Iliad revenue surges but device sales dampen the party

Disruptive French telco Iliad has reported 6.9% growth in consolidated revenues for the three months to March 31, but depressed device sales took some of the shine off.

While sales of fixed and mobile devices only brought in €45 million across the quarter, a 38.6% decrease in year-on-year sales would have bruised some egos. Reporting a 6.9% increase in consolidated revenues would certainly keep investors happy, but without the dent to device sales, Iliad executives would have been boasting about a 9.1% increase.

Still, few will complain with the performance of the business over the last three months, as share price increased 5.3% (12.30pm, May 12).

“All crises are revealing,” said CEO Thomas Reynaud. “And for our Group, this one has brought out the best in us, clearly showing the agility of our organization and the strength of our fundamentals.

“I have been particularly impressed by the commitment and drive of our employees who are working so hard to keep people connected. The crisis has strengthened the incredible spirit of solidarity which has always characterized Free.”

Iliad Group financial performance for three months to March 31 (Euro (€), millions)
Total Year-on-year
Consolidated revenues 1,382 6.9%
Service revenues 1,339 9.6%
Mobile ARPU 10.6 12.8%
Fixed ARPU 32 1.3%

Source: Iliad Investor Relations

As with many other telcos in Europe, Iliad is now searching for value outside its core competencies. This can be broken down to two main ventures, both of which are looking quite healthy.

Firstly, in pushing into the convergence business model in France with a FTTH proposition, Iliad is evolving to much more than a disruptive nuisance. The broadband network has now passed 15 million homes across France, adding 215,000 subscribers this quarter. The subscriber base now stands at 1.97 million, with the objective to have 4.5 million by the end of 2024.

The second venture is the launch of its own mobile network in Italy. This has proven to be a very successful bet, with Iliad providing plenty of disruption to the status quo. Revenues are growing in tough circumstances, while the team now has 5.8 million subscribers and market share of roughly 7.3%. The network currently has 2,936 active mobile sites, though this should be 5,000 by the end of the year and more than 10,000 by the end of 2024.

Although the COVID-19 pandemic is currently having a limited impact on the financial performance of Iliad, the team has warned of the operational consequence and the knock-on effect this would have. Like most of the telecoms industry, COVID-19 is not having a material impact, but the longer the lockdown persists, the more difficult it becomes to realise new revenues promised by vast expenditure.

O2 and Virgin Media are merging to form BT-busting connectivity giant

Telefónica and Liberty Global have confirmed plans to merge UK operations, O2 and Virgin Media, to challenge the connectivity market leader BT.

Since the end of the Supply Chain Review, the UK telecoms market has been relatively mundane, operating as one would largely expect, however this merger throws a cat amongst the pigeons. All of a sudden, the UK has become on the most interesting markets to watch, with the promise of a second convergence connectivity business to rival market leader BT.

“Combining O2’s number one mobile business with Virgin Media’s superfast broadband network and entertainment services will be a game-changer in the UK, at a time when demand for connectivity has never been greater or more critical,” said Telefónica CEO Jose Maria Alvarez-Pallete. “We are creating a strong competitor with significant scale and financial strength to invest in UK digital infrastructure and give millions of consumer, business and public sector customers more choice and value.”

“We couldn’t be more excited about this combination,” said Mike Fries, CEO of Liberty Global. “Virgin Media has redefined broadband and entertainment in the UK with lightning fast speeds and the most innovative video platform. And O2 is widely recognized as the most reliable and admired mobile operator in the UK, always putting the customer first. With Virgin Media and O2 together, the future of convergence is here today.”

Talks emerged earlier this week, though they certainly got to the official confirmation stage quicker than many were expecting.

As part of the agreement, a 50-50 joint venture will be created, with the promise to spend more than $10 billion on network development over the next five years. Synergies are expected to be as much as £6.2 billion, with 46 million subscribers, 15 million homes passed for broadband, 99% population coverage for mobile, 18,700 employees and £11 billion in revenue.

Full details on the deal can be found on a new website, proudly proclaiming the creation of a national digital champion.

This all sounds very promising, but when the merger is complete in mid-2021, which brand will survive?


What should a merged O2/Virgin Media company be called?

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“In the long run, we believe it would be better for the JV to retain the O2 brand at the expense of Virgin Media,” said Kester Mann of CCS Insight. “Both have a strong presence, but O2’s respected customer service, highly loyal customers and sponsorship of the O2 arena mean it is impossible to drop. A multi-brand approach serves only to duplicate costs and risks confusing customers.”

For convergence to work, there can only be one brand which survives. BT’s £12.5 billion of EE has arguably not paid off to date as the two brands still exist, effectively creating two separate business units inside the same group. There might be convergence benefits from an operational perspective, but to realise the gains from a customer and commercial angle, the businesses have to be fully consolidated and coherent.

BT has never really been able to take advantage of its assets. It has the largest mobile network, the largest broadband network, the largest public wifi footprint and the largest bank accounts to throw cash at content. Its inability to evolve into a convergence-defined business has opened the door for O2 and Virgin Media. But the question is whether the duo can learn from these mistakes.

Ultimately this is a major threat to the BT business, not because this is a combination which can potentially match the scale and depth of BT services, but these are also two currently healthy businesses which are coming together.

Financial Results for O2 and Virgin Media to March 31 (UK sterling (£), millions)
O2 Virgin Media
Total Year-on-year Total Year-on-year
Revenue 1,739 2.9% 1,266 -0.6%
Profit 516 2.4% 84 >1000%

Sources: Liberty Global Investor Relations and Telefonica Investor Relations

Usually, when mergers and acquisitions are discussed, one of the parties is a significantly stronger position than the other. It can still be good news, but there is plenty of work to do during the integration stages to ensure the new company is fighting fit. This is not the case with O2 and Virgin Media.

Virgin Media might have experienced a bit of a downturn over this three-month financial period, but this could likely be attributed to dampened customer acquisition amid the COVID-19 outbreak, while O2 has demonstrated year-on-year increases once again.

While these are healthy businesses right now, some might have suggested limited success in the convergence game would have caught up eventually. This is a very encouraging move forward, getting ahead of negative impacts, though a renewed assault on TV/content is needed. Neither, despite what Virgin Media claims, have done very well in this segment.

Current subscriber numbers for O2 and Virgin Media
Mobile Broadband Content
O2 35,266,217 29,085 *
Virgin Media 3,179,500 5,271,000 3,687,400

Source: Omdia World Information Series

*Too early to tell how successful the partnership with Disney+ to add a content element to O2 bundling has been

One area which should be allocated to the risk column, though it is a very minor risk, is the prospect of regulatory intervention.

“Unlike when O2 attempted to join forces with Three in 2015 but was blocked by the European Commission, I don’t expect there to be any major hurdles to this deal going through,” said Dan Howdle, consumer telecoms analyst at Cable.co.uk. “After all, with BT’s purchase of EE given the all-clear in 2016, it’s difficult to see how a case could be made to block it.”

These are both telecoms companies, but service overlap is minimal. Core competencies lie in different segments, and while there have been attempts to launch into parallels, success has been woeful. These are complementary companies with little material service overlap.

When considering whether competition authorities will be interested, you have to ask whether the merger would make single business units stronger or is the company stronger by association with parallel services. O2’s mobile business will not be enhanced materially by Virgin Media’s MVNO proposition, and Virgin Media will not benefit from O2 at all in the fixed connectivity game. There does not seem to be any case for objection on the grounds of competition.

Aside from the direct impact for both Virgin Media and O2, the rest of the market could be spurred into action.

“Vodafone UK appears the biggest loser as the deal lays bare its weak position in the market for converged services,” said CCS Insight’s Mann. “It also looks certain to scupper its virtual network partnership struck with Virgin Media in 2019. We think this deal will trigger a ripple effect on the UK market: Vodafone, Three, Sky and TalkTalk will all be assessing their positions and further deal-making can’t be ruled out.”

This is a challenge to the industry and will create a rival to BT in mobile, broadband, convergence and enterprise. However, it is also worth remembering the ‘also rans’.

Unless the ambitions of rivals are inspired by this threat, the prospect of a tiered connectivity industry could emerge, with those offering bundled services on top and the pureplay service providers on the bottom.

The UK has quickly become one of the worlds’ most interesting telecoms markets, thanks to the permutations which could be inspired by this merger.

Tier One Tier Two Tier Three
  • BT (mobile, broadband, content)
  • O2/Virgin Media (mobile, broadband)
  • Sky (content and broadband)
  • Vodafone (mobile and broadband)
  • TalkTalk (broadband)
  • Three (mobile)
  • MVNOs
  • Alt-nets

Verizon adds Google’s Stadia to Fios bundling options

The Verizon Fios bundling initiative is starting to look like an attractive proposition, and now it has added Google’s cloud gaming offer for an additional twist.

Launched in January, the mix and match offer looked like a sound attempt to boost broadband sales through bundling. There were several interesting elements, including the ability to pick-up and drop certain elements on a month-by-month basis, though adding a gaming segment will make the offer attractive to a small niche of US society.

The mix and match proposition is not a silver bullet for profitability, but more an incremental gain approach to building a comprehensive bundling offer. Each additional element will make the offer attractive to an additional sliver of the population. It’s a gradual and sustainable approach to take the company forward.

As part of the partnership with Google, new customers will receive a free Stadia Controller and Google Chromecast Ultra, as well as a Stadia Pro subscription for first 3 months, which will then cost $9.99 a month. Bundling in with a Fios Gigabit broadband service, Verizon is promising download and upload speeds up to 940 and 880 Mbps respectively, it could be attractive to the growing community of gaming enthusiasts.

According to analyst firm Newzoo, North America is second-largest region for gaming in terms of revenues, accounting for $39.6 billion, while the US is forecast to overtake China as the world’s number one individual market. And while mobile gaming is the largest segment currently, cloud gaming platforms are forecast for a surge in growth over the next few years.

The cloud gaming trends are driven by two elements. Firstly, the availability of platforms and the aggressive nature the providers, such as Google and Microsoft, expanding services. Secondly, the rollout of full-fibre networks and imminent adoption of 5G connectivity will ensure providers are able to deliver the promised experience to consumers.

The days of pure play telcos are drawing to a close very quickly. The attitudes commoditising data and the continuing decline in data prices will erode profitability of connectivity, meaning additional revenues will have to be sought elsewhere to increase (or maintain) ARPU. Another element to consider is the attractiveness of offers.

Numerous telcos are attempting to create convergence connectivity products as well as building on additional added value services such as security, gaming or entertainment options. Consumers are seemingly open to bundled contracts, meaning pure play telcos might become less competitive in comparison to some.

What Verizon is currently building might not revolutionise the financial spreadsheets overnight, but it is slowly developing a very attractive bundling service. Orange has validated the convergence business model in Europe, though this took years to create, and it now seems Verizon is getting a run on the market in the US.

TIM secures exclusive Disney+ deal in Italy

Telecom Italia has been announced as the exclusive partner for Disney+ in the country, with services set to be launched on March 24.

With the content and connectivity worlds becoming increasingly intertwined, telcos who are not able to offer a TV service within a bundle might look less attractive. This is the theory, which still needs to be genuinely ratified, though bundling content into connectivity packages is certainly not going to do any harm. With Disney+, Telecom Italia (TIM) has found a very attractive partner.

“We are proud that Disney has chosen TIM as its strategic partner in Italy,” said CEO Luigi Gubitosi. “This agreement comes within the strategy adopted by TIM to pursue alliances with major international players in various segments, to offer cutting-edge products and services.

