Bol.com sold, but not to Amazon.com

Bol.com, the leading e-commerce site of the Netherlands, was finally sold. It started life as part of Bertelsmann Online and is now becoming part of the Cyrte investments portfolio.
Two years ago, I argued that it was a great fit for Amazon.com. Bol.com, much like Amazon, is venturing beyond books into electronics and it too has fierce local competition from an eBay affiliate: Marktplaats.nl (classifieds).




Financial details of Bol.com are not disclosed, but let's see how they compare:

• Sales 2008: Amazon $19.166bn (+29%), Bol EUR 224m (+31%). This makes Amazon 65x larger (at current USD and EUR rates). Growth rates have pretty much converged.
  
• Employees (at present): Amazon 20,600, Bol 230. On this metric, Amazon is 90x larger.
  

Of course, the differences are significant. One could say that Bol.com is an early stage Amazon look-alike. It lacks a global presence, digital downloads and streaming, the Kindle e-book reader (including the WhisperNet MVNO), wholesale services (fulfillment) and web services. It doesn't seem to have the scale to ever match Amazon when it comes to innovation, which is essential in a world that steadily migrates away from physical products.

Amazon's market capitalisation is $36.3bn and it has $0.4bn in long-term debt, a total of EUR 27.7bn. One can only hope that Cyrte paid less than Amazon's 2x sales multiple valuation, which would translate into a maximum of EUR 400m.

Deutsche Telekom leads: the crisis is kicking in

Deutsche Telekom published preliminary results for the 09Q1 quarter. Results were due May 7 (which is now set for full results), which implies that management had something meaningful to disclose that couldn't wait another two weeks.

The US, the UK and Poland apparently are the cause of the recent deterioration. Less travel means fewer roaming revenues. Calling minutes in the US declined by a whopping 8%. And T-Mobile UK will take an impairment charge.

Is the telco industry immune to the crisis? I don't think so, but it kicks in with a 2 year delay.

True innovation arises at the active layer

My daughter was out horseback riding over the Easter weekend. Her teacher is new to the village where we have our country home and the business model deployed is really interesting.

The teacher rents space from an old farmer, who decided to take it a little easier. He was never into horses; his business was both milk and growing corn and wheat. Now, all he has left is a bunch of pigs. In other words MoF (milk over farm), PoF, CoF and WoF, but no HoF. He is still in control of the farm (the passive network of meadows, water, fences, etc.) but the young woman who co-locates at the farm, brought her own horses (active equipment, so to speak). She also does the teaching (the retail services) and the whole thing really works well. Right now, she is the only person co-locating, but I suppose the farm is big enough to be able to host a few more animal (horse, donkey, whatever) keepers. Or a service provider who knows how to teach the pigs a few tricks and sell the service.

So here is what is going on:

• Complete separation of passive and active elements.
• Vertical integration of active elements and services.
• No cannibalisation of legacy income streams. All interests are perfectly aligned.
• It remains to be seen what will happen once the farmer decides to allow another (horse) keeper to co-locate at his farm. There doesn't seem to be a reason for the farmer to keep the newcomer at a disadvantage, so it looks like this will lead to some competition.

Catching up on some old newspapers, a story about the Dutch railway system caught my eye. There has been structural separation between the passive elements (tracks, safety system, etc.), which are controlled by state-owned ProRail, and the active elements (stations, other real estate), owned by NS. However, there is still integration of the active level and a service provider (NS). Also, NS provides wholesale services to competitors.

Generally, the model seems to be working fine, but recently, new service providers have started to complain. They have a hard time competing with NS because the latter controls the active layer and provides wholesale services. Newcomers, that typically run services over regional lines, are at a disadvantage viz-a-viz NS as a service provider when it comes to renting office space at stations, the use of stations for consumers (competing trains are often at the far end of the platform, sometimes hundreds of meters away) and infomation to travellers.

A committee has proposed to take away wholesale service provision from NS and create a new company for that purpose or ask ProRail, the network owner, to perform this service.

