Is consolidation coming?

Say goodbye to your subsidised iPhone, your mobile-broadband deal that comes with a free laptop and levels of customer service that could disgrace even the finest international restaurants.

OK, the last is a gross exaggeration, but mobile-phone customers in the UK’s hyper-competitive market have certainly been treated to some extraordinarily generous deals over the last couple of years. Those could soon disappear if Germany’s Deutsche Telekom is eventually persuaded to sell off its struggling T-Mobile UK subsidiary.

According to today’s papers, each of the UK’s three other major operators – Vodafone, France Telecom and Telefónica – is holding out for a deal with its German rival that would make it the market leader by far. Vodafone and Telefónica are each reckoned to have made substantial cash offers of £4bn for T-Mobile UK. France Telecom, meanwhile, is involved in discussions with Deutsche Telekom about merging UK assets in a joint venture.

All would obviously hope to benefit from the cost savings that typically result from M&A activity. But a tie-up or takeover would also give an operator a lot more negotiating power with handset suppliers. With Telefónica’s exclusive deal for Apple’s iPhone thought to be up for discussion, that could be a critical motivator.

No doubt, the regulator’s preferred outcome would be for a joint venture between third-placed France Telecom and trailing T-Mobile. A takeover by Telefónica or Vodafone, after all, would give rise to a company controlling about 40% of the market.

Even so, any deal will upset regulatory plans for redistribution of spectrum, which had counted on there being five UK operators (including the smaller Hutchison 3). With mobile operators expected to play an important role in extending broadband access across Britain, authorities will fear the consequences of losing a competitor.

And so will savvier consumers.

Broadband crimes

Try explaining to an octogenarian in east London why she should pay for her countryside-dwelling grandson to receive broadband, when she has no interest in the service herself. UK communications minister Lord Carter is unlikely to do that, especially as it has just been revealed that he will shortly stand down from his position, but he does expect her to stump up the cash.

Indeed, the most criminal aspect of his new Digital Britain report, published today, was its recommendation that all fixed-line phone users be required to pay another £6 a year to fund the deployment of new broadband technology. The aim is to ensure that all households in the UK can receive a broadband service of at least 2Mbps by 2012.

While £6 a year is unlikely to cause much pain for most households, the principle is outrageous. A recent Ofcom survey indicated that 13% of UK residents have no interest in receiving broadband whatsoever. And yet those with ordinary phone lines will be expected to give money to privately owned companies – in which they have no stake – so that others can receive a service. What’s more, that money will be wasted if few new customers sign up, as seems likely.

The recommendations are also highly discriminatory. Households that use only mobile phones and a mobile-broadband service from the likes of Vodafone or T-Mobile, and no fixed-line services, will not have to cough up the 50p a month. Those who use no communications technology other than BT’s plain old telephony service will, even though many are worse off and attribute less importance to high-tech services than their mobile-only peers.

Despite these obvious anomalies and injustices, market watchers are busy complaining about Lord Carter’s ‘poverty of ambition’, and trying to explain why 2Mbps per household isn’t good enough. Some are even arguing that high-speed broadband is as important a utility as electricity or water. Seems it’s not only the bonus-hungry bankers who’ve lost touch with reality.

Etisalat out

Will any mobile-phone operator look at Iran the same way again? ‘Untapped potential’ is an expression it still brings to mind in the telecoms community. But after stripping Etisalat of its newly won mobile-phone licence, it is also building up a less favourable reputation as the scourge of the private-sector investor. Years earlier, of course, it had done the same thing to Turkcell.

In that instance, the suspicion was that Turkey’s close ties with Israel (then) incurred the displeasure of Iranian president and holocaust denier Mahmoud Ahmedinejad. The upshot was that Turkcell’s licence ended up in the hands of South African operator MTN.

This time round, Etisalat has been accused by the Iranian state of ‘not fulfilling its obligations’. Such a criticism is normally directed at telecoms companies when they’ve failed to meet coverage targets set by the government, or not introduced a new service they’ve been authorised to offer. Etisalat, however, has barely had time to celebrate its licence win, so that can’t be the explanation.

According to the AFP, Mohammad Soleymani, Iran’s telecoms minister, claims Etisalat still hasn’t coughed up the €300m it owes for its licence. That would certainly explain why Iranian authorities aren’t happy. Yet Etisalat insists otherwise.

