BuddeBlog

Following a long sequence of delays, the UK regulator has finally set early 2013 for the auction of spectrum suitable for LTE. Available spectrum in the 800MHz and 2.6GHz bands is generous, amounting to 250MHz. This will dramatically supplement the existing 333MHz now available to mobile phone operators.

One of the 800MHz lots available will carry an obligation to provide mobile broadband to at least 98% of the population by the end of 2017. This is considered by Ofcom sufficient to stimulate licensees awarded other lots to match coverage. Networks using the spectrum must go live by mid-2013.

To encourage competition, the regulator has imposed a spectrum cap, which includes the new spectrum bands (800MHz and 2.6GHz) as well as existing allocations (900MHz, 1800MHz, and 2.1GHz). It also set aside some spectrum for a fourth (wholesale) operator. In all likelihood this would mean 3UK, which is at a disadvantage in terms of spectrum, though the auction could potentially attract a range of players which are now active in the broadcasting, fixed-line telephony and broadband sectors.

Given the rapid increase in mobile data use, the regulator has also considered allowing the 700MHz band to be used for LTE, in line with developments in a number of other markets.

Estimates for likely data traffic to the end of the decade are difficult to make. Ofcom has been conservative, providing estimates which vary widely, such is the uncertainty. What is certain is that networks will be stressed unless these generous spectrum allocations are made. Some indication can be provided by 3UK, which by early 2012 was transmitting around 137TB of data daily. The operator recently reported that its contract customers more than doubled their monthly data use in a year, from 450MB per month to 1.1GB per month. This trend will be aided by consumer take-up of smartphones: across the board, about half of mobile subscribers now have smartphones, a figure which will soon reach 90% given that up to 80% of all new handsets sold are smartphones.

The regulator has provided estimates for the revenue that the government can expect to derive from the auction. A different approach was recently taken by Russia, which issued 800MHz licensees for free. LTE services are to be launched by mid-2013, as with the UK’s timetable, on the condition that licensees invest a minimum sum per annum until national coverage is reached.

The delay in auctioning 4G spectrum for the UK market may have a plus side in that technologies will be better tried and tested, and more evolved, by the time commercial services are required to be launched. However, the UK has certainly been placed among the laggards in Europe in this crucial market.

Henry Lancaster,

Senior Analyst

For more analysis on the UK’s mobile market, see the updated reports United Kingdom – Mobile Data Market Insights – 3G, 4G and Forecasts  and United Kingdom – Mobile Market Insights, Statistics and Forecasts.

Bolivia is one of the poorest and least developed nations in Latin America, with correspondingly low telecom indicators. For example, mobile penetration is the fourth lowest in the region after Cuba, Haiti, and Nicaragua. This, however, is no less than would be expected considering Bolivia’s GDP per capita is likewise the region’s fourth lowest.

The structure of Bolivia’s fixed telecom market is different from most other countries. Local services are provided primarily by 15 telecom cooperatives. These are non-profit-making companies privately owned and controlled by their users. Since liberalisation, the cooperatives also provide long-distance telephony, and several offer broadband and pay TV services.

Bolivia has a multicarrier system where consumers can choose a long-distance carrier for each call by dialling the carrier’s prefix. A number of operators have adopted VoIP, while others use fixed-wireless technologies, and some rent fibre-optic capacity.

State-owned Empresa Nacional de Telecomunicaciones (Entel) is the country’s incumbent long-distance operator. It also offers local telephony, ADSL broadband access, and satellite pay TV services. Its subsidiary Entel Movil is Bolivia’s largest mobile company.

Entel has cut it ADSL tariffs by 30%, but Bolivia’s broadband services remain the slowest and the most expensive in Latin America. Being a landlocked country, Bolivia has no direct access to submarine cable networks. It must therefore connect to the rest of the world either via satellite or through terrestrial links across neighbouring countries.

After it was renationalised in 2007, Entel has focused on providing telecom services in rural areas, under a project known as ‘Territory with Total Coverage’. This project aims to increase telecom coverage through mobile rather than through fixed networks.

Bolivia has more than ten times as many mobile phones as fixed lines, and the trend towards fixed-mobile substitution continues. Besides Entel, another two companies offer mobile telephony: Tigo, wholly owned by Luxembourg-based Millicom International, and NuevaTel, trading as Viva and controlled by US firm Trilogy International.

All three mobile companies offer 3G services. Considering the poor quality and high cost of fixed broadband, 3G could be an attractive alternative in Bolivia. On the other hand, growth is limited by the country’s high levels of poverty, as well as by insufficient mobile bandwidth. Users complain of slow and erratic connectivity in the larger cities, where networks suffer from congestion problems.

Entel has been criticised for advertising its HSPA+ services as 4G, a definition which is internationally used for Long-Term Evolution (LTE) services (strictly speaking, even LTE is defined by the ITU as only a pre-4G technology). The misleading marketing ploy, however, is used by numerous mobile operators throughout Latin America, including Bolivia’s Tigo.

