One Store Too Many

Its been months since I last wrote something and what an uneventful few months it has been, with not much happening in the Indian Telecom scene thanks to the general elections. The International scene is equally dry. Barring the broadband stimulus package announced by the Obama administration, there has been not been much news which can be analyzed with great interest. But what has now become almost boringly predictable is the opening of app stores by every vendor and off late, every carrier, regardless of the size.

Mobile applications have been around for more than half a decade - a concept championed by apple. The volumes, however started building up only since the last couple of years and most, if not all of the credit for this goes to the smart phones. The Apple iPhone’s & the appstore success has transformed the mobile industry. In multiple industry shows, handset manufacturers enmasse started announcing their intentions to offer multimedia handsets and complementary app stores to rival the iPhone juggernaut. The launches are justifiable. Despite having smart phones on the market for years, Nokia, RIM, Palm and Windows have struggled to garner the kind of momentum that Apple achieved behind its flagship device - the iPhone, and its app store. Apple stands to generate revenue beyond just hardware sales as it earns around 30 percent for each paid application purchased. With more than 1 billion paid and free applications downloaded in just nine months, Apple’s competitors recognized this continued revenue opportunity post hardware purchase.

Given all the hoopla around app stores the carriers who always hated being dictated by OS makers, but could do nothing about it, started making noise that they will soon join the fray. The operators recognise this opportunity as a natural evolution for their product cycles. With plump customer base (customers are more familiar with carrier brand than an Ovi Store or Android Marketplace) and unbarred network access, they are in naturally advantageous position. Already there is a talk that operators will differentiate their offerings by providing only certified content and giving customers an option to test the app before making them pay for using the full version. This really for them as some say, a mechanism to turnaround their dumb pipes.

But with so many stake holders endorsing the concept, are the app stores too big to fail? Well the concept itself will not fail but most of its believers will. From fashion to home automation to games, almost everyone is getting into apps. The key concern is many players are entering the app business more to ride the hype without understanding what the consumer wants and what resources are needed to manage this business. In short there are more players out there who are getting into a business they know little about. Being successful in this business requires scale, a global reach, a deep product catalog and a seamless way to deliver content to consumers quickly and cheaply. Only specialists and those who partner the specialists will eventually survive in this ecosystem. So all those developer conferences apart, a trend will emerge where developers will side with a fewer more serious set of big players citing scales and cost efficiency, throttling the smaller less serious ones to death.

Here & Abroad

Who ever said life in a tourist destination is all comfortable, needs to look no farther than my schedule. Expectations from a break from life in India was soon short lived when reality dawned upon me that it is still the very same people who drive the industry here as well. Sometimes you wonder where the slowdown really is - except a sizeable cut in the pay cheque and lost time with family, no where else has slowdown affected us Asians. If there has been any better demonstration of the century belonging to Asia, the resilience with which it has tackled slowdown has to be one among those. The bears have been overwhelmed by the bulls as far as telecom is concerned - the latest to add to the bull power is the news that India has just clocked 50% more net subscriber additions than ever achieved (15Mn users-month on month).

Reliance with its nationwide GSM launch added close to double the customers added by Bharti for the month of January 2009. After months of finishing distant second to Bharti in subscriber additions, Reliance looked like a company on steroids adding close to 5Mn users in one month. It is a mad rush at the moment with the core focus for the current set of players lying on customer acquisition alone, before the new ones enter the market. The new ones on their part are focused on increased liaisoning for faster network roll out. With teledensity close to 35%, and policies for MVNO & Number portability in the pipeline, more such "15Mn" months cannot be ruled out. With general elections round the corner, 3G auctions may still take a while to kickoff and the initial acceptance of 3G services from BSNL & MTNL may be limited as both control less than 9% of the total market. But with increased delays in 3G auctions, government will also be expecting an proportionate increase in specturm valuations. With the current economic scenario and limited interest from foreign operators, the government on its part would be satisfied if the total revenues raised through the auction is adequate to cover the network roll out CAPEX for the Defense forces.