This being Iran, the true story may never emerge. But Kuwait’s Zain has been the immediate beneficiary of Etisalat’s misfortune. Having come second during the original tender, it is now in talks with Iranian regulatory bodies about picking up where Etisalat was slung out. Zain shareholders will have to ask whether Iran’s huge promise is worth the risk.

Broadband flimflam

Kevin Rudd, Australia's FTTH-mad prime minister

Two items of news from the broadband sector caught my attention this week. The first – and, unsurprisingly, the most widely reported – was the announcement by Australia’s government of a plan to spend a budget-busting A$43bn on the construction of a near-nationwide fibre-to-the home (FTTH) network over the next eight years. The second – missed by some leading newswires – was the detail that 550,000 homes are now served by FTTH networks in France, and yet just 170,000 have taken up the service.

The question that links the two is obvious: what is the point of spending so much on a high-speed network if few people will pay for a high-speed service? Whether the funding comes from the private sector, as in France, or mainly from the public purse, as planned in Australia, observers have every right to question the economic and commercial logic of such investments.

France’s operators could argue that it’s early days for FTTH, and caution against jumping to gloomy conclusions based on take-up so far. But these subscriber figures are pretty worrying. At least one of France’s operators is trying to attract customers to FTTH by offering it at the same price as DSL, a copper-based broadband technology. But France Telecom – which has made the greatest progress in FTTH rollout – is charging more. The early indication is that many customers are not prepared to pay.

For some, this is missing the point. Fibre is a lot more resilient than copper, they say, and will be able to support services in the future we can’t even imagine today. It will also be much cheaper to operate and maintain than older infrastructure. But Australia’s government is justifying its FTTH plan on the basis that it will be an important stimulus to the economy, just as the railways of Britain were back in the nineteenth century.

It’s this latter point I find really troubling. While so much investment gets channelled into the FTTH infrastructure that customers seem unwilling to pay for, there is little sign of the economy-boosting services that FTTH will support. In fact, there is nothing to stop services that sound important, like e-medicine and e-education, from being delivered using DSL, and yet they have not received anything like as much government attention as FTTH. No doubt, ecommerce has taken off in heavily penetrated broadband markets like the UK and Germany. But what type of ecommerce could FTTH support that DSL can’t?

As for teleworking, that, too, can be done by most people quite satisfactorily using DSL. The barriers that have prevented it from becoming more widespread are cultural – not technological.

Indeed, strip away all flimflam from FTTH, and about all it can do that existing infrastructure can’t is provide a multi-channel high-definition TV service – something that is available to lots of customers already over various forms of broadcasting technology.

No doubt, the nineteenth-century railway builders also had their detractors. But their supporters must have been able to rely on much bolder arguments. After all, the railways were providing a transport system where none had existed beforehand. All FTTH seems to be doing is adding an expensive layer of polish to the track.

Stingy India

If you invited me to your party, and – as a popular sort of chap – I made it the talking point of the year, I would understandably be somewhat miffed if I were excluded from a subsequent get-together you were hosting.

Some of India’s private-sector telecoms operators have every right to feel like the popular party guest ignored the second time round.

Why? Because India’s stingy government has denied new telecoms licences to the very companies that drove the mobile-phone boom in the first place.

Bharti Airtel, Reliance Communications and Vodafone Essar are by far India’s three biggest operators by customers, having popularised mobile-phone services after receiving their original operating licences.

Yet the two licences for third-generation (3G) services that have been awarded have gone to BSNL and MTNL, which sit lower in the league table. BSNL was even leapfrogged by Vodafone Essar after the UK-headquartered operator bought its controlling stake in the business, proving just how flat-footed it is.

That makes little difference to India’s government, though, because BSNL and MTNL happen to be the two operators in which it still holds stakes.

The privately held companies knew the state-owned ones would get licences without even having to smarten up their appearance. They were initially unconcerned because they’d been expecting an auction for a handful of other licences to happen around the same time.

That’s now been delayed until later this year, supposedly because the telecoms regulator and the finance ministry are still bickering like reality-TV contestants over the minimum price that should be charged auction participants.

In the meantime, BSNL and MTNL have an unfair headstart in India’s biggest cities. Bharti, Reliance and Vodafone will be hoping they prove as inept in this market as they’ve been in the mainstream one.

But that will come as a huge disappointment to Indian consumers and businesses, who’ve been deprived of 3G – or, indeed, any decent internet service – for many years. Considering the economic benefits of broadband, LECG, an economics consultancy, reckons the cost to the Indian economy of deferring private-sector licence awards could run into billions of dollars.

