Vodafone and TPG win appeal for $15bn mega merger

The Australian Federal Court has overturned a decision by the Australian Competition and Consumer Commission (ACCC), paving the way for Vodafone and TPG to create a converged telco giant.

The ACCC had originally opposed to decision on the grounds of weakened competition, believing TPG would create a mobile offering while Vodafone would expand its broadband offering independently, however the courts disagreed. Both the telcos argued the financials did not add up to pursue convergence strategies independently, with the courts now greenlighting an AUS$15 billion merger after an 18-month wait.

Vodafone and TPG have said the merger is set to be complete by mid-2020, subject to approvals from other regulators and other shareholders, as well as the likely appeal from the ACCC.

“The ACCC’s concern was that with this merger, mobile data prices will be higher than they would be otherwise,” said ACCC Chair Rod Sims. “These concerns were reinforced by statements from the industry welcoming the merger and the consequent ‘rational’ pricing.

“We stand by our decision to oppose this merger. If the ACCC won 100% of the cases we took it would be a sign we weren’t doing our job properly; by only picking ‘safe’ cases and not standing up for what we believe in. The future without a merger is uncertain. But we know that competition is lost when main incumbents acquire innovative new competitors.”

Theoretically, the ACCC has a point, but it has been ignoring some very significant factors. Firstly, deploying a mobile network in a country so vast as Australia is incredibly expensive. Secondly, in banning Huawei as a supplier of RAN equipment, TPG’s business case was undermined. And finally, introducing additional competition and encouraging a race to the bottom does not necessarily create a healthy and sustainable telco industry.

TPG has said continuously over the last few months that without being able to work with Huawei the commercials of deploying a mobile network do not add up. On the increased competition, India and Italy are two markets which have demonstrated more competition and decreased tariffs can eventually lead to a very difficult position.

Mobile Broadband
Telco Market share Telco Market share
Optus 31.4% Optus 13.6%
Telstra 50.4% Telstra 55%
Vodafone 18.5% TPG 16.8%
Other 14.4%

While it is not guaranteed, there is hope this merger could end up being a positive for the Australian telecommunication market. A merged entity could provide more competition for the Telstra and Optus pair who are leading the market share rankings. Both of these telcos are able to entice customer with bundled service offerings, something which is becoming increasingly popular in the eyes of the consumer. The merged Vodafone and TPG proposition can now theoretically compete on a more level playing field.

“For the first time, Australia will have a third, fully-integrated telecommunications company,” said Vodafone Australia CEO Iñaki Berroeta. “This will give us the scale to compete head-to-head across the whole telecoms market which will drive more competition, investment and innovation, delivering more choice and value for Australian consumers and businesses.”

Competition is certainly not balanced in the Australian market currently. Increased competition might well fragment the market further, creating a ‘divide and conquer’ strategy for Telstra. It might have created more value for the consumer, as the ACCC so strongly insists, but it might have also worked out for Telstra, giving it a stronger position as market share is dwindled for the smaller players.

This ruling by no means guarantees the long-term health of the Australia telco industry, but it does create three converged players, perhaps the most logical position in the pursuit of sustainability.

Orange proves convergence should be telco business basics

A decade ago, Orange started trialling convergence in the Slovakian market, but today the success proves it should be the foundation of every successful business.

“Europe is a success story and convergence is the jewel in our crown,” said Ramon Fernandez, Orange CFO and Head of Europe.

In fairness to the Orange business, it has a way of investing in ideas and leading innovation for the European telecoms industry. It wanted to diversify into financial services, so it bought a bank. It wanted to drive home convergence, so started investing heavily in fibre. The smart home, security and energy services are on the horizon, once again proving Orange does not wait around for industry consensus before making its move.

Convergence is a trend which has now seemingly caught fire in the telecoms industry, with Orange arguably the most advanced telco strategically worldwide, but perhaps it should no-longer be considered innovative. Any telco with any sense is positioning themselves for a convergence play.

In the UK, BT is making the ‘Halo’ initiative the centrepiece of the consumer business, while Vodafone’s purchase of Liberty Global’s cable assets in Germany, Hungary, Romania and the Czech Republic sets the telco in the same direction. Convergence is not innovative anymore, it is something that telcos just have to do to stay relevant.

Looking at the Orange business, Fernandez said the telco now has 10.6 million convergence customers across Europe; 5.8 million in France, 3 million in Spain and the rest split across the remaining territories in Europe. Convergence customers now account for 40% of revenues across Europe.

Territory Revenue to Sept 2019 Convergence customers
Romania 813 million 227,000
Poland 1.9 million 1.3 million
Belgium 1.2 billion Unknown
Slovakia 409 million 77,000
Moldova 103 million 27,000

In terms of Group revenues during the last period, Orange reported growth of 0.8% to €10.57 billion for the third quarter, adding to €20.57 billion brought in over the first half. While financial growth might not be eye-watering, the foundations being laid through the convergence strategy offer excellent opportunities in the future.

After years of investing in both mobile and fixed networks across Europe, Orange’s fibre deployments are progressing very effectively, the connectivity foundation is sound. Few telcos can compete with Orange in terms of assets across the bloc, but the customer retention benefits of convergence are allowing Orange to explore new services. Security products are being launched, connected objects are being sold, banking is expanding, energy services are being played with and the team is investing in a smart home platform. Orange is making the evolution through to Digital Service Provider, built on the foundation of connectivity convergence.

While this is an enviable position, it is not one which can be created overnight. Orange has been investing towards the convergence strategy for years, and now other operators are playing catch-up. With results proven, perhaps we should stop talking about convergence as innovation, and just the way telcos should do business.

Verizon shakes things up with ‘Mix and Match’ bundling options

US operator group Verizon has unveiled a ‘Mix and Match’ offering as part of its drive towards service bundling.

While the monthly bill does still look to be very expensive, this is the US after all, it is a fair and reasonable attempt to drive disruption in the pricing area of the telco industry. Without sounding too bold, it could even be considered by some to be innovative.

“Customers have been loud and clear about their frustrations with cable, and we’ve listened,” said Frank Boulben, SVP of Consumer Marketing and Products at Verizon. “As a result, we’re transforming our approach to Internet and TV offers by giving customers more choices and more transparency.

“Customers are tired of having to buy a bundle with services they don’t want to get the best rates, and then discover that those rates didn’t include extra fees and surcharges. We’re putting an end to the traditional bundle contract and putting customers in control.”

Telcos are generally not the most innovative, but this looks to be an excellent idea from Verizon. The final bill might end up looking expensive in comparison, but there are few other options which offer this element of flexibility. It does look to be a rare example of an initiative which is customer centric.

Another element which will certainly interest some customers is this is a pay monthly contract with no fixed term. Customers can leave the service by simply giving a months’ notice, while there are bonus features for current mobile subscribers.

Current mobile subscribers will benefit from an additional $20 discount on the services per month. In addition, the same subscribers will be given a $10 discount towards their next device purchase for each month they are a ‘Mix and Match’ customer.

Bundling together various services, or convergence, is proving to be an increasingly common strategy around the world, though perhaps Verizon has more to gain that many. The telco has a monstrously large subscription base for its mobile business, and while it has a presence in fixed broadband, the scale is no-where similar. Cross-selling and offering discounts to the 93 million mobile subscribers is one way to drive the business forward.

2020: convergence, divestment, disappointment and political posturing

With 2020 drawing to a close, it’s only fair to have a look at how the industry has been shaped over the last few months, and what to expect in the build up to Mobile World Congress.

Although the headlines have been continually dominated by friction between the worlds’ two most dominant super-powers, there have been other trends to pay attention to. Here, we are going to dissect four of the trends we feel will make a mark over the coming months in the build up to Mobile World Congress in Barcelona, most notably:

  • Continued political posturing as decision day looms large
  • Convergence as the new status quo for telecom operators
  • 5G delivers, but delivers very poorly
  • Telcos gradually hand their fate over to the money men

The Huawei white-noise will reach deafening levels

2019 has been a year defined by political conflict. Almost everywhere you look there is collateral damage from more extreme and absolutist politicians wielding the power afforded to them by public vote (or not in some cases). The concept of tolerance and compromise almost seems to have disappeared as bullying tactics and misleading statements are the go-to plays in politics.

In the telecoms industry, this political friction has been concentrated to the fate of Huawei. Huawei is somewhat of a proxy, representing the rise of China’s influence in the technology world and a loosening grip from the US. Some might believe the US is acting as the champion of the world, countering the espionage threat of China through its telco champion, but a lack of evidence presented to the industry will always undermine these claims.

And while the continued barrage of political propaganda, from both sides might we add, was stuttering towards intolerable at times, perhaps we should brace ourselves for an onslaught in the New Year.

Italy has recently made noises about greenlighting Huawei, Germany’s incumbents are already reliant on the firm and soon enough someone in the UK will have to make a concrete decision regarding the Supply Chain Review. These are three very influential nations and could dictate the fate of Huawei throughout the rest of the European bloc.