“Adding Disney+ gives a major boost to the strategy of TIMVision as Italy’s leading aggregator of premium content in the Italian TV industry, in a context where convergence between telecommunications and content will play an increasingly key role in the group’s future, thanks to the development of ultrabroadband and 5G.”

Available across all devices, the TIMVision content platform does look to be an attractive proposition. While some telcos have chosen to secure fortunes through owning content rights, TIM has gone the more steadfast, and perhaps more sensible, direction of becoming a content aggregator. In fairness to TIM, it has done a pretty good job in creating a decent offer, one which will only be enhanced by Disney+ content.

Although Disney has been quite quiet over the last few weeks, it did proclaim during the earnings call that Disney+ had secured 28 million subscriptions in the first six weeks. Perhaps more impressive, is these numbers are only representative of the US market.

Outside the US, streaming video on-demand (SVoD) services have been gathering momentum. Uptake has not been on the same aggressive scale everywhere compared to the US, though bundling content packages in with local connectivity service providers has been a successful venture for Netflix to date. Taking these lessons to heart, Disney is targeting Italy with TIM, has partnered with Sky in the UK and Verizon in the US.

Sky grabs lucrative Disney+ partnership in UK

Partnerships are increasingly becoming the new way to do content in the telco world and Sky has landed what could be an attractive deal with Disney+.

With connectivity and content becoming increasingly entwined as the convergence business model becomes the norm, partnerships with the US streaming giants are very valuable assets. Sky has already inked a relationship with Netflix, even going as far as to embed the service in its content platform but adding Disney+ to the mix is another feather in the cap of the UK’s premium content leader.

“We’ve built a strong partnership with Disney over three decades and we’re pleased that our customers in the UK and Ireland can continue to enjoy their world-class content – all in one place on Sky Q,” said Jeremy Darroch, Group CEO at Sky.

“This is a great start to what is set to be another stellar year for Sky – in 2020 we’ll launch new channels and genres, start building Sky Studios Elstree and we’ve got brilliant new and returning originals coming too.”

If the mission is to have all the best content in a single window, Sky is looking like it is doing a very effective job. Sky already has some very attractive content, but with Netflix and Disney+ to bolster the offering, it seems few will be able to compete in a market which is becoming increasingly congested.

“Ultimately, the arrival of another service further fragments the market for consumers,” said Paolo Pescatore of PP Foresight. “There are too many video streaming services chasing too few dosh. It is becoming more important to be able to access all of these and future services on one TV platform. Here lies the killer feature, universal access!”

But while this is a win for Sky, Pescatore still thinks there is opportunity for a mobile player to cash in at some point.

“This partnership suggests an exclusive deal for a UK provider is still up for grabs. Highly likely that a mobile operator will secure this, mirroring Disney’s strategy in the US. Therefore, EE looks to be in prime position given its track record in securing key premium content partnerships. Disney brings the most sought-after breath of premium programming for all genres.”

Over in the US, Disney+ has proven to be an incredibly popular service. During the most recent earnings call for the Walt Disney Company, the team boasted of 26.5 million paid subscriptions, averaging $5.56 a month. These numbers were accurate to December 28, and considering the aggressive expansion plans, we expect these numbers to be considerably higher come the next earnings call in May.

What is always worth remembering is that these partnerships work both ways; Disney has as much, if not more, to gain.

For Sky, Disney adds depth to a content offering which is already market leading. It is a move to consolidate the position and add more stickiness to the service. It also allows Sky to add more value to connectivity offerings. It sounds like Sky is getting a lot, but then you have to consider what the opportunity is for Disney.

Disney has an excellent brand in the UK, though it will struggle to go head-to-head with the trusted proposition which is Netflix. Through this partnership, Disney leans on the existing customer relationships with Sky to gain a direct link, its existing billing relationship and exposure through an embedded tab on the platform. These elements, plus the marketing dollars which Sky will push towards the launch, will give Disney the best possible start in the UK.

