Still hungry

By The Informer

The Informer was once told that if you owe the bank £1,000 it’s your problem, but if you owe the bank £100,000 then it’s the bank’s problem. If this is true then Telefónica, which owes in excess of €48bn, surely can’t have a care in the world. Certainly the firm is not about to let the level of debt it’s carrying stop it spending.

The Spanish incumbent has actually cut its debt by €10bn over the past year but, like the Informer’s fat Aunt Alice celebrating the loss of half a stone with a chocolate cheesecake, it announced this week a takeover bid for E-Plus, which does sound a bit like an outsize clothes brand. The firm wants to acquire KPN’s German operation for €5bn in cash plus a 17.6 per cent stake in what it hopes will be the new Telefónica Deutschland, worth a further €3.1bn.

For some time consolidation in Europe has been looking likely to gather steam, with competition and regulation driving retail prices down and making life uncomfortable for operators that lack scale—and, indeed, those that don’t. It wasn’t surprising to see Telefónica looking to get out of the small, crowded Irish market, for example, selling up to Hutchison recently. Or Hutch consolidating its position in Austria last year.

But Germany is the largest market in the region and one of the most stable. KPN’s Teutonic play might be in third place but it still had 21.31 million customers at the end of Q1, which is more than the entire Dutch market. If that’s not a sustainable business, the rest of Europe had better get ready.

KPN, of course, is a minnow on the global scene – getting out of Germany will cut its customer base by two thirds – but Telefónica has big fish aspirations and the firm wants to be number one in the German mobile market. And number one it will certainly become, with 40.63 million subscribers, according to 1Q13 figures from Informa’sWCIS. The German market as a whole was 106.8 million subscriptions at this point.

The proposed deal raises a few questions, among them the following:

1) What does Carlos Slim make of all this? The Mexican AmericaMovil billionaire owns 30 per cent of KPN and has invested vast sums in the Dutch incumbent for little reward. Ironically enough, Slim is looking outside of Latin America to Europe for growth just as Telefónica is doing the opposite; establishing itself in the region as a serious presence and contender for Slim’s pickings. If TEF gets Germany it will be at the expense (in terms of market share) of Slim, who has yet to voice an opinion.

2) What is it going to cost Telefónica to reap the rewards of German consolidation? The talk from KPN was that there could be €5bn in savings to be had and Telefónica said it expected to start generating those savings in year two. But integration on that scale is, if those that have done it are to be believed, a massive and costly ball-ache.

3) Is it enough? Vodafone recently announced a move for KabelDeutschland in Germany and incumbent DT has a robust fixed offering. Telefónica might well end up as the largest mobile operator in the market but it could also be the only pure mobile player, at a significant disadvantage as a result.

4) What does this mean for the rest of Europe? Germany is the largest market and, if it can only sustain three players then perhaps the same is true everywhere else. We might be about to see a wave of consolidation spreading outwards across Europe from Germany like… Actually, it’s probably best to leave that analogy well alone.

E-Plus CEO Thorsten Dirk said that the firm would not be diverted from an operational strategy that is already in place. “We are implementing the next phase of our strategy towards a data-centric challenger, which already resulted in strong postpaid net adds and data growth in the first half of 2013,” he said. “I can assure you that we remain fully focused on executing our operational strategy.” Well, the poor bloke had to say something, didn’t he?

Back to those Telefónica results, though, and there was no disputing the importance of Latin America, which now accounts for 51.4 per cent of the firm’s consolidated revenues. A fair performance in the region helped the firm hit 1H revenues of €28.56bn, although that was down 7.8 per cent year on year. LatAm revenue grew 10.4 per cent year on year for Q2. OIBDA for the first half was €9.42bn and net income was €2.06bn.

At the end of June, the Group’s customer base had hit 317.3 million, of which more than 78 per cent (249.5 million) are mobile, the firm said. Postpay numbers increased by 8.1 per cent during the second quarter, with an additional 2.1 million users taking service pushing the number of contract subscribers to 85 million. Smartphone subscribers jumped by 8.2 million in the quarter, taking the firm’s smartphone penetration to 24 per cent of mobile customers.