The situation in the other side of the globe is in stark contrast to its asian peers. With consumer spending taking a massive hit, most network operators are struggling to find capital to fulfill rollout commitments. Operator focus has gone back to value offering thereby avoiding the "nice-to-have's". But telecom is in a much better position to face the crisis than many other sectors like manufacturing or financial services because it was already on a robust growth path before the downturn. Going into this period of turmoil telecoms were in fantastic shape. To an extent, credit should also go to telecom slowdown in 2000. The bursting of the telecom bubble in early 2000 prompted the established players to retrench and have made themselves quite solid. Integrated operators with both fixed-line and mobile products are best poised to come out unscathed as they have a resilient business model and have the capability to offer bundled services, which seem to be the preferred flavour for cash strapped customers. As far as enterprise communications in concerned, Telecom/network IT has both advantages and disadvantages. The disadvantage is that all the talk about ROI easily dries up when the client top management sees nothing but an urgent need to cut costs. But the advantage is that a properly planned set of carrier contracts provides far greater predictability in costs than most other corporate expenditures - The entire game here is how to get clients locked onto long term carrier contracts.

Finally, regardless of which region you hail from, every economic downturn provides new opportunities for some in respective markets and I think this one will lead to introduction of disruptive technologies in the telecom space. Crises often provides a fertile environment for new technologies to gain a foothold and provides optimum time for companies to develop innovative solutions which eventually result in reduced cost and increased efficiency. We are already seeing a surge in take up of low cost netbooks which are roughly half the price of full feature laptops. We are also seeing increased focus from the integrated operators on Mobile broadband compared to wired operators in order to reduce CAPEX investments. As someone rightly said, real crisis rarely affects telecom because Crises come and go but people still need to communicate wherever they are.

A Year Gone By !!!

It all started with this post http://svsantosh.blogspot.com/2008/01/me-user-generated-content.html last year on the same day. A lot has happened over the past one year - not just on the blog but also in my life. Its better to restrict the talk to the blog alone. It surely has come a full cycle. What initially started as a means to kill time quickly turned into a favorite pass time and now it has come to a stage where I hardly find time for my favorite pass time. A declining trend in the count of posts per month is a testimony to the fact that priorities in life are changing. It has been a fight for sure but more importantly its something worth fighting.

Wont commit if the tone of a similar post same day next year would be the same but be assured it wont be worse than what it has been today. Even if the body gives up, the mind with millions of thoughts and ideas will not - ensuring that the connectivity is kept intact.

Trouble in the Telecom Land

The credit crunch and the slowing economy is beginning to impact everyone. How fortuitous can one(/I) get - slowdown effectively kicked-in just months after I reentered the industry in April this year. With the re-emergence of a sellers market in the country, jobs have now become a matter of chance than choice for potential job seekers. The Slowdown has effected almost everyone in the telecom value chain from equipment makers to phone companies and application developers. With the trouble continuously spreading to other verticals, there seems to be no safe haven for investments. Even traditional enterprise communication giants like Cisco that are more shielded because of multi sector clientele, are facing the heat because of slowdown in financial, IT and automative sectors. Announcements of gloomy sales outlook are a common place today but we must draw solace from the fact that although wireless may encounter slowdown, it will fare better than most other industries in these hard economic times.

With an extended housing slowdown in most of the markets, anything related to housing market is going to be in trouble. Now that the housing market has ground to a halt, demand for broadband, voice lines and IPTV/cable services will slow drastically. This will have a rippling effect on service providers resulting in tightening of their infrastructure spending. It is expected that there will be delays of close to one year in the NGN buildouts of companies like BT, Verizon etc. This will have a multifold impact on equipment vendors like Alcatel, Motorola, Nortel etc. Alcatel has already announced job cuts and Nortel is on the verge of filing for bankruptcy. The root of their problem lies in costlier credit - it is forcing service providers to postpone their capital expenditure spends like upgrading their networks and launching newer suite of services. The problems are extending to handset manufacturers too, with lower demand from new customers and longer than expected replacement cycles of existing customers. Whats disturbing for them is the fact that, lower demand from saturated markets is not being offset by robust handset sales in emerging markets.

