Mobile connections: the threats behind the impressive stats

Interesting news that connected devices in the world now number higher than the population of the planet – the source of which appears to be somewhere around here.

Self-evidently, this is not the same as saying that everyone in the world has a phone – the number of westerners with a multiplicity of devices, providing density figures much in excess of 100%, provides enough of an expanding market to account for by the majority of connected people. Nevertheless, there is an interesting, if obvious, comment to make on the state of international development and solidarity when the number of people without access to safe, clean water and basic sanitation still lies in the billions while those in developed countries have access to not just one, but two, three, four or more connected devices.

Apart from that, it is the growth in mobile which has been so impressive – around 2001, as the chart in this article shows very well, the number of mobile connections globally was around the same as the number of fixed line ones (despite a history of just ten years at that point), but, in the ten years since then, the phenomenal growth rate has seen the number of mobile connections reach a figure around five times that of fixed ones. Indeed, by 2015, there are predictions that the number of connected devices will be twice that of the world’s population as near as 2015, while Ericsson has been predicting 50bn connections by 2020 for at least the last two years.

Impressive growth rates, for sure (if indeed achievable), but, as I argued below, growth as a goal is problematic and, in this context, I also note that Juniper Research has also this week produced another of its warnings that mobile costs may well exceed revenues within four years. Additionally, Nokia is also reporting difficulties arising not least from lower device selling prices as network operators start to drive prices down – a factor which will become more apparent should the France Telecom-Deutsche Telekom procurement link-up be successful – while other handset makers are also feeling the pinch. Counteracting the problems facing mobile companies, at a time of a need for the inevitable increased expansion of investment to deal with the implications for network capacity of such a high number of mobile connections, to say nothing of financially struggling countries looking to spectrum auctions as a source of cheap state finance (which themselves carry evident dangers), is a question that will heavily occupy not only mobile operators and their workers, but also regulators and policy-makers, over the next few years.

Another dot.com bubble?

Interesting piece here on totaltele.com reviewing recent valuations of social media firms.

My interest was immediately piqued by the introduction to the article : ‘Traditional metrics are no longer valid when it comes to measuring the value of the new breed of social media companies’, which then goes on to review the valuations placed on four social media firms – with more to come – as a result of stock market flotations. The key quotes come via a ‘technology valuation expert’ at a major firm of accountants troubled by an overlong name and a 90s-oriented obsession with marketing, with the article highlighting that:

…traditional metrics like price-to-earnings ratios do not apply when it comes to social media companies, which tend to prioritise growth over earnings. PwC suggests that a ‘value per user’ metric is more appropriate for these companies, “on the presumption that subscriber bases can eventually be monetised”.

At that point, I had a severe touch of déjà vu, since this is more or less precisely the (ir)rationale which led to the over-inflated values of internet firms being a contributory factor in crashes in stock markets at the turn of the last decade. In short: we’ll throw out tried and trusted means of valuing firms because we fancy gambling your money, pensions, etc. on something new and sexy which we don’t quite understand but which we hope will come good. Markets evidently don’t function in cases of imperfect information – but let’s at least hold this sort of rubbish up to the ill-informed gamble that it is.

Add in the prospect of rising interest rates and a stagnant FTSE100 over the last six months (and a Nasdaq that seems to be in a similar place) and we have at least some of the conditions of 2000’s implosion in place all over again. Oil prices which seem to be rising again following the correction of early May, stubbornly high inflation, a weak economy heading for another ‘soft patch’ and a government whose economic ‘education’ is firmly in the traditions of Alfred Roberts’s Grantham corner shop all add to the pressures.

An unreformed, business as usual capitalism is not only free, but destined, to repeat the same mistakes over and over again. That it seems to be doing so with such a velocity is something of a surprise, but this is perhaps a corollary of governments’ apparent collective refusal to contemplate systemic change, as well as our dependency on financial services and the associated structural problems of the UK economy (on which Larry Elliott had some interesting things to say in yesterday’s The Guardian). An economy so dependent on financial services seems to me to be not only in thrall to the City but also thereby blinded to the problems which imperfect information causes to market-based systems. Until we grapple with that, the economy isn’t going to get better.

Copper and fibre: the price relationship

An interesting report has been published on the relationship between the pricing of telecoms services over both old-style copper wiring and new-fangled, so-called next generation (glass)fibre.

Written for ETNO – the European Telecommunications Network Operators’ Association – the report was published initially last month by Plum Consulting, but I’ve seen it as a result of a news item concerning an ETNO workshop held this week and intended to raise awareness of the impact of the pricing of copper-based services on the case for investment in next generation networks.

