700Mz spectrum valuations - II

Well, its official. Verizon is the biggest winner of the 700MHz spectrum auction with AT&T coming close second. And it should be a disappointment for all those Google fans out there as the company failed to win any spectrum (Well, is this really a disappointment ? The Open Access guidelines as Google wanted still stay !! Lets keep the analysis part for later). The Auction netted around US$19.5 Bn to the governments kitty, a tad short of the expected US$20 Bn. Although the auction lasted for more than 50 days, nothing much happened the whole of last month with the bids just about coming in at base levels to keep the auction alive - this is quite understandable as the bidders may want to evaluate and reevaluate their options.

Let us take a closer look at what was on platter. A Total of 62 MHz was up for grabs during the auction with 22MHz for C-Block(12 regional licences) which came with open access rules. The D Block, a nationwide licence comprised of 10MHz but again it was paired with public safety deployment guidelines. The Rest of the blocks A,B & E made up the rest 30MHz of spectrum and mostly made up of licences for regional/local areas. So who wins what ?

• Again i cannot help but start with the C Block where Verizon has won 7 of the 12 licences. It might have been a intentional strategy by Verizon not to bid for the rest 5 licences as it mostly comprised of "not-so-attractive" markets like Puerto rico, Alaska, American samoa etc.
• It was never AT&T's strategy to aggressively bid in the auction, thanks mainly to the acquisition of Aloha Partners where it got more than 10MHz of spectrum in this band. It was however a big winner for the B Block auction where it won small regional licences. It will surely use these licences to complement the spectrum it already possesses in this band and extend the service coverage.
• So the auction for C Block must have been a two horse race between Google & Verizon. Google as originally committed would have quit the auction at reserve price leaving the next highest bid(that of Verizon) to win that block. The Fact that the coveted C-Block got sold at just above reserve price will definitely come as a disappointment to FCC.
• However,the disappointment on the face of auction was the D-Block spectrum where the bids fell much much lower than the reserve price. The FCC has now officially delinked D-Block from the auction and it is still unclear what it is going to do with the spectrum. Frontline Wireless & Qualcomm were the main bidders in this hallowed block, and I still cannot figure out the business rationale behind Qualcomm bidding for this Public Safety block.
• And if you thought that the auction will throw up new nationwide operators then you ought to be disappointed. Apart from Chevron, which won a regional licence, there were hardly any new faces in the winners column.
• Everyone believed that this auction would present the cable operators with their best chance of entering the wireless space. But "Everyone" were proved wrong. None of the cable operators apart from COX (which again was limited to regional presence) had anything to show for after the auction.
• Believers of the "third" pipe who were expecting that the auction will open up a third pipe (after mobile & DSL/wireline) into people's homes were doing only that, continue to "believe" after the results were officially declared.
• Echostar, a DBS powerhouse is the next big winner after Verizon and AT&T at the auction but it is still not clear how the company plans to use those licences. Will it convince an existing operator (T Mobile ???) for a tieup or will some cable operator (who has missed out on the spectrum during the auction) be a probable partner.

So, how will the eventual scenario shape up ? People may believe that Google after lobbying successfully for open access with FCC, is still a winner but i believe that with Verizon holding the spectrum that matters, Google may have to lobby doubly harder to ensure FCC pushes Verizon to strictly implement open access. Verizon on its part will continue over-selling devices in normal spectrum and underselling those that fall under open access. You can control and govern what applications ride my networks but you cannot control the way I market or sell stuff and do my business. Keeping this whole "open access" thing aside, I still have a huge committed shareholder base to whom I'm answerable. This is surely a huge disappointment to the likes of Skype, Google etc. Remember, there are still no working manuals & guidelines to tell Verizon what exactly comprises open access. If i were Google and if i was knowing that Verizon is walking away with a piece of spectrum that forms an integral part of my strategic growth path then i would certainly have got aggressive at the auction (considering the kind of financial backing that Google has) and would have bid above the originally committed bidding at reserve price.

But where were the cable guys ? Did the Pivot tie up with Sprint change their minds? Are they evaluating other options like WiMAX? The Response of the Cable lobby certainly leaves everyone disappointed including the FCC. It may have been one of the main reasons why 700 MHz didn't fetch what it should(leaving reasons like Economic slowdown aside). Sprint distanced itself from the auction citing enough spectrum availability to cater to its strategic requirements. T Mobile has presently got its interests laid elsewhere in FMC & UMA. Verizon turned "open", just days before the start of 700 MHz auction and I'm really sorry that I'm having to say this, but it may have entered(and won) the auction to block competition and entry of new operators in the wireless space thereby threatening its oligopoly. Kevin Martin, the chairman of FCC may declare the auction as a resounding success but if fetching money was his reason to celebrate then he deserves all the kudos and celebrations. Keeping the monetary aspect aside, the auction in its true sense is well and truly a failure. The fact that out of the $19.5 Bn that has been garnered from the auction, around $16Bn will be paid by Verizon & AT&T doesn't sound healthy at all. The Digital TV switchover is expected to be completed by the start of 2009 and the spectrum should be ready by February 2009, by which time we should have some clarity on the plans of Verizon. But at the moment, the consumer is left high and dry, contemplating "Competition ?? What Competition ??"

As with the rest of my posts, only time knows the future.

Under Sea "Unity"

Initially penned the introduction to this article by explaining the concept of Super Profit. But later refrained because i didnt want to get labelled as a cycle freak (by all those hype cycle fans from one of my previous articles). So let me give it a modest start. After months of rumours and denials, it was out last month. Google has joined a consortium of Asian companies, Bharti Airtel, Global Transit, KDDI Corporation, Pacnet, and SingTel, to build an undersea fiber optic cable between the United States and Japan. This Move obviously raises the question of whether this is part of the "tightening clutches" strategy against wireless & bandwidth providers including ISP's around the world.

Till date google has denied the suggestion that it is entering the wholesale bandwidth business. As more & more users try google search or watch videos on youtube, it surely makes sense for google to try a more scalable solution that meets its future requirements. According to some estimates, the bandwidth rates in transpacific are atleast 8-10 times of those in trans atlantic. Under such a scenario, google had no other choice but to scout for solutions which scale. Owning a fiber will take care of its bandwidth requirements in the long term. This would also help google stay ahead of the evolving broadband scenario in Asia. What google is hard pressing after this move is that it is not competing with telecom operators but, a lot of time & efforts are being put-in to ensure that it's not entirely relying on them either.

So why and how did i relate this situation to the concept of super profit ? The Transpacific route of under sea fiber is unique in many ways. As already mentioned, the cost of bandwidth on this route is many times higher than those in the Transatlantic route. The Dynamics of the business in this region are also distinctly different. Most of the fibers in this route are owned and operated by national incumbent operators who have learned from the mistakes committed by telecom operators during the atlantic fiber boom & bust. This means that prices dont drop (atleast not in line with traffic growth), so the more bandwidth google needs, to cater to its increased traffic demand, the more revenues it brings to these incumbents. Google now has solved this by joining a club of submarine fiber owners and not having to worry anymore about the cost of a megabit/s. So whats on platter for the operators on this route. This is definitely bad news for VSNL (now Tata Communications). VSNL was already a dominant operator along this route owning large chunks of bandwidth in SMW-2,3,4, Safe, Flag & TIISC. Flag Telecom has now been bought by Reliance but VSNL still holds both the Indian landing rights and around 20Gb on the cable system. Acquisition of Tyco Global Network made it the dominant bandwidth operator with no operator even close half the bandwidth what VSNL held in this region. The Only geography that it didnt cover through its fiber network after the acquisition of TGN was between Singapore & Japan. To Cover this geography, VSNL leased a fiber pair from Asia Netcom from Singapore to Japan. Enterprises have been complaining for a longtime to industry bodies & regulators about the high costs of bandwidth in this region. Things had to change sometime and it was just a matter of when. Google's entry in this space is a welcome competition(and thereby reduced prices), something that enterprises have been longing for. It is almost certain that google will tie-up with another operator for backhaul redundancy (of Unity) and i dont see that operator being VSNL(thanks to the lost goodwill). Reliance's Flag Telecom is the most probable operator that google will ink a deal with for the backhaul connectivity. Times sure look tough for VSNL, with the recent multifold drop in profits (the magntitude of which is unheard of in the present Indian telecom scenario), this was surely not the news it was hoping to hear.

So, what other options did google have ? It could have sat back and have watched competition grow in this market thereby take advantage of the bloodbath (a la atlantic scenario). But this scenario wasnt developing. So it had to somehow trigger this scenario and Unity, in many ways is the perfect trigger. Under the circumstances, continual leasing of STM-1's, STM-4's & STM-16's from operators was not a scalable solution for google. Google, in many ways believes that its bandwidth requirements have exceeded the ability of what the traditional players can offer, so having a fiber which exclusively caters to its requirements isnt that bad an idea.