The slowdown has different set of challenges for the Asian market. It could not have come at a worse time for Indian and Chinese governments who, after months & years of delaying the 3G spectrum auction currently find themselves wrong footed with a risk of completely missing the 3G bus if the auctions are delayed any further in search of right valuations. In the current macroeconomic scenario, the telecom sector plays the most important role in maintaining a robust GDP growth of over 7% for these two countries, and hence both governments are treading carefully to avoid any policy mismanagement. The Vendor ecosystem is waiting for the 3G auctions as the resulting network roll outs may just give them enough cash and time to counter the current economic slowdown.

Also the currently prevalent weakness does ripen the market for takeovers. The slowdown will accelerate further consolidation of the sector especially among smaller players. There will be renewed interest from companies looking to buy into US telecom assets. Huawei has already expressed soft interest in acquiring Nortel. The Private Equity players who have been missing from the telecom scene after the Avaya and Alltel transactions may renew their interests in the sector. Apart from mergers and joint ventures, further network sharing arrangements will become commonplace. Operators will also push their respective regulators to make sharing more appealing by introducing new policy initiatives. No matter what be the case, everyone in the ecosystem better gear themselves for a long, hard effort to fight slowdown.

A Not-so-Lucky Mascot

Discomgooglation: The feeling of distress or anxiety when unable to gain immediate information access. Inadequate dosage of daily internet access because of a faulty data card and the eventual relief once it started working made me realize that I am not too far from experiencing the symptoms of discomgooglation. Many things have happened since the previous post on the blog leaving me with no dearth of ideas to pen my thoughts on. Between the final 2 viz., the facebook phone and the lost billions due to 2G license sale, the quantum of the lost billions prevailed. This was not merely because of the policy decisions that led to it but also because of the far reaching impact it may have on the forthcoming 3G spectrum auction. This post is not about the classic Raja Vs. Maran comparison that the media is so fond of. Frankly both of them in their own merits have been India's best telecom ministers till date. If Mr.Maran was credited with lowering the overall call rates and fostering telecom equipment manufacturing in the country, Raja in his term should be credited with fostering competition and taking the biggest leap forward in comparison to his predecessors on the 3G spectrum auction - Unfairly though, his success or failure will eventually depend on whether he can successfully oversee the 3G auction as a telecom minister. India saw unprecedented growth rates during the term of these two individuals - 10 mn users a month - something we may rarely get to see again. No matter what be the case, the talk of a huge loss to the public exchequer by giving away 2G spectrum for free along with licences at prices that prevailed in 2002 is something which will always haunt Raja.

It all started when he took over the reins as Indian Telecom Minister from Dayanidhi Maran in 2007. After close to 5 months of "successfully" renegotiating the price for BSNL tender of 45 million lines, eventually saving Rs. 1500 crores (during which BSNL conceded its second position in the market to the then, Hutchison Essar), he set his sights on increasing the competition in the industry before setting the 3G ball rolling. This because it was felt that in the present market condition where 3 private GSM and 2 private CDMA operators were holding the aces, a spectrum auction may not yield "right" valuations. The two areas where he got it wrong were deciding to give away 2G licences at prices prices that 2002 and the much reviled First come First served basis of allotting licenses - both of which will be discussed later. What followed was mad rush for 2G licenses. From Realty to Retail, from consumer electronics to power, companies from every sector suddenly wanted a share of India's telecom pie. Selling licences at Rs.1651 crores and getting spectrum for free didn't look like a bad deal when many foreign players with big pockets were waiting for an avenue to enter India before the 3G auction. No one till date thought so much spectrum was ever available. We may never get to know the truth behind Maran's comments about spectrum shortage.