LTE is unavailable in Bolivia. In 2011, Entel conducted LTE trials in La Paz, but commercial deployment is unlikely in the short term.

Market highlights:

• Under the ‘Territory with Total Coverage’ project, Entel has expanded its mobile network and installed more than 1,500 base stations, reaching 337 of Bolivia’s 339 municipalities.
• Cooperative federation Fecotel is striving to become Bolivia’s fourth mobile operator.
• Bolivia is the Latin American country with the largest WiMAX share of broadband customers. While in the rest of the region WiMAX began to shrink in 2009, in Bolivia growth has been continuous.
• The state broadcasting network Bolivia TV has launched the country’s first digital terrestrial TV (DTT) services, initially in La Paz.

Bolivia’s fixed-line, broadband, and mobile statistics – 2010 – 2012

(Source: BuddeComm based on industry data)

For detailed information, table of contents and pricing see: Bolivia – Telecoms, Mobile and Broadband

While there has been criticism about the slow roll out of the UFB, with only a few thousand connections in place that is in our opinion not a major issue, as long as this has been properly cost modelled into the overall business plan.

Rolling out new infrastructure simply takes time, weather we like that or not, it is the law of physics that stops us from doing that more quickly.

What worries BuddeComm more are some of the underlying issues that are still not properly addressed in New Zealand. Governments should only be involved in projects such as the UFB if they are undertaken in the national interest; if there are sufficient social and economic benefits that will result from such an infrastructure investment. While a lot of lip-service have been given to those benefits (e-health, tele-education, e-government, smart grids, etc) very few policies if any have been implemented that are addressing the demand side for such an infrastructure. Without government leadership this demand side is going to develop very slowly.

Without the demand side issues addressed, customers will simply judge the UFB as another way to get access to the Internet. For them it doesn’t matter what technology allows them to do that. Based on current Internet demand the existing networks will be able to satisfy this demand for the majority of the population for at least the next 3-5 years.

Without any policies in place to speed up demand the UFB will be heavily underutilised for that period. Again this might not be such a major drama but if the question of uptake is now already appearing in the press, guess what will happen if large proportions of the population will have access to the UFB but are not going to take it up because they don’t see the need for it. This will be one political nightmare.

The other way to stimulate uptake of the UFB would be to have a retail price level that will lead to a faster uptake. International evidence is available and BuddeComm have been analysing this since the mid 1990s. At that time we mentioned that broadband uptake with prices above $100 per month would be in the order of 10-20%, at a price of around $75 the uptake would be close to 50%. Large uptake starts to occur if prices are below $50 and close to total uptake around $25 per month.

Table 1 – UFB* uptake scenario forecasts – 2015 – 2020 (household penetration)

*Price includes broadband and telephony access

(Source: BuddeComm estimates)

While the costs of the UFB particularly in the early stages of the project are very high, it will be very difficult to bring prices down and this will favour the exiting infrastructure, which to a large extend is already written off and the end-user prices for these services will significantly decrease over the next 3-5 years making the gap between current access prices and those that apply to the UFB even more starker. This will only further hamper the uptake of the UFB and therefore further fuel the political crisis which will start to develop around this issue.

With no demand policy in place to deliver new services and with retail prices that are too high for mass uptake, the UFB will struggle until natural demand for higher speed services start to occur, or when prices start to fall, which – without government intervention – could take many years.

So by choosing not to develop policies in relation to the demand side, retail prices and infrastructure competition the government will have to accept a slow uptake of the UFB and that might create financial problems for the project if these delays are not properly calculated into the overall business model.

Paul Budde

See also:

• New Zealand – Ultra-Fast Broadband Network – Overview and Analysis
• New Zealand – Still plenty of broadband questions for New Zealand
• New Zealand – Broadband – Statistics, Overview and Providers

Despite all the doomsayers – in particular some sections of the financial analyst community – claiming that the transformation of Telstra would be bad for investors, the company is proving them wrong.

It adopted an aggressive approach to winning back customers, and the net result is positive.

Of course, if you start participating in a competitive market you have to come up with good prices. In the past Telstra tried to sell itself to the market as a premium player – customers were expected to pay more for the privilege of being on the Telstra network. That, of course, didn’t happen.

On the positive side, previous management had the foresight to aggressively build out the company’s mobile network. It is this investment that is now paying off.

The real risk of an aggressive campaign was that it would significantly affect the profitability of the company. However, that was factored in by the management at the launch of ‘Project New’ and what the 2011 results are showing is that the impact on profitability has been not as severe as it might have been, and that therefore the results were better than anticipated, thanks to equally aggressive cost-cutting. The company was always going to have to face a rebalancing, as the profit levels that it was used to would never be sustainable in a more competitive situation. At a certain point in time Telstra would have to show that it could also compete outside a monopolistic environment, and these results show that it can do that.

