BT Mobile joins the 5G fray

BT has become the latest mobile player to enter the race for 5G subscriptions, though it does beg the question how economically attractive it is to own two rival services.

Launching in 20 cities and towns around the country, BT Plus and BT Business customers will be the first to be offered upgrades to the service. Convergence is a key pillar of the BT turnaround strategy, and the introduction of 5G to the BT brand does build in more relevance moving forward.

“Our 5G service provides customers with a faster and more reliable connection in high demand, crowded areas across the UK at peak times,” said BT Consumer CEO Marc Allera.

“When combined with the best fibre, the UK’s fastest 4G network and biggest wi-fi network, BT is helping consumers and businesses stay connected wherever they are and whatever they need to do.”

Despite the fact BT is in the most powerful position in the UK when it comes to connectivity assets, it hasn’t really been able to cash-in on the convergence craze just yet. The issue which has not been addressed to date, and now we suspect it won’t be in the near future, is rival brands, fighting for the same consumer, to contribute profits to the same bank account.

Customer acquisition in a mature and saturated market is incredibly expensive. The most successful strategies are generally those geared towards price, though this does create the dreaded ‘race to the bottom’. Perhaps one of the reasons convergence has not hit the high notes at BT is the multi-brand strategy which the team is persisting with.

EE has an excellent mobile brand, but it found wanting in broadband. BT leads the market in broadband but lacks clout in mobile. If either of these brands want to create value through convergence, they will have to lure customers onto a secondary-service which does not have the reputation of rivals. This is an expensive means of customer acquisition, both in terms of advertising and lower ARPUs.

These brands are not only fighting to lure the same customers away from the same rivals, they are also attempting to steal subscriptions from each other. It doesn’t seem like the most logical plan.

At some point, the brands will have to merge into one. Convergence doesn’t make the most sense when you trying to sell two different brands in the same bundle. We suspect the BT brand will win out, especially when you see the expensive brand advertising campaign which has been launched with the England, Wales, Scotland and Northern Ireland football associations.

That said, it is important for the BT brand to enter the 5G fight if it does want to remain relevant in the mobile world moving forward.

Looking at the deal, BT consumer customers can choose from 6 GB, 30 GB, or 60 GB 5G mobile plans, and can also gain a £10 monthly discount if the plan is purchased alongside a broadband package. This might gain some traction, though there is still plenty of opportunity for pricing strategies to shift over the coming months.

Although many of those with 5G ambitions have unveiled their pricing strategies, there is still plenty of volatility left to realise. Pricing seems to expensive right now, though the telcos will be stubborn while the early adopters are purchasing. These are consumer who are less likely to be deterred by price. As soon as the mass market starts to get interested, this is where we can envision the pricing war genuinely kicking off.

BT starts making noise about convergence with Halo launch

Convergence is a proven business model and now the slumbering giant of the UK telco market is starting to head in the right direction.

While there is already a convergence product available to customers, to date there has been questionable success. Unlike continental Europe, convergence has not really gathered steam in the UK, though BT is attempting to shift the status quo.

“I feel this is a once in a lifetime shift for BT in the UK,” CEO Philip Jansen said. “BT Plus has been a huge success, but this is a modest, first convergence product.”

The new convergence product will be known as Halo, available to both consumer and enterprise customers. The product will include the fastest available broadband service, unlimited mobile data, with the option to upgrade to 5G, a team of customer service agents which do home visits and access to the wifi presence throughout the country. Prices have not been announced just yet.

While this is a promising move forward, there are still challenges which need to be addressed.

Firstly, does the UK consumer understand the concept or benefits of convergence. And secondly, can a convergence product be successful when you have two distinct brands?

Starting with the concept of convergence, perhaps there is a misunderstanding about the definition and benefits because the telcos have not made enough, or the right, noises about it. Up until recently, BT was the only UK telco which had the assets to create a genuine convergent product portfolio. There was of course a significant advertising campaign behind BT Plus, the first iteration of convergence, though arguably this had limited success.

Before too long, more details will be unveiled regarding a brand advertising campaign. BT will have to be smart to communicate the benefits very clearly.

Looking at the BT business, this is where the team has a big decision to make; can convergence work when you do not have a single brand? EE is king of mobile, but questionable on broadband, while BT is the broadband leader with a suspect mobile offering. More has to be done to marry the two brands together.

An interesting announcement which has been made which will help to address this challenge concerns the high-street. The BT branding and customer service team will have a much more prominent presence in every high-street store moving forward. This will help tie the two brands together in the minds of the consumer, though you still have to question whether convergence can be successful with two distinct brands.

Ultimately, this is a good move forward by BT. There is still a sense more could be done and said, though it is heading in the right direction.

BT has an opportunity few others in the UK can compete with. It has the widest and best-performing mobile network, a dominant broadband network and a wifi presence with more than five million points of presence. Over the next couple of months, the TV service will be re-launched adding another element to the mix.

