Capital Markets Day (2): highlights Europe

Market revenues estimates 2012-2015 from EUR 65 to 67 billion:

• Blue Ocean CAGR +6%
• mobile internet EUR 4 to 6 bn
• connected home EUR 10 to 11 bn
• IP services EUR 5 to 8 bn
• B2B/ICT EUR 17 to 19 bn
• Red Ocean CAGR -6%

DT targets:

• Blue Ocean CAGR 2012-2015 12% and raise to 28% share of rev.
• Red Ocean: indirect cost redux cum EUR 0.6bn (6%) by 2015, direct cost decrease 2% by 2015.

One DT Europe strategy:

• All IP: "All-IP transformation represents the creation of a simplified and standardized network", separation of OSS and BSS.
• B2B 'Big Bang'
• Mobile internet, innovation: targets 11 NatCos with LTE coverage of at least 60% (today 4 with 30%).
• 'Cost revolution', operational excellence: Shared service centers, IT supply centers

"Differentiated steering of NatCos, according to market position, to create relevant focus"; 4 NatCo clusters:

• Senior leaders (Greece, Hungary, Croatia, Macedonia): stabilize topline, "Increase Blue Ocean topics revenue share" (the growth areas), radical opex redux
• Macedonia: capex redux.
• Junior leaders with a challenge in mobile (Romania, Slovakia, Montenegro): FMC, radical opex redux.
• Romania: smart TV, B2B FMC
• Mobile runner-ups (Poland, CR): Increase market share.
• Poland: boost B2B
• Smart attackers (NL, Albania, Austria): increase revenue (esp. B2B, mobile data), reduce capex.
• NL: unconventional attacker, boost efficiency, "network performance is only a hygiene factor"
• Austria: leading attacker.

Focus from quarterly EBITDA to 'cash contribution' (i.e. EBITDA - capex). Focus on revenue + cost.

Targets 2012-2015:

• Revenue CAGR organic +1.4% (reported -0.6% as a result of regulation) to EUR 14bn in 2015.
• Traditional from 81 to 72% share, growth areas from 17 to 24%, B2B/ICT from 3 to 4%.
• Capex stable at EUR 1.7bn (excl. spectrum).

Deutsche Telekom Capital Markets Day (1): highlights overall

From Deutsche Telekom's Capital Markets Day.

• Dividend to be lowered.
• Capex to be stepped up, focus on LTE and FTTC.
• Focus on cloud, partnerships with Microsoft (Office 365) and Box (Box Business).
• Growth markets: B2B/ICT, mobile data, TV; will go to 40-45% of rev by 2015 (2010: 24%).
• Revenues to return to growth by 2014 (Germany stabilising, USA only from 2015).
• Dividend policy to be reviewed for 2015, will be a mixture/choice of cash dividend and share-based dividend.
• Net debt/EBITDA 2.0-2.5, equity ratio 25-35%.
• Germany: "High-speed Internet access on a scale never seen before", LTE (150 Mb/s, coverage 85% by 2016), FTTC (coverage 65% by 2016 or 80% incl public co-funding; with vectoring 100 Mb/s; capex 2013-2020 EUR 6bn), hybrid LTE + vectoring (hybrid-box, 200/90 Mb/s), EBITDA-margin to 40%, market shares 35% in mobile service rev and 43% in BB lines.
• USA: LTE (2x20 MHz; capex $4bn; coverage 225m pops YE 2013; MVNO platform), agreement with Apple (from 2013). MVNOs 12Q3: 3.9m subs (+11%), rev $126m (+15%). B2B 12Q3: 6.3m subs (+5%), target 2013 growth 8-10%.
• MetroPCS: subs to be migrated by 15H2, CDMA to be recommissioned, spectrum to be re-farmed for LTE, DAS network (6k nodes) to be upgraded to HSPA+ and LTE, addressable pops to 280m.
• USA targets mid-term (5 yr): rev CAGR 3-5%, EBITDA CAGR 7-10%, FCF CAGR 15-20%, margin (of service rev) 34-36%. Sources of growth: contract (flat growth), no-contract (the 'un-carrier'; 80-90%), geographic expansion of MetroPCS brand (10-20%).
• Considers IPO for EE, strategic alternatives for Scout group, more network sharing deals.
• IT savings EUR 1bn per annum by 2015; One DT Europe program (centralizing shared tasks) to leverage economies of scale in Europe.

Assuming inclusion of MetroPCS from 1/1/2013:

                  2012      2013      2014   2015   2016

SERV. REV USA            20.8-21.0

EBITDA    GROUP     18      18.4        up
          USA              5.8-6.0

MARGIN    GROUP                                40
          USA               27-29

EPS                                          0.80

DPS               0.70      0.50      0.50

CAPEX GERMANY                3.4       4.1    4.3    4.5

      USA                 $4.7-4.8    $3.0   $3.1

      GROUP        8.3       9.8              9.5

FCF                  6         5                6

Scarcity-based business models may elicit government intervention

Government intervention in the broadband market conflicts with free markets. It arises from fears of market failure as a result of:

• Ineffective duopoly i.e. oligopoly and too little competition.
• Underinvestment by the incumbent, the cable company, and challengers.
• Scarcity-based business model at both the incumbent and (if any) the local cable company.

