EU single market for telecoms: international roaming major stumbling block

Neelie Kroes is aiming for a single market in the EU for telecoms. Everybody would agree with this concept, but there are several serious issues. Let's look at the main constituents of the single market:

1. Net neutrality
2. International roaming
3. Harmonisation of regulation and spectrum management

All this would add 0.9% to GDP, or EUR 110bn per annum through innovation, new business models and enhanced demand.

1. Net neutrality: adapt or die

NN can be seen as a way to protect the OTT/CSP sector against blocking and throttling by ISPs. Competition at the services level increases, and ISPs (the incumbent) want something in return.

To ease regulation (open access to wholesale customers at layer 2 or 3) doesn't make any sense, however, because regulation covers the relationship between the incumbent and its wholesale customers, not the OTT/CSP sector.

It looks like this is just tough luck for the incumbents: times are changing, managed services are disappearing, adapt or die. They need to focus on broadband (fixed and mobile). And to die isn't all that bad (looking at it from a national security point of view), because infrastructure will always be an attractive asset, even when auctioned off in case of bankruptcy.

2. International roaming: not realistic

While sympathetic, this is as ambitious as leveling the price of bread throughout the EU. Costs (opex) vary dramatically across the EU, so how could wholesale (let alone retail) pricing of an MB be equalised?

3. Harmonisation: lengthy process

Operators would be allowed to do business across the EU - as if that wouldn't be possible today. Next, they could choose which regime to follow - which makes no sense. Harmonising spectrum is ambitious but sympathetic, with current license expiring at vastly different points in time.

LomboXnet: electric cars as storage devices in a solar powered smart grid

LomboXnet, the small-scale ETTH network in the Lombok part of Utrecht, is making an interesting turn. As it awaits a viable IPTV solution, it has decided not to expand the network, for now at least. Instead, it is developing a smart grid, based on the ETTH network, several solar plants and ... storage!

Solar panels are mounted on rooftops of local schools etc. and the smart grid will help to match supply and demand as much as possible. Weather forecasts will be included in the input. This is where storage comes in, and the company has decided to allow electric cars to act as storage devices for the grid and the local community. Charging and home use will alternate, depending on weather conditions.

A few numbers from the solar industry (approximations):

• Existing electric cars (Nissan Leaf) have storage of c. 24 kWh, enough to run a household on for c. 3 days and LomboXnet for c. 8 hours.
• New electric cars (Tesla S) can fully charge at c. 20 kW, which translates in just half an hour. Storage is 85 kWh. Any full day's drive in the Netherlands normally doesn't use more than half of this, leaving the rest for home use. Such cars are currently cheaper than buying comparable storage capacity on a stand-alone basis.

Local (de-centralised) energy production and storage may mean the end of large energy distribution & network companies, although for now they will be needed to make it through the night and through the winter. Solar energy is becoming ever more viable by the day, as a result of increasing efficiency of both production (solar cells are becoming better, faster and cheaper) and storage (driven by the smartphone/tablet/laptop industry).

War of the words continues between fiber and copper

Recently, the Dutch cable sector (i.e. Ziggo, UPC and NLkabel - NOT the smaller cable companies and CIF) decided to step up its lobbying efforts against the fiber lobby (led by Reggefiber/KPN). It all seems to come down to the use of the words 'future-proof' (toekomstvast or toekomstbestendig). Now, unfortunately, Hartwig Tauber of the FTTH Council Europe, decided to enter into this silly discussion, claiming that FTTH is the only future-proof network:

“Fibre to the Home is de enige toekomstbestendige oplossing. Consumenten profiteren nu al van glasvezelverbindingen die 1 Gbps en meer bieden voor het up- én downloaden. Bovendien is Fibre to the Home in staat een niet te kloppen servicekwaliteit te bieden. In plaats van consumenten te misleiden met maximumsnelheden kunnen Fibre to the Home-netwerken aan ieder huishouden een gegarandeerde snelheid leveren. Operators die gegarandeerde snelheden van 100 Mbps en meer aanbieden, bevestigen dat klanten tevreden zijn met die snelle verbindingen.
Er zijn echter nog steeds spelers op de markt die stellen dat hun koperoplossing toekomstbestendig is, omdat consumenten geen hogere snelheden nodig hebben. Het logische gevolg hieruit is dat deze partijen hun klanten voorschrijven wat toekomstbestendigheid inhoudt en de ontwikkeling van innovatieve diensten belemmeren, waaronder diensten met grote socio-economische voordelen.”

Of course, this is total nonsense. No single network is future-proof. Every network needs work: maintenance, repairs, upgrades, etc. And it all starts with the question: is this about the passive or the active components? Fiber appears to be the way forward, but you can never tell; and 100 Mb/s equipment seemed to be enough, until Reggefiber decided to upgrade to 1 Gb/s - with implications for backhaul (i.e. fiber) as well.

And then there is the use of the words future-proof: linguisitically (semantics), it is incorrect to talk about 'more' or 'less' future-proof, in the same way as it is nonsensical to say that something is 'more perfect' or 'less perfect'. Something is either future-proof, or it isn't. And no single technology is future-proof.

We have been proponents of FTTH for many years, but the discussion has to be fair. NLkabel and the FTTH Council are bending the truth (to say the least). And this isn't helping. Of course, fiber is better than HFC: more capacity, easier to upgrade, symmetric, open. But FTTH is on the roadmap of HFC as much as it is on the roadmap of copper networks.

Unfortunately, Hartwig's statement fails on more points:

• He forgets to mention openness.
• He talks about bandwidth guarantees, but networks are all shared at some point in their architecture.
• He doesn't distinguish between GPON ('shared') and WDM-PON and p2p ethernet fiber (dedicated) networks.

We have written on the subject twice recently. In summary, there are three points to be made, two of which are mostly overlooked:

1. FTTH beats HFC in many respects (see above). Cable operators are billing their networks as NGNs, which is total nonsense. One needs to distinguish between the passive and the active networks. Every network can be upgraded. FTTH is on the roadmap of all.
2. There is a sharp distinction between the advantages for users (QoS, real estate value), for operators (capacity, opex, new business models) and for governments (socio-economic and environmental benefits).
• Fact is, that many cable customers still are happy customers.
• Fiber operators are trying to make the network a worry for their customers ('choose the network that is most future-proof'), but the customer shouldn't care. The network is the operator's worry. Fiber operators also claim that cable networks cannot keep up, but again, that is the cableco's worry. Or that they can't afford it - which is probably true, but let John Malone worry about that. If their upgrades start falling behind demand growth, the market will do its work and subscribers will migrate to FTTH. There's one problem though: FTTH penetration. In areas where FTTH will not be deployed for many years, HFC only competes with DSL and hence has no incentive to move to all-fiber, which could create a digital divide.
• The government has no voice, because it decided to leave telecoms to the market (apart from rural areas, where the market fails), and so: either shut up or create a national infrastructure, either the Australia (nationalisation) or the Singapore way (tender).
3. The way the market works, is that capacity is added as demand grows. Business models are based on scarcity. Moving to an all-fiber gigabit network is a big leap and only makes sense when other forms of upgrades make no sense from a return point iof view, or when new business models, based on abundance, are explored.

Dumb-pipe operator or dumb pipe-operator?

Two remarkable releases from the Dutch mobile industry:

• Vodafone NL CEO Rob Shuter on the company blog: "The multiband auction last December brought an unexpectedly large windfall for the Dutch treasury of EUR 3.8 billion. For us, however, this meant a solid bill shock of 1.38 billion! We were obviously fully aware when auction prices for mobile frequencies were established, but all parties agree that the prices were much higher than expected."
• KPN, Vodafone NL and T-Mobile NL are suing the Dutch government over the 2012 multiband auction. Vodafone claim that reserving spectrum for a newcomer created artificial scarcity.

It is rather ironic to have mobile phone companies complain about bill shock and artificial scarcity, because these are at the heart of the industry. In fact, they have sort of invented those terms.

As to bill shocks: mobile operators charge ridiculous prices for international roaming (which next year will end) and for some reason there is still no pan-European pricing (T-Mobile Austria charges €17 while T-Mobile Germany charges €96 for the same smartphone tariff allowances). Further, the companies are using the fact that most people didn't see high prices coming (we did), which created a buzz in the press about overpaying. But in reality, other auctions brought in more on a per MHz per capita per year basis. And the result wasn't impressive in relation to the 2011 UMTS auction. And last but not least: buying a 17 year mobile license creates an enormous entry barrier and comes at the expense of EUR 230 per sub or just over 1 euro per month per sub for Vodafone.

As to artificial scarcity: this is exactly what telecoms operators create, slicing & dicing available bandwidth (i.e. throttling) in order to create a 'business model'. Mind you, this whole throttling of a 24 Mb/s ADSL service to tiers of e.g. 1, 2, 4, 8, 12 and 24 Mb/s (or a 1 Gb/s service to 50, 100, 200, 500 and 1,000 Gb/s) is extremely expensive from a capex/opex point of view (equipment, billing, marketing) and is hardly warranted by the associated costs (a 24 Mb/s sub is probably not much more expensive than a 1 Mb/s sub).

Yahoo!/Tumblr: combining UGC and social networking is where the action is

Yahoo! is acquiring Tumblr. The specs:

• 117m users (growing 120k per day), 108m blogs, 300m monthly active visitors
• 75m posts per day, total 51bn
• Raised $125m
• 2012 revenues $13m
• 175 employees
• Combining with Tumblr will grow Yahoo!'s audience by 50% to 1bn and traffic by 20%.

Tumblr is a combination of user-generated content (UGC) and social networking, like Instagram (Facebook), and in a sense comparable to Pinterest (pictures), Waze (social mapping & traffic info, going to Facebook). Flickr (Yahoo!) could expand its social functions as well, as could YouTube (Google).