Copper pricing, which refers to the bit that we pay for our residential telecoms services either to BT or, where the line is BT-owned but leased to another, to that retail provider, is a topical issue not least because Ofcom has recently launched a new consultation on the prices that Openreach – BT’s provider of wholesale network services – can charge its own customers (which then sell retail services to us). So, the timing of the workshop and the publication is highly important in the UK context.

Plum Consulting makes several points in its document, among them that the running of copper and fibre networks in parallel during the period of transition from old to new will present serious challenges as regards pricing – not least that falling copper prices may well discourage investment in next generation fibre since there would be less incentive for customers voluntarily to migrate to (more expensive) fibre. This would act in turn to reduce retail price levels for high-speed broadband, thus jeopardising the investment case. The prospect of fibre investment being treated in the same way as copper – by being subject to continuing price reductions – is also likely to provide room for second thoughts among investors.

In some ways, this might well be a ‘Well, they would say that, wouldn’t they?’ scenario given the nature of the commissioning body, but Plum Consulting is right to point out that adoption of, and investment in, next generation fibre is not a given and that the policy framework must seek to ensure that incentives to operators are correctly aligned with the public policy goals for high-speed broadband. This means, not least, that copper prices should be maintained at levels which support efficient migration to next generation fibre, thus assisting operators with investment cases, and that – inevitably – fibre pricing must ensure cost recovery and deal with the long-term nature of investment and the uncertainty of demand. The latter is uncontroversial – but the former ought to provide some considerable food for thought for Ofcom, and other regulators across Europe.

Ofcom becomes Off-com

Ofcom today confirmed plans for a 28%+ cut in its budget over the next four years – with the vast bulk being front-loaded: 22.5% of that cut will come in 2011/2012, with a cut of £27m, taking the overall budget to £116m.

We need to see Ofcom’s forthcoming Annual Plan – due out ‘shortly’ – to see what this means in practice (although the confirmation of the dimensions of the cut seem to indicate that this draft is likely to be substantially unchanged), but (on the back of the experience of year-on-year budget cuts) Ofcom believes it can nevertheless maintain its ‘capability and effectiveness’ in delivering ‘effective and targeted regulation’ and, as if to prove ‘business as usual’, it chose today to launch a new consultation on Openreach’s wholesale pricing. Though this tells us little other than that the regulator is on-message.

Ofcom is already in the process of finalising cuts to 170 jobs – 19.5% of its workforce as at 31 March 2010 (see Table 6) – and it’s difficult to believe that this will not have an impact on regulation in the sector. Cuts to Ofcom’s governance structure and the closure of its Consumer Panel have already been made, while I note that those employees remaining in the companies defined benefit pension plans are faced with the loss of future accrual on top of a two-year pay freeze. We are also likely to see the loss of Ofcom’s role in encouraging digital participation and rationalisation of its research programme.

Time will tell. The earlier removal from last year’s Digital Economy Act of a greater role for Ofcom in promoting investment in the industry is already a critical loss since this would have counter-balanced the existing statutory duty to promote competition which is proving problematic to the shape and direction of the industry. The impact of a smaller – perhaps more focused – regulator on the dynamism of the industry is yet to be seen, as will be its ability to compel the government to see through its ambitious plans for the communications industry (about which this blog has previously been critical – see, for instance, here). The signs are clearly not hopeful – but the ideological gap between what I’ve just said about the role of the regulator in driving the industry forward and the practical reality of the government’s market-driven approach is immense.

Sky clouds the picture

Sky has been much in the news these last 24 hours, not least for the continuingly spreading tentacles of Hackinggate, for Offsidegate, which has – rightly – now claimed Richard Keys (albeit via a resignation) as well as Andy Gray, and for Culture Secretary Jeremy Hunt being minded to refer to the Competition Commission NewsCorp’s bid for the majority of BSkyB that it doesn’t already own on the grounds of the threat to media plurality (although he has given NewsCorp more time to come up with a bit of a defence – if you like, a sort of opportunity to re-examine an assistant referee’s offside decision).

Somewhat squeezed out by all these MBs of bandwidth coverage, but also of considerable importance in its own right, is Sky’s purchase of The Cloud – a network of 22,000 urban Wi-Fi hotspots across Europe. Other operators are also in the market, with the key aim of being able to retain subscribers across a range of platforms rather than loosing them to other operators in different locations, so Sky’s acquisition is absolutely within the prevailing market strategy. The Cloud – both in its own right as well as via its arrangements with market leader BT Openzone – is likely to have a large market share but, with a nod to the impact over time of Sky’s obvious pulling power, this is not a question of market dominance of the Wi-Fi hotspot market.

