Day one of MWC was dominated by the usual array of sexy devices with ever increasing feature lists and ever diminishing true differentiation. Today, we saw more of the same with some more color on tablets plus Microsoft and Nokia driving down the Windows Phone specs and price points to potentially enable the next 1B smartphone users.

More significant for me today were the reactions and statements of leading operators. Operator alliances to promote TD-LTE as well as branding RCS under the Joyn moniker as well as significant discussions of privacy issues were all front and center in Barcelona today.

Joyn apps for Android are being shown off at MWC, and in the coming months they will be joined by iOS apps and devices with the capabilities built in.

There is clear consumer demand for enriched messaging and voice services, and Rich Communications provides mobile

network operators with solutions to address these consumer needs.

? Anne Bouverot, GSMA

We also see the industry moving forward on privacy guidelines issues today by the GSMA being a much needed initiative given the tsunami of apps and the inevitable rising tide of opportunities for abuse.

Further evidence of operators and service providers looking to partner to grow the entire mobility pie can be found in the m-payments arena where Vodafone was top of mind with planned global offering partnering with Visa for NFC.

The operator keynote panel which included China Mobile CEO Li Yue, Vodafone CEO Vittorio Colao, and Ralph de la Vega, CEO of AT&T's mobile business as well as Franco Bernabe, CEO of Telecom Italia painted a picture of an industry with significant challenges in declining arpu, escalating investment costs, growing competition from OTT players and of course those pesky regulators.

We noted in the Blog of September 19^th. that AT&T has begun to explore possible spectrum sales to other operators to gain approval of its acquisition of T-Mobile USA. Two operators were mentioned as AT&T’s first targets – Leap Wireless and MetroPCS.

Is it possible that AT&T could satisfy the Department of Justice (DoJ) by divesting spectrum to just these two companies? To answer this we looked at whether MetroPCS and Leap have current presence or operations in the right target ‘divestiture markets’ to expand cost effectively by adding spectrum and subscribers from AT&T. 

The amended DoJ complaint of September 16^th 2011 states that the “…97 CMAs, identified in Appendix B, effectively represent….area(s)  in which the (merger with T-Mobile US) likely would substantially lessen competition for mobile wireless telecommunications services… each constitutes a relevant geographic market under Section 7 of the Clayton Act, 15 U.S.C. § 18.”

The 97 CMAs identified are those where the Herfindahl-Hirschman Index (HHI) is increased by more than 200 points by the AT&T T-Mobile Deal. HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600 – Calculated as follows: 30² + 30² + 20² + 20² = 2,600.

Only three CMAs in the Top 100 are not identified by DoJ as an HHI ‘problem’ - Grand Rapids and Flint, MI and Shreveport, LA. Many on the DoJ list however are in the 200+ to 400 HHI increase range that could potentially be diminished significantly by the sale of Spectrum to the third or fourth largest player in each market. 

To see what role MetroPCS and Leap could play we then conducted an analysis of these 97 ‘problem’ Cellular Market Areas (CMAs). In AT&T’s April 21^st.2011 filing it listed in Appendices B and C the competitors in all the cities where it operates. The chart below shows that in the 97 CMAs listed by DoJ either Leap or Metro PCS has a presence in all except two - Honolulu, HI and Johnson City-Kingsport-Bristol, TN-VA.

MetroPCS and Leap Wireless presence in the 97 problem CMAs

MetroPCS and Leap are present together in a few CMA’s which might create some competitive bidding in: Philadelphia, PA, Buffalo, Rochester, Syracuse and Albany-Schenectady-Troy NY, Toledo, OH-MI, Lansing-East Lansing and the Upper Peninsula MI, as well as Las Vegas, NV and Tacoma, WA

DoJ’s amended complaint also noted that in “more than half of the (97) CMAs…. AT&T and T-Mobile together would have a greater than 40 percent share. In at least 15 of the CMAs, including major metropolitan markets such as Dallas, Houston, Oklahoma City, Birmingham, Honolulu, and Seattle, the combined firm would have a greater than 50 percent share - i.e., more customers than all the other firms combined.” These are clearly the markets where DoJ is most concerned that the merged entity should have a lower share.

In the 15 markets shown in the chart below the DoJ Post-Merger share estimate is over 50%.

MetroPCS and Leap Presence in 14 of 15 ‘Problem’ markets

Either MetroPCS or Leap is in each of the 14 markets. The only exception is Honolulu, HI where neither is currently present.

AT&T needs to sell significant spectrum, and could potentially accomplish most of the required divestitures with sales to MetroPCS and Leap alone. Provided these two operators can raise sufficient financing – potentially even guaranteed by AT&T - this could catapult these two operators to National Status overnight.

AT&T and T-Mobile’s latest subscriber market shares – as well as those for Sprint Nextel, Verizon Wireless, MetroPCS and Leap Wireless - can be seen at ‘Wireless Operator Performance Benchmarking Q2 2011’.

According to two sources speaking to Bloomberg “AT&T is approaching smaller rivals including MetroPCS Communications Inc. (PCS) and Leap Wireless International Inc. (LEAP) to sell spectrum and subscribers” and find a way to gain approval for its acquisition of T-Mobile USA. Sources also said that AT&T “has … reached out to CenturyLink Inc. (CTL), Dish Network Corp. (DISH) and Sprint Nextel Corp. (S) to gauge their interest in buying assets.”

This is the type of strong positive response we predicted in the recent Insight ‘AT&T and T-Mobile: Will there be a Spectrum Fire Sale to Escape Department of Justice and Close the Deal?’ and the earlier blog ‘AT&T Opponents Shift Focus to Challenge Excessive Spectrum Consolidation’. It is likely that AT&T is also reacting to the proposed six month Department of Justice (DoJ) pre-trial schedule and the co-filing by seven states who joined the DoJ lawsuit last week.

Proposed Department of Justice Schedule would go ‘down to the wire.

On September 16, 2011 Department of Justice filed a schedule proposing Monday, March 19 2012 for all steps to be completed in order to be ready for trial. AT&T is anxious to accelerate the process and suggests a completion date of Monday, January 16 2012. This is probably not because AT&T is anxious for a trial but because it still hopes to find a negotiated resolution with both DoJ and FCC as well as the states prior to its March 20, 2012 deadline for enforcing the deal with Deutsche Telekom.

The details of the two proposed Schedules are as follows.

AT&T and DoJ Proposed Schedules

The two parties will meet with US District Court Judge Ellen S. Huvelle on September 21, 2011 to finalize the schedule. AT&T’s proposed schedule is extremely tight for this extensive case.

And the other Parties are Piling on.

Also on September 16 Attorneys General in seven states filed as co-plaintiffs in the DoJ lawsuit. The seven states are led variously by Democrats and Republicans: California, Illinois, Massachusetts, Pennsylvania, Washington, New York, and Ohio. DoJ has had an excellent working relationship with several states in building its case and welcomed their participation.

On the same day Sprint’s attorneys filed motions in Federal Court asking the judge to integrate its case against AT&T in a coordinated proceeding as part of the DOJ complaint.

Summary

These opponents’ actions appear to have stimulated AT&T to initiate aggressive bargaining. AT&T and T-Mobile’s latest subscriber market shares – as well as those for Sprint Nextel, Verizon Wireless, MetroPCS and Leap Wireless - can be seen at ‘Wireless Operator Performance Benchmarking Q2 2011’. User shares are available on request to srudd@stratregyanalytics.com or Pkendall@strategyanalytics.com.

Skype today launched Video for iPhone, iPod Touch and iPads. This new version of the Skype service application software lets users make and receive video calls from iPhones, iPod touch and iPads, with instant messaging for other Skype users, over both Wi-Fi and AT&T's 3G network.

Was it a test for this iPhone video application that brought down Skype's Video Network Last week? The story going around last week was that a new release for Apple software - possibly the Skype iPhone Video application announced today - had a problem and triggered the Skype server failure when installed first on one and then several Skype 'supernodes'.