Pulse went to LinkedIn and Yammer to Microsoft. Other obvious takeover candidates are those that in a way combine UGC and social networking:

• Pinterest (pictures)
• PhotoRocket (photos)
• SlideRocket, SlideShare (presentations)
• Evernote (notes)
• SoundCloud (music, audio files)
• WordPress (blogs)
• Quora (Q&A)
• Path (mobile social net)
• Dropbox and Box.net (storage)
• Twitter (text-based microblogging)

More on access and services

Telecoms is moving away from its 4 traditional silos: fixed voice, broadband, TV and mobile. A more compelling way of looking at it now is (see previous post):

• Two enablers:
• Devices (portable and non-portable)
• Access (fixed and mobile)
• Two classes of services:
• Communication (voice/video calls, text/IM/chat, M2M)
• Entertainment (TV/catch-up/VOD, gaming)

And thus:

• This could be the basis for new regulation.
• The distinction between managed (traditional voice, SMS, TV) and OTT services is becoming less meaningful. Net neutrality is used to create OTT competition to managed services. The call (mostly from the fiber community) to create new and compelling services ('killer app for FTTH') seems quite ridiculous, considering the innovation going on in the OTT space. And as witnessed by the thousands of apps available on smartphones. Not to mention that it is the world upside down: we are not looking for new services to justify the roll-out of NGA networks; we are rolling-out NGA networks to keep ahead of demand (c.q. commoditise bandwidth, put an end to throttling, remove bandwidth as an artificially scarce resource) and especially because of the implied opex savings.
• A distinction between telco and cableco no longer makes sense.
• Access:
• Each of these markets are very competitive, except access. Unless it no longer makes sense to distinguish between fixed and mobile. LTE allows mobile operators to offer fixed-line replacement services, WiFi allows fixed operators to launch quasi-mobile services. Governments could consider to allocate lots of spectrum for unlincensed use to make sure that technologies such as WiFi increase competition.
• The access market is core for telecom operators. It creates subscriber ownership and generates fat margins (whatever the operators claim). Operators are now throwing in free services to attract/keep broadband subscribers e.g.:
• KPN: free access to Spotify Premium.
• BT: free access to BT Sports.
• Communication is traditionally voice and SMS. A third leg is M2M, e.g. DT's usage-based insurance (mobile) and home automation such as AT&T Digital Life (fixed). The commonality between these services appears to be: sensors.
• The 'entertainment' market is still developing. It consists of video (live TV, catch-up TV, VOD) and gaming. Will there be a third leg?

The new dichotomy of connectivity and services

Technological innovation, competition and regulation shape the telecoms sector. The entry of OTT providers has one the one hand been more of the same, but on the other hand it is causing big changes. If we take a step back to see how the sector changed over the past two decades or so, this is what appears to be going
on.

First, let's look at what we have to work with:

• Telecoms is a privatised free market.
• Regulation consists of defining markets, ascribing significant market power and applying remedies (on the wholesale or retail level).
• There are two infrastructures (in most countries to at least some extent): copper (nationwide) and coaxial (regional).
• Telecoms is a scale business. The entry barrier (capex, licenses) is very high. It has a tendency towards a monopoly, duopoly or oligopoly.

In the old days, the wider telecoms market was about traditional managed services (voice, SMS, TV). There was a somewhat artificial distinction between line rental (basic charge, fixed) and a usage-based fees. Competition was inter infrastructure (copper vs. coaxial) of intra infrastructure (unbundling, reselling). A three-layer model (passive, active, managed services) could be applied. The incumbent telco was regulated, the local cable company (lacking nationwide coverage) was not. When services such as CS and CSP rose, a rebalancing in the voice market started to happen: as usage fees went down, line rental charges went up.

Today, a fourth layer is added: IP, enabling OTT services (VoIP, IM, unmanaged IPTV). Unbundling appears to be too expensive for most challengers, but OTT brings a new form of competition, at least in the services space. Infrastructure-based competition is reduced to copper (upgraded to fiber) vs. coaxial (HFC). A rebalancing is going on, as traditional managed services are being replaced by non-managed OTT services. The new distinction is between service revenues (dropping) and connectivity. Limited infrastructure competition may lead to rising connectivity prices. Especially when the infrastructure players not only see services revenues dropping, but at the same time investments must be made in NGA networks (FTTH, LTE, WiFi). Hence, they are asking for a regulatory holiday to first roll out the NGA and accept regulation at a later stage.

In the services domain, net neutrality rules are designed to protect the OTT players in order to create a higher level of competition. Looked at it this way, other regulation is no longer needed.

That leaves lots of questions regarding connectivity:

• Is two enough in fixed-line competition (copper, coaxial)? In mobile, is three enough?
• Is LTE a fixed-line replacement? Is WiFi a mobile replacement?
• Is infrastructure a natural monopoly? Is it really a utility, such as water, gas, sewer, electricity?
• Is structural separation the answer? Is regulatory symmetry needed, i.e. structural separation of cablecos as well?

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?