Should the team be able to create a product which is attractively priced, supported by a brand marketing campaign which clearly communicates the benefits, BT should be untouchable in the UK’s connectivity segment.

Vodafone Australia and TPG told to wait three months for merger decision

The final arguments have been presented to the Australian courts and now Vodafone Australia and TPG will have to wait until early 2020 for the decision on whether the $15 billion merger will be allowed.

This is a saga which has the potential to cause some long-term friction between the regulator and industry. Wherever you are around the world, best-case scenario would be collaboration between all elements of the ecosystem, but it does appear this is far from the case.

In a court case which has been on-going for just over three weeks, Justice John Middleton will now take into consideration all the arguments which have been presented. Unfortunately for those who are seeking a swift conclusion to the litigious chapter will be disappointed. Justice Middleton has said to expect a decision in January 2020, or potentially February.

Australian Competition and Consumer Commission (ACCC) took the decision to block the merger between Vodafone Australia and TPG on the grounds it would negatively impact competition in the future. The telcos are arguing this decision should be over-turned, suggesting it is the only way to ensure competition in a world which is quickly being defined by convergent operations.

This is a decision which will certainly disappoint someone. As patiently as Justice Middleton could look, there is no middle-ground between the feuding parties. The regulator is effectively accusing TPG of lying and the Vodafone/TPG representatives are suggesting the watchdog is not living in the realms of reality.

Looking at the perspective of the ACCC, the regulator believes the merger would prevent a fourth mobile player from emerging in the country. This is of course presuming TPG still has the appetite to deploy a network, and considering the telco has said it does not, the regulator is making a bold assertion.

Another interesting statement made by Michael Hodge QC, the lawyer representing the watchdog, is that its persistence to block the merger is based on “regulatory paternalism”. This is effectively a more acceptable way of saying ‘we know what better for you than you do’.

On the other side of the aisle, Vodafone and TPG are questioning whether the ACCC is looking at the same conundrum.

TPG did have an interest in diversifying revenues to enter into the mobile space, it was potentially going to do a ‘Jio Job’ to cause chaos, but the Huawei ban effectively put an end to this. Huawei was being touted as TPG’s main supplier of network infrastructure equipment, though the Australian ban for the vendor made financially unviable to pursue the network deployment, according to the telcos.

“Indeed, on the Commission’s evidence, TPG dodged a bullet that the network that they were rolling out would have been one of the great white elephants of Australian telecommunications history,” said Peter Brereton QC, representing Vodafone Australia at the trial.

If you believe the telcos, TPG is no-longer interested in building its own mobile network. It is not a financially attractive. Should the ACCC’s blockage of the merger stand, Australia will continue with three mobile network owners, though Vodafone will be in a weakened position to compete with the likes of Telstra and Optus.

This is the question which Justice Middleton needs to ponder. What is the best course of action for enhanced competition in the future? Three strengthened, converged telcos, or a fingers-crossed situation that TPG will be able to source CAPEX to fuel its own network deployment.

There are of course good and bad arguments on both sides of the aisle. The ACCC is potentially right to push for a disruptive fourth mobile provider, though is it reading the environment correctly? The telcos are of course correct to pursue a more comprehensive converged player, three top-tier telcos is certainly favourable than a duopoly, but there might be some nuanced language over the TPG appetite for network deployment moving forward.

The risk which could emerge is potential animosity. The UK’s connectivity landscape suffered due to friction between BT and regulator Ofcom, and there is potential for the same outcome here. Vodafone Australia and TPG only have one thing on their mind right now; a tie-up to challenge Optus and Telstra. The ACCC has taken somewhat of a patronising and stubborn stance, and seemingly does not want to consider the opportunity for increased competition with three converged operations.

Neither party is willing to budge, and it seems the loser will have to swallow a lot of pride to ensure a smooth relationship in the future.

IBC 2019: Are the nuances of the content world being understood by telcos?

The traditional telco business model is being commoditised, this is not new news, but with more telcos seeking to drive value through content, do they understand the nuances of consumer behaviour?

Once again at IBC in Amsterdam, it is an OTT which is grabbing attention. This should come as little surprise considering the disruption which this fraternity is thrusting on the world of telecoms, media and technology, though here it is more than gratuitous. Cécile Frot-Coutaz, the head of YouTube’s EMEA business, outlined why these companies are leading the way; a fundamental and intrinsic understanding of today’s consumer and the consumer-driven market trends.

This is perhaps why the telcos and traditional media companies are struggling to adapt to a world dominated by millennials, generation Z and digital natives. They appreciate society is changing but have perhaps not correctly balanced the formula to fit cohesively and efficiently into the new paradigm.