The numbers were flying around all over the place this week, among them the latest update from UK consolidation and LTE poster child EE. The UK’s largest mobile network reported a 4.4 per cent drop in service revenue for the second quarter year on year, to £1.42bn. But the firm’s EBITDA margin for the first half of 2013 rose 2.6 per cent year on year to 22.9 per cent. The firm attributed its top line drop to regulatory measures affecting mobile termination rates and roaming revenues, without which service revenue would have been flat year on year for the second quarter, it said.

The firm’s focus on mobile broadband and its early launch of LTE is paying dividends, it said. More than half of its customer base is now on post paid contracts which generate six times the ARPU of prepaid customers. LTE now accounts for 56 per cent of new and upgrading customers, and migrated LTE subscribers generate on average ten per cent additional ARPU.

Non-voice services now account for 55 per cent of all revenues, while non-messaging data accounts for 41 per cent, EE said.

Now, here’s what the Informer can’t make up his mind about: Is a ten per cent revenue uplift for customers that have moved from 3G to LTE a good result? You might suggest that any kind of uplift is worth celebrating in a world where mobile service is viewed with such ruthless indifference by consumers. But is that going to make LTE pay?

The Informer’s mobile contract—not with EE but the UK operators are broadly comparable—comes in at £27/month. Ten per cent on that would still be under £30/month and would feel like pretty good value if the LTE network really performed. In fact, it would feel like a steal. And he can’t help but feel that ten per cent uplift, bearing in mind EE’s sole occupancy of the UK LTE market, is a little thin. What will happen to it when the rest of the UK operators launch their own LTE services…?

There were results also this week from EE parent and French incumbent Orange. Half year consolidated revenues were down 4.5 per cent at €20.6bn, or 2.2 per cent if those pesky regulations are left to one side. EBITDA was €6.417bn for the period, although net profit was €1.209bn, down from €1.909bn for the same period in 2012.

More upsetting for Orange was a tax bill of more than €2bn which it must pay following perceived irregularities in a restructuring of the company that was carried out in 2005. It’s a bit complicated. In 2005 Orange took the decision to merge a holding company that held some 60 subsidiaries into what was then France Telecom. A number of these assets had recorded significant losses and provisions for the impairment of the holding company’s shares were recorded prior to the merger. These provisions were not deducted from the company’s taxable income, Orange said, and a subsequent reversal of the provisions following the dissolution of the holding company were not accounted back into group tax earnings in a bid to “avoid double taxation.”

Orange said that the Government’s decision “effectively prevents a company from deducting provisions from its taxable income and leads to a second imposition on these same provisions once reintegrated into the company’s accounts.” It’s going to pay up now but appeal.

If it’s numbers on the up you want then look no further than Facebook, which continues to ride the mobile networks like a king on a carthorse, driving 41 per cent of its $1.6bn Q1 advertising revenues from mobile. Total revenues were up year on year by $700m to $1.8bn, with net profit coming in at $333m, up from negative $157m  a year ago. Monthly active users increased 21 per cent year on year to 1.15 billion, with mobile MAUs up 51 per cent to 819 million.

Meanwhile Telenor saw 2Q net profit leap to NOK3.25bn up from NOK2.07bn for the second quarter last year. The firm also added more than five million new customers across its portfolio, driven largely by strong growth in Asia.

Not in quite such good health is O2UK’s health service offering. In fact, and I’m afraid there’s no easy way to say this: It’s dead. It’s kicked the bucket, shuffled off the mortal coil, run down the curtain and joined the choir invisible. It is an ex-service. And rather than put out a press release to the effect (“We haven’t been too proactive in talking about it,” said a spokesman, gently) O2 let customers of its Help at Hand and Health at Home services know that they’re on their own from the end of this year, offering them a refund on device costs, unused airtime and a £100 cash gift by way of an apology.

The decision came just four months after the services were launched. Four months! Given that reliability and steadfastness must be among the top required characteristics of a brand looking to run these kind of services, four months’ operation before giving it up for a bad job does make O2 look a tad skittish.

Interestingly, the firm does not rule out a comeback at some stage. “At the moment we’re withdrawing until such a time as the market in the UK picks up,” the spokesman said. Presumably the firm is banking on those doddery old folks failing to remember its lack of commitment to their needs. Either that or it will wait until they’ve carked it.

