BuddeBlog

Will US Consolidation Outbreak spread to Australia?
At the Roundtable on 23 March I will address the recent consolidation outbreak in the USA, where two more major (mobile) mergers are rumoured. Also there is renewed talk of M&A activities amongst the vendors.

Will the Alcatel/Lucent merger discussion be revived? We have been advocating for many years that vendor consolidation makes good sense.

Next Generation Networks will have a massive impact on telco cost structures. This could result in another 10,000 lay-offs at Telstra, after the privatisation. This, of course, will bring new dynamics to the Australian market.

Will the consolidation outbreak in the USA spread to Australia?

We have our own type of M&A here, called network sharing. This trend was set, in the first instance, by four mobile companies, but the Ministers are promoting it as a good model for fixed network sharing also.

Will this result in regulatory changes?

So far the consolidation we have seen has been small-time. The real action will begin when Telstra, News Limited, Kerry Packet, Optus, Vodafone, Hutchison, Ten, Seven, and AAPT all get involved – and this is precisely what I am predicting.

This level of industry consolidation will have an effect on just about every company involved in this market: infrastructure suppliers, billing companies, network management companies, content providers, software developers and others that have OEM arrangements or other partnerships with big operators and big vendors.

Make sure that you are well-situated to take advantage of deals that could bring about an actual reduction in the business opportunities available. Only if your company is correctly positioned can consolidation play to your own unique strengths.

Are your prepared for this? Come and join me at the Consolidation Roundtable on Wednesday. It will be the perfect networking event to find out what’s occurring, who’s interested in the game, and what opportunities may arise.

Paul Budde

Roundtable with Paul Budde – Wednesday 23rd March 2005

AGENDA
09.30 – 10.00
Arrival, networking and coffee

10.00 – 10.15
Welcome, introduction of delegates

10.15 – 11.15
Key trends and developments driving consolidation – Paul Budde
Convergence, triple play, Nextgen
Fragmentation through disruptive developments (Mobile substitution, VoIP, regulations, wireless broadband).
Reconstruction, separation, integration developments

11.15 – 11.45
Morning coffee

11.45 – 12.15
Reasons for consolidation. Strategic drivers for M&A in Australia and NZ – Mark Burns Managing Director TMT Partners Pty Ltd

12.15 – 13.15
Implementation issues and market reaction to consolidations. Strategic/Market implications for mergers and acquisitions in the telco sector.-
Jonathan Lerner Director, Corporate Finance Grange Securities Limited and David Langford Director Equities research Grange Securities Limited

13.15 – 14.15
Light lunch

14.15 – 14.45
Mergers and Acquisitions – a practical view – Kim Wingerei independent advisor

14.45 – 15.00
Afternoon tea

15.00 – 16.30
Roundtable discussion with delegates

16.30
Close – drinks in the bar

Cost:
$350 per person (excluding GST) – this includes morning/afternoon coffee and lunch

Venue:
The Observatory Hotel
89-113 Kent Street, Sydney

Booking:
Call or e-mail Christine Lewis to make your booking:
Telephone: 02 4998 8144
E-mail: pbc@budde.com.au

The longer it takes for alternative infrastructures such as WiMax and Broadband Powerlines (BPL) to become properly standardised (which in turn will lead to commercially viable projects and solutions) the more difficult it will be for these technologies to have any serious impact on broadband infrastructure developments.

While companies plan to sell WiMax products next year, this might be too late for the more developed broadband markets. The technology will therefore have to find a better starting point in emerging markets.

BPL is another technology waiting to get off the ground but, apart from the USA, there are still serious regulatory issues that are making large-scale roll-outs difficult. Also, there is still no defined standard and that will push commercially viable roll-out dates back to 2006 and beyond.

The industry is still very optimistic about the potential of WiMax and BPL to make high-speed wireless Internet services available across regions – but commercial viability continues to be a cause for concern.

Scarce spectrum, radio interference and wide availability of DSL and cable will slow down WiMax and BPL for some years.

The most promising prospects are for regional operators. For them BPL and WiMax could extend networks and avoid the high costs of new wires in the ground.

