Ziggo: piecing together an OTT mobile strategy

Fixed-line operators are looking to (re)enter the mobile market, despite threats from OTT, other competition, regulation and a stretched balance sheet. BT bought spectrum and is now looking for a partner. Virgin Media UK has an MVNO and plans a VoIP app. Ziggo appears to take its own route, involving WiFi, femtocells, an MVNO and a VoIP app. Here's how it may work.

• WiFi. All customer modems will be opened for use by Ziggo subscribers. It's much like FON (a KPN partner), except Ziggo has a dedicated piece of spectrum reserved for use by fellow Ziggo subs. As a result, the modem owner will not see his (shared) spectrum reduced by strangers.
• Femtocells. One might think that Ziggo, UPC and the other cablecos could allow each other to place femtocells outside their own footprint in order to reach nationwide coverage. But Ziggo is taking femtocells further and plans to expand the (very limited) footprint of its subscriber modems. It intends to roll-out femtocells to locations outside subscriber homes, possibly lamp posts or anywhere near the existing fiber backbone or backhaul from street cabinets. It now becomes clear why Ziggo bought LTE-2600 spectrum.
• MVNO. Ziggo already has an MVNO in place, with Vodafone NL. Customers do not need to sign up, but then they won't have full mobility. That would
  require a SIM card (hence subscribing to the MVNO). Ziggo will probably go SIM-only, and possibly data-only, if they manage to create a solid:
• VoIP app. At the recent Q1 call, management promised a VoIP app for 14H2.

There are plenty of challenges: a saturated mobile market, rolling out femtocells on a large scale, creating seamless handover between WiFi and 3G/4G, doing a stable and customer-friendly VoIP app. And hope that the network supplier (Vodafone) doesn't give in to the temptation to block mobile VoIP, violating Dutch net neutrality rules.

The mobile strategy looks a lot like an instrument to reduce churn. But it also has the potential to grow into a business and a new revenue stream. For this to happen, subscribers will actually need to join the MVNO (hence creating a quad play, mostly).

All in all, Ziggo is developing an interesting strategy to add mobile by going over-the-top.

Ziggo's share price rise: the good, the bad and the ugly

Ziggo's share prise has been on the rise over the past few months, despite deteriorating results. There are (at least) three possible explanations:

• The good: investors are banking on a return to growth, based on either mobility or yet another off-net revenue stream.
• The bad: investors are assuming that existing strategies (marketing and up-selling) can restore growth.
• The ugly: investment banks are pushing the stock among their institutional investor customers a. to make the share prise rise, b. to make nice with the Ziggo management and c. to get a slice of the pie once a public offer from Liberty Global needs to be executed.

KPN: preview to 13Q1 results (April 23)

KPN's 13Q1 results are due April 23, before the market opens.

Looking back to the 12Q4 results:

• Weakened results.
• Rights issue announced.

Guidance:

• NL: market share broadband 40%, longer term 45%, market share mobile >40%, 'leading' on the Business/ICT market; overall stabilisation toward 2014; EBITDA margin mid term 40-45%.
• Germany: long-term market share 20%, margin 30-35%; 2013 margin down.
• Belgium: long-term market share 25%, margin 25-30%.
• Overall 2013: capex EUR 2.3bn, dividend 3 c/share, net debt/EBITDA toward 2.0-2.5.
• Overall 2014: dividend 3 c/share
• Beyond 2014: consolidation Reggefiber not before 14H2, capex cumulative 2013-2015 EUR 7bn (incl. Reggefiber).

Market consensus 13Q1:

• Revenue EUR 2.95bn.
• EBITDA EUR 1.00bn.
• Net income EUR 310m.

Recent issues:

• The results for 2011 and 2012 have been slightly restated to account for IAS 19 and for the splitting up of Corporate Market (formerly Getronics) - most migrates to Business, the rest continues as IT Solutions (data centers, consulting services, workspace solutions).
• The Reggefiber takeovers (approved April 2012) and the Reggeborgh takeovers (approved October 2012) create an unequal comparison basis. Same for the sale of Getronics International (May 2012).
• When will the rest of RoutIT be bought (KPN acquired 12.5% in September 2012).
• During 13Q1 the 4G-licenses were paid for (EUR 1.35bn).
• Rights issue EUR 3bn was approved and will follow after the 13Q1 results. EUR 2bn in hybrid bonds was already raised.
• What will the cooperation with America Movil (29.8%) lead to?
• According to fresh market rumors, E-Plus and O2 Germany are working toward some form of network sharing.
• Fixed network outsourcing to Alcatel-Lucent. KPN Business sold a maintenance unit.