But final decisions have not yet been made.

In each of these markets, the telcos are chomping at the bit to drive forward with 5G deployment, but without the certainty of a Huawei decision only stuttering progress can be made. If these national economies are to compete in the digital economy, scaled 5G networks will need to be present soon enough; a decision needs to be made.

If a decision is on the horizon, expect some hardcore lobbying over the next couple of weeks, especially as we build towards the annual bonanza in Barcelona. The Huawei noise is perfectly poised to reach deafening levels.

Convergence is King

The idea of convergence, the bundling together of products and services into a single bill, is not new but it is starting to gather momentum.

It does seem like we have been talking about it for years, though it is only today the telcos have finally aligned all the relevant pieces to make a competent offer. This is a strategy which is expensive to develop, but the rewards do appear to be significant.

What is worth noting is that there are telcos who bought into the trend very early and are reaping the benefits today, Orange is a prime example. This forward-looking telco has been building towards the convergence dream for years and now looks as far away from the commoditised business model as possible.

This is a business which should be envied. It has a solid mobile and fixed business, a banking brand, fingers in the content pies and is even starting to make headway in areas like consumer security. Convergence is one reason for this as it has driven loyalty and trust through creating products which people want to buy and at a price which is tolerable.

Convergence works both ways. For the consumer, bundling two services into the same bill is cheaper in the long-run, and for the telco, it reduces churn, increases ARPU and creates opportunity to sell additional services. Theoretically, everyone benefits.

More telcos are driving towards the convergence dream, though some are not. What may emerge in the future, is a two-tiered telco industry (although it arguably already exists today). At the top, you have the telcos who have embraced convergence early, and at the bottom, the pure-play companies who believe there is nothing to the hype.

Convergence works. And those companies who have ignored it, will be the also-rans of the telco community.

Be surprised if people are happy with 5G

5G will be a lot of things, and above all else, we suspect it will be a disappointment.

This might sound incredibly negative and counter-intuitive, but it is being realistic. Today’s consumer is demanding, impatient and cash-conscious. 5G has been launched by numerous parties across the world, though the geographical footprints of these networks are minimal.

Realistically, the telcos have done an excellent job in delivering 4G connectivity. In most advanced nations, coverage is almost guaranteed, unless you are a farmer. Unfortunately for the telcos, this experience will count against them as we push into the 5G era, as the consumer will expect the same. Few will have been educated to understand that emulated the scale of 4G in 5G will take years to achieve.

This is a challenge the telcos will have to address over the next couple of months. Consumers will have to be upgraded to 5G tariffs, but they will not want to pay anything extra, irrelevant of the geographical coverage. Telcos might well have to introduce a premium on these tariffs to raise the funds to continue deployment, as the efficiency gains of 5G connectivity over 4G are highly unlikely to be enough to fund the required investments.

Enterprise customers will of course provide a lot of stimulus for the industry to drive forward with 5G deployment, though everyone in the industry should brace themselves for an unhappy consumer as the sparse 5G connectivity gets negative reviews.

Money men start to erode telco influence in telco industry

2019 has already seen numerous money men get more actively involved in the telco industry but it looks like this is only the tip of the iceberg.

Goldman Sachs bought CityFibre, Elliott Management has been wrestling for control of Telecom Italia and Brooking Infrastructure is hoovering up assets throughout the industry. These are only a few examples, but the financial and investment industry is looking much more attentively at telecoms.

But why?

Firstly, the consumer is increasingly showing a willing to spend more money on connectivity services and products. This sounds strange, but more families are upgrading to fibre, more users are taking up unlimited mobile tariffs and more products are embedded with connectivity. The consumer appetite looks attractive to these companies.

Secondly, governments are setting in place the right policies to encourage investment in connectivity infrastructure. Red-tape is being removing, ransom rents are being killed off, access to public infrastructure is being opened-up and government subsidies are becoming more common place. Return on investment for communications infrastructure is looking much more achievable.

Thirdly, the enterprise segment looks like it will be a cash-bonanza in the future. Digital is finally embedding itself in industry as more companies realise that digital-first is the only way to survive. This opens up huge potential for telcos to make more money from assets which once laid have incredibly life-spans.

Finally, the telcos need cash. The digital dream is one which is very expensive, and these are companies which have taken a beating over the last decade. Despite the promise in the future, the telco industry is a difficult one to make profitable today. This presents a bargain opportunity for the money men to engage the telcos who are desperate for cash injections to drive through 5G and fibre deployments.

As we have said before, 2019 saw a lot more engagement from the financial and investment community, though this is likely to accelerate over the coming months.

