Sowing seeds of distrust

Germany's opposition to security agency eavesdropping was in the news again this week, with Deutsche Telekom outlining the opportunity to liberate citizens being monitored by national spy agencies and encouraging European operators to focus on providing data security and data privacy.

January 31, 2014

14 Min Read
Sowing seeds of distrust

By The Informer

Germany’s opposition to security agency eavesdropping was in the news again this week, with DeutscheTelekom outlining the opportunity to liberate citizens being monitored by national spy agencies and encouraging European operators to focus on providing data security and data privacy.

Deutsche Telekom said that before public enemy number one/Nobel nominee (depending on whose phone you’re listening in on) Edward Snowden’s revelations were made, data privacy and security were never in the public spotlight as much as they are now. And the operator is looking to become a knight in shining armour for consumers by providing data privacy and IT security services, differentiating itself from competition in the process.

“2013 was a burdensome year for data privacy. The scandal involving interception practices by the American NSA and the British GCHQ raised basic question about the foundations of our democratic society and, not least, called the integrity of telecommunications and the digital media into question,” Lothar Schröder, deputy chairman of Deutsche Telekom’s Supervisory Board wrote in the operator’s Data Privacy and Data Security report.

“Big Brother behaviour by a number of intelligence agencies runs counter to every endeavour by telecommunications companies to treat the personal data to which they have access as confidential. Credibility will take a massive hit if we have reason to fear someone is always listening to and spying on what we say and write.”

The comments were the latest in a string of moves made by the operator to protect subscribers from those who might be eavesdropping. Last month, Deutsche Telekom increased the security for voice transmissions in its German network to better protect its subscribers from the spy agencies’ practice. It deployed the A5/3 encryption standard for voice transmission, which is being rolled out nationwide. The company has also said it will avoid routing customers’ email traffic through US hosted infrastructure and will step up email security in the wake of the NSA PRISM spying scandal.

Last year, then CEO René Obermann said Deutsche Telekom and its partners would roll out SSL (Https) encrypted connections between users’ client devices and the operator’s email servers.

“Germans are deeply unsettled by the latest reports on the potential interception of communication data. Our initiative is designed to counteract this concern and make email communication throughout Germany more secure in general. Protection of the private sphere is a valuable commodity,” said Obermann at the time.

Deutsche Telekom is being backed by the Deutsche government too, with Chancellor Angela Merkel this week reportedly saying in a speech to the nation’s parliament that the spy agencies’ actions “violate trust and sow distrust”. According to German news site The Local, Merkel said in her speech:

“Is it right that our closest partners such as the United States and Britain gain access to all imaginable data, saying this is for their own security and the security of their partners? Is it right to act this way because others in the world do the same? Is it right if in the end this is not about averting terrorist threats but, for example, gaining an advantage over allies in negotiations, at G20 summits or UN sessions?

“Our answer can only be: No, this can’t be right. Because it touches the very core of what cooperation between friendly and allied countries is about: trust.”

Merkel herself was allegedly spied on by the NSA and has demanded that the US government give Germany clarity over the future of the NSA in the country.

Last year also revealed distrust between players in the US and Chinese telecoms sectors. However, the US government’s accusations against Chinese infrastructure vendors did not stop Google selling its relatively recently acquired MotorolaMobility handset business to Chinese hardware player Lenovo.

It’s increasingly looking like the hardware space isn’t a fun place to play, with the handset market seemingly dominated by Apple and Samsung. Last year, competitive pressures forced the once-dominant Nokia to sell its handset business to Microsoft, BlackBerry’s struggles in the space have been well documented with analysts expecting it to soon put its hardware business up for sale, and now Google has divested itself of the firm it paid $12.5bn for in 2011.

Lenovo is paying a fraction of that, $2.91bn, for the business just two and a half years later. Crucially though, Google is keeping a hold of “the vast majority” of Motorola Mobility’s valuable patent portfolio, including current patent applications and invention disclosures. Lenovo will be given a license to the patent portfolio and other intellectual property though, and it will also receive over 2,000 patent assets and the Motorola Mobility brand and trademark portfolio.

The deal might be welcomed by Google’s Android handset partners, as it means there is one fewer competitor in a fiercely competitive smartphone market. It will also relieve Google of a loss making business and CEO Larry Page admitted defeat in the firm’s attempt to create a formidable handset player. He said that Motorola “will be better served by Lenovo—which has a rapidly growing smartphone business and is the largest, and fastest-growing, PC manufacturer in the world”. The move will enable Google to devote energy to driving innovation across the Android ecosystem, he added.

Lenovo will be hoping the deal will help it gain a foothold in Western markets, where the firm’s handset business lacks presence. It believes the acquisition will complement its presence in  Asia Pacific and in China, where it has 11.8 per cent market share making it the nation’s number two handset provider. China is an important market for smartphone players, one that can make or break a challenger in the smartphone market.

