“Austrian consumers enjoy some of the lowest prices for mobile voice and data services in the world”

Austria has long since been one of the most intensely-competitive markets in Europe and with a population of just 8.4 million, such intense competition meant four profitable operators could scarcely be sustained in the long term. Austrian consumers enjoy some of the lowest prices for mobile voice and data services in the world. A mobile broadband plan including 10GB of data can be picked up for less than $12 per month on 3’s network. By comparison, a similar package would set a US consumer back $80 on Verizon Wireless.

Crucially, 3 has already finalised a number of major concessions to help smooth the passage of the deal past the Austrian and European competition authorities, including the sale of spectrum, towers and customers to market-leader Telekom Austria for a sum of around €390m. 3’s net outlay will therefore amount to just €900m.

“There is a valuable lesson here for telecoms executives, especially those at AT&T and Deutsche Telekom”

There is a valuable lesson here for telecoms executives, especially those at AT&T and Deutsche Telekom, who failed so miserably in their attempts to drive consolidation in the US. Make sure the deal you put in front of the authorities is digestible from the start and recognise that if concessions are likely to be tagged to a potential deal at a later point, it’s better to address them immediately from the inside, before they are imposed from the outside.

Where next?

The announcement of the consolidation of the Austrian market will surely echo loudly around the executive suites of Europe’s leading telecoms operators.

Telco executives across the continent see in-market consolidation as a critical step to easing the cut-throat competitive dynamics that characterise so many of their operating markets in Europe. Excited investment bankers are sure to set phones ringing as they seek to pitch other potential deals within the European mobile sector. Indeed, the Greek market is widely expected to see renewed attempts at in-market consolidation as negotiations between Vodafone and Wind Hellas develop further.

Prey turns predator

Speculation has been rife for years that Hutchison Whampoa’s 3 Group would be ripe for consolidation, but in virtually every M&A scenario played out by match-making analysts it was 3 that was the supposed prey.

Speculation has been rife for years that Hutchison Whampoa’s 3 Group would be ripe for consolidation, but in virtually every M&A scenario played out by match-making analysts it was 3 that was the supposed prey. But today’s news has turned the prey into the predator.

This is a clear billion-dollar signal from Hutchison Whampoa that it is in the Austrian mobile business for the long-term.

But for most observers, it’s what potentially around the corner that poses the more interesting questions. Does Hutchison share the same level of resolve and deep pockets to inorganically grow its remaining sub-scale units elsewhere in Europe? Or will Hutchison Whampoa seek to cash in on other subsidiaries in order to concentrate on those operations that have are performing most strongly? Many will now surely begin to question the fate of the Hutchison operations in the UK and Italy, two markets that have been viewed as ripe for consolidation virtually ever since they commenced operations in 2003.

The real question is whether the owners of two of the UK’s major operators, Vodafone and Telefonica, will dare to test the resolve of the UK regulatory authorities and put in an offer for 3 UK. Whilst the creation of Everything Everywhere by the merger of T-Mobile and Orange passed with no major hurdles, Ofcom is believed to be very reluctant to see a further operator swallowed.

Group operations in Europe

Source: Informa Telecoms & Media estimates

Facebook has filed for an IPO

As the industry awaits Facebook’s IPO, Telecoms.com takes a look at what the social networking site going public will mean for the telecoms industry.

The social networking site revealed in its documents that it currently has 823m unique users per month, according to its December 2011 figures, and half of that figure – around 430m – are using the site from a mobile device, which is larger than the global Android user base.

The site saw $3.74bn gross revenue for 2011, with $1.7bn operating profit before tax and $1bn net income, marking a healthy margin of around 27 per cent.

However, there is still vast scope for growth and, with an influx of capital expected by floating on the stock market, commentators are suggesting that the most promising avenues for the firm to invest in to stimulate further growth are in mobile and in-app purchases.

Aggressively expanding its mobile efforts is not going to be plain sailing for Facebook. Net advertising income from a mobile user is currently less than for a PC-based browser user for Facebook because the site does not display third-party advertising in either native or web mobile applications. It has been suggested that the firm may even need to working out revenue share deals to gain support from operators and ensure they do not feel threatened by its services, such as Facebook chat service displacing revenue streams from SMS.

Despite that, the proliferation of smartphones represents a huge opportunity for the site. In developed markets there is scope for Facebook to increase revenues from services that can be used on the move, such as location-based services and coupons. But, the firm is aiming to appeal beyond smartphone users in developed markets.

In many emerging markets, such as Africa and parts of South East Asia, growth in internet penetration via desktop PCs is modest. However, while they are not investing in PCs, many consumers are investing in feature phones, and Facebook can capitalise on the opportunity that presents.

For example, in October last year, Facebook introduced a version of its platform that can be embedded on the SIM. SIM card manufacturer Gemalto developed the offering, which is targeted at the mass market, and the Facebook software application is embedded inside the SIM, allowing users to access core features from the phone’s main screen, through a cascade of menus

“Right now people think the Facebook mobile experience is primarily for smartphone users but Facebook wants to be accessible on every device, not just smartphones but lower-end handsets as well. That means making Facebook a de facto part of handsets that are sold in emerging markets,” said Michael Gartenberg research director at Gartner.

The firm is also in a strong position to offer marketing services beyond display advertising. There is a mass of consumer data accessible via the Facebook platform, and third parties are also integrating Facebook functionality into their websites. But perhaps the most interesting development is the volume of revenue Facebook is seeing from in-app purchases, through services such as games, according to Adrian Drury, practice leader and senior consultant at Ovum.

“One of the most notable things we’ve seen is the volume of revenues coming from PAYG services in the platform, which is brought about by its exposure to [social network game developer] Zynga,” he said.

“Users are paying for premium content and features through these games and apps, and everybody is surprised by just how much money that is generating for Facebook.”

But it will be a challenge to maintain this pace of growth. Becoming a public company, the firm will now have the added burden of a responsibility not just to its users, but also to shareholders.

According to Fred Huet, MD of telecoms and media consultancy Greenwich Consulting, Facebook has acknowledged in the past that it needs to generate more revenue per user, and the floatation is only going to increase that pressure. Huet explained that the current model of the Facebook platform playing host to third-party games and apps is overly dependent on other industries and players moving to Facebook and finding ways to make money from the site.

“Now it is going to be quoted, it will probably have to take a little bit more of a driving seat in that space as well. It will surely continue the platform play – providing third parties with a great way to make money, while making a cut for itself. But it will also have to do a bit more on its own—and this means developing more products in-house for its own platform.”

However, Gartner’s Gartenberg does not believe that the IPO will significantly impact the way that Facebook does business. He said that the site will continue operating largely as is, because if the user and the user experience were no longer the priority, Facebook would suffer and so, inevitably, would its shareholders.

“Zuckerberg still has a controlling interest within the company, and they are going to pursue the market as they see fit,” he said.

He also argued that it has been taking into account shareholder considerations for a few years now, with venture capitalist firms such as Elevation Partenrs, recently investing in the site. However, he conceded that there will be more pressure on the company to drive higher levels of revenue via advertising, particularly in mobile apps, where it currently has no display advertising.

“It’s hard to believe that’s going to remain that way forever, but at the same time, it has to strike the balance between advertising revenue and becoming annoying to consumers; too much advertising with no targeting ends up doing more harm than good. It needs to focus on preserving the user experience on Facebook, because if that begins to change then they will have bigger issues.”

But Sky has always been a deeply pragmatic company, and the nominal threats from new OTT providers such as Netflix have caused it to put aside its ideological differences with its old enemy, and ensure that its customers don’t desert their pay-TV service.

It will be interesting to see the impact of this on iPlayer usage. Customers of Virgin Media have been active viewers of iPlayer via their TV for some time now, but the addition of Sky subscribers could even see the iPlayer becoming predominantly a service viewed on TVs rather than PCs.

At the same time, the shows available on iPlayer (and on ITV online –also part of the Sky deal and home to some of the UK’s TV crown jewels such as Coronation Street and Downton Abbey) represent the ‘short head’ of on-demand TV content, the sort of shows users watch in large numbers within 24 hours of transmission. These are not only the most desirable shows, they are free. For a service such as Netflix, based on delivering ‘long tail’ TV content for an additional monthly fee, business just got a little tougher.