Australia is one of the few developed countries where WiMax and BPL might have a better chance. There is hardly any infrastructure-based competition, and the only company which could provide this, Optus with its HFC network, is taking a very lacklustre approach – preferring, instead, to rely on wholesale arrangements with the incumbent telco.

WiMax and BPL operators could perhaps fill the gap here and take a similar role to the cable TV companies in Europe and North America. But these infrastructure competitors launched their operations at the beginning of the broadband boom, in the late 1990s, and, apart from the USA, none of the cable TV companies have been overly successful.

The reality that nobody wants to know about is that it looks as though the incumbent telcos are going to maintain their natural infrastructure for many years (decades) to come.

Paul Budde

See also:
Global – Utilities – Powerline – Trends and Developments in 2004/2005
Global – Broadband – Wireless – WiMax Analyses

We recently had a most enjoyable barbecue lunch with some friends, at which we were told about a recent ‘domestic’.

The husband had bought himself this marvellous PDA – top of the range – the absolute pinnacle of technology. It was totally synchronised with his laptop, and delivered all the programs he needed.

And this same cleverly-integrated unit also delivered all the mobile phone functions, even the latest camera options.

Unfortunately he couldn’t find a way of actually viewing all the photographs he took. A few near accidents took place in the car, also, as the pda/phone needs two hands to operate it.

Also, he discovered that his fabulous pda had a bad habit of ‘talking’ at the wrong time. For instance, at an important business meeting it suddenly said: ‘Pay tax for superfund xxx’ – most embarrassing!

But the greatest problem related to his personal life – and, in fact, this nearly brought the marriage down.

My friend’s wife has a slight sleeping problem – those of you aged 40-plus may identify with this. She needs a quiet sleeping environment and, if disturbed, has great difficulty getting back to sleep.

So you can imagine the strife that ensued when the pda began to deliver messages in the early hours of the morning. For example, one night at midnight the pda began reciting the various appointments he had the next day.

And, to top it all off, whenever the mobile phone rang this baby-boomer frantically called out to his wife ‘where are my reading glasses?’ because he couldn’t read the pda/phone functions without them. Needless to say, this resulted in many ‘missed calls’.

In the end, one morning my friend’s wife placed the pda on the table and said: ‘either this goes, or I do!’

I am glad to report that they reached a compromise, which consisted of a separate mobile phone and a separate pda, with the pda firmly switched off during the night.

I suppose we could say that IT also saved the marriage.

Paul Budde

VoIP, a disruptive technology
Although specialist companies such as Vonage, and smaller cable companies such as Cablevision, have offered VoIP since 2002, the entry of #1 Multiple Service Operator (MSO) Comcast into the VoIP market in January 2005 is seen by many as the greatest threat to local wireline incumbents to date.

If VoIP becomes ubiquitous, the Baby Bell wireline telcos would lose around half their current revenue base. The wireless companies would be hit even harder as 80% of their revenue is derived from voice calls.

Large corporations have been using Voice over IP (VoIP) (now also called Voice over Broadband (VoBB)), over their Wide Area Networks (WANs) for several years. Legislative resistance by the Baby Bell lobby has delayed its introduction into the consumer market. The entry of the two major MSOs, Comcast and Time Warner, and smaller MSOs Cablevision and Cox, projects VoIP soundly into the mainstream.

To make a voice call over your local broadband access line, all you need is software. The quantity of data downloaded/uploaded over the connection during a phone call is insignificant. Its cost to the broadband carrier is negligible. The duration of the call, how far the call is carried, where the call originates or terminates, all these make very little difference to the cost.

Until now, VoIP has been the domain of specialist companies, such as market leader Vonage, which has been operating since 2002 and has around 300,000 customers. Its market niche could be called the nerd market, for technology savvy users.

In 2003 MSO cable companies invested $63 million, and in 2004 $123 million, in VoIP equipment. In 2005 they have started to sell the service to their 40 million cable customers, and market their triple play bundles, namely voice, Internet and TV, to attract new customers from around 80 million homes which are passed across their coverage areas.