But don't blame the Apple software application.

Skype's supernodes act as both offline message (IM/SMS) relays and as Skype's Chief Information Officer noted yesterday "a directory, supporting other Skype clients, helping to establish connections between them and creating local clusters typically of several hundred peer nodes per each supernode."

The initial crashes brought down 25% to 30% of the Skype supernode servers - just before the normal daily peak. This in turn led to traffic overload that created extensive delays in the support servers responsible for offline instant messaging. This resulted in long response delays to some to Skype Windows clients and 20% of these had an old software bug that then caused them to crash.

The official Skype story was released yesterday by Lars Rabbe, Skype's Chief Information Officer, who describes the "snowball" effect that blocked most Skype users for 24 hours on 22^nd.- 23^rd. December 2010.

"50% of all Skype users globally were running (an older) 5.0.0.152 version of Skype for Windows, and the supernode crashes caused approximately 40% of those clients to fail. These ... included 25–30% of the publicly available 'supernodes', (that) also failed as a result of this problem."

"The failure of 25–30% of supernodes in the P2P network resulted in .. massively increased... load as (supernodes) reconnected to the peer-to-peer cloud... just before our usual daily peak-hour (1000 PST/1800 GMT)". As users tried to reconnect to the system, they generated "traffic to the supernodes that was about 100 times what would normally be expected at that time of day" and overwhelmed the remaining supernodes bringing the whole system to a standstill.

It is interesting that some sources focus blame on Microsoft, not just Skype's network, servers and software, but maybe the problem is more profound.

P2P Server Architecture.

Serious questions need to be asked about a network service architecture that allows:

• Application software to crash what should be 'carrier class' servers performing network functions
• P2P software that causes both network and user device based clients to crash as a result of network overload problems
• Network server problems that spread automatically across a large number of supernodes

Network servers need to be especially resilient and intelligent in how they 'fail-over' in a distributed networking environment; but a robust Service Architecture is always a pre-requisite.

Let other P2P and 'Cloud' service providers beware.

On a positive note Skype brought in massive extra capacity to stabilize the network and was also able to restore Group Video Calling functionality in time for Christmas.

Software Release Deployment

Lars Rabbe also committed to review Skype's "testing processes to determine better ways of detecting and avoiding bugs which could affect the system.". Hopefully this promise includes:

• 'Old fashioned' regression testing of all old versions of client software
• Large scale network testing that does not impact live users - especially at peak traffic times!

These are rules that traditional service providers have followed for decades. Perhaps a little more respect for the "old fashioned" network operators and their software release processes is warranted.