“We will immediately have the opportunity to become a strong global player in the fast-growing mobile space,” said Yang Yuanqing, chairman and CEO of Lenovo. Lenovo acquired IBM’s PC business in 2005 and Yang said he is confident of strengthening the Motorola brand, as the Chinese firm did with IBM’s Think brand.

Meanwhile, Microsoft’s hunt for Steve Ballmer’s successor looks to be coming to an end. Ericsson chief executive Hans Vestberg has been linked by the industry rumour mill to the top job at Microsoft, but in an interview with the Swedish vendor’s CFO Jan Frykhammar sought to set the record straight.  He told the site that Vestberg had met with the Ericsson board of directors Wednesday morning to quash the Microsoft rumours and reaffirm his commitment to the Swedish vendor. “It’s clear that [Hans] is Ericsson,” said Frykhammar.

Instead, it is looking likely that Microsoft will promote internally, with Satya Nadella, the company’s head of cloud computing, touted as its next CEO according to multiple reports.

UK operator group Vodafone also made a divestment of its own this week, completing the sale of its 45 per cent stake in VerizonWireless to its JV partner VerizonCommunications for $130bn.

Vodafone will receive $58.9bn in cash from Verizon Communications but will pay out $23.9bn of that to its shareholders. The operator group’s shareholders will also receive $60.2bn in Verizon shares as part of the deal.

Vodafone will also receive $5bn in Verizon loan notes, as well as Verizon’s 23 per cent stake in Vodafone Italy, which is valued at $3.5bn, giving the British operator full ownership of the Italian subsidiary.

The deal will have pleased Voda’s investors, with a total of 99.08 per cent of them voted to approve the deal, but Steven Hartley, practice leader of Ovum’s Industry, Communications & Broadband Practice, warned that giving so much to them is indicative of a short-term vision.

“Vodafone is never going to see that sort of cash windfall again,” said Hartley. “Just imagine what it could have done with even more. It could rip out all of its networks around the world and start again. It could replace all of its legacy IT systems. Actually being able to have the latest and greatest networks, imagine what it could do competitively. It could have had any of the latest technology available to make the transport of data more effective.”

Vodafone insisted though that the cash it does receive will enable it to better execute its 2015 strategy, Project Spring, to enhance its market competitiveness, data networks and customer experience services. It intends to invest £6bn in accelerating the rollout of its LTE networks to cover 90 per cent of its five main European markets by 2017.

Gavin Darby, who was once a high flying executive within the firm, holding roles as CEO/COO of Vodafone UK, CEO for USA, Africa, China and India, is now in the food business. But he was back in wireless this week though, announcing a deal between the firm he is now in charge of, PremierFoods, and – you guessed it – Vodafone.

Darby has signed a “multi-million pound contract” with Vodafone that sees the operator become the food group’s “fully integrated communications partner” covering fixed and mobile voice services and an upgrade and network linking all of Premier Foods’ sites.

Darby said: “Reducing complexity is a key part of our strategy to drive growth. By continually improving our efficiency and effectiveness we will be better able to meet customer needs. I am delighted to be working with Vodafone who will deliver the right integrated communications platform to support our future growth.” Premier Foods owns brands including Mr Kipling, Batchelors and Bisto. Insert your own gravy train/piece of cake joke [here].

It was a big week for earnings results, and the telecoms sector posted some pretty large numbers. First off was Apple, which generated record quarterly revenue of $57.6bn in 1Q14. The firm sold 51 million iPhones in the quarter, which it said was an all time record for the firm and an increase on the 47.8 million handsets sold in 1Q13. It also sold a record 26 million iPads and 4.8 million Macs. These sales meant quarterly revenue saw a 5.7 per cent increase on the $54.5bn generated in the same quarter a year ago. It saw a strong performance in China, and according to Professor of strategy at WarwickBusinessSchool Loizos Heracleous: “China is the engine of growth and Apple is taking the right steps to consolidate this potential”.

But analysts and investors are rarely content, particularly with Apple, a firm many seem quick to write off lately, despite its stubbornness in generating strong sales and profits. This quarter, they pointed out that quarterly net profit stood at $13.1bn, the same as what the firm recorded in 1Q13. We can’t have that now, can we? Gross margin for the quarter also fell, albeit by 0.7 percentage points, from 38.6 per cent to 37.9 per cent year on year.

Meanwhile, Ericsson reported flat sales for the fourth quarter and full year 2013, while net earnings were boosted by the patent licensing agreement with Samsung.

Revenues for the year came in at SEK227.4bn (£21.2bn) and SEK67bn for the quarter, both flat year on year, although the strength of the Swedish Kroner helped boost the firm’s figures. The company turned a profit of in the fourth quarter and SEK12.2bn for the year, up significantly due largely to the SEK3.3bn boost from licensing GSM, UMTS, and LTE patents to Samsung after two years of negotiations.