Technology research firm, Strategy Analysis, released a report in February 2005 predicting cable VoIP subscribers to grow from 3.3 million currently to over 5 million by the end of 2005.

Who are the short term winners and losers?
In the short term the cable companies could attract millions of new residential customers away from wireline, and could generate significant voice revenues from their current customers.

The incumbent VoIP specialists, such as Vonage, will also benefit by the de-mystification of VoIP. These operators are not limited to cable coverage areas, but can offer their services to anyone with a broadband connection, from wireline DSL subscribers to travellers with laptops connected to WiFi or WiMax.

In the short term, the losers will be the wireline telcos or Baby Bells: SBC, Verizon, Quest and Bell Atlantic, which have been directing their efforts to resisting the onset of VoIP through regulation. They are now a few years behind cable in building fibre to the home (FTTH) infrastructure capable of transmitting TV, called IPTV, which will enable them to compete with triple play bundles.

The greatest losers will be the wireless operators, whose principle service is voice calls, generating 80% of their revenue. Voice call prices are diving and the take up of their 3G offerings, ranging from video calls to MobiTV, has been small despite the immense capital expenditure required to deliver these services.

Who are the long term winners and losers?
In the long term, the wireline telcos will dominate. The geographical coverage of their Next Generation Networks (NGNs) will surpass those of cable. The quality, speed and cost per megabyte of their broadband access over fibre, will beat all other delivery systems, including cable, broadband over power line (BPL), and the wireless networks such as 3G, 4G, WiFi and WiMax.

It seems likely that in the long term wireless operators will disappear and wireless services will be bundled with wireline triple play. The current wireless operators will be taken over by mega-sized wireline telcos.

It seems inevitable that wireline telcos and their Next Generations Network infrastructure will become utilities, like electricity companies, to deliver a great diversity of applications and services provided by third parties. The Bells will become wholesalers of commodity services provided by the experts. The cable companies, whose cable networks will eventually merge with the wireline networks, will focus on their core competency, their special connections with Hollywood and the media giants, to deliver subscription TV.

In the long term, the niche VoIP players, such as Vonage, will not survive unless they can diversify into new services over the wireline network.

See also:
USA – Company – Comcast Corporation;
USA – Broadband – Cable, DSL, Wireless, FTTH and BPL;
USA – Broadband – Market Overview and Statistics 2003;
USA – Broadcasting – Major Cable Operators;
USA – Cable Telephony;
USA – VoIP Market – Analysis & Statistics;
USA – Telecommunications – Key Statistics and Market Overview;
USA – Major Telcos – Statistics & Analysis.

The divestiture of 1984
The US telecoms environment has seen some spectacular mergers lately:
Local operator SBC bought the international operator AT&T;
Verizon, another local operator, acquired the second-largest international operator, MCI, (previously known as WorldCom); and
International/mobile operator Sprint Corp bought wireless operator, Nextel Communications.

As a result of these mergers five major telcos now remain in the USA: Verizon, SBC, BellSouth, Sprint and Qwest.

These developments have to be analysed in the context of a range of developments in the past.

Of course, it all began in 1984 with the AT&T divestiture, which led to the set-up of local telephone companies (RBOCs: US West, BellSouth, PacificTelesis, Southwestern Bell – SBC Communications, American Information Tech – Ameritech, Nynex and Bell Atlantic.) and long-distance telephone companies (AT&T, followed by its competitors MCI and Sprint).

This all made perfect sense at a time when telecoms meant making telephone calls. And it served the US environment well – the country saw a rapid increase in competition, which resulted in better prices and a range of innovative services. Although the Americans complained about their telcos (just like everybody else), for a long time the telecoms environment was more competitive in the USA than in most other countries.

The rise of cable TV
In a separate development, in its early years the cable TV industry in the USA received protection from the regulator, the FCC. This regime didn’t allow telcos to own, amongst other assets, cable TV companies. In that way this industry was able to build a competitive infrastructure next to the telcos.

From the late 1970s onwards new interactive services started to enter the market and were pursued, both by the telcos (videotext) and the cable TV companies (iTV). However, neither really got any traction until the Internet and digital TV began to arrive in the 1990s. From then on it became clear that the telcos and the cable TV companies were on a collision course, since both were now able to enter into each other’s traditional markets.