BT finally unveils its reimagined TV proposition

The aggregator model has taken centre-stage at BT, leveraging its existing capabilities instead of trying to beat the content industry at its own game.

Under Gavin Patterson, BT tried to do something which almost looked impossible. It attempted to disrupt the content industry by not only owning the delivery model for content, but the content itself. It attempted to muscle into an established segment and compete with companies which were built for the content world. It was expensive, complicated and messy, and it failed spectacularly.

BT has not given up on content under new leadership, but it is taking a seemingly more pragmatic and strategic approach. Aside from its own content, Now TV will also be embedded in the BT interface, meaning that customers can now watch, pause, rewind and record premium Sky Entertainment and Sky Sports content. Customers will also be able to integrate Amazon Prime Video and Netflix onto their BT bill, while each element of the bundle can be scaled-up or -down month-by-month.

It is making best use of its assets, and it looks to be a comprehensive and sensible pillar of the convergence strategy.

“Life doesn’t stand still from month to month, so we don’t believe our customers’ TV should either. Our new range of TV packs bring together the best premium services, fully loaded with a wide range of award-winning shows, the best live sports in stunning 4K and the latest must-see films – all with the flexibility to change packs every month – with  quick and easy search to find what you want to watch,” said Marc Allera, CEO of BT’s Consumer division.

BT will ‘own’ some content, it still has the UEFA Champions League broadcast rights after all, but it is picking its battles. The BT TV proposition failed in years gone because it tried to go it alone, but without the broad range of content genres, it looked like a poor attempt to compete with the likes of Sky. In reality, it didn’t need to.

The telcos have a significant advantage over many content companies around the world; they have an existing and trusted billing relationship with the customer. According to the Ovum World Information Series, EE has 30.6 million mobile subscribers and BT has 9.1 million broadband customers. These relationships can be leveraged through the partnership model to realise new profits in a low-risk manner.

BT is in a position of strength. The streaming wars are raging, and the service providers will do almost anything to gain the attention of the consumer, as well as build credibility in the brand. By bundling services into the BT, the OTTs are leveraging the trust which the customer has in the telco billing relationship and gaining eyeballs on the service itself. All they have to do is offer BT a small slice of the profits.

This is the symbiotic relationship in practice. The OTTs gain traction with customers, while BT can complete the convergence objective in a low-risk manner through the aggregator model.

That said, it is somewhat of a retreat from its previous content ambitions.

“This well long overdue move feels like a last-ditch effort to be successful in TV,” said Paolo Pescatore, founder of PP Foresight.

“Aggregation is the holy grail. BT has done a superb job of introducing some novel features and bringing together key services all in one place. This will strongly resonate with users. However, it is unlikely to pose a considerable threat to Sky who in turn will be able to bundle BT Sport into its own packages. In the future expect this new TV platform to be bundled with BT Halo which will further strengthen its premium convergent offering.”

Convergence is a strategy which should be fully embraced by the BT business. Not only has it been proven in other European markets, see Orange in France and Spain, but the depth and breadth of BT’s assets should position it as a clear market leader. With mobile, broadband, public wifi hotspots and content tied into a single bill, as well as partnerships to bolster the experience, BT is heading down the right path. If it can start to build service products on top, such as security, this could start to look like a very competent digital business.

The issue which remains is one of price. The Halo bundle is one few can compete with, but if it is not priced correctly it will not be a success. This does seem to be the issue with the BT consumer business right now, it is pricing itself out of the competition. Convergence is attractive to customers when it is convenient and makes financial sense, but right now it doesn’t seem to.

BT is slowly heading in the right direction. It might have taken years, but it is slowly creating a proposition for the consumer which few should theoretically be able to compete with. If it can merge the business into a single brand and sort out the pricing of its products, it should recapture the market leader position.

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.