The company has stated that it sold “well over 1 million” Lumia devices, but this would have disappointed bearing in mind the impressive demand experienced during the first days of launch back in October. This early promise obviously never really materialized for the remainder of the quarter, which is a key time of year for all handset vendors. In tandem, the company’s Symbian smartphone sales are suffering as the trend towards lower-priced smartphones on the Android platform is taking hold and quickly eroding Symbian’s volume. Nokia must hope that its price-competitive Asha range of S40 devices can help stem some of this tide in a number of markets owing to the selection of on-board apps that these devices have, giving some element of “smartness”. With the average selling price (ASP) for smart devices also on the wane – down nine per cent year-on-year – the company needs to quickly rebalance its portfolio in the sector and find volume for its “hero” devices if it is to remain a key player in this highly competitive market.

However, Nokia can claim limited success in its mobile phone business, notably dual-SIM handsets in emerging markets, but again ASP has fallen by 24 per cent for the quarter year-on-year. The company still leads the market in terms of volume in the non-smart segment, with a solid array of available handsets, but it is quite clear that margin and profit are becoming key indicators in the market rather than purely volume, which is ripe for attack by the growing strength of the cost-conscious Chinese vendors.

Moving forward, the company hopes to it can crack the North American market with its Lumia devices – notably the flagship Nokia Lumia 900 LTE smartphone with AT&T, designed specifically for the North American market. While the device has already won awards and has beaten Apple’s iPhone and BlackBerry to market with LTE (but not Android), it remains to be seen whether the device has a strong enough pull to attract the hordes of AT&T subscribers that are already attached to the Apple brand.

Nokia needs to extend the Lumia range across price tiers and move quickly to other mobile operators and markets if it is to achieve critical mass for the devices, notably breaking China, as its smartphone volumes are clearly reliant on Lumia starting to plug the gap left by declining Symbian sales.

This would be an aggressive move by Ericsson, illustrating that the carrier wifi market is rapidly growing and that large vendors may not afford to wait until they develop their own wifi product lines – especially for in the case of a vendor like Ericsson who has long believed in the strength of its macro cellular product line. Ericsson is among the last vendors to embrace a new technology (including femtocells and wifi) that somewhat compete with traditional macro base stations, but it’s acquisition of BelAir would make sense in the current market environment.

BelAir Networks is also developing small cells solutions in addition to wifi. Small cells are expected to be a major trend during the next Mobile World Congress and in the years to come since urban locations with capacity constraints and rural markets with coverage blackspots are two particularly interesting locations for large scale deployments of small cells.

The acquisition would be beneficial to both parties: Ericsson will would get access to wifi and small cell technology while BelAir will would be able to take advantage of Ericsson’s market reach, managed services contracts and market trust to increase its footprint.

Informa expects more consolidation in the wifi and small cell space, where big vendors may choose to partner or acquire smaller, more agile vendors rather than develop their own product lines.

Carphone Warehouse says there will be three main pillars of long-term growth:

• Continuous postpaid-smartphone sales growth, since customers normally upgrade their phones when their contracts are up.

• “High end” prepaid users. Although the company said demand from prepaid users has been weak, it says there is strong potential to upgrade a number of segments in the prepaid customer base (including the most loyal customers) to smartphones.

• A broader product portfolio, going beyond handsets and smartphones. Because of the significant growth in tablet sales, the company is willing to start offering other consumer-electronics products, such as laptops and e-readers.

No question Carphone Warehouse has been successful in the smartphone and tablet markets, by creating a shopping environment in which customers can experience new devices, in addition to offering strong client and technical support via its Geek Squad. However, it needs to carefully evaluate how far it should go beyond selling phones.

Because many consumer-electronics products provide big margins for the seller, the field is competitive and will be challenging for Carphone Warehouse to enter. To compete, Carphone Warehouse needs to maintain its core strategy when offering new products and services.

Carphone Warehouse should focus on connected devices as its core business and transfer to connected-device sales the experience it has acquired with smartphones and tablets, taking advantage of its customer-care and shopping-experience capabilities. For example, the Geek Squad can be a strong differentiator to attach to connected TVs.

Another strong suggestion is to apply innovative initiatives used by US big-box retailer Best Buy, with which it has a joint venture, to sell connected devices. For example, Best Buy’s US MVNO recently began adding connectivity to laptops. Carphone Warehouse might not launch an MVNO in Europe, but it could work in partnership with operators to embed connectivity services in these devices.

A mystery-shopper survey on connected TVs conducted recently by Informa Telecoms & Media revealed that UK retailers fail both manufacturers and consumers, because smart TVs remain a low priority, with many retailers ill-equipped to sell these products because the majority of stores have no Internet connection, no dedicated in-store section and poorly trained sales staff. This is definitely an area in which Carphone Warehouse can differentiate itself from its main competitors in a fast-growing market.

By focusing on tablets, accessories, applications and content, becoming the “home of technology” (or maybe “connected technology”) seems to be an interesting road, which is in line with Carphone Warehouse’s core value proposition. The challenge will be to take the good customer experience and support it provides its mobile phone customers and apply it to these new products.

While the rampant speculation has provided RIM’s beleaguered stock with a nice short-term upswing, none of this serves to solve the company’s struggles to execute on its plans to update its entire product line and introduce BlackBerry 10, the company’s great hope for the future.

With recent announcements from RIM suggesting that new BB 10 devices will not reach the market until late 2012 due to a short supply of semiconductor components, the outlook for the company’s performance this year has become positively glum.   In the face of this turmoil, RIM has undertaken significant cost cutting through massive layoffs and is also engaged in substantial reorganization efforts, neither of which will provide an immediate correction for its existing difficulties.

So, unless RIM’s executive leadership is willing to entertain selling to the highest bidder and relinquishing control of their pride and joy, the company’s leaders have one option to wrest control of their company’s failing position with Wall Street and set their future course as they see fit: piece together a group of trusted investors and take RIM private.

Why go private now?  There is no better time than the present from a cost perspective.  With its current market capitalization hovering below $9bn, RIM’s value has reached its lowest point since 2004, when the company was still redefining mobile email, enterprise mobility and smartphone design.  Even with acquisition rumors providing temporary upswings in the stock value, the overall downward trend in RIM stock remains doggedly persistent.

Despite the fact that RIM continues to be among the more profitable firms in the space, several PR missteps and strained relationships with key financial analysts have resulted in a swiftly declining stock price that shows little hope of rebounding in the next few quarters.  Sure, RIM has been rebuilding its marketing and investor relations teams, but until the company is prepared to launch an innovative product portfolio around a fully functional and well realized BB10 operating system, the Street will continue its brutal treatment of the company’s stock.  So, in the face of near certain gloominess, why bother being a publicly traded company with a Street that shows little to no faith in the company’s leadership?  Given the recent price target downgrades, RIM will likely never be better positioned to buy back the company than right now.

If RIM’s co-CEOs are serious about their vision of a unified OS platform and device innovation and are committed to making it work, they should put together a group of private investors who are capable and willing to think in time horizons that stretch beyond the current quarter and take the company private again.

In the best of times, the benefits of being a publicly held corporation provide outstanding capital for investments and stock valuations that can dazzle even the most jaded of CEOs.  But the salad days for RIM’s stock are over for the foreseeable future and the Street’s impatience with RIM’s strategy has created an atmosphere in which co-CEOs Mike Lazaridis and Jim Balsillie are being challenged at every level, including their participation in the board of directors.  Certainly, stockholders have every right to be concerned about the company’s recent string of product difficulties, slow innovation cycle and product launch delays.

But in consideration of RIM’s larger strategic challenges, constant skirmishes with financial analysts and stockholders can easily become a festering wound, distracting the company from its more urgent tasks of executing on its plans.  Instead of following a path of little to no return, RIM can and should choose to see its current financial position as an opportunity to up the ante, buy back the company and remove the very real distractions and challenges posed by the financial community as it charges ahead with its product strategy.

Informa’s IP&TV session at CES saw panellists from Cox, AT&T, YouTube and Sony all debating the future of TV, and what different players in the value chain can gain from partnering with each other. But the big unspoken truth was that wholesale change will be slowed by one group in particular – content producers and owners.

This is something that will not change for as long as the likes of Disney continue to be handed cheques the size of the one they recently received from Comcast. The deal will probably see Disney content disappear from free-to-air OTT outlets like Hulu, ands puts it future in the hands of the old guard more than ever before.