O2’s spokesman said uptake had been “slower than anticipated” but declined to reveal how many customers the services had attracted. Charlie Davies, an Ovum analyst who specialises in e-health said she was “not surprised” by O2’s decision to pull out of the market, adding “it is very difficult for operators to develop straightforward, consumer healthcare offerings where they don’t have adjacent supply deals in place.” Davies said that the assisted living solutions market in the UK was already highly competitive.

The fact that the services should be pulled so soon after launch, with O2 having made significant investment to establish and market them suggests the decision was made at Telefónica group level, Davies said.

The Health at Home service included a secure software platform that enabled healthcare professionals to monitor patient’s health and a range of devices used by patients to monitor their symptoms. Help at Hand supplied elderly or at-risk consumers with a simplified mobile device containing an accelerometer to detect falls, a GPS locator and four speed-dial buttons. A web interface allowed users or carers to check location and set parameters and notifications including geo-fences.

Chris Millington, MD for UK and Ireland at Doro, a handset vendor that specialises in products for the senior market, said he was “very disappointed and frustrated” at O2′s decision, in particular the implicit suggestion that the mobile telecare market in the UK does not exist.

“There is a market for mobile telecare in the UK but you have to do it properly and O2 created some of the issues themselves. They made the classic mistake of thinking that old people are incapable and they stigmatised their offering with a limited device,” he said.

Speaking of limited devices, the head of BlackBerry’s tablet unit has stepped down for personal reasons just weeks after the PlayBook was effectively put out to pasture. The Canadian handset maker posted a $169m operating loss for 2Q13 and generated $3.1bn in revenues over the three months ending June 1, 2013, a 9.3 per cent increase on the $2.8bn generated in 2Q12. However, cost of sales were also up by four per cent year on year to reach $2.03bn.

In related news the company has laid off 250 workers in manufacturing and R&D roles at a facility in Waterloo, Ontario.

Sticking with Canada, which this week rejoiced to the very highest level in the birth of its new Prince, let’s go from the B to the S to the S and a deal that saw Ericsson agree to acquire local BSS consultancy and SI Telcocell. Ericsson trumpeted Telcocell’s abilities in converged charging, custom development, quality assurance and production support, as well as its politeness.

In other BSS news Chinese player AsiaInfo–Linkage has teamed up with IBM to bring its Big Data appliance to Europe and other markets outside of China. The key to the Veris C3 (C cubed) offering, the firm said, is contextual awareness to ensure operators are only delivering relevant ads to their customers.

According to Andy Tiller, VP of product marketing at AsiaInfo Linkage, contextual advertising is two to three times more effective than regular untargeted internet advertising. In fact, trials with China Mobile have delivered a 4.3 per cent click through rate, Tiller said.

It strikes the Informer that a really useful contextually aware system would be able to detect when the user was tipsy drunk and more likely to follow the advertiser’s merry dance.

A merry dance is what some of the EU Member States have been leading the EC when it comes to 800MHz spectrum reallocation. The EC has been forced to allow nine Member States further postponements to their obligation to make 800MHz spectrum available for mobile broadband use. All states originally agreed to meet a January 2013 deadline but a number have yet to comply. There were 14 requests for further postponements, accounting for half of all Member States.

“We have agreed to temporary and limited 800MHz derogations for nine countries. This is a pragmatic and final concession. Every delay in releasing spectrum hurts our economy and frustrates citizens,” said Neelie Kroes, European Commission Vice President. “That is why spectrum reform will be a centerpiece of the Commission’s September proposal for a telecoms single market.”

A statement from Kroes said that some devices, considered “essential” by European consumers—Apple’s iPhone the most obvious—are not being released as fully compatible LTE devices because insufficient markets have made the spectrum available.

The Commission has agreed to postponements for Spain, Cyprus, Lithuania, Hungary, Malta, Austria, Poland, Romania and Finland. But it refused derogations for Slovakia and Slovenia where the delays were “due to the organisation of the authorisation process and not to exceptional circumstances preventing the availability of the band,” the statement said.

And that’s it for this week, and this half of the year as the Informer is off on his summer holidays, slated to return in September.

Enjoy your August

Take care

The Informer