To summarize:

• Complete separation of passive and active elements.
• Vertical integration of active elements and services.
• Full cannibalisation because there is just a single service: travel. The 'pie' most likely isn't growing very much, unless service levels at competitors are higher, which may draw travelers away from their automobiles. Right now, this doesn't seem to be happening, as witnessed by competitor complaints. To be sure: the pie is growing somewhat because competition has urged NS to raise its level of service.
• Vertical integration of the active elements operator and the dominant service provider seems to be an inhibitor for the system to really work. (Art Price would say: You can't compete with your customers.)
• Adding wholesale service to ProRail would effectively collapse the passive and active layers into a single network layer. It doesn't seem to be a bad idea, because there doesn't seem to be room for a competing active operator anyway.

Transporting these events to the world of telcos, my conclusions would be:

• Meaningful innovation arises at the active level (HoF is new to the farm). Innovation at the service level probably has more to do with service levels (railways are about taking people from A to B - no more, no less).
• Newcomers co-locating compares to xDF access (MDF, SDF, ODF).
• Newcomers not in control of active elements, are sold wholesale broadband access (WBA) by the operator.

If co-locating horses is like buying xDF access from the farmer (owner), and if providing travel services is like buying WBA from NS (operator), then what would it be to ...:

• ... buy WBA access from the horse keeper (operator)? A newcomer wouldn't bring his own horses. Service levels may rise, but innovation is questionable. If a new service provider wants to sell new services, it is dependent on the horse keeper to teach the animals new tricks. But then the new tricks could become available to all service providers.
• ... buy xDF access from ProRail (owner): A newcomer would bring along his own stations. It could be possible in theory, because many stations are too small anyway and serve as bottlenecks, degrading service levels. How about this for a stimulus plan?

Final conclusion:

If there is scope for true innovation, xDF access must be available (wholesale service provided by the owner); if innovation is merely about raising service levels, WBA is sufficient (wholeale service provided by the operator).

That's the question!

Australia goes structural separation for near-nationwide FTTP

After Singapore and New Zealand, now it's Australia to help fund a National Broadband Network. It will be FTTP after all: FTTH + FTTO. (There are 21.5m Australians in 7.5m homes, but how many offices? - anybody?)

Here are the specs:

• Ownership: government, managed at an arm's length; majority i.e. at least 51%; may not be sold until 5 yr after launch; private investment expected; any RSP max 15%.
• Technology, topology: FTTP, max 100 Mb/s, to cover 90% (all towns of >= 1k people), elsewhere wireless/satelliet, 12 Mb/s.
• Total cost: AUD 43bn (initially AUD 4.3bn), funding through Building Australia Fund and the issuance of Aussie Infrastructure Bonds (AIBs)
• Time-line: 8 year roll-out; simultaneously in metro, regional and rural areas from early 2010; first national backbone and Tasmania (July 2009, to be built by Aurora); FTTP mandatory in greenfields from July 2010.
• Jobs: 47k jobs, 25k staff every year (peak: 37k).
• Government strategy: facilitate access to land, poles, ducts; e-health, e-learning; FTTP required for greenfields from July 1 2010.
• Regulation: consultation on measures considered at Telstra: access, functional separation, horizontal separation; response due June 3 2009.

Questions remaining:

• PON (effectively 2-layer; no unbundling, just WBA) or P2P (3-layer, WBA or ODF access) network?
• How about in-home wiring?
• Role of Telstra: horizontal and/or vertical separation; access to infrastructure; spin-off assets into the new company?
• Pricing?
• Penetration targets?
• Will 1 Gb/s come into play?

Remarks: similarities to Singapore (PON) and New Zealand (probably P2P - see page 26):

• Clear choice for FTTP over FTTN.
• Mixed ownership of the passive layer.
• Open access.
• Structural separation.

Singapore: 100/50 Mb/s triple play for under 40 EUR/mo

IDA has ordered Nucleus Connect to construct the active layer (switches and routers, including network termination equipment (NTE) at the subscriber) of the Singapore NGNBN (Next Gen NBN). A presentation is here.