Between the allotment of licenses and spectrum, the recession factor kicked in much to the dismay of Raja. Once the new players were starting to receive spectrum they were promised, players like Unitech and Swan duly sold stakes in the to Telenor & Etisalat which eventually valued their companies 7-8 times the price they paid for the license 6 to 8 months ago without even commissioning a single tower. It would have been double those valuations, if credit was much easily available. Considering the above valuations, a conservative estimate is that there is a loss of close to Rs.60000 cr to the exchequer. The figure is made to look even bigger by comparing it with India's current year fiscal deficit at Rs.130000 cr. But before accusing an outright scam one must understand what sort of a market structure are we looking at had it been a 2G auction scenario

With India's top business houses and world's largest mobile operator among the top 5 players in an Industry where scale economies are the order of the day, an auction for 2G spectrum would never have been an attractive proposition for a new player. An under priced license along with free spectrum gave a new player some incentive to test the waters in unknown shores which in turn guaranteed government definite revenues through license sale. I'm thoroughly of the view that a reviewed license fee along with free spectrum should have been the way forward and that is where I repeat the government got it wrong by selling license at 2002 prices and deciding that allotment will be on a First come First served basis. A reviewed license fee would have covered much of the losses that are being projected today and with more competition during 3G & BWA auction, government would have realized much better value. But with a recessionary market scenario, the spectrum may never meet its correct valuations - yet another case of noble intentions falling by the way side (remember the BSNL tender sale). The Ministry has now proposed measures like one time fee on operators holding more than 4.4 Mhz of spectrum, higher revenue share, definite lock-in before stake sale, disengagement fee for majority stake sale etc. some of which can be challenged legally because contracts cannot be changed retrospectively.

Raja's assertions of a better valuation for 3G spectrum due to 2G license sale will be thoroughly tested in the future. One wonders how would the scenario have been had the Ministry revalued the 2G license fee, had the TRAI been more clear in its recommendations about first come first serve basis, had the market not slumped - all these would have stood testimony to "noble" intentions of Raja. Maran learned it before, and Raja is learning it the hard way now, that good intentions do not always mean good outcomes.

That Sour Berry !!

These are troubled times in world economy. Bailout packages by governments across the world have failed to improve the macro sentiments overall. Its strange to believe how a bull economy can turn bearish in a matter of days wiping out some of the hallowed financial institutions of our times on its way. So is it the turn of Socialism again? No I am not attempting to answer this tricky question - I'd rather attempt to dwell on something more comfortable. Although the effects of economic slowdown have had limited effects on telecoms scenario, a prolonged recession can effect operators' growth plans. But as someone rightly said every situation is an opportunity. Valuations of many companies have tanked owing to free fall in stock markets and these are ideal times for some one sitting on excess cash (now is that as rare as a blue moon in these crazy times?). One of those who always seem to have that is Microsoft and with rumours of interest in Research in Motion - the makers of Blackberry, reemerging, the fight for market share in the Mobile OS is set to become all the more interesting.

With competition from Nokia's Symbian, Apple’s iPhone and most importantly, the Google Android platform, Microsoft’s mobile platform is facing its toughest environment yet. Recently it was revealed that the upcoming version of Microsoft’s mobile OS, Windows Mobile 7.0, would be delayed and will now release as late as 2010. The updated version, which the company’s partners had been hoping to have by early 2009, was aimed at giving Microsoft a bigger presence on the mobile stage. Although Nokia with its dominance in the handset is helping Symbian's cause and iPhone with its touch sensitive features is continuiung to wow customers worldwide, its the entry of Google's Android platform that has got Microsoft worried - with T Mobile's announcement that it has close to 1.5 million preorders for G1 adding to its worries. Over the years, Microsoft has pummeled countless rivals, including the heavyweights like I.B.M, Netscape etc. But it has never faced a rival as formidable as Google. Though, Microsoft is currently enjoying increased penetration levels thanks to the classic "first mover advantage" principle, Google appears to be much more superior in speed & smartness and seems to understand customers need better. Having exhausted the best of its ideas on how to deal with Google, it has realized the best way to compete with innovation is not to recreate innovation but to buy it. The same was true when it tried to buy Yahoo through a series of hostile bids earlier this year, the same was true for the Facebook investment, and the same is also true when it is trying to buy its way into dominance in the Mobile OS space through its apparent interest in Research In Motion - the makers of Blackberry.