There’s been no shortage of foreign investors queuing up to enter India’s mobile-phone market, given its huge promise. But if India’s bureaucrats keep acting like this, not getting invited to the party will cease to be a concern.

The Chapter 11 scandal

I was discussing the rise and fall of Nortel with a former colleague the other day and ended up feeling very unsympathetic towards the Canadian firm. My ex-colleague had earlier interviewed Tzvika Friedman, the chief executive of a small Israeli manufacturer called Alvarion, which has collaborated with Nortel on a relatively new mobile-broadband technology called WiMax. Alvarion is owed US$2.4m by Nortel and unlikely to get paid (at least in the next few months) because the Canadian company is now in Chapter 11 bankruptcy protection. A fuming Mr Friedman had vowed to get his money back one way or the other – said my ex-colleague – but he may be out of pocket for some time.

Chapter 11, of course, gives a company protection from creditors demanding repayment. Whether a greedy, bonus-dispensing bank or a struggling former partner, you have no more immediate claim on a company in this position than Robert Mugabe has on the presidency of Zimbabwe.

 

Before anyone thinks I’m suggesting that ailing employers should be left to collapse by an uncaring system, I do think Chapter 11 has its place. A company stripped financially bare should be entitled to take shelter while it sorts through its problems. My issue is with companies that still have cash on their books and yet are allowed to put others at risk before paying off their debts.

 

Nortel might well have had US$4.5bn in long-term debt when it entered Chapter 11, but it also had US$2.4bn in cash. A sliver of that would have helped Alvarion, which is hardly in peak fitness. Last quarter it posted a net loss of US$4.8m. And it laid off 11% of its workforce in December.

 

Of course, the thorny issue is the apportioning of these cash piles. Nortel has a long list of creditors and others would undoubtedly argue they are more deserving than Alvarion. And, obviously, Nortel was incapable of repaying just over US$2bn of its debt when it entered Chapter 11.

 

Even so, there seems something fundamentally wrong with a system that allows companies to put others in jeopardy while they have money in the bank. If you’ve messed up badly – as companies seeking Chapter 11 usually have – then you should bear the consequences. And if that means entering Chapter 11 with an almost-empty purse, then so be it.

Chrome-plated browsing

“You actually spend more time in your browser than you do in your car,”  Brian Rakowski, group product manager for Google’s browser project, told Reuters yesterday. If that’s really true, I had to take Google’s new baby out for a test drive. So, I’m using it as I type, flipping between tabs to pick up the graphic (left) and checking the general Chrome chatter.

Like most Google products, it’s clean and neat and somehow cuddly with its soft blue colours. It swept up my zillions of bookmarks, but I can’t find my RSS feeds. An attempt to chase these down through the help button was unsucessful. This glitch aside, there are two main improvements to browsing that Microsoft should study.

First, Chrome’s opening screen gives you a snapshot of all the sites you’ve recently visited so you can go right to your favourites and second, it prompts you as you type the name of the site you are going to, the way email programmes do with recipients’ names. Nice.

One of the Google video promos promises you more stability – that is, if you are doing your online banking on one tab and working on another, a crash on the bank site won’t slow down your labours one tab two. I’ve never had this problem with IE7 or Firefox so we’re back to cuddly, the missing RSS feeds and whether the quicker browsing tricks are enough to make me switch.

I suppose the thing that’s making me keep IE7 as my main motor for the time being was something unrelated to Chrome itself. It was a tick box under the download for Chrome. I nearly ticked it until I had a closer read. It said:

Optional: Help make Google Chrome better by automatically sending usage statistics and crash reports to Google.

Needless to say, I didn’t tick the box.  I think Google knows enough about me already.

Dongle danger

Poor old Carphone Warehouse. Having begun life as a pure retailer of mobile phones, the British company has toiled to re-invent itself as a broadband operator only to realise those efforts were ultimately futile. It should really have become a mobile operator instead.

Actually, that’s not strictly true, but Charles Dunstone, the company’s chief executive, has rattled the market and sent his share price crashing 12% partly by admitting that sales of mobile broadband ‘dongles’ – tiny plug-in devices that allow roving laptop users to surf the net – are chewing into his business.