Many people believe that this is a start of a trend because there are many companies out there just waiting for bandwidth prices to fall through natural means but never ever evaluated the option investing in a under sea fiber. With google's lead, they may start looking at this option. The only other operator, i believe which may (must and should) follow google's example is Microsoft. With its NOC in Singapore, and significant investments around Asia & Europe, a stake in a fiber consortium aint that bad an idea for Microsoft. But apart from Microsoft I dont see any other operator following google's example. One must remember that it is not all free lunch after investing in a under sea fiber. There will be a significant ongoing cost, for fiber maintenance which is more than 5% (per annum) of the original cable investment. Apart from this there is also an unpredictable aspect of fiber getting cut ot sliced that has to be addressed. Considering all these, i believe only google and microsoft have the kind of scale to derive any sort of advantages out of owning an exclusive under sea fiber.

Divide and Rule....... Literally !!

After defending quite a few comments from people about being excessively biased towards Western Markets in most of my articles, i thought its high time i pen down my thoughts on markets much closer to home. And where better to start than the world's biggest telecom market, the Chinese Wireless market. The Market is abuzz with news of a major restructuring, a long overdue one. The MII says that a restructuring would help the industry sustain its high growth rates but the reasons behind such a restructuring tell a different story.

• The Chinese market has been trailing its Indian peers since quite some time now in net subscriber additions and although the penetration numbers of china are higher than those of India, but this doesnot completely explain the fall in net subscriber additions.
• In India, competition & huge FDI inflows are the main reason behind falling call rates, something that china with the present industry structure is not able to enjoy.
• Although, the government holds stake in all the operators, China Mobile with more than 80% of the wireless market share is creating a monopolistic market situation controlling both the technology that enters the market and the prices that customer have to pay.
• With Technology, China Mobile is single handedly blocking innovation from entering the market. One recent example is that of Apple when it had no other option but to approach China Mobile(with more than 80% market share) for the introduction of iPhone. Talks hit a deadlock (followed by Apple withdrawing its proposal)because both the operators could not finalize on a revenue share formula.
• Continuing the trend which is affecting its Asian & European peers, state owned fixed line operators like China Telecom & China Netcom are bleeding profusely because of declining fixed line numbers and Fixed Mobile Substitution.
• Issue of 3G licences under the present market scenario will hand China Mobile (with its huge network) an un due advantage over an already weak competition.

So what does this whole restructuring thing place on the platter ?? The scapegoat as per many internal industry sources is China's No.2 mobile operator China Unicom which has investments in both GSM & CDMA technologies. The Chinese Government hopes that post restructuring, there will be 3-4 operators with substantial investments in both fixedline and mobile operations. The Plan is that the two fixed line operators will get one each of China Unicom's GSM & CDMA assets and the talk is already in the air that No.1 operator China Telecom is going to take control of the CDMA assets with the No.2 China Netcom bagging the GSM network. China Railcom, another small fixed line operator will get integrated into China Mobile. This would create 3 major companies viz., China Mobile, China Telecom, China Netcom capable of producing both fixed and landline services.

From a foreign investor point of view, the shareholders of vodafone(with around 3% stake in China Mobile) should take this as negative news. The entire restructuring thing does post significant threat to the existing market share of China Mobile. It is still not clear what happens to the stake that SK telecom holds in Unicom. Under the circumstances, the best it can do is to lobby for a stake in China Telecom(thereby leveraging on its worldwide CDMA economies) in return for its stake in Unicom. The Winner undoubtedly is Telefonica with almost 8% share in China Netcom. Post restructuring, it is getting access to Unicom's GSM assets (with GSM being its worldwide choice of technology). It significantly raised its stake in Netcom just months before the news of market restructuring broke out.