The most remarkable thing about the Disney-Comcast deal is its ten year length. Given the mammoth changes that have happened to TV in the last ten years and that will probably happen in the next ten, it’s a huge vindication of the current model.

Much is made of Google’s ability to disrupt the content game, fuelled by its announcement of a $100m investment in original content late last year, but Francisco Vaerla of YouTube claimed that its content ambitions were much more modest. Its aim, he said, was to create different types of content that did not try and compete against the sport and movie-rich offerings of the likes of AT&T and Cox, and which would not fit in a Pay TV environment.

It seems the most likely disrupting content force, then, will not be a deep pocketed player from any part of the value chain, but from punters themselves. Should enough people start to become disinterested in the big budget fare of HBO, ESPN et al – or at least disinterested enough not to pay through the nose for it – and consider the free, more niche content of YouTube to be a suitable alternative, then the current model would be on shaky ground. It’d be an enormous shift change but lest we forget that, not so long ago, most of us only watched two or three channels. Stranger things have happened.

In the emerging markets the growing requirement for more complex rating and billing functionality also promises rich pickings for those vendors with the right products. Meeting these challenges is not a matter of choice for most operators however, particularly for those who have or intend to embrace LTE, because having the bandwidth necessary to offer mobile broadband data services is not enough without the support systems to fully exploit the technology.

In all cases, the marriage of high-speed IP-based network infrastructure and the new generation of IT support systems will ultimately lead to a greater focus on areas such as customer experience, business intelligence and innovative ways of dealing with network congestion.

1. One of the most exciting developments in 2012 will be Increase in demand for policy-based OLC as operators begin to exploit some of the opportunities for innovative service development offered by the technology. There is a danger however that the speed of this development will be hampered by operators’ apparent inability to get their network and service creation staff working together cohesively and resolve issues such as who owns the service model.
2. There will be further development of tiered services based on speed, volume and time of day as a defensive strategy against network congestion.
3. Operators in mature markets will focus more closely on the monetization of mobile broadband data services, which in turn will drive other areas of growth, such as Facebook and other social networking-based plans, hybrid accounts and customer self-provisioning.
4. As the year progresses, there will also be an increase in demand for Diameter-based routing as signaling becomes a problem, particularly in the Radio Access Network (RAN) because unlike their predecessors, LTE networks are subject to 100% smartphone penetration from day one.
5. An intriguing development is the trend towards the use of SaaS in the OSS/BSS sector, driven by the demand for more complex service support and the requirement to squeeze the last bit of investment from legacy systems. It is possible that the perceived CAPEX and OPEX savings gained from using cloud-based systems could add further momentum to this trend, given the current economic climate; however issues around latency and security will need to be addressed.
6. Vendors of network optimization software could see a rise in demand for their products, in particular those relating to RAN congestion as femtocells and other small-cell technologies are increasingly used in a traffic management role.
7. 2012 is also likely to bring the beginnings of an overall improvement in some areas of the overall customer experience as increasingly larger volumes of more granular data becomes available for use in call centers and pro-active CRM.
8. Demand for analytical software for business intelligence will be slower to develop than at first thought, as operators concentrate on more defensive strategies; however the threat of increasing churn will ensure the topic doesn’t fall completely off the radar. As more network, service and RAN data becomes available, operators will begin to understand the significance of it and begin to exploit it more than at present.
9. It will be more important than ever that vendors are able to demonstrate beyond all doubt that their products will integrate quickly and easily with those of other vendors, even when offering end-to-end solutions of their own. Operators are beginning to feel that although they may source systems from a single vendor, they want the option of being able to incorporate individual platform elements from other vendors as and when they see fit without incurring high integration costs.
10. The year will see a rise in demand for support systems specifically tailored for M2M services. The nature of the support required for M2M service implementation is still largely undefined as the sector has the potential to require many different billing and charging models as well as varying traffic requirements.
11. The continuing need to integrate new IT infrastructures with legacy systems will maintain a strong demand for mediation products, as will the desire to maintain high levels of revenue assurance in the face of increasingly complex service models.
12. Looking at regional markets, Africa could be a strong growth area for billing and rating systems, as many of the smaller operators reach market saturation and begin looking for something more complex than an Excel spreadsheet. Latin America, though still essentially an emerging market, is perhaps more developed than most, as evidenced by the success of companies such as Sandvine in that region. Some of the newer charging and billing platforms might seem like a big investment to emerging operators, but they could prove to be cost-effective in the long run, particularly for start-ups without legacy systems as there are fewer integration issues to be addressed.