He’s right to worry, as should all ‘fixed’ broadband operators. In the UK, such 3G dongles are fuelling a new tech craze, selling more than 50,000 a month, according to the latest figures from Ofcom, the UK telecoms regulator. The risk for the likes of Carphone Warehouse is that dongle buyers will not renew their fixed broadband contracts, seeing little need for a house-bound service when they can get one almost anywhere through a mobile operator like Vodafone or 3.

A few things act against this: mobile broadband networks are still slower than fixed; coverage can be notoriously patchy; usage is rarely unlimited; and prices are typically high.

But that last, crucial barrier is giving way. In a few European countries, such as Austria, mobile broadband is now less expensive than fixed, and that’s prompting many customers to ditch the latter.

The main refuge of the fixed-line operator is clearly under attack.

Nortel rising

Nortel’s share price has crept up like mercury on a hot day following its announcement that LTE and not WiMax will be the focus of its 4G efforts from now on.

The markets are responding favourably because the Canadian manufacturer is leaning towards a technology that has already won the support of some of the world’s biggest mobile operators, including AT&T and Verizon in the US, NTT DoCoMo in Japan and China Mobile.

Its investments in WiMax, a rival technology backed mainly by new entrants, will effectively be spun off in a venture with Alvarion, an Israeli manufacturer of WiMax kit. That will leave the core Nortel business free to concentrate on LTE.

For all the excitement, none of this is particularly surprising. Nortel has always claimed to have kept a hand in both technologies because of similarities between them. But really it has been waiting to see which way the wind blows. Even a few months ago such a move seemed likely, when John Roese, Nortel’s chief technology officer, told the Economist Intelligence Unit that LTE would probably dwarf WiMax in years to come.

Of course, this is more bad news for WiMax. It recently enjoyed a brief rally, after Google and Intel pumped funds into a WiMax project led by US operator Sprint Nextel, but is now almost visibly sagging. More announcements of this nature and it may struggle to ever regain its once-proud posture.

iFanatics await …

Apple’s latest cult gathering gets underway in a few hours, at which – it is widely anticipated – high priest Steve Jobs will offer up a new version of the iPhone to his slavering acolytes. This time, however, any technical wizardry is likely to be overshadowed by details of the commercial arrangements.

The religious-like fervour stems from the expectation that the second-generation iPhone will work on third-generation (3G) mobile-phone networks. Dull as that might sound, it’s important to some because the first version could only connect to the internet on slower mobile networks, or using WiFi – a technology that isn’t readily available outside coffee shops, airports and five-star hotels (which probably suits some iPhone users just fine).

Cheerleaders for 3G – who naturally include the cash-splurging operators – have been singing the same ditty for the past few months: that the iPhone met with a disappointing reception in Europe (where it has sold just a few hundred thousand units since going on sale late last year) because of competition from other handsets that are ‘3G-capable’.

Pretty much piffle. Deutsche Telekom, France Telecom and Telefónica didn’t tell iPhone customers they were getting a 2G internet service. They sold the device as a ‘mobile broadband’ gadget, just as vendors of the new version will. Some technophiles might have held off buying an iPhone after reading the network specifications. But most did for one overriding reason: it’s too darn expensive.

Which brings us on to the rather more interesting aspects of the launch. First, as is already well known from the spate of press releases dispatched by new Apple partners over the last few weeks, exclusivity has gone out of the window. It seems there are few big operators left that aren’t going to be selling the iPhone.

Second, while the original partners were tied uncomfortably to Apple, the next batch appears to have been cut loose. Revenue-sharing agreements look like an endangered species. And as they dwindle, so will the high upfront costs attached to the device. Some operators may even discount the iPhone to zero to spur adoption.

That doesn’t, of course, mean the iPhone will be cheap (according to the Guardian newspaper, UK customers getting them for nothing will have to pay at least £75 a month in service costs). But it does show Apple trying a different tack. And, frankly, it has little choice. IDC data shows its share of the US smartphone market fell last quarter from 26% to just 19%, and it is well off hitting its target of 10m unit sales by the end of the year (it is thought to have sold around 5m so far).

So is the iPhone finally due to go mass-market? Personally, I think prices need to fall a lot more for that to happen. But Apple’s targets are actually pretty modest. Simply introducing the iPhone to new geographical markets will spark some uplift in sales.

A lot, of course, will be down to the operators. The iPhone has gained a reputation in existing markets of being a luxury toy for wide boys and geeks. Altering that perception will take some clever marketing.