Although there were rumours in the second half of last year about a possible buyout, with plummetting stock prices, new rumours are swirling that Microsoft which is much more comfortable with the valuations now and may test RIM's resolve by placing a bid close to current market price. Regardless of the authenticity of market talk, one must question the business sense behind the interest. Although this does possess some obvious advantages to both the companies - like providing Windows Mobile which has a sizeable consumer presence, a headway into enterprise customer base for its exchange & other business offerings and Blackberry with some much needed "touch screen" presence, but buying a company that makes hardware which doesnt run Windows Mobile pose many potential operational challenges. Also Blackberry supports multiple Email platforms and one has to doubt how interested will Microsoft be to support Lotus offerings on Mobile. Built on Linux platform, Blackberry is not strategic fit for Microsoft's Windows strategy for Mobile OS.

At the moment, there are too many complications for the deal to go through. Both companies can do much more individually than as an integrated unit. The acquisition might have made more sense about 5 years ago when Blackberry was smaller & less prevalent. Platform integration would have been a much easier task then. One does hope this rumour remains just that - a rumour not just to sustain the healthy growth in the Mobile OS industry but also because the industry is not ready for consolidation yet.

The "Capacity" conundrum

Its finally here. After months of delays, Sprint finally launched Xohm yesterday bringing an end to speculation about the brand and the service itself. As a long term sprint and WiMAX critic, one must admit being quietly surprised by what Sprint has managed to pull out. Xohm, in its initial few days after announcement evoked mixed reactions from different sections of the media. Some positive that the consumer will finally get to see wireless convergence earlier than they hoped and others neutral/negative partly because they were more concerned with cycle time of their "evolution" investments. Sprint through Xohm became the poster boy of WiMAX worldwide. Although operators in some emerging markets are betting on the technology on a much bigger scale, everyone in the ecosystem continue to link sprint's success to WiMAX's future or should we rather say WiMAX's survival.

If its about survival, then it must be said that Xohm managed to keep mobile WiMAX alive to fight another day. Yesterday, Sprint launched its first Xohm commercial WiMAX network in Baltimore with subsequent launches planned in atleast 5 other cities before the end of 2008. But as they say, the devil is in the detail. The network at launch is a notebook and home play network only with timelines still unclear about handheld Voice(with Sprint EVDO) and data (WiMAX & EVDO). The Initial launch however promises required QoS for VoIP. There is no commitment yet on Wi-Fi integration. Sprint at 2.5GHz has deployed around 170 cell sites in Baltimore alone with the number expected to go to 200 by the end of the year. Some reports say that this is 15% more than what Sprint deployed for a CDMA EVDO network. The number of sq km the network covers is still unclear but it has to be a long way off from Intel's original promise of 30 Km coverage per cell site. In building coverage is another important aspect with commitment of 2 to 4 Mbps of download speeds and upload speeds in upwards of 1Mb - and that is why Wi-Fi integration is all the more important for Xohm.

One area where Sprint surprised everyone was by removing the 5 Gb data cap. This they say goes with their strategy of positioning Xohm and WiMAX as more a "capacity" story than a "technology" or a "speed" story. This will not only differentiate it with the 3G lookalikes like HSPA or EVDO but also throw the gauntlet at LTE and its ecosystem. Once the service starts penetrating in other major cities of US, I think the likes of ATT, Verizon, T Mobile etc will do away with the download caps on their networks. At launch, mobile WiMAX service plans include a $10 day pass, $25 monthly home Internet service and a $30 monthly mobile service available on any WiMAX device and a $50 monthly service option covering two different WiMAX devices. If the network expands nationwide, this might be a good option, assuming prices will rise as coverage expands — and that the coverage is good.