Vodafone launches quad-play tariffs with Apple TV+

Vodafone has announced the launch of a new converged offer, bundling together its mobile and CityFibre-fuelled broadband services with a 12-month Apple TV+ subscription.

With convergence becoming the new industry norm it was only going to be a matter of time before Vodafone entered the fray. In fairness to the team, it does look like a very competitive offer, though the reception of Apple TV might go some way to dictate success.

“We’re giving customers unlimited mobile data, unlimited home broadband and now Apple TV 4K with Apple TV+ included for a year in one great package,” said Max Taylor, Consumer Director at Vodafone UK.

“Now our customers can use Vodafone’s game changing unlimited data to seamlessly stream content – whether they’re in the home, or out and about. With access to live TV, catch-up services, plus our choice of content partners we believe that our customers can get all the entertainment they want in one easy bundle from Vodafone.”

Vodafone UK has been in somewhat of an unusual position in recent years. After being the dominant mobile player in the UK, market share has fallen to as little as 19.8%, according to Ovum’s WCIS, some way off market leaders O2 and EE. The last few years have seen sizeable investments in the business, though CEO Nick Jeffrey recently said the business would now be a lot more aggressive in recapturing market share.

Convergence is a strategy which makes sense for both the consumer and the corporation. In some cases, it could mean fewer customers, but with increased ARPU, revenues can be maintained. Vodafone can afford to be smarter in the way in interacts with customers and more strategic in the way it pursues new subscriptions. On the other side of the coin, a bundled offer can mean cheaper bills for the customer.

This is where Vodafone could start to make progress; the tariffs do look very competitively priced.

Broadband Mobile
Deal 1 – £54/month 33 Mbps 10 Mbps
Deal 2 – £58/month 63 Mbps 10 Mbps
Deal 3 – £58/month 33 Mbps Fastest available
Deal 4 – £62/month 63 Mbps Fastest available

All of the deals are available with an Apple TV+ subscription for six accounts, a landline phone and the option to upgrade to additional content services for £6. Most customers will probably want more content than what is on offer for the additional £6, Now TV’s basic package is one of the options for example, though it is a very interesting and well-priced proposition to start with.

There are a couple of risks which will need to be well-managed in the first instance however.

On the mobile side, tiering the tariffs on speed limits is an interesting idea, but will have to be communicated effectively. Most customers will want the fastest speeds available without realising they do not need it, and Vodafone has not done much to date to educate the consumer on how much speed is actually required. Tiering on speed is a sensible approach, but it will fail unless Vodafone start the education process.

Secondly, Apple TV+ is a bit of an unknown so far. This will feature prominently in the advertising campaigns, but if the content does not live-up to the expectation, Vodafone’s convergence offer will not deliver on the potential.

Today’s world of connectivity is largely commoditised, therefore the content element of these convergence deals is the differentiator. If Apple TV+ is a dud, people will just go elsewhere. It doesn’t matter if it is free or not, if it is rubbish there is no appeal to the consumer.

The next six months are going to be very interesting in the UK’s connectivity market. BT has launched its own convergence offer, which does look attractive but has its own challenges. This is a company which still has two identities, BT and EE and is yet to make the renewed push into content. Both of these are significant challenges and convergence does not work without addressing them.

With Vodafone entering the market with its own convergence deal, two titans of European connectivity will be going head-to-head. What remains to be seen is the reaction of the other two telcos in the market; will O2 persist with the precarious pure-play mobile proposition and will Three be able to get the pricing right for the currently too expensive FWA services?

Virgin Media enters the 5G fight with Vodafone MVNO switch

Virgin Media has announced it will move its MVNO wholesale agreement from BT Enterprise to Vodafone, as the 5G engines start to rev.

Although the agreement with BT Enterprise does not expire until 2021, Virgin Media has said it will launch 5G services on Vodafone’s network ahead of this time. Virgin Media Business has also signed a wholesale agreement with Vodafone relating to the supply of various network services.

“This agreement with Vodafone will bring a host of fantastic benefits and experiences to our customers, including 5G services in the near future,” said Lutz Schüler, Virgin Media CEO.

“Twenty years ago, Virgin Mobile became the world’s first virtual operator and this new agreement builds on that heritage. It will open up a whole new world of opportunity for Virgin Media as we focus on becoming the most recommended brand for customers and bring our mobile and broadband connectivity closer together in one package for one price.”