As a consequence, the business model for fleet tracking is proven, is readily repeatable and gives a good return on a per-connection basis for fleet tracking service providers. Even if the number of fleet vehicles in existence represents a specialised and limited addressable market that only makes up a small percentage of the total number of vehicles on the road.

The value proposition and business model for auto OEMs that wish to embed telematics systems into passenger vehicles is also clear. Emergency crash notification and remote diagnostic systems may not yet be mainstream options let alone standard features, but both of them play to the auto OEM’s core competency of selling vehicles as they provide vehicle-specific service enhancements.

Emergency crash notification and remote diagnostics are preventative measures designed for the anticipation, avoidance and expeditious reconciliation of troublesome situations. They have low-bandwidth communications requirements and predictable usage profiles. They do not put the auto OEM in an awkward position with regard to the amount or the cost of bandwidth required, operating invisibly to deliver latent but on-demand functionality.

Consumer telematics services

What seems less certain however is the potential for consumer telematics services. They are not M2M services in the traditional sense but they are certainly related to them. Consumer telematics services often involve a degree a degree of human interaction in setting up service delivery options (which may be automated from then on) or in manually requesting on-demand content. For they extend to the car access to ‘infotainment’ material previously only accessible elsewhere.

With consumer telematics, the question of which party should be responsible for doing what – and who it is that ‘owns’ the rights to the relationship with the customer and their money – is less clear. So there are a number of questions that need to be answered before the market can emerge in earnest: Who should be paying for any connectivity, as well as how much of the technology required to deliver the services should be embedded by the OEM versus brought-in in an aftermarket fashion by the end user?

Also, should auto OEMs by trying to step outside of the realm of their core competency to become content distributors, plus how can you possibly reconcile the connectivity costs associated with high-bandwidth streaming media or an ‘open Internet access’ service model? There has been a lot of discussion about infotainment services and mobile apps for the automobile market but, critically, is it something that the consumer would actually ever be willing to pay for on a recurring basis?

The draw of the mass market

Embedded communications and the M2M market have traditionally existed to allow for the creation of operational efficiencies, cost savings and improvements to the quality of existing services that have their own proven business models and which are already being delivered to existing customers. I.e. they have been for the sake of bolstering established product lines rather than for generating new and discrete revenue streams.

But the M2M market at large presently has great hopes for the potential of the consumer electronics vertical to generate brand new service revenues streams. Thanks to the impact already made by game-changing devices such as the Amazon Kindle, where seamless embedded connectivity is a fundamental part of the devices value proposition.

The consumer electronics industry consists of many thousands of different devices being sold to many millions of people worldwide. Its sheer scale means that any level penetration achieved by devices that rely upon embedded connectivity will result in significant sales and profits for the manufacturers that conceived them. In light of which, it is fully-understandable and only natural that the telematics market should also be excited about mass market consumer opportunities for communications-based in-vehicle services.

It’s good to talk

At the Consumer Telematics Show (CTS) in Las Vegas on January 9th 2012, important topics relating to the future of the consumer telematics market are scheduled to be explored: How the upsell of premium content may reshape the business model for telematics. How innovations in Human Machine Interface (HMI) could help to deliver the usability required to kick-start the market. How existing telematics delivery platforms can be reused to provide innovative driver-centric services without needing to be re-engineered – plus how dynamic content and applications may be safely delivered to passenger vehicles as personalised packages of services.

Informa Telecoms & Media’s Senior Research Analyst Jamie Moss will be at CTS, where he is keen to meet with other companies that are interested and involved in this intriguing market sector for mobile communications. The day after CTS the Consumer Electronics Show (CES) will also begin its four-day run in Las Vegas. Informa Telecoms & Media’s mobile and fixed-line devices and content specialists Dave McQueen, Jamie Moss, Andrew Ladbrook and Giles Cottle will be in attendance too. So please do get in touch – we look forward to seeing you at both events!