For Sprint, Xohm launch could complement the Clearwire joint venture that it recently joined. Sprint will hope that Clearwire perfectly addresses WiMAX penetration concerns atleast in rural areas. What remains to be seen is if the American thirst for the Internet on the go will provide Sprint's Xohm with enough customers to pay the bills and turn it into a profitable venture. The Operators with wired access infrastructure are just beginning to realize that even wired bandwidth is not unlimited. Wireless is all about limited airwaves and it will face choc-a-bloc when subscriber numbers start growing. Further, it is also unclear what the merger with Clearwire will do to the business model, and really unclear if a data-only network, with VoIP at some point, can compete with existing networks that offer voice and data services. In the near future, a customer with a handheld will have 3 hotspots to connect to Wi-Fi, Xohm and the HSPA/EVDO base station. It would be interesting to see how much customers are ready to pay to connect to each of the 3 options. What would be more interesting to see is how Sprint succeeds in arresting its churn and ARPU decline through Xohm.

Let bygones be bygones

Its been quite a long time and I don't even want to get into the reasons for the delay. Quite a lot of things have happened during this time but the one that stands out for me is the finalization of 3G policy - making way for the long cherished dream of the industry to become reality. But that's not what is being written about today. Last week Reliance entered the Indian DTH market thereby continuing its push to become a leading converged telecom operator. The market already has some established players like DD, TATA Sky, Zee group, Sun Network etc. Bharti, not be left behind is going to start their own DTH service very soon. All this to penetrate into the 80 million "unsatisfied" cable homes of the country. With the Indian cable industry in such unorganized state, the time is ripe for the DTH (may be even IPTV) operators to go for the killing.

The problems surrounding the cable industry seem endless at the moment. The industry is too fragmented to put up a meaningful fight against the DTH pack. What more can be expected when 80 million cable TV homes are being serviced by more than 60000 cable operators and 6000 MSO's. Worse, the top 3 of the industry - Hathway, WWIL and Incable address only 25% of the market with the rest being taken care of by (mostly) unorganized players. So easy is the entry in this market that someone with an approval from the head post master of that area can launch a service. Recently the Tamilnadu government launched its own cable network by the name "Arasu". One has to question the independence behind this decision of the government to become an MSO itself. Further to this comes the aspect of technology. 90% of the cable networks in the country are analog in nature. Meaning they cannot carry more than 90 channels (post migration to HFC) with the existing network capacity. It is fair to say that the industry is in the middle of a massive digitization drive converting their existing networks to IP - but only time will tell whether the efforts are too little too late. Promises of pay-per view, red-button, video on demand don't seem too far but the key question is when will they reach the critical mass. With a installed set-top box, a digital cable TV network promises to deliver more than 1000 channels. Arrival of DOCSIS 3.0 compliant cable equipments are definitely a step in the right direction for the industry. What we comfortably forget is that the cable operators hold a substantial chunk of Internet subscriber in the country. They are till date best positioned to leverage on their existing networks which already deliver video(TV) and data (broadband). With further evolution of FTTC or FTTN networks in India, they are the closest to making the Indian IPTV and triple play dream a reality - but the question still remains, who will drive this in a fragmented and cash starved industry. Some years ago, CAS implementation promised to bring in some much needed relief - but lack of political will seems to have put it on the back burner. But these are not all. Years of distrust have also created a lot of bad taste between the TV channel owners and the industry.

In the initial few years of cable TV revolution in India, most of the channels were available free to air. This was both to increase the viewer base and help in better penetration on the Cable industry. Once channels thought they had substantial chunk of the user base, they turned pay channels. Since the structure of the industry is such that the cable operator pays the channel owners on a per subscriber basis, what followed was massive under reporting of subscriber numbers. The cable operators under reported to MSO's who in turn under reported to the pay channel owners. This lead to frequent squabbles between them leading to blackouts ahead of key television events (often sports). In order to cover their costs, the channel owners further increased the rates of their channels which lead to more under reporting. Lack of proper audit mechanism for subscriber numbers is one issue that digitization promises to address. Although the top 3-5 players of the industry are showing interest keeping long term gains in perspective , the more fragmented part of the industry is unwilling to migrate to digital networks - more because of the lack of knowledge of the advantages that digitization would bring. Its not just the pay channels who are unhappy but newer channels who are having to pay astronomical carriage fee to these operators. An extremely skewed demand supply ratio has sent the carriage fee of all channels skywards. There are constraints on the number of channels an analog cable TV platform can carry. Pay channels are generally allotted the premium bands but every other day, there is a new channel vie-ing for the slot of a pay channel thereby pushing the fee upwards. One wonders what is prompting the business leaders to launch new channels left, right and centre when the bandwidth choc-a-bloc is not expected to clear at least until 2010. Here again digitization seems to be the answer. The Content owners are hoping that DTH penetration increases at a faster pace as they are confident that even after digitization of some cable networks, a major portion of the cable industry will still reel under analog platforms.

The flag bearers of the cable industry today are maintaining that they are on par with the DTH players as far as innovation is concerned and their industry today lacks only a face for selling their products. Dish TV has Shahrukh Khan whereas Tata Sky has Aamir Khan among a whole host of other small artistes. But the situation on ground suggests otherwise. As already mentioned, these operators already have a key pipe laid into people's homes through which they can push various other services - with minimal capital investments from the subscriber. Next comes the mobile opportunity - these operators will be under gross disadvantage if they dont leverage on the wireless opportunity when the 3G/BWA auctions get underway. By the time they get their act together and once the consolidation effors reach maturity, one whole line of business will be past them and they wouldnt even know when it went by. It is difficult to blame them because they need to address some much more important short term priorities which threaten their survival before thinking of the long term.

No free lunch in User generated content

After a hectic few days of trying to redesign the procurement processes, I am back again doing something am more comfortable with. This one is for all those UGC buffs out there who by nature overestimate the effect of advertising in today's social networking landscape. Lets start with a bit of background. 2007 was a big year for social networking - It became a norm for everyone using Internet to hop-on to the social networking bandwagon giving birth to an entirely new set of companies in the online space. It eventually re energized the fast debilitating online advertising industry. So positive were some industry observers that some industry reports pegged the total online advertising revenues (in social networking) at US$500 Bn worldwide. If 2007 was a year of positives for social networking, 2008 is the year year that sounded warning bells for those who believe social networking represents the next frontier in online advertising revenues. A sobering slowdown in growth, combined with a more worrying drop in usage of social networking sites, has highlighted the significant challenges that the big established players, in particular, face in keeping users engaged.

This could well sway the odds in favour of some of the more specialised sites, who are able to focus on catering to the needs of different audiences. Bain Capital recently invested US$53 Mn in professional networking site LinkedIn which now values the site at more than US$ 1 Bn. Although this was far less than what Microsoft paid Facebook, but it is an indicator of things to come. Merely having appealing platforms for users to interact may not keep users glued to the sites. The focus has well and truly shifted to applications. This again brings us back to the same question. How profitable is social networking as a business model. One more testimony to this is the news released last week where google conceded that the revenues from its pet UGC video site, You tube will fall short of expectations.

Much of success You Tube has enjoyed as discussed in one of my other articles (http://svsantosh.blogspot.com/2008/02/death-of-30-second-tv-commercial.html) is due to minimal content filtering. This has been crucial to its popularity and the core of its ability to now boast to advertisers of millions of eyeballs that visit its site dialy. But advertisers are starting to weigh the gains of exposing their product/brand to millions of unpredictable users. Viral marketing can have its own set of disadvantages as well. As an example, the popular mentos + coke video created so much buzz that some other user uploaded a clip of a person eating Mentos, drinking Diet Coke and then projectile vomiting. How positive would a brand like Diet coke (which targets health concious audience) be for such positioning is quite questionable. Another issue is that of hosting ads on "copyright infringed" content. A substantial amount of content in You tube fall into this category, exposing it to potential legal wrangles.