In particular the second half year has been very positive and this will give the company confidence to continue with this strategy, Project New still has 2 years to rum.

These results are a major boost for the CEO. Up until now the analysts have been sitting on the fence. They accepted that Telstra had made the decision to start its transformation, but they wanted to see whether David Thodey, with his more inclusive management style, would be able to deliver. The results are certainly giving the market more confidence that Telstra is on the right track and his style of management can deliver good results.

Indications were that Telstra had already been the major beneficiary of Vodafone’s woes, but even taking that into account the mobile business has performed exceptionally well. Its market share increased by just over 3%, while Optus’s dropped by 1% and Vodafone’s by 2.5%. Another plus for the company was that PSTN revenues did not fall as far as they had in the previous year.

These developments augur well for next year. With the transformation on the right track the company can continue to move along its chosen path. For the foreseeable future cost management will remain the most important element, since new revenues from NBN-based activities will not start to reach a moderate level until 2013.

While Telstra has delivered ARPU levels above expectations the trend remains negative, so in the days ahead all eyes will still be on the margins in this business.

The positive developments will also strengthen Telstra’s resolve to continue to follow its chosen path in relation to the NBN. They have indicated they want to push forwards as quickly as possible, with or without final ACCC approval. It is most unlikely that the Federal Opposition’s plan to sell the NBN Co assets to Telstra will be an attractive option for the company. It clearly perceives its future to be in the higher margin services business rather than the utility-based infrastructure business.

Regarding Sensis ….. we realise that this sounds like a broken record but, as we have pointed out many times over the years, Telstra has failed to implement the changes needed for this business to move into the digital future. So far each new strategy has been just one more bandage applied over the last; it is sad to see that this division continues its decline.

A reinvigorated Telstra means that the industry will have to respond more aggressively to Telstra’s success. The focus should be totally on competition. True, there are regulatory issues, but rather than relying on lengthy processes here the industry would do better to look for solutions by talking to each other. Time is of the essence here – for both Telstra and the rest of the industry – with companies racing to get into the best position to compete in the new NBN environment. This should be a catalyst – for both sides – for a behavioural change towards more of a can-do approach.

We are in a new era now and there is a real opportunity to move forward significantly faster. Trust will need to be built up and risks will need to be taken in this respect. Collaborating and cooperating, will increasingly become the message for the future; the sooner the industry can get its act together here, the better.

And when all else fails there is a very well-respected ACCC that will step in, but preferably that should become a means of last resort.

Some key facts and figures:

• $3.23 billion profit with a 17.5% drop in net profit for the year to June
• second-half profit of $2.04 billion for the six months to June 30, up fractionally from $2.03 billion in the same period last year.
• total mobile revenue at Telstra grew by 10.7% to $8.1 billion, driven by customer growth and steady average revenues per customer.
• mobile ARPU down by 1.8% to $49.70
• 15% increase in mobile subscribers to 12.2 million, market share increased from 39.6% to 43%
• mobile broadband numbers up by 55% to 2.5 million
• fixed line voice revenues declined by 7.9% to $5.3 billion, ARPU down by 4.4% to $52.55, subscribers down by 3.4% to 7.5 million
• retail fixed broadband revenues increased by 1.4% to $1.6 billion (2.4 million subscribers), ARPU down by 1.5% to $56.04
• IP access revenues grew by 16.2% to $970 million
• network applications and services revenue grew 10.7% to $1.14 billion this segment – which include cloud computing – is earmarked for significant growth
• Combined T-Hub and T-Box penetration has now exceeded 15% penetration of broadband users.
• The Telstra T-Touch tablet, an in-house Huawei branded tablet, that was released in 2010 was withdrawn fromsalesin October 2011 as the unit was not strongly selling and instead the Apple iPad2 would be sold in stores along with other name brand tablets.

Table 3 – Financial and operational headline statistics – Telstra results 2011

(Source: Telstra annual results 2011)

Sensis – another missed opportunity – 2011

When launching its new business strategy in early 2011 aimed at trying to save its declining business, Sensis didn’t come up with a game changing solution instead it send out a more of the same message. In BuddeComm’s opinion this was yet another missed opportunity to look at more serious change.

Simply making the directory offering more digital is not going to save Sensis. This includes the addition of the Yelp service in mid 2011 – a popular site in theUSproviding user-written reviews for everything from restaurants, to sops, to products and services. As more businesses move online, and more and more people get easy access to the internet – largely driven by the smartphone – it is hard to understand why companies would still want to advertise in the Yellow Pages.

There is certainly a group of customers who are left behind on the information highway and who may find the bundled offering and the new lead generating service attractive, but that group is dwindling. However, those who are familiar with the internet and who have incorporated it into their daily life are unlikely to use Sensis to find the business they are looking for. Again, there will always be a certain niche market for such a service, but that is what it is – a niche market – and that is not the Yellow Pages business model.

The kind of service provided by Sensis is available free – or at least at much lower costs – on the internet and companies like Google have largely replaced the old directories model.

At the risk of sounding like a broken record, the solution BuddeComm has been advocating for close to a decade is to combine the Telstra content businesses and turn them into a true digital media business. If they were to be combined these companies should be able to come up with innovative new business models that will not just stop the rot but will enable them to explore new business opportunities.

In the last five years Sensis has lost half the value of its business. This will simply continue, and the smaller the company becomes the more difficult it will be to transform itself into a completely new business.

The reality of a ‘linear’ business model (from printing to online) is that those who have tried to do that in the past have experienced a decline in revenues: music, newspapers, books, video. The same will apply to directories; much more is needed to build a truly digital business.

It looks as though the current strategy is to milk and defend its present business model for as long as possible and hope that those who are left behind on the information highway, and those involved in certain niche markets that rely on the Yellow Pages, will continue to pay the expensive advertising costs that are linked to this medium.

This, in itself, is not a bad strategy but it does indicate that the train is slowly moving towards the terminal.

Finally Telstra bundles its media assets

Over the last decade BuddeComm have made dozens of comments and produced numerous analyses relating to Sensis and Telstra’s other media assets. As an example just one such a comment, from Trading post good for sensis not for telstra, (see the BuddeBlog) is selected.

During all that time BuddeComm argued that Sensis should be separated from Telstra and that, combined with Foxtel and broadband media, it should be positioned as an independent internet media company.

It puzzles us that it took the company so long to take the first step, in 2011. The company has now announced that Sensis, Big Pond, Trading Post, IPTV and Telstra’s 50% holding in Foxtel, as well as its other content rights, would be brought together in the new digital media division as part of a strategy to integrate all Telstra’s content so that it can be delivered over any of its platforms.

This is happening a decade too late. Its competitors in the digital media have now already effectively established themselves and the question is whether at this late stage the new set-up will be able to turn the tide.

On the positive side, we do not have a good national champion in social media, internet media, etc. The broadcasters and newspapers are doing something but they are nowhere near a viable alternative. They are still mainly concentrating on protecting their incumbent businesses, which makes it impossible for them to take an aggressive stand in this market. With the NBN around the corner new ‘local’ opportunities are arising and if Telstra is now really serious about this there is an opportunity to move forward. In our opinion, however, a full integration of these assets is essential, followed by a full separation from Telstra.

As a soon to be structurally separated business Telstra will have to create new businesses to enable it to move away from its reliance on the monopolistic benefits derived from being a vertically-integrated company.

The most important business for Telstra is what we at BuddeComm call ‘the value-added infrastructure’. This is the infrastructure needed for the digital economy and it includes cloud computing, data centres, content hosting, and in general a whole area of middleware that is needed to organise the move towards the digital economy. With a further $800 million investment over the next five years Telstra is well and truly establishing itself as a leader in the cloud computing market. They had already an early lead here and also some good wins.

We believe this next step is a very clever move, especially with the Small and Medium Enterprise (SME) market emerging as a key user of this new technology concept.

The company will soon have a war chest of $9 billion, coming from its upcoming sale of basic infrastructure to NBN Co, so they have some money to spend. When David Thodey took his place as the new CEO he understood that not only would there be pressure on the company to structurally separate itself; at the same time he clearly recognised the many new business opportunities this offered to the company, as it moved away from an ever-decreasing market based on telephony and basic telecoms access service to a new one with products and services that would fetch higher margins. This is certainly not an easy transition – on the contrary – however the company took the bull by the horns and, quite correctly, immediately commenced reconstruction.

It will have fierce competitors, especially from the IT sector, where others such as IBM, Microsoft, Google, Apple, HP, Optus, Macquarie Telecom and many others are all moving in the same direction. However Telstra has the network capacity and is now building up the software around it to challenge these perhaps more experienced IT companies. If necessary, Telstra will buy companies that will help to fill in the gaps in its expertise in building up this new business. Nevertheless companies such as Google and Apple will be fierce competitors especially in the SME market.

The benefits of cloud computing are well-known (SMEs can achieve IT savings of between 50-80%) and so it is obvious that this market will become very significant indeed. However there is reluctance in the business community in general re cloud computing (security, reliability, latency, etc). Australia will be unique in that it will be among the first countries in the world to have a robust network (NBN) that will provide all the essentials needed for cloud computing. The NBN will also be a test-bed for cloud computing (and other services and applications) for overseas companies who need to build expertise and knowledge in this field. And it will be of particular benefit to our own R&D industry.

Demand is building up quickly and Telstra is clearly investing in its future.