About scarcity vs. abundance as the foundation of the business:

                                                                   

                         Scarcity            Abundance

Revenue driver           price               volume

Bits are like            wood, water         electrons

Bandwidth                throttle            maximize

Business focus           connectivity        VAS

Business model           usage-/speed-based  one proposition

Market                   saturated           growing

Innovation               none                maximize

Vertical integration     yes                 no

Infra-based competition  yes                 no

Structural separation    no                  national infra

Marketing, propositions  maximize            minimize

Customer focus           increase spending   increase satisfaction

Business model           subs, transactions  ads, transactions

Customer data            full                growing

It appears that telcos, cablecos and ISPs traditionally belong to the Scarcity group, whereas Amazon and Google are in the Abundance group. Netflix, Facebook and Apple seem to be moving from left to right. Microsoft and Nokia may be moving in the opposite direction.

If the governement believes there is market failure, or that Abundance is a better foundation for economic growth than Scarcity, then it has several options to intervene and contribute to broadband performance and coverage:

• Limit the effort to bringing broadband to rural areas where xDSL doens't work and cable is absent. But then, it could be left to the market to provide LTE services, or even satellite-based broadband.
• Facilitate all market participants by reducing red tape, providing loans, becoming an anchor tenant, etc.
• Participate at market terms to create a third infrastructure (FTTx). But do not expect existing players to simply quit competing and become service providers on your FTTx network.
• Regulate in such a way that competition truly increases. For example:

1. forbid the incumbent to consolidate the market, or even do any takeovers at all.
2. force structural separation upon the incumbent (see New Zealand). But raising wholesale prices is clearly a way of helping just the incumbent, and foregoing the interests of its wholesale customers.
3. nationalise (see Australia, NBN).

Fixed/mobile convergence 2.0: 10 varieties

In the business market, fixed/mobile convergence is probably the biggest issue at the moemnet, with cloud computing. But what does it mean in the consumer market?

GENERAL
1. Apps. In the mobile data world, apps helped break open the market. In the fixed broadband market they are not new, but they may redefine how we use the internet.

VOICE/TEXT
2. Mobile-only. Why hang on to fixed voice, unless it is given for free as an add-on.
3. Unified communications. A call is routed to any handset, based on preferences managed in a portal such as Google Voice.
4. Quad play. The 3P and mobile are combined into a 4P. The addressable market is much smaller than the 3P market. Virgin Media UK's 4P penetration grows very slowly and now stands at 15.6%.
5. OTT. Apps, whether independent (Skype, WhatsApp, Viber, Facebook Messenger, Google Talk, Rebtel, VoipBuster, Kakao, KeKu, IKmobiel, Tango, Fring, Nimbuzz, eBuddy) or operator-controlled (pfingo (StarHub), Joyn (Vodafone, T-Mobile), TuMe (Telefonica), UPC Phone, SmartCall (Virgin Media UK)) branch out to offer a full communications suite (text, voice, video calls), from fixed, mobile and WiFi, with free on-net calls.

TV/VIDEO
6. TV Everywhere. Content on any screen, primarily VOD but live TV as well. Primarily in and around the home, but anwhere as well (Slingbox, Belkin's @TV).
7. Second screen. The tablet or smartphone functions as second screen, as social TV or as remote control.
8. Cloud. Content (and in TV Everywhere: the UI) moves into the cloud (Apple iCloud, Google Drive, Amazon Cloud Drive etc.) and so can be consumed on any connected device/screen.

NETWORK
9. WiFi. This is where fixed and mobile networks meet, whether public (free or net), private (whether open or closed) or shared (MiFi, TriFi) hotspots. Backhaul network (fixed or mobile, or even satellite) is more or less irrelevant. Cable companies consider foregoing mobile and focus on WiFi instead.
10. LTE. This may be a fixed-line replacement. Not for the entire market, but the addressable market could still be interesting. See for instance Cota's TD-LTE in Spain.

Smartphones and tablets convert hardware, paper and discs into software and touch screens

We may worry about the exhaustion of natural resources due to the rise of the smartphone and the tablet, but the truth is much rosier. The ease of having so many devices integrated into one, no doubt represents massive energy savings. After all, advanced smartphones, such as the Samsung Galaxy S III, and tablets allow the user to do away with a growing number of devices - they are true 'Swiss knives':

• Phone, either mobile or desk.
• Computer, if you are not a very heavy user.
• Other devices:
• Camera, since picture quality is very high.
• Baby mobitor, if your operator/subscription allows it.
• Navigation/GPS device, thanks to Google Maps.
• Clock, alarm, watch and stop watch.
• Gaming device, portable console.
• Barcode scanner.
• Video:
• TV screen, second screen.
• Video player, DVD player.
• Remote control.
• Audio:
• Radio.
• CD player, MP3 player.
• Voice recorder.
• Other:
• Piano, if your musicality doesn't reach beyond fiddling with an on-screen keyboard.
• In time: wallet, keys, banking/credit card.
• If the technology is integrated into your Google Glasses, it obviously replaces your glasses as well.
• Once sensoring devices (movement, smell, air quality, etc.) will be integrated, the smartphone will also replace those kinds of hardware tools.

Not to mention access to all sorts of media and information services on paper and discs: dictionary, diary, newspaper, city map, cookbook, TV guide, photo album, CDs, DVDs, etc.

In short, the smartphone saves tons of resources and energy from the conversion of hardware, discs and paper into software and touch screens. And owning a personal device such as a very cool smartphone also reconsiles us with the fact of having a smaller screen and reduced audio quality, which in itself also saves us resources and energy.

Q2 reviews for Dutch big 6 telcos

Here are the reviews of the Q2 results of the 'big 6' telcos in the Netherlands (background articles: subscription required):

Available in Dutch:

• Ziggo in Q2: groeitrends zetten door ondanks groeiend verlies van klanten en moeilijker conversie van analoog naar digitaal
• Vodafone NL in Q2: afgezien van storing een behoorlijke performance
• Tele2 NL in Q2: marktaandeel mobiel kopen betekent nog geen commitment aan Nederland
• KPN in Q2: turnaround in breedband nabij, maar niet in mobiel
• UPC NL in Q2: terugval in groei op de breedbandmarkt en in de conversie naar digitaal
• T-Mobile NL in Q2: verschuiving naar postpaid, zakelijke markt en data bij laag investeringsniveau

Available in English:

• Ziggo Q2: growth trends continue despite increased customer loss, tougher digital conversion
• Tele2 NL in Q2: buying mobile market share not yet sign of commitment to Netherlands
• KPN in Q2: turnaround nearing in broadband, mobile not yet
• T-Mobile NL in Q2: shift to postpaid, enterprise and data, at low investment level

Conclusions

Full service:

• KPN: broadband is being repaired, but mobile is still worrisome
• Tele2: small positive: growing share on the mobile market

Mobile:

• Vodafone: unremarkable
• T-Mobile: outperforming the mobile market

Cable:

• Ziggo, UPC: losing focus but still OK

Mobile data aren't mobile at all

Mobile operators claiming that the vast majority of their subscribers use less than 500 MB of data per month are talking differently in public than in a recent survey, in which most operators say they expect a 20 fold rise over the next 5 years. Just do the math on watching YouTube at a 1 Mb/s bit rate: you would burn through your monthly allowance in just one hour. 500 MB is really just nothing.
So, if these operator claims about users staying below the 500 MB threshold are right after all, then there are two possibilities:

• Subscribers aren't using mobile data's full potential.
• They are on WiFi all the time.

America Movil may swap its 28% KPN stake for 100% of E-Plus and Base

What could Carlos Slim's rationale be for making an unsolicited public offering for a minority of KPN's shares?
KPN finds the price too low, but so does Slim, of course, or else he wouldn't see any upside potential.
Then again, even the people at Blackstone aren't financial wizzards: after buying a 4.5% stake in Deutsche Telekom in 2006 for 14 EUR/share, the stock price declined and now hovers around EUR 8.50.

Here are the options:

• A purely financial investment, based on KPN's near halving of its share price in a year's time. This doesn't really make sense because based on multiples the stock isn't cheap and the future looks grim: mobile is going down, there may be a new market entrant as early as next year, the broadband market share keeps dropping, TV is not generating much cash, Germany and Belgium are losing momentum.
• Reducing the overall risk of America Movil. In itself, this makes sense, because its portfolio is heavily geared toward high-risk Latam countries.
• Taking control of KPN. America Movil will likely demand a few seats on the board. The question remains: why? The KPN management is doing whatever it can and Slim isn't in the position to know better. And synergies will be very limited.
• A first step toward a full public offer for all of KPN. Hard to tell, but this could be the case. The question remains: why first build a minority share? And what will the KPN management do?
• Sort of take control of E-Plus. This could make sense. Slim now holds a trump card in the possible consolidation of the German mobile market, where arch rival Telefonica may be looking for an exit to reduce its debt. Slim can easily fund an offer for O2 Germany and create a strong competitor to Deutsche Telekom and Vodafone. Or else he could demand a nice price for E-Plus and exit Europe once he sells E-Plus to Telefonica or anybody else.

Whatever the case is, here is my guess at what will happen next: America Movil will at some point split KPN. Their interest is probably in the mobile assets, and possibly in the non-Dutch ones only: E-Plus (Germany), Base (Belgium) and Ortel (European MVNO). Some assets may be sold off (iBasis) and what remains is a focused Dutch integrated operator (which may spin off its passive network assets to become a service provider - but that's a different story).

Carlos Slim could make this work by swapping his 28% KPN stake for a 100% stake in KPN Mobile International plus debt.