But, the news was broken by The Sunday Times – which, of course, is also in the NewsCorp stable. So, a newspaper arm of a media company (and one which charges for online access) gets first dibs on the story of an important business acquisition of another company in the same group. Perhaps Jeremy Hunt might like to focus on the media plurality aspects of that when he sits down to ‘negotiate’ NewsCorp’s bid for BSkyB with The Digger over the next few days. That’s right – negotiate. In the context, what a terrible word. Perhaps Hunt should, as advised by Ofcom, have simply blown for offside. One aspect of the ConDem’s attempt to ‘return policy to ministers’ is that we end up with this sort of undignified haggle over terms which leaves the process itself completely lacking in integrity.

Tesco Mobile reaches 2.5m

One of my more enduring posts on these boards is the one(s) relating to UK mobile market share. Outside the big four/three (plus 3…), the mobile world is dominated by virtual network operators of which the largest are Virgin Mobile (which pitches up on the T-Mobile network) and Tesco Mobile (which uses O2) – thus neatly putting each on either side of the everything everywhere/3 and Vodafone/O2 network duopoly.

So, in this context, I noted with interest this week Tesco Mobile announced that its subscriber base had topped 2.5m (indeed, it was one of the company’s bright spots in an apparently disappointing Christmas period). Tesco Mobile reported this Christmas as its ‘best ever‘ [NB Not sure about the longevity of this link], increasing its subscriber base in each quarter and the total by 25% over the course of 2010 (thus adding 500,000).

The company believes it is ‘well on the way to becoming the No. 1 MVNO’. Last time I posted, Virgin Mobile had a total of just under 3.2m subscribers although these refer to the end-2009 position. Whether Tesco is gaining ground needs to await further figures from Virgin Mobile – and there is no reason to assume that Virgin Mobile, as a separately-owned company, is sharing the same woes as T-Mobile. Nevertheless, 25% growth in a saturated market – there are over 80m ‘active’ mobile subscriptions in a country of 60m+ people – is an impressive achievement and the gap is evidently likely to have narrowed sharply.

Ofcom published its 2010 second quarter market update figures just over a week ago; this was the first quarter in which joint figures were published for Everything Everywhere (the merged T-Mobile and Orange operation). This indicated that Vodafone had 17.3m subscribers, O2 20.7m and Everything Everywhere 27.1m (Section 3 on the mobile market, Table 4 – p. 20). The data is incomplete since it excludes 3 and also, apparently, both Virgin Mobile (now) and Tesco Mobile, but it evidently shows a mobile market for the top players of 65.1m subscribers, leaving the rest therefore with 15m. These would divide roughly as follows: 3 claims 6.2m subscribers (a figure which is in all its press releases, the most recent of which is here); while Tesco Mobile now has 2.5m. This would leave room for – say – c. 3.6m with Virgin Mobile [Edit 20 February: I was over-generous: it’s actually 3.1m (Table C4, p. 20)] and the remaining 2.7m or so as various re-sellers and niche players and a market structure something like this (figures approximate):

Return of the landline duty?

thinkbroadband.com is today reporting that Internet Service Providers have put the issue of a residential broadband levy back on the agenda in a meeting with Ed Vaizey, Minister for Communications, Culture and Creative Industries, which took place earlier this week. The story first appeared on ISP Review, where there is a little more detail about the meeting.

The story is a little confused, not least by the context of the meeting being intended to discuss the controversial rating system for fibre installation, but ISPs appear to have suggested that the government institute an £8/year levy on residential fibre to the home connections of 1ooMbps.

The purpose of the levy is not clear, and neither is Vaizey’s reaction to what was apparently a ‘lively’ discussion. The last government intended to legislate to raise a £6/year levy on ordinary telephone landlines so as to generate funds to roll out fibre in the ‘final third’, but this was derided by the Tories in opposition, with George Osborne taking great delight in cancelling the by then already-dropped plans in June’s ’emergency’ Budget. It is not evident that this newly-proposed levy would be used in this way. Further mystery is added by the absence from this week’s meeting – apparently invitations weren’t extended – of both BT and also Vtesse Networks, the latter of which has made probably the most amount of noise on the issue of the rateable value of fibre installation which was, after all, the purpose of the meeting [Edit 14 January: ISP Review has since corrected its report to state that, although not being invited to the original meeting, Vtesse was represented, by its Finance Director, at this week’s re-scheduled one].

An £8/year levy on residential 100 Mbps connections isn’t likely to raise much money – though getting the principle in place would be a useful start to raising the sorts of money that would be required to make a serious dent in the ‘final third’. Neither does Vaizey have much political scope for manoeuvre on the issue, given both Osborne’s actions in dismissing the landline duty so comprehensively and the Tories having also dropped their manifesto commitment to reviewing the tax paid on fibre connections. Though this of course wouldn’t be the first policy U-turn by this ConDem government, even this week.