CFO Jan Frykhammar told that the company was now seeing a higher share of capacity projects over coverage projects, as expected with an industry transitioning to LTE.

The industry’s larger operators reported increased profitability this week. USA’s AT&T reported a 149 increase in net income for FY2013 to reach $18.2bn compared to its $7.3bn 2012 result. Consolidated revenues reached $128.8bn for the year, an increase of 1.1 per cent year on year.

The firm recorded $12.2bn operating income for 4Q13, having posted an operating loss of $6bn in the same period a year earlier. Consolidated revenues also grew by 1.8 per cent to reach $33.2bn.

And India’s BhartiAirtel reported a 115 per cent rise in net income year on year for its fiscal third quarter. Net income surged from INR2.84bn in 3Q12 to INR6.1bn in 3Q13, as the operator was able to raise revenues from India by 10.3 per cent and internationally by 18.5 per cent.Consolidated revenue also rose by 13.3 per cent to reach INR219,390m ($3.51bn).

In other news, former CEO of VimpelCom and TelekomAustria, Boris Nemsic, picked up his engineering tools this week, reappearing  as chairman of the board of Cellwize, a Self Organizing Networks (SON) specialist. Founded by RAN experts in 2008 as an optimisation services company, Cellwize launched a commercial SON platform in 2012 and won contracts in EMEA, APAC and Europe.

Meanwhile, the current CEO of Telekom Austria, Hannes Ametsreiter, has been speaking to about overseas investment in the European sector. He even went as far as to predict that some European telcos might shift their headquarters outside of the region as a result.

The comments are especially intriguing given that the incumbent, which is still part owned by the Austrian state, is also part owned by Mexican billionaire and AmericaMovil CEO Carlos Slim. Slim is reportedly keen to grow America Movil in Europe and it has been rumoured that he is eyeing full ownership of the Austrian operator.

However, Ametsreiter insisted that he was speaking in general terms and not about his own organisation, although reports have surfaced from Reuters that a move for increased ownership from Slim is imminent.

“I believe we will see more consolidation in Europe, I believe international players from outside Europe will make acquisitions and I believe this means that the headquarters of some European operators might move outside of the region,” Ametsreiter told, adding:  “I am not talking about us, that is not the case. I just see that there are many rumours in the industry that show there is a lot of interest from international investors in Europe.”

Also this week, Hong Kong-based carrier services firm PCCWGlobal banded together with 16 other high profile international network operators, including China Unicom, Telecom Egypt, Etisalat and Ooredoo, to construct a high capacity submarine cable system between Asia, Africa and Europe.

The AAE-1 will interconnect Hong Kong, Asia, the Middle East, Africa and Europe with a target ready for service date in 2016 and claims to be the first high capacity cable system to link all of the major South East Asian nations to Africa and Europe via the Middle East. PCCW Global plans to land the cable at the Cape D’Aguilar cable station in Hong Kong and then extend connectivity to a city data centre, making Hong Kong a key telecommunications hub in addition to Singapore and Marseille in France along the AAE-1 network The cable aims to facilitate and provide support for the unprecedented growth of Asia-Africa trade.

And finally, conclusions from the second annual Industry Survey have begun to make their way into the public domain. One notable observation is that although the telecoms industry remains largely enthusiastic about the prospect of operators partnering with Over The Top service providers, several challenges still threaten to derail any operator-OTT partnerships.

A total of 92 per cent of respondents (and 93 per cent of operator respondents) voiced their belief that there is value for operators partnering with OTTs and others in the digital ecosystem. However, the most serious challenge to the successful execution of an operator/OTT collaboration was felt to be confusion or uncertainty over the benefits available to both parties. This challenge was ranked as six or seven on a 1 – 7 scale of severity by 47 per cent of respondents overall and 48.5 per cent of operator respondents.

Another challenge revealed by the survey is the issue of commitment on both sides. Lack of commitment from OTTs was given a high rating (six or seven) as a challenge by 35.5 per cent of respondents and an almost identical share of operator respondents.

The survey also revealed that operators are the organisations with the best brands and market positions to offer a coherent, nationwide wifi service. But while fixed and mobile operators generally rated themselves over one another in this regard, a significant portion from each category favoured the other.

More than 80 per cent of respondents to the 2014 Survey felt that telcos were the most natural providers of wifi, with 54.1 per cent identifying mobile operators and 26.4 per cent identifying fixed operators. Specialist wifi providers scored poorly, with only 10.5 per cent of the votes, with internet players a little further off the pace, with 9.1 per cent.

On February 12th there will be a webinar offering an exclusive preview of the results from this section of the survey, which you can register to attend by clicking on the above link. The full report from the survey will be made available in February. You can register to receive the report here.

And that’s about all for this week. Take care,

The Informer

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