August 11^th 2010 Doing the FCC’s job? On Monday August 9^th. Verizon and Google issued a joint ‘suggested policy framework for lawmakers’ which reads as if it had come from the FCC, leading to an appropriate response from FCC commissioner Michael J. Copps that it is “time to reassert (FCC’s) authority”. The framework endorses all the good ‘motherhood’ concepts - openness for legal content, nondiscrimination that does not block or degrade the Internet, and transparency for both wireline and wireless. And it addresses some of the traffic and network management concerns raised in my blog of May 27^th . But the sting is in the tail. The fifth and sixth points posted in the expository blog carve out two major markets. The ‘Carve Out’.Two key markets are carved out for minimal FCC oversight and therefore would not be subject to many ‘net neutrality’ and access requirements. First area is ‘differentiated online services’ that integrate application services with bandwidth – “healthcare monitoring, the smart grid’ etc. i.e. vertical markets where performance and security must be guaranteed. The proposed Verizon and Google approach allows each application to be ‘nailed-up’ to a specific network - rather than the Virtual Private Networks VPNs) with Service Level Agreements(SLAs) that operate today. This could lead to significant innovation – if only it were not based on exclusive bi-lateral transport and applications vendor deals. Haven’t we been here before? Didn’t this lead to the original Enhanced vs. Basic Services split of Computer Enquiry II.  And it recreates the comparatively unsuccessful ‘Walled Garden’ approach to applications. Second ‘carve out’ is wireless broadband which is claimed to have “unique technical and operational characteristics” and to be “more competitive and changing rapidly”, so “in recognition of the still-nascent nature of the wireless broadband marketplace” Verizon and Google recommend against applying any of the “wireline principles” except transparency. Broadband is Broadband is Broadband….Although wireless has historically had special treatment, mobile broadband is rapidly reaching parity with wireline speeds and quality. Over the next two years applications will operate seamlessly across wireless and wireline networks and many users may not even be aware which network they are on. To users Broadband is Broadband. All applications require an appropriate class of service at a competitive price. Special value added networks and mobile broadband cannot and should not be carved out from the general area of FCC broadband service oversight. Reactions and Furor on both sides of the ‘pond’ In the US, Wall Street Journal welcomes this ‘Traffic Plan’ and TIA notes that the “Verizon and Google…rightly addressed important issues such as the need for network management welcoming it as a “step in the right direction … and a possible solution to the uncertainty created by the Comcast decision.” But bloggers and the New York Times Opinion page started discussing carrier/search engine business alliances and making jokes about ‘VerGoogle’ that have now prompted a strong tweet denial from Google “We've not had any convos with VZN about paying for carriage of our traffic. We remain committed to an open internet.” Wired magazine however, describes the ‘differentiated online services network’ as a “left-field proposal to anticipate an entirely new information highway for ‘fast lanes’” and believes that “Google and Verizon have proposed creating a second, paid-access-only internet” “over an unspecified global network”. Could that be Verizon’s new Packet Optical Transport Platform (P-OTP) network? Across the pond reactions are still evolving. Financial Times subtly points out that “industry insiders on Capitol Hill and at the FCC are questioning Google’s motives for an apparent about-face on its position as one of the most powerful advocates of net neutrality.” Others reflect the stronger view that the EU is taking on Net neutrality.with one blogger warning that “An obvious outcome … is that when Google is dragged backwards through an antitrust investigation by the EC or DoJ, it will find no favours from civil society after this betrayal…..Good luck, Google - you thought China was sticky in terms of political support, you'll find that was a storm in a delicate teacup.”

Yesterday in Paris, Orange unveiled its new five-year strategic plan, Conquests 2015. The plan covers four strategic priorities:

    The conquest of employee pride – to re-build its reputation as an employer;
    The conquest of networks – covering fibre-optic build in France, LTE deployments, the monetization of mobile data traffic (read: no unlimited data plans) and green networks;
    The conquest of customers – delivering a superior customer experience and helping customers navigate through their connected/digital lives;
    The conquest of international development – targeting 2x growth in revenues from emerging markets, with total customers growing from today’s 200m to 300m by 2015.

We published a report profiling the world’s 20 largest mobile operators last week, providing a SWOT and overview of strategic directions. We knew a new Orange vision was on the way, but there are only so many events that can postpone a report’s publication. It is with relief that I can say that, in terms of the key elements of this new strategic plan, enough had been discussed in the past to allow us to predict this quite accurately.

In this report, we looked at two key differentiators for operator performance: footprint (scale) and unification (both in the sense of integrated/converged networks and the provision of integrated services). The more profitable global mobile operators have strengths in these areas and it is good to see they form the basis of Orange’s new strategy.

Orange is very much committed to improving the value of its footprint, both in terms of growing its business in Africa and the Middle East (it is suggesting roughly three-quarters of its emerging market revenue growth could come from M&A here), but also in terms of its mature market footprint, where further consolidation (after the Orange / T-Mobile UK deal) can be expected.

In terms of unification, the next-gen network upgrades are a key building block there, as well as layering in services in areas such as health, education and payments. One of the more interesting statements in this strategy launch was that “Orange must become a multimedia coach for its customers by working alongside them to make their digital life easier”, with Orange’s CEO Stéphane Richard adding that Orange “are trying to be activists for an open world”. That trusted partner role has taken over from the own-branded services/content role as a priority for telcos and it is encouraging that Orange is focusing on its key strengths there.