This conundrum is most relevant in the content world. Telcos need to factor this complex and nuanced segment into the business model, but how, where, why and when is a tricky question. Many telcos want to do something completely new and very drastic, but the simplest ideas are often the best ones; how can connectivity be used to augment and enhance the fast-growing, fascinating, complicated and profitable content space?

From our perspective, telcos need to diversify, but the best way to do that is figure how connectivity can enhance growing businesses and segments. This might sound like an obvious statement, however the evidence is the nuances are being missed.

Take AT&T for example. This is a company which desperately wants to diversify to take advantage of the digital economy. One way in which it feels it can do this is through the acquisition of Time Warner, a $107 billion bet to own content, create a streaming platform and drive another avenue of engagement with the consumer. Sounds sensible enough, but why take such a risk when there are opportunities closer to home.

Another strategy is more evident in Europe where telcos are attempting to create partnerships with the streaming giants to embed the distribution of these services through their own platforms. See Sky’s integration of Netflix or Vodafone’s work with Amazon Prime. Again, it is a perfectly reasonable approach, but does this future-proof the business against the trends of tomorrow?

These are two approaches which will attract plaudits, but we would like to take the strategy closer to home once again.

During her presentation, Frot-Coutaz pointed to several trends which could define the content world of tomorrow, and it is a perfect opportunity for the telcos to add value.

Firstly, let’s have a look at the consumer of today and tomorrow. Millennials and Generation Z have fundamentally changed the way in which the media world operates, and content is consumed. Not only is it increasingly mobile-driven, but there are new channels emerging every single day. Technology is second-nature to these consumers, and this is shaping the world of tomorrow.

Another interesting point from Frot-Coutaz is the fragmentation of content. One of the objectives of YouTube is not only to own content channels, but to empower the increasing number of content creators who are emerging in the digital world. If the content creators make more money, so does YouTube.

Frot-Coutaz claims that the number of YouTube channels which generate more than $100,000 per annum has increased 30% from 2017 to 2018. These trends are highly likely to continue, further fragmenting the content landscape.

This is where owning content or embedding popular streaming services into platforms becomes problematic. Consumer trends suggest the variety of channels through which the user is consuming content is increasing not decreasing. Embedding Netflix into a platform is an attractive move, but it is only attractive to those who have an interest in Netflix. If connectivity solutions can be offered to consumers to simplify and enhance the consumption of content, agnostic of the platform, there is a catch-all opportunity.

Although Netflix and Amazon Prime might be the content platforms on everyone’s lips for the moment, the number of ways in which consumers engage content is gathering significant momentum. There are new challengers in the streaming world (Disney+ or Apple TV), traditional social media (Facebook or Twitter), challenger social media (Tik Tok) AVOD channels (YouTube), traditional conversational websites (Reddit), messaging platforms and who knows what else in the 5G era. What about the VR/AR platforms which could potentially emerge soon enough?

This is a nuance, not a drastic change in thinking, but it is an important one to understand. Do telcos want to be the owner of content, the distributor or the delivery model. Admittedly, the delivery model is not the sexiest in comparison, but it might hold the most value in the long-run.

Another way to think about this taking the example of Killing Eve, the BBC spy thriller. Is there more long-term value in the eyes of the consumer in owning the content, owning the distribution channel or owning the connectivity services which fuel consumption and engagement through all channels?

The best means of differentiation have always been the ones which are closest to home. If you look at the likes of Google, Microsoft and Amazon, these are future-proofed companies because they are taking their current services and creating contextual relevance. There might be examples which undermine this point, but the general claim holds strong.

At Google, the team diversified their business through the acquisition of Android. This evolution took Google from the PC screen and onto mobile, but it is an extension of the advertising business model in a different context. The same could be said about YouTube. A video platform is drastically different from a search engine, but the underlying business model is the same; identifying the needs of the consumer and serving relevant commercial content.

The telcos are looking to do the same thing, but perhaps there needs to be more of a focus on a proactive evolution of the business rather than reactive. The telcos are playing catch-up on the consumption of video through mobile and a shift to OTT distribution, but the current approach is perhaps too narrowly focused. Focusing on the core business of connectivity delivery is more of a catch-all approach, factoring in future trends and the increasingly fragmented digital society.

This is a very easy statement to make, the complications will be on creating products which encapsulate these trends and offer an opportunity for telcos to grow ARPU. We are sitting very comfortable in the commentary box here as opposed to in the trenches with the product development teams, but the nuances of content are there to be taken advantage 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.

Orange hints it might be ready to take Romanian fixed assets off DT

Last week, reports emerged Deutsche Telekom had been given the green-light to sell its fixed network stake to Orange in Romania, and the French telco isn’t quashing the rumour.

With a 54% stake in Telekom Romania Communications, DT has a healthy position in the market, though it appears the country is no-longer part of the grand plan. Orange is reportedly in-line to purchase the fixed network stake, the remaining 46% is owned by the Romanian Government, and as you can see from the statement below, it is not denying the rumours.