So is restructuring a rational thing to do or is there another way out for the MII. Considering the present circumstances, where the focus is on increasing the competition, the better option would have been to break up China Mobile into 3 independent entities (a la AT&T style) and amalgamating them into each of China Telecom, China Netcom & China Railcom rather than merging the assets of an existing operator into other existing companies. Breaking up of China Mobile would have a four fold advantage to the chinese government

• Post the breaking up of China Mobile, the chinese telecom ecosystem will have multiple operators having extensive experience in managing wireless operations. This would also ensure that all the operators have significant market shares. The idea is better compared to the MII's proposed restructuring plan, because after the restructuring, the only operator with a meaningful background of managing wireless assets (Unicom) will be bifurcated and sold off to entities with completely different knowledge base and expertise.
• Through multiple entities, chinese government can attract a lot of foreign investments into the wireless space although this point of view may be debatable considering the chinese government's disinterest in allowing large foreign investment into the telecom industry.
• Competition will also ensure innovation in the telecom market, something which China desperately needs before the Beijing Olympics.
• Although, the presence many competitors will help reduce the prices and break the prevailing monopolistic scenario, a bigger advantage will be in terms on higher prices during the auction of 3G spectrum & licenses, if and when they happen.

The Chinese MII, got it right when it recognized the need for restructuring the telecom industry to maintain/sustain its long term growth. A bigger challenge will be to recognize the priorities and breaking up of China Mobile does fulfil most of the medium to long term priorities.

You are OK, I am OK !!!!

Was Initially a bit apprehensive about writing an article on WiMAX because of the sheer number of WiMAX experts around me but somehow gathered courage to air my views on it. Few years ago sometime during the dotcom boom, Gartner coined a terminology, "Hype Cycle" to explain the over-enthusiasm and the following disappointment that typically occurs with new technologies. The 5 phases of the Hype Cycle starts with technology breakthrough followed by over inflated expectations of the technology and then a period of disillusionment, where the technology & the user expectations synchronize which lead to further experimentation into the practical applications of the technology and finally the last phase of the hype cycle where the benefits of technology become widely accepted.

If WiMAX, as a technology were to be mapped to the Hype Cycle, my guess is that it would be firmly entrenched in the third phase, the period of disillusionment. It was all good news on WiMAX front, until the poster boys of WiMAX vendors worldwide, Sprint & Clearwire decided to call off their venture due to complexities in the partnership but i believe the problems started after a "WiMAX friendly" sprint CEO quit owing to investor pressures. This was followed by good news on two fronts for WiMAX. First, it being categorised as a 3G technology (Is it actually good news ?? Were'nt they targeting 4G) and the auction of 700 MHz spectrum.

But Sprint's problems continued and they still persist. Last week in its Quarterly results, Sprint reported a loss of over 29Bn dollars and it also revised downward its guidance for next few quarters and asked its investors not to expect any dividends in the foreseeable future. Although this was attributed to goodwill write-off's following Nextel purchase. But i believe, the reasons behind the loss are far more complex. On one side, Sprint is failing to stem the subscriber churn(mostly in the high ARPU postpaid segment), on the other it has already committed huge sums of cash for WiMAX deployment. It is yet to fully start realizing the synergies out of Nextel merger and the competition is one-up over sprint when it comes to understanding the market. Recently, almost all major operators introduced unlimited Voice, text and Data for $99 and this idea as per some industry sources was sprint's brainchild (Sprint was the last among the "big 4" to launch the unlimited "Simply Everything" plan behind AT&T, Verizon & T-Mobile). Last year the vendors committed dual CDMA/WiMAX phones in the market by early 2008 but there is not much news on that front yet. All this apart, WiMAX's main competitor LTE is capturing a lot of news space lately with successes in its latest round of trails. It is continuously adding Service providers across the world in its "backers" list and the fact that it represents a more natural evolution from 3G to 4G is helping its cause multi-fold. Although WiMAX will have the time to market advantage over LTE, delays in certifications by WiMAX forum coupled with network rollout delays will substantially narrow its Window of opportunity.

Although the need of the hour is a clean-up of its core Wireless business, i believe the future success of sprint almost solely rests on its WiMAX investment. What kind of Business risk is the company embracing when all eggs are put in a single basket ?? Clearwire on its part sensed trouble early and moved out of the JV. Clearwire is more a small and niche company and i believe a move out of the JV will actually help Clearwire in terms of financing from the major equipment vendors for WiMAX deployment although there is a talk that it has massively reduced the number of PoP's that originally committed to deploy during the initial phase. The WiMAX vendor trio of Intel, Motorola & Samsung have till date projected a very rosy picture of the technology but problems like high Capex, delays in certifications by the WiMAX forum and lack of interoperability with existing handsets is for everyone to see. What these vendors have to understand is whether real or perceived the future of WiMAX still rests heavily in Sprint's hands . Yes, WiMAX can and will survive without Sprint but at an entirely different level. Sprint was exactly what WiMAX needed when the technology was still in its initial phases back in 2006 and i don't think situation has changed much since then.