Here are the specs of the entire network:

• Part of the iN2015 policy.
• FTTH PON network, in the familiar 3-layer model. Structural separation between passive and active layers, operational separation between active layer and any RSP owned by the same company (i.e. StarHub). Open access (OA) at layer 2 and 3 (slide 8).
• Passive layer to be built by OpenNet (SingTel 30%, Axia NetMedia 30%, SP Telecomms 15%, Singapore Press 25%). Subsidy SGD 750m. Residential wholesale tariff 15 SGD/line/mo, business 50 SGD/line/mo, no connection fee.
• Active layer to be built by Nucleus Connect, a separate StarHub company. Subsidy SGD 250m. Tariffs (include OpenNet fee; all in SGD/line/mo): residential 100/50 Mb/s for 21, 1.0/0.5 Gb/s for 121; business: 100/100 Mb/s for 75, 1/1 Gb/s for 860.
• Open access to retail service providers (RSP).

And here is the timeline:

• Nucleus to be incorporated April 17 2009, RfP to formally close October 2009.
• Service launch April 2010.
• Coverage 60% by end of 2010, 95% by end of 2012.
• Universal service obligation from 2013.
• 2015 targets: 330k residential subs, 80k business subs.

Some remarks:

• Pretty much fits my ideal for a FTTH network, featuring structural separation of the passive network. See what is does for ownership and bringing in third-party investors. SingTel may spin-off network assets into OpenNet. It goes even further than New Zealand (structural separation only once Telecom NZ gains a majority share) or KPN/Reggefiber (functional sepapartion 'only'). It is striking to see how functional separation in the NL is defended by referring to the competitive situation (nationwide cable coverage), which has nothing to do with it - see Singapore, where structural separation is forced because the network needs to function properly, not because there is competition from some other network.
• Too bad it's PON, not P2P (slide 24).
• The 1 Gb/s offering is neat, though.
• The residential offering is asymmetrical. We are seeing more of this, because FTTH needs to be positioned above DSL (i.e. more expensive), including business DSL.
• The 2015 targets appear to be quite modest, for a state that is home to 4.8m.
• We'll be on the lookout for RfPs to equipment manufacturers. RSPs are suggested to bring their own residential gateways (see slide 26). The NTE will allow end-users to get services from several RSPs at once (as limited by the number of ethernet ports on the NTE, I suppose).
• The 100/50 Mb/s service will be 21 SGD/mo for the RSP (just over 10 EUR/m0), the 1.0/0.5 Gb/s service will be 121 SGD/mo (60 EUR/mo) at the wholesale level for RSPs. The retail price for a triple play will add a margin plus the cost of both TV and telephony. It looks like an extended TV package is 37 SGD/mo, and telephony (line rental, unlimited local calls) is around 10 SGD/mo. The fast triple play would then be around 68 SGD/mo (EUR 33,50), the ultra-fast triple play 168 SGD/mo (EUR 83), before earning the RSP a margin. I suppose the triple play will be commercially available for under 40 EUR/mo.
• MobileOne lost this round, but has stated it will be a RSP. Sureley SingTel will be one too.

Next in line: Australia is due this week to award its NBN contract.

Banking as a value-added service

My friend John posted on Tesco's recent effort to get into banking. It's in Dutch, and here's a Google translation into English. It's interesting an a number of accounts: using your network as a platform to launch yet another service; enter a new market without cannibalising a legacy revenue stream; commoditisation. Sounds a lot like IP and the possibilities it creates. If somebody would add the element of sharing (something to the order of Revolution MoneyExchange), it could very well be banking 2.0.

Control of subsidised FTTH will bring structural separation to Telecom NZ

New Zealand is getting closer to its ultra-fast broadband dream. The government issued a 'draft proposal for comment', basically to set up a PPP for constructing the network.

As promised earlier, the government will contribute half of the cost (NZD 1.5bn) of building out an open access FTTH network to 75% of the people (in 25 towns - note that 29.5% of all homes are in Auckland). During the first six years, focus is on schools, businesses, the health industry and greenfields. However, FTTH must be deployed within 10 years.