“The Orange Group’s strategic ambition is to be a leading convergent fixed and mobile operator in Europe, and we are exploring all potential opportunities in Romania to further implement this strategy,” the company stated.

“Our analysis is still at a preliminary stage and no decision has been taken by Orange. In any case, such a decision would be subject to mandatory regulatory approvals.”

The reports in local press claim DT has received approval from the Romanian Government to sell its stake in one of the country’s biggest telcos. For Orange, this does look like it is a sensible move. It is the leading mobile provider in the country, though adding the fixed assets through such an acquisition would certainly make a more complete offering.

The convergence business model is one which is being firmly grasped across the Orange group. There are of course regional twists in terms of execution, though the over-arching strategy is fully-embracing convergence.

What is worth bearing mind is that there is enough nuanced language to add an element of doubt, but it does appear an announcement of some kind might be on the horizon in the not too distant future.

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.

EE forced to backtrack on 5G data tariffs

It does appear EE has been forced into a rethink on 5G data pricing, as the firm launches an unlimited data offering to keep pace with rivals in the UK.

Like hamburgers at breakfast, the 5G tariffs didn’t look right to start with. The price points were too expensive for today’s cash conscious consumer who expects the world for tuppence. EE might have been first out of the gate to capitalise on the growing 5G euphoria and earn the right to boast about being first, but it has been forced to backtrack a little.

The only issue with being first is that you give everyone else a taste of what is on the table. Even if EE had nailed the proposition and priced it perfectly, it left the door open to be embarrassed by rivals to be undercut. If the aim of the game was to secure post-paid subs and look to long-term ROI, EE left itself exposed to a cheap shot.

That said, it has now seemingly rectified the situation.

When it first launched in May, prices were tiered depending on download limits. Not only did it not look practical, limits would be reached relatively easily, it was expensive. Admittedly the price of 5G devices were factored in, but with rivals presenting options which were easier on the wallet, a new approach was needed.

“If you want an unlimited data plan, you should get it on the UK’s best network, with the coverage and speeds that let you make the most of it,” said Edward Goff, Marketing Director at EE.

“Our new unlimited range offers customers the ultimate smartphone experience in more places across the UK than any other network, all with no speed caps and great swappable benefits like Amazon Prime Video and BT Sport.”

What is worth noting is that the unlimited offer for 5G-SIM only plans is still expensive.

MNO Price
EE £44 a month
Vodafone £30 a month
Three £22 a month
O2 Unknown

Each of the telcos have taken their own approach to data pricing. EE offers 5G SIM-only contracts for £44 a month in the most traditional manner. Vodafone has offered tariffs on speed tiers with the £30 a month tier offering the ‘fastest available speed’, which might vary dependent on where you are. Three is offering 5G connectivity for free for anyone who has an unlimited 4G contract. The £22 a month deal is SIM-only.

O2 is the only one not to release pricing for its 5G data tariffs, being the last to market, though it certainly has taken the opportunity to undermine the promising progress made by rivals.

Although few in the EE offices will be happy to backtrack and have a rethink on the unlimited plans, it does now look to be in a very competitive position. It is the most expensive, but it does have the best network and most consistent, high download speeds. If performance is the measure of success in the consumers eyes, EE is certainly hitting the right notes.

Another factor to consider is the ‘swappables’ element of these deals. For those who sign-up to a 12-month SIM-only deal on 5G for £44 a month, three ‘swappable’ content deals will be included. Each month, customers will be able to elect which bundled content services they desire, ranging from zero-rated video data or music, additional roaming locations, BT Sport or Amazon Prime Video.

The team could probably do with negotiating a few more partnerships as it does look a bit thin on the ground, though it is a reasonable offer.

What we are yet to see from EE is an aggressive push towards the convergence game. Executives have been giving the same presentation at conferences for years, promising a seamless connectivity experience for customers through mobile, broadband and wifi assets, though there doesn’t seem to be much activity on the marketing front to link-up these elements in one conclusive offer.

Either there is something in the pipeline or this is a case of negligence. The combination of EE mobile and BT’s wifi and broadband assets would create a connectivity offering few could dream to compete with. Three and Vodafone are plugging into the convergence game with their own fixed wireless access (FWA) offerings, but EE seems to be lagging here. The opportunity to make noise is there but the team seem to be enjoying the uncomfortable silence.

EE is arguably the market leader in the UK, though thanks to O2’s MVNO relationships it can claim to be the network with the most mobile connections running across it. With the unlimited offer, bundles, biggest and best network coverage and BT’s wifi and broadband assets, EE has an opportunity to nail itself down as the top mobile provider in the UK.

Trying to pick out the winner in the UK’s 5G race is starting to get very difficult.