Saturday, November 08, 2008

Mobile companies facing investment dilemma

This started out as a quick post, but ended as a bit of a ramble through the jungle of mobile telecoms!

Mobile phone companies are facing a real problem over the next couple of years as the credit crunch bites into their need to innovate and maintain growing customer numbers and Average Profit Per User (APPU)*. The latest land grab, for that is how the industry works, is for data users on their 3G networks. However this is also driving their need for more Capex, to the alarm of their Boards and banks.

It is only 8 years since the industry had to dig deep and find £22bn for 3G spectrum licences which were needed to cope with growing voice demand and to provide data services, which were seen as the holy grail of the mobile industry. But that wasn't the end of it. Once the technology was developed it had to be deployed and backhaul** networks had to be upgraded, all adding to Capex and increased Opex

Once it was deployed it took a while for an eco system to develop sufficiently to produce cheap handsets that took advantage of the new technology. Annoyingly, customers didn't want to pay for slow data services and operators weren't able to develop the "killer application" that would drive customers to pay more for the benefits of the technology. Video phones proved to be a huge turn off, probably because of costs.

While all this was going on home based broadband was taking off, through BT's deployment ADSL***, and the Internet was developing in to what is known as Web 2.0. This meant that the web has become the "killer app" as people want to access to the content they want, not what the Mobile operators were offering in their walled gardens. Unfortunately for the operators the basic 3G technology wasn't up to delivering the experience users were getting used to at home, which proved to be another barrier to take up.

This meant another technology development for the MNO's to improve data capacity on their network. This technology is called High Speed Data Packet Access (HSDPA) and is a relatively inexpensive upgrade to the existing network. Marketeers have made many claims about this technology, data speeds of up to 7.2mbps. The reality is somewhat different, as you would expect, but it does offer a good experience for early users.

All this investment has driven a need for operators to grow their customer base and revenues. Only the most ostrich like technophobe would have missed the land grab as the MNO's make all sort of offers to attract customers, including "free PC's", unlimited data packages and free USB dongles. futhermore the iconic iPhone has gone 3G and has many imitators.

Unfortunately the technology hasn't lived up to the hype, again, and there is huge disappointment as a recent YouGov survey found:

However, experience of Mobile broadband is needs improvement. The data suggests it is great out-of-the-box but usage drives dissatisfaction and ~25% of mobile broadband users seem unlikely to renew their contracts over the next year. The service ranks below fixed ISP’s for every comparable service satisfaction question in the survey.
So less than 10 years after paying for 3G licences mobile operators are far from satisfying the need for data and face another real challenge. If they are to meet this challenge they need to deploy a new technology referred to as Long Term Evolution (LTE) and they also need more spectrum.

The first thing to note is that Ofcom has been prepared to auction more spectrum in the 2.5GHz band but this has been delayed by both T Mobile and O2 who are challenging Ofcom in the courts. There are a few reasons for doing this but the main one is fear of high auction prices****.

The other problem is that LTE is not an evolutionary technology as its name implies. Whether this is a deliberate ploy to make Boards and banks feel a bit easier I will leave you to judge, but the transition to LTE is likely to be as traumatic, and expensive, as the one from 2G to 3G and the penny is just starting to drop. This is from a recent interview with Ericsson's UK CTO:
If there is still life in HSPA, will the economic downturn delay LTE? We've had a downturn in the telecoms industry before, related to the internet bubble. This time, banks are involved, so operators wanting to upgrade may find it hard to get the credit to buy a lot of new equipment.
Conceivably — but I probably shouldn't comment.
What is so telling about this is that Ericsson are one of leading cheer leaders of LTE and desperately need its take up for their own future well being. Furthermore one of their major customers is Vodafone worldwide. So if Ericsson's UK CTO is being coy does it mean Vodafone are under pressure from their bankers not to spend?

But what if they don't, what if Vodafone, or any of the other MNO's, can't support their customer base on the existing 3G HSPA networks and they lose ground? They certainly won't be the darlings of the stock market if their customer stop growing and, even worse start to decline. Once that happens they will be in defensive mode, with only cost cutting to protect profits.

It was going to be a tough call before the credit crunch, it is even harder now. Who would want to be the one making that call?

I will be meeting my financial advisor on Tuesday for a 6 monthly review of the pension funds I am investing in. I think I'll look closely at any with mobile phone companies in them with a view to a move for a couple of years. Of course this is by no means a recommendation to do anything, just my personal opinion of what I might do.

If you got this far I admire your stamina, well done!

*Traditionally the telecoms sector looks at ARPU (Average Revenue Per User) but this doesn't tell the whole story as costs rise margins get squeezed. One of the biggest costs are subscriber acquisition driven by high churn

** Backhaul is the generic trm for connecting mobile sites, roof tops, towers etc, back in to the network. It is either very capex intensive or high opex. Either way, it is a real burden on mobile operators

*** BT had to be dragged kicking and sreaming in to rolling out ADSL and allowing local loop unbundling, you beleive it to listen to them now!

**** T Mobile are also claiming that the original 2G spectrum should be refarmed and set aside for 3G. This is a technical issue but if anyone wants more details let me know

No comments: