UK Government does not understand digital divide – committee report

A UK parliamentary committee has unveiled a report that suggests while rural connectivity is improving, it is still not keeping pace with the urban environments.

The report from the Environment, Food and Rural Affairs Committee has suggested the digital divide is persistent. Steps forward have been made though the committee does not believe the Government has fully grasped the extent of the problem, the scale of the challenge, or the wider cost of poor connectivity for the rural economy.

“Despite improvements in coverage since our predecessor’s Report, our inquiry has shown that poor broadband and mobile data services continue to marginalise rural communities, particularly those living in hard to reach areas,” said Neil Parish, Chair of the Environment, Food and Rural Affairs Committee.

“Digital connectivity is now regarded by many as an essential utility, with many in rural areas struggling to live a modern lifestyle without it. There continues to be a lot of frustration felt by those living or working in rural areas– and rightly so.”

While the committee has conceded positive steps have been made by the Government is recognising the challenge, Parish does not feel it fully grasps the depth and breadth of the challenge.

“However, the Committee is not confident that the Government has fully grasped the scale of the challenge currently faced and is sceptical as to whether the Government will meet these ambitious new targets without considerable and potentially controversial reforms,” Parish said.

The Government has of course set very ambitious targets to close the digital divide, though it does appear the action plan to meet these targets has not been set in place. If the gains are only being dwarfed by progress in the cities, is this is a genuine solution?

Although it might sound like a first-world problem, the idea of connectivity should no longer be seen as a luxury; it is a fundamental part of the UK’s society.

This is the attitude some will take. You can’t get fast enough broadband, so outside and kick a ball instead of watching Netflix. However, if you consider many banks are now taking a digital-first approach, closing smaller branches in the countryside, connectivity becomes critical. At risk patients no-longer have to be limited to a ward if they can be effectively monitored at home. Agriculture can be revolutionised with technology also. There are certainly more benefits than simply removing buffering.

Another interesting element to this argument, aside from empowering businesses outside the major towns and cities, is the impact on well-being.

This is a very important aspect on improved connectivity and an element of the evolution of many forward-looking businesses. Trends are moving towards a flexible-working relationship between the employee and employer, with more companies being open to work-from-home environments. It improves the happiness of the employee, potentially increasing retention, and also allows the company to access new talent.

However, it does depend on consistent, reliable connectivity throughout the country.

Interesting enough, a sluggish approach to the broadband challenge could also have an impact on the fast-growing mobile economy, bolstered by the emergence of 5G.

“With 5G on its way, it is also crucial to ensure the background infrastructure (the fibre highway) is in place, using techniques such as fibre cabling directly to the outdoor antennas, combining fibre with power to the huge number of new ‘small cells” that will be required and leveraging existing fibre-to-the-home (FTTH) construction to add in extra 5G connection points along the way,” said Phil Sorsky, VP of the international business at CommScope.

The digital divide might not be as apparent in the UK as it is elsewhere, though it is still a persistent problem for British citizens. BoJo’s target of full-fibre coverage by 2025 might sound good, however it does appear there is a lack of thinking behind the execution of the strategy.

FCC moves to kill off all exposure to Huawei in rural networks

FCC Commissioner Geoffrey Starks has stuck the knife into Huawei at an industry conference, suggesting rural telcos will be given financial assistance to cleanse their networks of the vendor.

Speaking at the Competitive Carriers Association annual conference, Starks targeted the Chinese telecommunications industry on the whole, and Huawei in particular. Not only is the FCC exploring ideas on how to ban the purchase of Huawei equipment entirely, but also the introduction of an initiative which would offer federal dollars to search for, and remove, legacy Huawei equipment which might be in the network.

“Huawei is one of the biggest telecom equipment manufacturers in the world, and although its share of the U.S. telecom market is relatively small, some wireless carriers have purchased Huawei equipment for their networks,” Starks said.

“These carriers bought this equipment, often a decade or more ago, because it was far less expensive than other options, and because Huawei was willing to work with them to create customized networks.

“The Commission is currently examining whether to ban the use of federal support dollars for the purchase of such equipment, but we can’t ignore the problem of the equipment that’s already here.”

Starks is the FCC frontman for a new programme which has been known as ‘Find it, Fix it, Fund it’. The initiative will provide funding to telcos to self-assess networks and identify what would be deemed as ‘suspect equipment’. Currently it is voluntarily, though it does appear there are regulatory changes on the horizon to make the initiative a compliance issue.

In the short-term, the equipment might be allowed to stay in the network, though it would be quarantined. Long-term, Starks is suggesting every piece of equipment would have to be ripped and replaced.

The financial support from the FCC is an interesting element, and it does seem to have been working with the private sector to advance its ambitions.

“Nokia and Ericsson have said that they are willing to create products and financing options geared toward smaller carriers that need to replace Chinese equipment,” Starks said. “They also claim that they have had handled similar replacement efforts with minimal customer disruption.”

The challenge which many of these rural telcos are facing. Financially these companies are under strain. Connectivity is an expensive business and the rural players cannot experience the same economy of scale benefits the national players can. Ripping and replacing prior investments would be a kick in the teeth for already financially tense environments.

This is the reason Huawei has been successful in engaging rural and regional connectivity providers in the US. Not only does it offer a broader range of products, some of which are much more financially attractive, but it has been much more open to customisable deployments than rivals. The US is an incredibly varied geography, there is not a one-size-fits-all opportunity here.

A lack of competition and the removal of the cheapest network infrastructure provider is a massive concern for the rural and regional telcos. However, with the help of federal funding and new business offerings from Ericsson and Nokia, the financial burden of rip and replace regulations might be lessened. This does not mean networks will be better or cheaper in the long-term, but it is a nod from the FCC to the immediate concerns.

Aside from this conference speech from Starks, further evidence of Chinese aggression has emerged from the US.

Senators Chuck Schumer and Tom Cotton have called for a ban for China Telecom and China Unicom to use US networks. China Mobile has already been facing difficulties in obtaining a licence to operate in the US, though this further expands the scrutiny which is being placed on Chinese companies.

In a letter to the FCC, Schumer and Cotton have suggested the two telcos, both of which have direct links to the Chinese Government, could use networks to target US communications. They have also suggested the pair could use the licenses and exposure to US networks to reroute traffic through China.

Perhaps this is an incident which many should have expected, but it does demonstrate the US Government is taking a more comprehensive approach to tackling China, bringing more companies into the fray.

Last month, it was suggested the Department of Justice is attempting to put the brakes on a subsea cable which is being funded by Facebook and Google, as well as a Chinese partner. Dr Peng Telecommunication and Media Group does have ownership ties to the Chinese Government, though two US firms could get hit by collateral damage through this DoJ investigation.

All of these incidents indicate the aggression from the US Government is widening and becoming increasingly complex. The likes of ZTE, Alibaba, OnePlus and Xiaomi should perhaps be wondering when they will be dragging into the conflict.

Quibi: a short-form streaming service to keep an eye-on

A passing reference at IBC 2019 was the first we had heard of Quibi, but it certainly looks like an interesting proposition which could add further disruption to the content world.

Imagine a cross-over between Netflix and Snapchat and you’ll have something close to Quibi. Although there isn’t a huge amount of information out there about the business, it looks to be a mobile-based, short-form video subscription service designed for millennials. Content will be designed for mobile-format, and only viewable through the app.

This might sound like a bit of a fad but looking at the content it already has lined-up, the first-step towards success has been made.

Firstly, you have a yet to be named thriller starring Oscar winner Christoph Waltz alongside Liam Hemsworth, where a terminally-ill man is hunted by contestants, as he attempts to provide long-term for his wife. Secondly, you have a Stephen King horror series which can only be watched at night. Another title is “Action Scene” which stars Kevin Hart.

These are only a few of the titles which Quibi has floated through the press. Despite there not being a huge publicity push for the service, Hollywood stars seem to be convinced by the concept.

Although it was only a passing comment on-stage at IBC 2019, All3Media CEO Jane Turton and UK MD of Production for BBC Studios Lisa Opie also suggested they had both been commissioned for content on the platform. Turton also said her parent company Liberty Global was an investor in the business.

Interesting enough, the Quibi business seems to have attracted interest from some of the worlds’ most recognisable technology businesses without making a significant splash in the publicity pond. Walt Disney Company, 21st Century Fox, NBCUniversal, Sony Pictures Entertainment, WarnerMedia, and the Alibaba Group complete the list.

Once again, we are relying on third-party sources, but it does seem to be priced reasonably fairly. For $5 a month, or $8 for an ad-free service, the platform might well gain some traction should the content live-up to the expectation.

Another interesting aspect of this business is the leadership team. Jeffrey Katzenberg, a vastly experienced executive in the firm industry with tenures at Paramount and DreamWorks, has been brought on-board to work alongside CEO Meg Whitman. If Whitman sounds like a familiar name, she was previously CEO of Hewlett Packard, leading the business through the restructuring period which created HP Inc and Hewlett Packard Enterprise.

While Whitman’s tenure at HP was not exactly the most successful, her background in the technology industry married to Katzenberg’s experience in the content world dovetails quite well. It’s technology pragmatism alongside content creativity; both barrels will have to be firing if the Quibi business is going to be a success.

This is the other side of the business which the team is yet to discuss; technology. Digital natives are not very tolerable of poor service, so Quibi will have to be on-form if it is going to be a long-term success. Creating a new, disruptive service is difficult, just look at YouTube’s experience last year.

As Paolo Pescatore of PP Foresight pointed out to us, streaming the Champions League Final on YouTube was not the greatest of successes. It was an interesting move, setting the scene for potentially a new field for YouTube, but the team did not necessarily nail the experience.

“YouTube had decoding issues dealing with the huge demand from the live streaming event. There were no problems with the stream to the BT Sport app,” said Pescatore.

“Key to the success of Quibi will be distribution as it has a strong growing slate of content. It should strong consider forging tie ups with telcos who are crying out for great content to drive connections and usage on fibre broadband and 5G networks.”

We like the idea. It is a novel-concept which could potentially form a completely new kind of content delivery model. The audience is likely to be curious as well.

If the last few years have shown us anything, it’s that the millennials and generation Z are open to new ideas. And they are willing to pay for it. $5 a month is a price point which many will tolerate as an experiment.

Assuming the content lives up to the blockbuster names it is attracting, the technology fulfils the experience which digital natives demand, and the marketing team is clever enough to cut through the noise in a very crowded space, this could well be a success.

Quibi isn’t exactly shouting about itself at the moment, but it is an idea which we really like the look of.

Aussie regulator not in the ‘real world’ over Vodafone and TPG

Lawyers representing Vodafone Australia and TPG have suggested the Australian competition watchdog is not living in reality as it continues quest to force in a fourth MNO.

Last year, Vodafone and TPG announced intentions to merge operations in pursuit of creating a business which can offer comprehensive services in both the mobile and fixed segments. The pair were searching for ‘synergies’, seemingly a play to compete in the world of convergence, but the Australian Competition and Consumer Commission disagreed, blocking the merger four months ago.

The ACCC rationale was relatively simple; if the pair are forced to continue to operate independently, they could potentially fund their own fixed and mobile networks, broadening competition across the country. Vodafone and TPG suggest this is not the case.

“What TPG wants is for this merger to go through but when you step back and look at the options and approach it had before August 2018… it is entirely commercially realistic that TPG will return to rolling out a mobile network,” said Michael Hodge, representing the ACCC in court.

However, the opposition hit back.

“There isn’t a real chance that TPG will pursue the rollout of a mobile network. There is not a real chance that TPG will become Australia’s fourth network,” said Inaki Berroeta, Vodafone Australia CEO.

The dispute here is simple. The ACCC wants four, independent MNOs across the country. TPG made some noise about deploying its own network prior to the merger announcement, though these ambitions were seemingly quashed by the ban on Huawei technology in the country.

“TPG did try to build it, but it was thwarted by community objections, by technical difficulties but ultimately by the federal government’s security guidance,” Ruth Higgins, the legal representative of TPG, said.

Vodafone and TPG do not believe they can compete with Optus and Telstra without a merger, though the ACCC is under the impression a fourth MNO will emerge organically.

TPG did announce in May 2018 it was planning to launch its own mobile network, learning from the success of Reliance Jio in India. The idea to attract subscribers was to offer six months of data and voice services for free, though this idea was killed off due to two developments.

The first development was the merger between Vodafone and TPG. Why would it build its own mobile network when it could dovetail with Vodafone, bringing its own fixed network to the party to complete the convergence dream.

The second development was the banning of Huawei technology in Australia.

“It is extremely disappointing that the clear strategy the company had to become a mobile network operator at the forefront of 5G has been undone by factors outside of TPG’s control,” TPG Executive Chairman David Teoh said at the time.

Following the decision, TPG decided against building its own mobile network as Huawei was the main supplier to the firm. This is an instance which backs up the Huawei claims it will improve competition in the 5G vendor ecosystem, bringing down the price of equipment investment and speed of deployment.

The decision to end TPG investment in a mobile network might have been enough to convince the ACCC the merger could be approved, but it seems the competition watchdog is clinging onto the hope it would do so on its own. TPG statements should be taken with a pinch of salt, it wouldn’t be the first-time executives changed their minds, but it does run the risk of negatively impacting competition.

One thing which is not healthy for any market is a tiered ranking system. If Vodafone cannot compete with Optus and Telstra without the converged business model the TPG assets offer, it might well fall further behind. If it dwindles to the point of irrelevance, the Australian telco market will be in a worse position than it is today, or with the combined Vodafone/TPG company offering increased competition. The risk the ACCC runs is effectively creating a duopoly.

Realistically, there is no right or wrong answer here. We do not have a crystal ball, and we cannot read the minds of TPG executives. It might well pursue the deployment of a mobile network if the prospect of a merger is killed off all together, but then again, it might just double-down on fixed line investments. It does currently have an MVNO, but that is a poor substitution for a fourth MNO to increase competition.

Elliott’s vultures are circling AT&T

Activist investor Elliott Management has set its eyes on AT&T, suggesting the firm is bloated and undervalued, with ambitions to cut staff, clear out the leadership team and sell-off non-core assets.

In a letter sent to AT&T investors, Partner Jesse Cohn and Associate Portfolio Manager Marc Steinberg have attacked the firm and suggested a drastic turnaround strategy which includes divestments, retail location closures, job cuts and a change in mentality. It does appear shareholders are intrigued by the idea, with share price increasing 6% in pre-market trading.

“The purpose of today’s letter is to share our thoughts on how AT&T can improve its business and realize a historic increase in value for its shareholders,” the letter states.

“Elliott believes that through readily achievable initiatives – increased strategic focus, improved operational efficiency, a formal capital allocation framework, and enhanced leadership and oversight – AT&T can achieve $60+ per share of value by the end of 2021. This represents 65%+ upside to today’s share price – a rare opportunity for any company, let alone one of the world’s largest.”

For those who aren’t familiar with Elliott Management, this is not necessarily a move which is out of character.

Known as a ‘vulture fund’, the team search for businesses which it deems are undervalued and effectively enter to cause chaos. More often than not, the team suggests a complete overhaul of senior managers and a new strategy. This strategy often involves job cuts and asset stripping. Shareholders are brought on board with the promise of increased dividends and a boost in share price.

There are numerous examples where the team has attempted to muscle in on operations, with Telecom Italia (TIM) being the most relevant in recent history. At TIM, Elliott Management has been battling with Vivendi for control and a new strategy, and it does appear to be winning.

In the case of AT&T, Elliott Management is promising a 65% increase in share price by the end of 2021. This is an attractive promise as share price has barely moved over the last five years, from $34.50 on September 12, 2014 to $36.25 at the close of the markets on Friday (September 6, 2019). During this period, a high of $43.28 was experienced on August 12, 2016, and a low of $28.31 on December 21, 2018.

But how do these numbers compare to the share price of AT&T’s rivals over the last five years?

Telco Today 12 Sept, 2014 High Low
AT&T $36.25 $34.50 $43.28 $28.31
Verizon $59.06 $48.40 $60.30 $42.84
T-Mobile US $79.15 $30.83 $84.25 $25.31
Sprint $6.82 $7.00 $9.30 $2.66

Although AT&T is a dominant force in the US telco industry, it has seemingly not capitalised on the 4G revolution in the same way some of its rivals have, most notably T-Mobile US. To rub salt into the wounds, AT&T failed to acquire T-Mobile US in 2011, had to pay the largest break-up fee to date (at the time), and then provided the firm with a seven-year roaming deal and spectrum. This could perhaps be viewed as the turning point for the struggling T-Mobile US.

Another interesting assertion from the Elliott Management team is inability of the AT&T business to act in a timely fashion. This is another point CEO Randall Stephenson should be worried about, as Elliott Management claims AT&T did not deploy 4G aggressively enough and lost out to Verizon in the battle for first place. With 5G on the horizon, investors might well be worried about a repeat.

Ultimately, the biggest criticism is one of poor performance. Despite some very attractive numbers in the 90s and 00s, AT&T hasn’t really pushed on to capitalise on this momentum. In fairness, every telco around the world has suffered over the course of the last decade thanks to the growing influence of the OTTs, but this point has been conveniently ignored in the Cohn and Steinberg letter.

However, it is the acquisition strategy is one of the biggest points made.

“In recent periods, however, AT&T has embarked upon a very different sort of M&A strategy,” the letter states. “Over a series of deals totalling nearly $200 billion, AT&T built a diversified conglomerate by pushing into multiple new markets.

“In each case, the push was as significant as possible. Beginning the decade as a pure-play telecom company with leading wireless and wireline franchises, AT&T has transformed itself into a sprawling collection of businesses battling well-funded competitors, in new markets, with different regulations, and saddled with the financial repercussions of its choices.”

The telco industry has changed in the last decade, and Elliott Management clearly doesn’t agree it is for the better. In the 90s and 00s, acquisitions were connectivity orientated, while recent years have seen an aggressive push into the world of digital services, diversifying products which can be offered to the consumer.

This is one of the critical points the Elliott Management team is levying towards AT&T; its acquisition strategy has not been effective. The failure to merge with T-Mobile US is a critical point, but since that point the team has spend more than $200 billion to create a beast of a business. Some have suggested this was necessary to diversify the business in preparation for the digital economy, however this is not the opinion of Elliott Management.

We do not agree with Elliott Management here. Convergence is a sound business model which moves the telco into the value-add column. A more stringent focus on connectivity will walk the telco down the road of utilitisation, opening the industry up to more aggressive regulations and price controls. This is not the direction many telcos want to head, but Elliott Management does seem to like the profits driven out of a business which focuses on operational efficiencies and little else.

Let’s not forget the Elliott Management business model after all. Identify underperforming shares, disrupt the business model for short-term share price rises and then sell the stock, while collecting meaty dividends along the way. If Elliott Management gets it way, AT&T will be a utilitised business, with fewer assets. It might not be a competitive force in a decade, when other telcos are reaping the benefits of diversification. However, Elliott Management will not care by that point.

Perhaps the three most important points of the plan set forward by Elliott Management are:

  1. A change in strategic direction from acquisition to executive
  2. Clearing out the current management team
  3. Divestment in non-core assets

There are other points made, such as closing redundant retail locations, negotiating more authorised third-party retailers, cutting back on the over-bureaucracy, simplifying the management structure and redundancies. However, we feel the three mentioned above are perhaps the most important for investors.

By shifting from an acquisition mind-set to an execution one, and making the suggestion of divestments, it would appear the AT&T business is one which will be focused more acutely on traditional telecommunications services. The tone of the letter does not suggest Elliott Management believe the content world is one which can bring fortunes, and the way in which the team discuss the success of T-Mobile US also alludes to this new, narrowed focus.

What does this mean for the very expensive content acquisitions? Perhaps nothing, or perhaps everything. We suspect the idea from Elliott Management would be to silo each of the business units, allowing a more lasered focus on core revenues in the siloes. There might well be cross-selling opportunities, but the language used by Cohn and Steinberg suggests digital services and ambitious convergence is not on the agenda.

The proposed strategy to realise the 65% increase in share price is one of simplicity, enhancing what is currently in the armoury and taking a more traditional approach to the business of connectivity.

And while there might be thousands of nervous employees throughout the organization worried of the prospect of job cuts, the senior management team should be much more concerned. After interviewing various former-executives, Elliott Management has come to conclusion that the executive management team does not have the right skillset to tackle the challenges which AT&T is facing today.

Should Elliott Management get its way, heads could roll, and the leadership team could look remarkably different. Elliott Management is also seeking greater influence for the Board of Directors, another common play from the team. The activist investor often looks to secure positions to friendlies at the companies it has in its crosshairs, and it will certainly want to exert more control on the strategy moving forward.

If Elliott Management gains control and influence at AT&T, it could look like a very different business. The investor believes it has identified $10 billion in cost-efficiencies would can be realised through spending $5 billion. This does not account for any divestments which would be made though. AT&T might well have fewer retail locations, a smaller headcount, a new management team, a lessened focus on content and digital services and a more utilised business model in the near future.

This is only the beginning of this saga, Elliott Management will certainly have a wrestle on its hands to gain control, but it does have good form when it comes to forcing through disruption.

The winners and losers of telecoms will be decided by convergence

There are still naysayers about the benefits of convergence, but those who ignore this trend will fast find themselves sleep-walking the path to utilitisation and irrelevance.

First and foremost, let’s have a look at what convergence actually is. This strategy is not the silver bullet which some telcos are seeking. A convergence strategy which not recapture the lost fortunes of yesteryear overnight, and it will not turn the traditional telco into the sleek shape of an internet giant. However, it does future-proof the business against the rising tides of utilitisation.

For those companies who are happy to be utilities, fair enough. There are profits to be made through the commoditisation of data services, though it is a very different type of business. But those who think they can be a value-add business, simply focusing on a single revenue stream are fooling themselves. Those companies shall remain nameless here, but it is pretty obvious who they are.

Convergence is about layering the business through multiple service offerings and diversifying the way in which telcos can engage consumers. It could be through multiple connectivity opportunities, and increasingly content has become a common theme, but there are numerous options open to the telco which demonstrates a bit of bravery.

According to recent research from OSS/BBS firm Openet, 73% of consumers are open to purchasing more digital services from telcos. The result of the introduction of these services is not only more revenue, but increased loyalty. 65% said the presence of more digital services would make them feel more engaged with their telco, while 79% said it would increase their loyalty.

Firstly, this is an opportunity to avoid the dreaded race to the bottom. If a telco can offer a positive network experience (not a given in today’s world however) and a reasonable price, as well as digital services, churn will also theoretically decrease. But what do digital services actually mean?

Content is the most obvious one to start with. If a telco is flush enough, this can mean owning a content segment, such as football rights in Spain for example, though partnerships with OTTs is an increasingly popular option. The telcos can be very valuable partners to the OTTs, either through their billing relationship with the customer or a trusted link in regions were direct customer acquisition is more difficult.

Numerous telcos are taking this approach, and it is proving popular with customers. Using the Openet research once again, 38% of respondents would switch their provider for better content options, while another 38% would be interested in changing should there be a zero-rating offer attached also.

But content is only the start, and this is an area which could become increasingly commoditised if/when these partnerships become commonplace. Looking beyond these content bundles, offering a broad range of niche features could be the next battle ground. Think of the Vodafone partnership with Hatch for gaming. This will not appeal to everyone, but it will attract interest from a niche. O2’s Priority loyalty programme offers early access to music venues and festivals. Again, a niche, but it will appeal strongly to some.

Looking further afield once again is where you start to see the real leaders in the digital world. Orange is a perfect example, with its security products. This is where the world of connectivity and digital services can be blended to attract completely new revenues. And of course, as more of the world become digitised, there are more opportunities to add value on top of connectivity offerings.

The smart home presents opportunities, as does the connected car. The telcos have a unique opportunity to capitalise on the digital world as few consumers today would leave their home without their smartphone. This is a direct, and constant, link to the consumer. There are not many other industries which can boast this advantage.

Interestingly enough, the telcos will not even be cannibalising their own revenues with these new products. For most consumers, the money spent on connectivity is different from that which is spent on entertainment or security. If you can help them spend less through bundled services, this is a bonus, but asking the consumer to spend money on entertainment as well as connectivity is not going to decrease ARPU. Quite the opposite.

The consumer wants to spend money on entertainment and digital services, but the question is who they are going to spend it with.

Ideally, we would like to see more telcos take the Google approach to business. In 2015, Google undertook a business restructure, separating the two functions into very distinct business units. On one side, you have the core search business. Google knows it can make money from this without really trying. On the other side, you have ring-fenced funds which are used to fuel the ideas which drive diversification on the spreadsheets.

Through this structure, one side of the business is not influenced by the other until the right time. Ideas are given the opportunity to flourish and be what they are intended to be, without the limitations of the traditional business. Fi is an MVNO which has emerged from the research side, as is Sidewalk Labs and balloon connectivity firm Loon. Without the separation, would these ideas have evolved to their full potential which is currently being realised?

This is the challenge which the telcos are facing. Convergence and the evolution into a digital services provider requires an internal disruption. It demands executives think about priorities different and invest in areas which are alien to the organization. It means being forward thinking and preparing to fuel ideas with long-term ambitions. And it needs to be done quickly.

You don’t necessarily have to be first to market, but you need to be a fast-follower at the very least. A convergence strategy encourages loyalty from subscribers after all, and once the dust has settled, it will become increasingly difficult to lure valuable postpaid customers away from rivals.

Not every telco will get it right. Not every telco will believe in the convergence buzz. And not every telco will evolve fast enough. However, there could be the creation of a tiered industry for too long. The winners at the top who nail convergence and become a valuable part of the digital economy, and the losers who continue to trudge the path to commoditisation.

Rakuten delays network launch to work out the bugs

Japan’s fourth mobile operator has said it will delay its launch, originally set for October 1, in favour of a limited trial for 5,000 users.

The announcement will put a dampener on the spirits of those who are closely watching developments in Japan. With the barriers set so high on entering the mobile connectivity game for new-comers, cash-rich technology companies will be looking for tips and tricks to develop their own game-plans, though this was not supposed to be part of the story.

“In order to ensure the stability and quality of its service for customers and continue to improve the network based on customer feedback and requests, the company will initially open applications to 5,000 subscribers free of charge through the Free Supporter Program,” the firm said in a statement.

The official launch of the service will now be at some point before 31 March 2020, with the Free Support Program set to conclude at that point. Those subscribers who are assisting with the network trial will continue to get free services through to 31 March however.

The trial will focus on Tokyo, Osaka, Nagoya City and Kobe City, with KDDI and Okinawa Cellular to provide roaming services outside of these regions. Those on the trial will receive unlimited calls and data services through the period, in exchange for providing regular feedback to the telco.

The launch of Rakuten has caught the attention of many inside and outside of Japan for several reasons. In the country, consumers have had to deal with three providers to date and the introduction of a fourth player will provide additional competition, as well as a potential disruption to create a new status-quo when it comes to pricing. Just look at the impact Reliance Jio had on India to see the potential a new player can inspire.

Outside of Japan, there will of course be vendors rubbing their hands together in anticipation of a genuine greenfield project, though those who have an interest in muscling in on the connectivity game.

Starting with the vendors, this is a potential gold mine. If Rakuten is going to be competitive, it will have to get its network up-and-running very quickly. Aggressive network deployment and expansion to reduce the reliance on roaming requires some serious investment. The more success Rakuten can generate in the early days, the more quickly it will be able to mobilise investment to fuel further expansion.

And now for the disruptors. There will be several companies which will be keeping an eye on developments here, hoping to understand what works and what doesn’t when deploying a new network.

Dish is one company which falls into this category. Should the T-Mobile US and Sprint merger survive the legal challenges it is facing, Dish will become the fourth MNO in the US through acquiring the Boost prepaid brand from Sprint. It will then have to try and build its own network as quickly as possible.

There are of course other companies who have already declared their interest in the mobile connectivity game, 1&1 Drillisch in Germany for example, however internet companies have also been rumoured to be getting involved.

Amazon is the company which immediately comes to mind, a rumour about Amazon mobile is never too far away, however this is applicable to any internet firm which has a lot of money. Owning and managing a network is one way to make money, another opportunity to collect valuable data on consumers and a chance to own the relationship with the consumer end-to-end.

If Rakuten can prove an internet company can deploy an end-to-end fully virtualized, cloud-native network cost-effectively and in a timely manner, as well as attract the right people to manage the network to meet customer expectations, why wouldn’t others believe they can do the same.

Amazon has buckets of cash, as does Google, Facebook, Alibaba, Baidu or Microsoft. If Rakuten can do it, why couldn’t they? Or how about investment companies and venture capitalists who are always looking for a way to make money?

Interdigital sues Motorola-owner Lenovo over 4G patents

Mobile and video tech developer Interdigital has filed patent infringement action against Lenovo in the UK because they can’t agree a price for use of its 4G patents.

Perhaps wary of being labelled a patent troll, Interdigital is keen to stress that this is the first patent infringement litigation it has initiated for six years. It claims its hand has been forced after the failure of almost a decade of negotiation with Lenovo, which makes Motorola phones as well as its own-branded devices.

Interdigital reckons it owns around 10% of the standards-essential patents in both 3G and 4G technology, which means it gets a piece of the action whenever someone sells a device that uses them. How much users of these patents have to pay is usually determined on a FRAND (fair, reasonable and non-discriminatory) basis, but apparently Lenovo won’t even accept third party FRAND arbitration.

Patent litigation canned comments are among the most formulaic, but let’s have a look anyway. “Having product companies take fair licenses to patented technologies flowing out of fundamental research is absolutely essential for the long-term success of worldwide standards like 4G and 5G,” said William Merritt, CEO of Interdigital.

“InterDigital has a long history of valuable technology innovation and patient, good faith negotiation and fair licensing practices, including our willingness to allow the economic terms of a FRAND license to be determined via binding neutral arbitration. We also have longstanding licensing relationships with many of the top companies in the mobile space, including successful license arrangements with Samsung, Apple, LG and Sony, among others.

“For our company, we turn to litigation only when we feel that negotiations are not being carried out in good faith. In bringing this claim in the UK High Court of Justice, which has a history of examining standards-essential patent issues, we are hopeful for a speedy resolution and a fair license.”

Here are the patents in question:

  • European Patent (UK) 2 363 008 – Enables the efficient control of carrier aggregation in 4G (LTE). In advanced mobile phones, carrier aggregation is key to achieving high data rates.
  • European Patent (UK) 2 557 714 – Supports the use of multiple antennae transmissions in 4G (LTE). The patent enables the use of flexible levels of error protection for reporting by the handset, increasing the reliability of the signaling.
  • European Patent (UK) 2 485 558 – Allows mobile phone users quick and efficient access to 4G (LTE) networks. One of the main technological challenges of developing LTE networks was efficient bandwidth usage for various traffic types such as VoIP, FTP and HTTP. This patent relates to inventions for quickly and efficiently requesting shared uplink resources — for example, reducing lag when requesting a webpage on a smartphone on LTE networks.
  • European Patent (UK) 2 421 318 – Decreases latency during HSUPA transmission by eliminating certain scenarios in HSUPA where scheduling requests may be blocked. A blocked scheduling request may prevent a smartphone from sending data.

Interdigital presumably has others that Lenovo is using in its devices, so either there’s no dispute over the them or Interdigital is focusing on the four juiciest ones, who knows? Patent litigation is pretty arcane stuff at the best of times, but it seems like Lenovo must have really pushed its luck for its relationship with Interdigital to come to this. It’s hard to see how they can justify refusing to go to FRAND arbitration, but there could well be extenuating circumstances that will come to light in due course.

Apple given golden opportunity to crack India with relaxed rules

Apple has struggled to gain any sort of traction in the Indian markets to date, but new Government rules could perhaps open the door a crack.

India is a market which represents a significant opportunity for the major players in the digital economy. It has the second-largest population globally and a smartphone penetration rate of roughly 24%, but one of the few markets worldwide where smartphone shipments are increasing quickly. Thanks to certain market disruptions, India is currently under-going its own digital revolution, with the increasingly wealthy middle-class easing into the digital euphoria Western consumers have been accustomed to as the norm.

Year Smartphone penetration1 Average income (US $)2
2018 23.9% 2,020
2017 21.9% 1,830
2016 20.4% 1,690
2015 18.6% 1,600

1Statista 2World Bank Group

The evolution of India and the surge of the digital economy in the country is moving at a dramatic pace. The opportunity for profit is monstrous, but this is a tricky market to crack.

This is the conundrum which Apple is currently facing. It currently has less than 2% of market share across the country (which isn’t increasing), and premium prices are stifling any genuine ambition to increase this.

Indian consumers are gradually spending more on devices, though by the time Apple’s prices would be deemed palatable, other brands might have already developed a strong sense of loyalty; do not underestimate the power of the Android/iOS divide.

Brand Market share
Xiaomi 31%
Samsung 26%
Vivo 6%
Oppo 6%
Realme >1%
Apple >1%

Figures curtesy of Counterpoint Research – Q2 2019 shipments

However, there is a glimmer of hope. The Indian Government has this week announced it will relax rules which dictate how foreign companies can operate in the country. Fortunately for Apple, the easement will allow it to sell directly to customers through its eCommerce channels.

In by-gone years, a foreign company had to source 30% of its production locally to create a retail presence in India. This presence includes online channels. With such reliance on China for the manufacturing elements of the supply chain, Apple has always struggled to meet these requirements. As a result, Apple’s devices have been sold through local partners, who add a premium to an already premium product; it has struggled to gain a foothold in the market.

Another element tied to this is the brand story. The Apple Store is a presence in 25 countries around the world, not only presenting a direct-selling opportunity, but a chance to offer an experience to current and potential customers. This is a fundamental building block in the Apple strategy, which is all about creating a brand and an identity to cultivate customers into the loyal iLifers you see around the world today.

Thanks to new elements being considered by the Indian Government, Apple now meets the requirements and will allegedly begin selling products through its own eCommerce channels in the coming months. These new considerations take into account more iPhones will be manufactured in India, not only for Indian consumers, but for export to Europe as well. This is massive win for Apple.

In short, there are two massive benefits for Apple. Firstly, it can own the purchasing relationship with the customer, dictating the messaging and reducing the price while maintaining profit margins. Secondly, it can begin to create the Apple experience for customers to nurture the sense of loyalty which is so critical to the Apple success over the years.

Apple is an incredibly successful smartphone manufacturer because it creates excellent devices, but the work which has been done to build loyalty with its customer base should never be underestimated.

Think back to the 90s and 00s when you saw Apple adverts on TV. None of these adverts ever really discussed products in the way you would expect but talked about the Apple experience. A huge proportion of advertising today is designed around story-telling and brand experience, but Apple was arguably one of the first to do it and remains one of the best at building this experience.

The result of these campaign was an ‘us’ and ‘them’ mentality which persists today. Whether it pins iOS versus Android, or Mac versus PC, the split is very apparent, and crossover is very rare. Not only does this segmented approach maintain loyalty for the individual products, it presents significant cross-selling opportunities. How many iPhone users have an iWatch, an iPad or a Mac also? We suspect a high percentage.

Shifting people into, and keeping them in, the Apple universe can partly be attributed back to the brand marketing campaigns, the closed ecosystem and ownership of sales channels and brand experience. And now, it presents another massive opportunity moving forward; software and services revenues.

Period Net sales Software and services revenue Percentage of total
Q3 2019 53,809 11,455 21.2
Q2 2019 58,015 11,450 19.7
Q1 2019 84,310 10,875 7.7
Q4 2018 62,900 9,981 15.8
Q3 2018 53,265 10,170 19
Q2 2018 61,137 9,850 16.1
Q1 2018 88,293 9,129 10.3

Figures taken from Apple financial reports – USD ($) in millions

Apple CEO Tim Cook has made a big deal about software and services, and he is very right. It attracts recurring revenues without the R&D and manufacturing price tag. There will of course still be R&D, but smartphones are very expensive products to produce at the level Apple customers demand.

Generating revenues through AppleCare, iTunes, Apple Music, iCloud, Apple Pay, Apple Books, Siri, maps, search or TV subscription services becomes substantially more profitable once people are bought into the ecosystem. And as you can see from the table above, it is becoming an increasingly important facet of the financial spreadsheets.

With many users persisting with the OS they have become accustomed to, if Apple wants to make India a profitable market, it will have to start embedding itself in the minds and lives of Indian consumers today.

The Indian market is one which offers great prospects and profits for those who play their hands wisely. Up to now, Apple would have been written off by many industry commentators, but will changes to the rules, the door is slightly ajar. But that is all it is right now.

Apple will have to convince smartphone users it is a better alternative than the Android ecosystem, while also justifying the premium it traditionally charges for products. This will be a very difficult battle, but Apple is in a better position today than it was yesterday.

Google writes opening line of Huawei smartphone obituary

Huawei’s next flagship smartphone will not feature official Google applications as the weight of the US ban finally hits home.

Speaking to reporters in the US, and first reported by Reuters, a Google spokesperson said the Huawei Mate 30 rumoured to be launched in October, cannot be sold with licensed Google apps and services. This is a significant setback to Huawei’s consumer division and begs the question as to whether anyone would now consider the devices without the Android OS and supporting app ecosystem.

The blow from Google of course leads back to the White House. In entering Huawei and its affiliate companies on the Entity List, US suppliers are banned from supplying any products, components or services to the Chinese vendor. This includes Google, with its horde of popular applications and platforms.

There has of course been a moment of reprieve for some US suppliers. President Trump said there will be an extension on the ‘grace period’ afforded to Huawei and its US supply chain, though Google has now stated this only applies to devices which are already on the market. As long as the conflict between Beijing and Washington persists, it looks like the new Huawei devices will have a Google-shaped hole in them.

Although Google has not confirmed whether it has applied for an exemption from the ban, it has said in previous months it wishes to continue working with Huawei. Of the 130 applications sent to the US Commerce Department to seek a special licence to continue working with Huawei, none have been accepted thus far.

This is of course not as simple a situation as one might expect. Google owns Android, the open-sourced operating system. Huawei is not banned from using Android, it can’t be, but it is banned from being an official Android partner of Google. This means it will not be entitled to security and performance updates as soon as there are available. It can use the basic Android building blocks, but it will effectively have to build its own OS, which it has pretty much already done, but it will be a completely different product.

The confirmation from Google here is the news many Huawei fans will not want to have heard. The Mate 30 will not feature popular applications such as Google Maps, or the Goole Play Store where users can download other apps. These are only two examples, though they are critical elements of any Android smartphone.

The question which remains is whether anyone will buy a Huawei smartphone now?

We suspect not, assuming they have kept up-to-date with developments or done the slightest bit of research. There will of course be a market for Huawei in China, there is a sense of patriotism there propping up the business, though this could be the beginning of the end for Huawei in Western (perhaps all international?) markets.

A Google-less future is the new status-quo for Huawei, and unless this changes quickly, we suspect its smartphone business will be a shadow of its former-self in a very short period of time.

For those who have been plotting and scheming the downfall of Huawei, this is the first sign of success. For months, the Chinese vendor seemed to be immune to the collateral damage from the US/Chinese trade-war, though now it has finally hit home.

The consumer business unit has been very kind to Huawei executives over the last couple of years. Thanks to the creation of consumer devices which performed well and were reasonably-priced, and an extensive above-the-line advertising campaign to drive the Huawei brand, Huawei has become one of the most popular consumer electronics brands worldwide. It has consistently been the number two smartphone brand for shipments globally in recent years, while the consumer business group is now the largest contributor to group revenues at the firm.

In its recent financial statement, Huawei reported another year-on-year revenue increase, though it did appear growth in the smartphone business was driven by domestic smartphone sales. Research from Canalys suggests smartphone sales in Western Europe were down for the second quarter by 16%, with Samsung and Xiaomi benefitting. Unless the situation changes, we cannot see anything but a dramatic decline in Huawei smartphone sales in Western markets, and perhaps this misery will spread to all of Huawei’s international market.

This is currently an incredibly profitably and valuable business to Huawei executives and shareholders, though now it appears it has been cut-down at the knees by the White House and the Trump administration.