The big issue of course is: what will Telecom NZ do? Will they overplay their hand the way Telstra did in Australia? The document clearly demands structural separation of Telecom NZ, should it want to invest in the passive infrastructure; unless it would hold a minority stake (comparable to KPN holding 41% in the new Reggefiber Group), in which case functional separation (which it already implemented) would suffice. In other words: if Telecom NZ steps in with a minority share, it wouldn't have to change its structure, but (unlike KPN) it would need to be structurally separated once it would gain a majority stake in any LFC.

Here are the Key Principles from the document:

• making a significant contribution to economic growth;
• neither discouraging, nor substituting for, private sector investment;
• avoiding entrenching the position, or ‘lining the pockets’, of existing broadband network providers;
• avoiding excessive infrastructure duplication;
• focussing on building new infrastructure, and not unduly preserving the ‘legacy assets’ of the past;
• ensuring affordable broadband services.

Here are some conditions:

• The vehicle for investing the subsidy will be crown-owned: Crown Fibre Investment Co (CFIC). It will invest, alongside co-investors, in Local Fibre Cos (LFCs). CFIC will hold up to 50% of the shares of the LFCs.
• "Selection criteria will be focused on several aspects – the amount of additional fibre coverage being proposed, the proposed capital structure (including the parties’ relative capital contribution requirements), the commercial viability of the proposal, consistency with government objectives, and the track-record of the partner."
• "The government’s shareholding may be concessionary, and in particular may be subject to a lower rate of return than the partner for an initial period (for example, up to ten years). These provisions will be negotiable."
• "LFCs will not provide retail services. However, the government will not exclude partners that own or operate telecommunications retail operations, but such partners may not have the majority of voting control on the board of LFC (unless they divest themselves of any retail business). Telecom, and other telecommunications operators with retail operations, will therefore be able to participate in the contestable selection process, subject to the above requirement."

And here are some more details:

Time line

Comments due end of April, report back to the government end of May, appointmnet of the vehicle mid June, RfP to be released mid August, proposals due mid October, initial decisions due January 2010. All submissions, due April 27, will be published at www.med.govt.nz/broadband.

Wholesale

The network owner will primarily sell dark fiber, and "potentially other approved wholesale broadband services. (...) LFC may: provide a wholesale bitstream service; and enable the provision of interim solutions by wholesale customers, such as wireless last mile or ADSL2+ or VDSL2 solutions, provided that this is consistent with the LFCs achieving the government’s objective of FTTH within ten years; and subject to the CFIC’s approval, provide any other wholesale broadband service."

"The government investment will be in fibre networks that will operate only at the wholesale level, selling dark fibre based services enabling telecommunications providers to design and specify their own downstream services. This approach will ensure that all decisions regarding active network technology options are left to private sector investors."

"By keeping the new fibre business out of retailing, it will have no incentives to act anti-competitively, and there will be little need for regulation of its prices. In fact, there will be considerable initial incentives for it to keep the fibre rental prices low to facilitate use by downstream providers."

"The new network will provide dark fibre services to any ISP or telecommunications service provider, and will operate as an infrastructure ‘utility’ at the passive level of the market. The aim is to provide a new fibre platform upon which service providers can develop their own services and create unique, innovative offerings."

Services

The usual suspects are there, including: "There is also a strong likelihood of new applications being developed in the future that will require residential users to have fibre broadband connections to operate them effectively, particularly as increasing numbers of services are delivered digitally."

Shopping time for eBay

At its recent analyst day, eBay laid out plans for all its units: MarketPlaces, PayPal and Skype.

PayPal and Skype combined are targeted to equal the MarketPlaces business in terms of revenues by 2011 (up from 35% of eBay in 2008). Skype should double its revenues almost to $1bn in 2011 (from $551 in 2008). Skype's margin must be grown to 18-20% (from 11% in 2008). PayPal too has has for doubling revenues and restoring margins to the 18-20% range.

An interesting part of the statement was that eBay now targets the secondary market, estimated to be worth $500bn worldwide, including liquidation inventory.

Now, coincidentally I ran into just the site that eBay could single out for an offer: Troostwijk. The company was founded in 1930 and they are just the place to go if you are looking to fill your newly acquired real estate. I have no financials, but somebody registering and tracking what's going on for a while, could get a pretty clear picture of the value of the merchandise passing hands on the site. And the interesting thing is: such auctions deliver the auctioneer a hefty 16% fee, with not too much risk and a self-explanatory web site.

ISPs meet MLTA

Here is a link between two recent posts.

• MLTA (multi-level TV advertising): This is not like the Red Button (interactive commercials). Who watches TV to see commercials? Right, nobody! People watch TV to see TV shows. The box (Daily Media) and the software (Dynacast) combined create a split screen reality, offering viewers a much more immersive TV experience, with information, sharing, communication and, last but not least, highly targeted advertising. And all of that via the remote control. Hence the term: Zapping 2.0.
  
• ISP differentiation: Video may come to the rescue of ISPs trying to differentiate (the flat fee business model is killing them, remember?). They could strike a deal with content providers (YouTube, catch-up TV) to provide subscribers with enhanced picture quality as part of a premium subscription.

The link: ISPs could team up with Daily Media for a host of applications, plus MLTA.

The situation is becoming worse for ISPs offering their services over FTTH: how to justify a premium price when all you have to offer is a triple play? If the ISP teams up with Daily Media/Dynacast, interactive TV could very well become a driver of FTTH.

Clusters of drivers of FTTH

This post is for future reference, summing up the drivers of FTTH (or NGA in general), brought together in clusters.

A. DEMAND
First, applications as drivers of FTTH. There is not one killer app for FTTH - there are many. Convergent applications (see #3) demand special attention - what's next?

1. Video
After data and voice comes video. Except, the internet wasn't designed for it. The rise of 3-D, HD and holography makes matters worse. These applications are run in traditional locations, except the latter that is about public screens.

Applications:

• Broadcast TV
• VoD
• Catch-up TV
• Embedded video (tele- and e- apps)
• City displays
  
• Computers with embedded 10 Mp cameras for video calls/conferences

2. Everywhere, everybody
We do not want to be limited by our home or office.

Applications:

• File sharing, community efforts
  
• Sling box (place shifting)
• Cloud computing
• Online storage, back-up

3. Mobile backhaul
More stuff that the internet wasn't originally intended for. Essentially, the broadband connection can be seen as a form of backhaul for new services.

Applications:

• Fixed/mobile convergence: femtocell (backhaul of mobile traffic)
• Fixed/mobile convergence: as wireless networks go 4G, more base stations will be built and hence more backhaul is needed. This will go on to the point where mobile backhaul can be seen as an overlay of fiber backbones.

4. Connected devices

The internet increasingly reaches beyond PCs, laptops and even smartphones (which may connect to fiber via WiFi).

• TV/internet convergence: interactivity (BB/internet content added to the TV experience on a split screen: the Daily Media box with Dynacast technology - see next post).
• Widgets make the internet accessible on a new range of devices, even low-end handsets.
• Digital cameras, e-books and e-readers (such as Amazon's Kindle), navigation gear, digital TVs, STBs: a broadband connection is often supplied. This has consequences for the network, esp. in the upstream.

5. Networked hours

Due to multitasking, the nu mber of networking hours rises from 36 in 2008 to 48 in 2013 (Cisco, June 2009)

• Active multitasking: e.g. reading mail while gaiming
• Passive multitasking: e.g. watching one TV channel and simultaneously recording another

B. SUPPLY
Second, operator centric reasons for migrating to FTTH.

1. Intrinsic
Fiber beats copper and HFC.

• Quantitative criteria: bandwidth, symmetry, latency, loop length
• Redundancy (we hate waiting - "too much is just about right")
  
• Aesthetics (no sat dish needed).
• HFC (and copper) is not (always) unbundled, so innovation at the active layer (for community services e.g.) is not possible.

2. Timing
Why now?

• Growth is high
• Roll-out takes a long time
• Every home needs to be connected because people move all the time
• Resources (funds, labour) are scarce.

3. Financial
Capex may be high, but there is more.

• Capex is continually falling
  
• Opex is very low
  
• Green (save on travel, carbon emissions)
  
• GDP grab (attract business)