Infrastructure-based competition
The FCC correctly foresaw these developments and, in the 1996 Telecoms Act, the US government (guided by the FCC) promoted infrastructure-based competition rather than ‘pure’ telecoms competition. It took a light-handed approach within the telco market, which upset the many competitors who would have loved to utilise the telcos network to establish competition with the incumbents.

However, the FCC persisted with its approach and continued to stimulate more infrastructure-based competition, championing wireless operators and BPL providers. The country was the first to ratify regulations that allow for broadband over power lines (BPL). The fact that in 2004 the telcos asked for, and received, special protection when they promised to start rolling out a $75 billion FttH infrastructure also needs to be seen in the light of this infrastructure-driven regulatory approach.

In the cable TV market, it are the satellite companies that are delivering the much needed infrastructure based competition.

Now add broadband to the equation
In the meantime, the cable TV companies, uninhibited by vested telecoms interest in data networks, grabbed the opportunity to enter the broadband market in the late 1990s, and they are still the market share leaders – mainly because the telcos were very slow to roll out broadband. This vindicated the FCC’s infrastructure regime – in the end it was competition from the cable TV operators that forced the telcos to move into broadband.

For the cable companies, the upgrade of their analogue TV networks allowed this convergence to take place. Boosted by their broadband success they started to penetrate deeper into the telco market with VoIP, at the same time using their new digital TV infrastructure to deliver a range of new iTV services.

While, in the meantime, the telcos are also moving into such triple play business models (delivery of voice, high-speed Internet and video services over one access line), they have problems of their own to fix before a full-blown pursuit of this market is possible. The current restructuring will certainly curtail the Telco’s content related triple play activities.

They need to quickly replace their traditional telecoms network with a next generation network (NGN) based on IP, basically turning it into a gigantic datacomms network, which is much better suited to the technical requirements for the delivery of applications and content services.

Structural separation
Over the next ten years telephone and basic access revenues, which now account for 80% of most telcos revenues, is going to be turned upside down, as the price for telephone calls is going to further decrease by up to 80%. The NGNs are going to make this possible, as this development will result in a 50%-60% efficiency gain – which, in turn, will lead to massive cost savings (read ‘sackings’) in the traditional telco businesses (wages typically account for 60% of these companies’ costs).

On these new networks voice will simply be one of the applications, not THE application and the telcos understand that they will have to drastically change their business models in order to cope with these massive changes – the value of their traditional markets is dropping at an enormous rate. It is therefore a logical development for the telcos to go for scale, hence the mergers.

The most likely scenario is that, with NGNs and FttH, the telcos will have a far superior infrastructure. However, they will never be able to transform themselves into the best application and content providers. So, in the natural course of events, structural separation will be introduced and this will eventually produce a much better wholesale environment for the content and service providers.

The future of infrastructure-based competition
Where does this leave the cable TV companies? Their strengths obviously lie in content. While they do have infrastructure it won’t constitute any competition to FttH networks, and it is highly unlikely that we will see massive overbuild of FttH infrastructure, as this doesn’t make economic sense.

Nevertheless, there is no guarantee that this isn’t going to happen – so, yes, we will see some initial FttH roll-outs from cable TV companies, as even the telcos with all their money won’t be able to fibre every town and city in the country quickly enough. There is a window of opportunity for other infrastructure providers, including BPL and the wireless operators, to get a part of the action and use the opportunity that will exist for the next of 5 to 8 years to establish themselves, before the next major shake-out takes place.

The divestiture of 2014
In a ‘perfect world’ as soon as the telcos are prepared to offer good access that makes it economically viable for content and service providers to use these networks there will be less need for others to build infrastructure.

The cable TV companies will have to make a decision where they fit into all of this. Are they infrastructure providers or content providers? Those who perceive the reality to be the latter might choose to offer their video entertainment services over the FttH networks from the telcos.

What this means for the FCC is that the newly created super telcos will become even bigger monopolies and that the country might need to see a new divestiture around 2014.

Paul Budde

See also:
United States of America