While customer bundling has always been a prominent strategy for the Virgin Media business to increase customer loyalty, the mobile side has never genuinely attracted much interest in a UK market where MVNOs have traditionally played second fiddle. Pricing and bundling options have not been revealed as of yet, though with a prominent broadband business sitting alongside a refreshed content proposition, perhaps the Vodafone network might be the missing piece of the puzzle for mobile.

“We are delighted that Virgin has recognised the huge investments we’ve made, and continue to make, in building the UK’s best mobile network and our role in challenging the market with new commercial services,” said Nick Jeffery, Vodafone UK CEO. “As a result, they have chosen us to work with them in the next phase of their development.”

As it stands, Virgin Media currently has 5.6 million broadband subscribers, a 21% market share of the UK’s 26.6 million broadband connections. Project Lightning, Virgin Media’s fibre expansion initiative, will eventually pass 17 million residences, while ARPU for the broadband services has increased 0.5% to £45.39 for H1 2019. Prices are also set to rise by 4.9% on average for the remainder of the year to further grow ARPU.

Alongside the progress being made in broadband, the team has also refreshed its TV proposition. This was a pale imitation of content in bygone years, though partnerships with Sky, BT and Amazon Prime for football content could lead the TV services into the land of relevance.

This is a very healthy position to be in, however the share of mobile is much less attractive when you take into consideration how long the brand has been around. With 3.1 million mobile customers, Virgin Media’s MVNO only commands market share of 3.6%. This is the missing piece of the puzzle.

Mobile certainly presents an opportunity for Virgin Media to drive revenues forward, though the 5G world is becoming increasing congested. Alongside the four MNOs, Sky also plans to launch 5G services and we suspect there will be more in the pipeline. In a market with just over 84 million subscriptions to fight for, there will be a lot of choice.

Being a MVNO is not necessarily a perfect situation, though Virgin Media is in a good position. The convergence trend, bundling together services into a single bill, is a proven strategy to decrease customer churn and increase both ARPU and NPS. It might not have taken hold in the UK just yet, though there is plenty of evidence for the sceptics to mull over on the continent.

Investors scupper Sunrise expansion plans

Sunrise has cancelled an Extraordinary General Meeting (EGM) to secure acquisition funds to acquire UPC Switzerland after investors rejected the move.

Announced back in February, Liberty Global proudly proclaimed it had offloaded its Swiss business unit, UPC Switzerland, for $6.3 billion. At the time, the acquisition looked expensive, and it now appears the investors aren’t prepared to foot the bill.

“We regret cancelling the EGM,” said Peter Kurer, Chairman of the Board of Directors of Sunrise.

“We have spent a significant amount of time engaging with our shareholders and continue to believe in the compelling strategic and financial rationale of the acquisition.”

To fund the acquisition, Sunrise was attempting to force through a 2.8 billion franc rights issue, though this was opposed by Freenet, Sunrise’s biggest shareholder, as well as several other investors. With the opposition from such weighty investors, the writing was clearly on the wall for the Sunrise management team.

While the deal had already received regulatory approval, the usual stumbling block for consolidation in smaller markets, all the opposition arguments come back to the price of the acquisition.

For Sunrise, this was supposed to be a deal which would allow it to compete on a more level footing with market leader Swisscom. With UPC Switzerland introduced to the mix, Sunrise would have inherited mobile subscribers to boost market share, but also a fixed business unit which passes more than 50% of homes across Switzerland.

Theoretically, the inclusion of such assets would have enabled the business to create an attractive convergence model to challenge the leadership position of Swisscom, but it was too expensive.

Just to put things into perspective, the current market capitalisation of Sunrise is roughly $3.57 billion, less than half of the value of the acquisition. This is not necessarily unusual, though when you look at what is being acquired the numbers start to look a bit suspect.

UPC Switzerland has passed just over 2.35 million homes with its fixed network, roughly 50% of the country’s total households. It has 1.07 million broadband subscribers, and 1.04 million video customers, 599,400 of which are premium. The mobile business currently has 173,400 subscribers.

In the three-months ending June 30, revenues at UPC Switzerland stood at $315 million, a year-on-year decrease of 5.2%. The revenue dip was attributed to poor performance in the fixed business unit, though this might be down to decreased marketing activity as management team cast its eye towards the Sunrise transaction; it isn’t necessarily a dip to read into too much.

Investors clearly do not believe these numbers justify a cheque worth $6.3 billion. Just to put it into context, BT acquired EE for £12.5 billion in 2016 and inherited 30 million mobile subscribers at a very similar ARPU.

For Liberty Global, this would seem to be back to the drawing board. The team is attempting to reduce exposure in Europe, refocusing attention on South America, and this will be a disappointing outcome.

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.