New markets:

• LTE and DC-HSPA services in NL.
• Partnered with FON in NL.
• Mobile network for Alliander (energy grid operator).
• Quad play in NL (KPN Compleet).
• Triple play in Belgium (SNOW).
• Accenture is now developing IPTV for KPN (taking over from NSN).

Other issues:

• How are the results developing, especially in mobile? Can guidance be maintained?
• How is the DSL market doing? What was the effect of the winter on Reggefiber?
• Will the EUR 3bn rights issue suffice, or does the leverage need to be reduced further?

Doing FTTC is ignoring a family of elephants in the room

The reasons to do FTTC/VDSL/vectoring instead of FTTH are obvious: they are about capex (cheaper) and demand (supposedly there isn't any). But when BT, DT and the Coaliton in Australia gamble on FTTC, it creates a family of elephants in the room. If you want to do FTTC, that's fine, as long as you acknowledge that it has a few issues.

1. Cost
It may save on capex, but FTTH saves on opex. And if FTTC proves insufficient, it risks being a 'regret investment'. It is going for the short term, instead of the long term. Put differently: the greatest benefit of FTTH is its opex savings of around 20%.
Further, vectoring is still quite experimental. It is completely unclear what the real-world performance will be and which share of the lines it can be applied to.

2. Demand
Doing a bottom-up assessment of the number of devices per household and the usage per device may render a picture of the demand side, but it completely ignores innovation and unexpected use cases. 4K is moving faster than previously expected and gaming may be a major growth driver.
To be fair, ongoing compression is relevant and also the fact that we are moving from a downloading to a streaming world. And streams are offered at a certain fixed rate. Making the access network 'faster' doesn't help. And the access network isn't the only bottleneck in the system.

3. Quality of service
Any bandwidth will suffice for anybody, as long as we don't care about QoS. As demand rises and networks aren't upgraded at a similar pace, QoS will go down.

4. Geography
If one could isolate the 30% (or whatever it is) that would be willing to pay for a gigabit, it would be easy to roll out FTTH there, and FTTC everywhere else. Only this doesn't work for several reasons: people move every 7 years or so; building nationwide FTTH in any country will probably take 10-20 years; and the 30% that needs a gigabit changes every month, so in reality it is probable closer to 50% (or whatever it is). Compare Cisco's statement: "the top 1% is actually the top 5%".

5. Business model
Traditional telcos are rooted in scarcity. They will upgrade not ahead of demand, but somewhat behind demand (in such a way that complaints are controllable). It is their game to minimise capex in order to maximise shareholder remuneration. And capex peaks are to be avoided, when shareholders must be reported to on a quarterly basis.
Google on the other hand is rooted in advertising. Governments, like Google don't want bandwidth to be a scarce resource. Google because it wants to maximise usage in order to create advertising inventory, governments because of the economic, social and environmenal benefits of migrating online.
Both business models can be applied, but looking at it this way explains why others besides incumbents are getting involved.

6. Specs
FTTH is not about download speeds alone, but also about the uplink and latency. And if it's not GPON but point-to-point, it is also dedicated instead of shared.

7. FTTH has a lot of supporters
Governments such as the current one in Australia, Google, KPN (sees FTTC as an interim technology), challengers such as Free and HKBN, several cable companies, etc. prefer FTTH over FTTC for any or all of these reasons.

Tele2 NL: preview to 13Q1 results (April 18)

Tele2's results are due April 18, before the markets open.

Looking back to the 12Q4 results:

• Relatively strong in mobile, weak in fixed broadband.
• Revenue still down, EBITDA weak as a result of losses in mobile.
• Tele2 has now finally entered the NGA world of FTTH and LTE.

Guidance for the mobile activities in NL:

• Revenue SEK 1,600-1,700m (EUR 185-200m) (2012: EUR 105m)
• EBITDA negative SEK 50-75m (EUR 6-9m)
• EBITDA break-even: 3 years after launches 4G-services
• Capex: SEK 2,000-2,500m (EUR 230-290m), of which SEK 1,400m (EUR 161m) for 4G licenses.

Market consensus (roughly):

• Revenue SEK 1,330m
• EBITDA SEK 340m
• Mobile subs 540k

Recent issues:

• Tele2 Russia was sold and perhaps Tele2 Croatia is next. This is good news from a capex point of view as resources may be shifted to NL. It may also leave room for acquisitions.
• Tele2 Business finally has a new director, Fedor Hoevenaars (formerly of BT and Verizon).
• Group management was reshuffled. Günther Vogelpoel (formerly Western-Europe) is now solely responsible for NL again.

Conclusion:

• The main point is Tele2 NL's LTE strategy:
• Timeline, pricing, targets, quad plays, fixed-line replacement services?
• Will there be network sharing (with T-Mobile NL)? Recently, the group stated it expected to see 'co-build' in NL.
• Is Tele2 NL essentially a mobile-only company, following the group's motto: "Tele2 - a European mobile operator - Mobile is our strategy".
• What about WiFi? And distribution (Tele2 NL doesn't operate a retail store chain of its own)?

Ziggo: preview to 13Q1 results (April 17)

Ziggo's results are due April 17, before market opening.

Looking back to the 12Q4 results:

• Revenue growth fell back to 1.4%; slowdown caused by weak telephony results (free on-net calls, FTA reduction, lower AMPU), less steep annual price increases; increased competition; no real growth for paid digital TV services (peaks at around 900k).
• Net adds digital TV zero (remaining analog viewers probably late adopters of digital TV), hence analog-to-digital conversion zero; net adds RGUs first time negative.

Guidance 2013:

• EBITDA growth 2.5-3.5%.
• Revenue growth slightly ahead of this.
• Capex EUR 320-330m.
• Expenses for S&M and product development (TV Everywhere, mobility) are speeded up.

Market consensus:

• 13Q1: revenue EUR 390m, EBITDA EUR 220m, net income EUR 76m
• 2013: revenue EUR 1,585m, EBITDA EUR 906m, net income EUR 310m

Recent issues:

• Rene Obermann (DT CEO) to be CEO from 140101
• Acquires Esprit Telecom
• In January 2013, Ziggo stated that the Q4 trends continue, i.e. the loss of RGUs isn't over.
• Liberty Global acquires a 13% stake.

Conclusion:

• Negative: Ziggo has a growth problem. Lifting revenue growth doesn't seem likely as a result of competition. It looks like the mobile strategy (around WiFi) is more about reducing churn than about adding to growth.
• Positive:
• Acquisitions in the business market save the day (Esprit adds 2.4% to revenues) and more may follow.
• Ziggo appears to move to offering services off-net, as with Breezz and Esprit, and also with TV Everywhere. Next may be offering services on FTTH (Reggefiber/KPN, CIF).
• Another way to look at it, is to see Ziggo as a content aggregator. Taking its ontent off-net, could add new revenue streams.
• Also, Ziggo may buy cable companies or even CIF of T-Mobile NL.
• Foreign takeovers could consolidate assets like Com Hem (Sweden), ONO (Spain), Numericable (France).
• Finally, at some point Liberty Global may launch an offer.

SingTel Investor Day: March 15, 2013

Short highlights from the SingTel Investor Day, March 15, 2013.

• Group Consumer (Singapore, Australia): Optus to launch TD-LTE in 2300 band 13H1 (slide 9).
• Group Enterprise: Market overview (slide 4), growth areas (slide 16).
• Consumer Singapore: Doubling the price for excess data usage April 2013 (slide 3) to 10.70 SID/GB (EUR 6.75). [Not quite as cheap as T-Mobile USA's new rate.] Interesting picture of cost per MB for both 3G and 4G coming down with rising traffic (slide 5). "Challenge: Customers are substituting roaming voice and SMS with data, using ‘free’ OTT services and Wifi. Solution: Partner international operators to offer data roaming packages - Launched roaming packages with partners for a fixed fee eg. Daily unlimited data roaming in UK with Telefonica at S$30/day"
• Group Digital L!fe: Clear picture of the telco role versus partner roles (slide 4). Acquisitions (slides 20, 24, 32, 36).
• AIS (Thailand).
• Bharti Airtel (India, Bangladesh, Sri Lanka and 17 African countries).
• Consumer Australia (Optus).
• Globe (Philippines).
• Telkomsel (Indonesia).

Tele2 sells Tele2 Russia

Highlights from this transaction, which didn't come unexpectedly after the company wasn't able to secure a 3G or 4G license (hence no data). In 12Q4, Russia was the largest contributor to the Group's revenue with 30%. Next to be sold Croatia?

There is a different reason why the sale is no big surprise. Less than two months ago Jere Calmes was appointed CEO of Tele2 Russia. His LinkedIn profile states that in 2012 he briefly was MD of Fast Lane Ventures in Moscow, while being a board member at Tele2. VTB, to which Tele2 Russia is sold, is a strategic partner of Fast Lane Ventures. Kinnevik is also a Fast Lane partner.