 

May you live in interesting times as the old Chinese proverb goes. Well in the information, communication and entertainment industry we certainly do. Some very interesting questions face our industry whether we look at:

• the outcome of much delayed Indian 3G auction or
• the battlegrounds around HSPA+ and LTE or
• the surging Android ecosystem vs. weakening Symbian or
• the upside potential for WebOS under it new owners
• the potential disruption caused by mobile cloud phones and device

Every major technology advancement has lead to a massive disruption in the handset and infrastructure vendor community.

• In 3G, Motorola’s slim myopia led to its near ruin and has provided huge growth for Samsung and a foothold in international markets for LG and SEMC.
• On the infrastructure side 3G was expertly grasped by Huawei and ZTE leading to a new wave of M & A and a new world order which counts Nortel as a victim and seriously challenges ALU.

So how will the migration to 4G change the playing field?

• Who will benefit most on the operator/service provider side?
• Will Cloud Phones be disruptive in LTE?
• Will operators find a path to realign the traffic/revenue mix with mobile broadband devices?

I would welcome your thoughts on these key questions. Also don’t forget to join our client webinar on Thursday May 27.

 

David

The bids in Germany’s current spectrum auctions are starting to add up. With a range of spectrum on the table (800MHz, 1800MHz, 2GHz and 2.6GHz), it is the digital dividend 800MHz spectrum that is dominating proceedings – at the end of round 94 the bids totalled €1.9 billion, with nearly 90% of this bid on the 800MHz spectrum. Although there is still some way to go, the auction is already pricing the 800MHz spectrum at more than 30x higher than the 2.6GHz spectrum. The need for denser LTE networks in higher frequency bands will come, but for now 800MHz is much more valuable as it is the most cost effective for delivery of next generation coverage. However, in this instance the government isn’t leaving that to chance as it strives to close the broadband coverage gap in rural areas. Winning bidders have to cover smaller towns before they can move on to larger cities. That is a nice touch by the government. The next few years of spectrum auctions in Europe are unlikely to raise the kind of sums seen in the 2.1GHz 3G auctions of 1999-2001. So getting some public good (other than money for the public purse) out of the auctions makes sense. Building in licence rules to make sure 800MHz spectrum really is used to close the digital divide is logical as 3G/4G mobile broadband adoption soars. So if you live in a rural community that has yet to be touched by DSL/cable and are fed up waiting for a decent 3G mobile broadband signal, the sale of 800MHz spectrum for mobile services and they way coverage is being prioritized in the legislation is good news (provided you can wait a little longer for the spectrum to be cleared of analogue TV). But for the rest of the population in Germany at least, this is probably all very dull. There are only four bidders in this auction (the four existing mobile operators), so it will do nothing for competition and probably nothing for pricing either. Many operators we speak to have a similar view to TeliaSonera and will position LTE as a premium mobile broadband product as they try to pull back from what has often been quite intensive price competition in this fledgling sector.

Newton MA.USA. The size and bureaucratic tone of the FCC’ s ‘Connecting America :The National Broadband Plan’ conceal some exciting implications for broadband wireless. So here is the crib sheet.The new pro-active US Federal Communications Commission has decided to follow the example of other industrialized countries - that have been aggressively promoting Broadband - and has proposed a Broadband Availability Target (BAT) for every household and business location in America to have access to affordable broadband service with download speeds of at least 4 Mbps and upload speeds of at least 1 Mbps with good quality of service. 14 million people in US today do not have access to a terrestrial broadband infrastructure capable of meeting the BAT. FCC projected potential broadband revenues from these 14 million people and subtracted the required capital expenditures and ongoing costs for terrestrial fixed broadband. The difference is the Broadband Availability Gap (BAG) which has a 2010 present value of $24 Billion. “The gap is greatest in areas with low population density” where, the FCC says “service providers .. cannot earn enough revenue to cover the costs of deploying and operating broadband networks, including expected returns on capital… there is no business case to offer broadband services in these areas.” So what role does the FCC assign to broadband wireless to help fill this gap? FCC notes that as of November 2009 3G service covered only roughly 60% of U.S. land mass. And although FCC politely questions the spectral efficiency and services of current Fixed Wireless technology and timing of 4G wireless it boldly announced new plans to: Make 500 MHz newly available for broadband use in 10 years, of which 300 MHz is for mobile use within 5 years as follows:

• 20 MHz for mobile broadband use in the 2.3 GHz WCS band • 10 MHz Upper 700 MHz D Block for commercial use compatible with public safety broadband services • 60 MHz in AWS bands • 90 MHz of Mobile Satellite Spectrum (MSS) for terrestrial use • 120 MHz reallocated with compensation from the broadcast bands television (TV).

And the FCC recommends allocating funds for the plan in stages as follows:

Stage 1: 2010–2011 - FCC will establish Connect America Fund (CAF) to support the provision of affordable fixed broadband and will begin to switch up to $15.5 billion from the Universal Service Fund(USF) to CAF. CAF funding is planned to be “technology and carrier neutral”. FCC will also establish new Mobility Fund for specific locations that are lagging significantly behind in 3G wireless coverage (and to establish) the basis for the future footprint of 4G mobile broadband networks. Stage 2: 2012–2016 - FCC will assign approximately $4 billion from Inter-Carrier Compensation (ICC) reforms and CAF to Mobility Fund and related activities. FCC will also provide funding of up to $6.5 billion to support deployment of a nationwide, interoperable Public Safety mobile broadband network. Fixed wireless broadband will compete with terrestrial broadband for CAF funding.

Our recent TRS report ‘Gambling on Telco Returns - Telco CAPEX and Risk in Six Countries’ calculated that today fixed broadband capital investment cost per subscriber in the US, is approximately $250. This compares to approximately $70 per subscriber for today’s wireless networks and potentially twice that for 3G+ or 4G. Wireless broadband is likely to require significantly less FCC subsidy than terrestrial broadband to fill the FCC’s ‘Broadband Gap’, especially in the underserved low density rural areas of the US. Tariff and Revenue Strategy Service analyzes how service providers can balance their fixed and mobile broadband capital expenditures and price new broadband services to achieve profitable ubiquitous operations. Sue Rudd, Director Tariff & Revenue Strategies – srudd@strategyanalytics.com

We are currently updating Q4 operational/financial data in our Wireless Operator Performance Benchmarking research, with the last 7 days seeing a large number of operators report results. There are two over-riding themes coming out of the results so far. Firstly, for most operators Q4 was better than Q3, which is great news. The slight problem is that this is better in the sense of “less worse”. If you get mugged two days in a row, the chances are the mugger will get less off you on the second day – you probably haven’t got a new phone and your spare wallet won’t have all your replacement cards/ID in it yet. So that’s obviously a much better mugging. So the fact that revenues and profits didn’t fall as fast in Q4 as they did in Q3 is equally good, right? Secondly, “relentless” cost control / management is a standard item in strategic directions for 2010. A few operators are predicting flat EBITDA for this year, many are expecting moderate single-digit declines. Mobile data remains the growth engine, but falling revenues from voice/termination/roaming will be hard to overcome. So its cost control that will save operator profitability in 2010: distribution mixes and device subsidies seem to be key items up for debate in most mature markets. I worry for an operator recovery in 2010. The recession will be officially over (it already is in many countries), but unemployment will increase, few workers will be banking on pay rises, private consumption will lag GDP growth (which is itself a real mixed bag across different countries), and governments will push through austere budgets. Plus everyone who put off upgrading their handset last year will want to do it this year, so we will see a higher share of mobile spend diverted to device vendors. Depressed yet? The debt crisis in Greece is perhaps a worst case scenario, though I’ll leave you with this sobering quote from OTE’s results last week: “In 2010, the OTE Group expects its revenue base to be further impacted by difficult economic conditions in all markets, lower consumer spending, intense competition, and regulatory constraints on its capacity to respond effectively to these factors. OTE management … will work hard to minimize revenue shrinkage and defend Group profitability.” OTE will not be the only operator to get mugged again in 2010. Phil Kendall