Details:

• Tele2 Russia: 22.7m subs; 3500 employees; rev 2012 SEK 13.0 bn, EBITDA SEK 4.7 bn.
• Sells Tele2 Russia to VTB Group, for $2.4bn (SEK 15.6 bn) in equity value + $1.15 bn (SEK 7.5 bn) in net debt, equivalent to 4.9x EBITDA 2012; capital gain SEK 15.6 bn.
• Plans capital distribution SEK 12.5 bn = 28 SEK/share via share redemption.
• Core markets are now Sweden, Norway, NL, Kazakhstan.
• New guidance (first time on Group level): rev CAGR 2013-2015: 5-7% to SEK 35.6 bn; EBITDA CAGR 2013-2015: 10-12% to SEK 8.3 bn; ROCE minimum 20% per country (was 24%); target net debt/EBITDA 1.25-1.75; div 2012 remains SEK 7.10.
• Opportunities to co-build in NL.
• Motto: "Tele2 - a European mobile operator - Mobile is our strategy"

Cisco VNI: highlights

Besides findings such as 'Global mobile data traffic grew 70 percent in 2012', the most recent Cisco VNI report (Feb. 6, 2013) contains other interesting material (the picture is a heatmap, showing where and when LTE will be deployed).

• Mobile data traffic growth in S Korea, China, Japan was ~100% in 2012, versus ~40% for Australia and Italy. Telefonica's and Vodafone's blended growth was ~35%. Cisco provides three answers why growth was lower in some regions: migration from unlimited to tiered data plans; a slowdown in laptop growth; increased offload to fixed via WiFi.

• Cisco also provides promoters of growth in usage: increased speeds; a shift to video; migration from fixed to mobile (where usage is higher) as a result of prices converging; increased tie spent (again, because mobile has higher usage).

• "Cloud applications (such as Netflix, YouTube) allow mobile users to overcome the memory capacity and porcessing power limitations of mobile devices."

• "Mobile offload is set to increase from 33% of total global mobile data traffic in 2012 to 46% in 2017."

• "The growth in 4G with it benefits of higher bandwidth, lower latency and increased security will help the regions bridge the gap between their mobile and fixed network performance leading to even higher adoption of mobile technologies".

• "Currently, a 4G connection generates 19 times more traffic than a non-4G connection. There are two reasons for this. The first is that many of the 4G connections today are for residential broadband routers and laptops, which have a higher average usage. The second is that higher speeds encourage the adoption and usage of high bandwidth applications, so that a smartphone on a 4G network is likely to generate 50 percent more traffic than the same model smartphone on a 3G or 3.5G network. As smartphones come to represent a larger share of 4G connections, the gap between the average traffic of 4G devices and non-4G devices will narrow, but in 2017 a 4G connection will still generate 8 times more traffic than a non-4G connection."

• "From 2011 to 2012, average usage per device on a tiered plan grew from 425 MB per month to 922 MB per month, a rate of 117 percent, while usage per device of unlimited plans grew at a slower rate of 71 percent from a higher base of 738 MB per month to 1.3 GB per month." (Based on a study of 2 global tier 1 carriers, looking at 22k devices over 12 months.)

• "Tiered pricing plans are often designed to constrain the heaviest mobile data users, especially the top 1 percent of mobile data consumers. An examination of heavy mobile data users reveals that the top 1 percent of mobile users is actually the top 5 percent, because the top 1 percent of users varies each month."

• "The proportion of mobile users generating more than 2 gigabytes per month has increased significantly over the past year, reaching 18 percent of users towards the end of 2012."

• "in comparing data consumption over Wi-Fi and cellular networks, the global average for daily data consumption over Wi-Fi is four times that of cellular, averaging 55 MB per day for Wi-Fi, and 13 MB for cellular. For end-users, selecting Wi-Fi over cellular for the majority of their data consumption is an important consideration for staying within the limits of their cellular data plans."

• "in comparing data consumption over Wi-Fi and cellular networks, the global average for daily data consumption over Wi-Fi is four times that of cellular, averaging 55 MB per day for Wi-Fi, and 13 MB for cellular. For end-users, selecting Wi-Fi over cellular for the majority of their data consumption is an important consideration for staying within the limits of their cellular data plans."

How relevant is the Dutch 4G auction?

At first sight, an auction is business-as-usual, a non-event.

• Spectrum: simply a license renewal.

Taking a closer look, it looks quite exciting:

• Spectrum: a lot of licenses, technology-neutral, up for grabs.
• New entrant: from 3 to 4 MNOs.
• Technology: from 3G to 4G.

However:

• New entrant: Tele2 is an MVNO already. End-users will not care.
• Technology: upgraded 3G (HSPA) can match 4G performance at launch.

Conclusion: not so much of a big deal after all ... at first.