There are many examples which project both good and bad (for the brands) of hosting content on Youtube or on other social networking sites in general and you can always argue either ways. Google believes that the next big opportunity in online advertising lies in playing a wider role of a broker for offline and online content. But this next big opportunity is definitely not an immediate one and only time and innovation will bring this to fruition in years to come (how many years will depend on how patient we are).

Joining the crowd of the mortals

It has been quite some time since I wore my favorite "critic" cap but it wasnt because of the dearth of topics. It may be because of the lack of time(but I am not getting into that). This time round, i'm taking a huge risk of wearing this cap again. That is because everyone seems to be very happy about Apple offering the 3G iPhone for USD 199. The other day, in a discussion with a group of professionals, i was overwhelmingly short of support when Apple's 3G iPhone strategy was being discussed. Its tough to be a naysayer without the company of fellow naysayers. Through this medium, I'll try to put across my views, in totality as to why i think 3G iPhone @ USD 199 ain't such a good idea after all.

First of all, lets be clear that it is great news of all those longing to own an iPhone but couldn't because of the high entry barrier. Sometime after this announcement, I was lucky enough to experience iPhone first hand (thanks to my manager who managed to get the one from US unlocked in India) and needless to say, it didn't disappoint one bit. Leave alone disappointing, it only increased the urge to own one. But that's when the telecom cum marketing guy(albeit a crude one !!!) deep inside raised alarm bells. Is it such a good strategy after all? Apple was always a company known for its premium products/services. Be it MAC or be it the iPod line of products. Its products always had fashion as being central to them. The need was driven by its designers and fulfilled by its R&D team. A look at its history suggests that Apple had always succeeded even though the core functionality of the products it introduced was already available in market although at various levels of comfort, quality and innovation. The reasons behind two of its biggest successes are mentioned below.

• iPod: It wasn't like iPod succeeded because there were no portable music devices in the market. Sony, Phillips etc were manufacturing them and were making good business out of it. What Apple did was to give a PC interface to a portable music device and create a hip looking device. Giving iPod windows support was single most important decision in iPod's PLC. Windows support helped iPod reach the masses - much beyond its initial kitty of MAC users.


• iPhone: Here again, Apple was a late entrant and the market wasn't short of mean mobile devices or manufacturers. The reasons for iPhone's success are again creation of a really hip looking device with a killer user interface. Visualizing (and developing) a mobile phone without a physical key pad left the competition and the target market spellbound.
  

Apple's products always had a distinct look and feel about them. Same is the true about its marketing and positioning strategy. iPhone's (for that matter all of its products) branding and positioning till date have been spot-on. Its products are known for their cult following. 3 Australia, the only other company which couldn't strike a deal for iPhone 3G has gone to the extent of launching a iPhone website and started a campaign allowing its subscribers to register interest in the iPhone, send SMS messages about the iPhone and provide comments which would influence the for the powers that be at Apple to see to strike a deal with 3. All this may be pointers to a real rosy scenario for iPhone 3G. But the factors which create doubts aren't about iPhone 3G but about Apple's overall mobile market strategy.

Below are some of the challenges that Apple (after the launch of iPhone 3G) will face in its overall quest for the mobile market.

• Apple iPhone is successful today even though there is only one product in its line because of its pinpoint positioning - appealing the youth with significant disposable incomes. By giving out iPhone 3G @ USD 199, its starts competing is segments dominated by traditional players who have the capabilities to derive better scale advantages.
• Apple just doesn't do enough R&D in mobile & wireless. Somewhere down the line, the Nokia's and the Samsung's of the world have better laid out product strategy for future technology evolutions. Already people have started talking about LTE and handset manufacturers have started developing handsets for LTE & WiMAX.
• iPhone 3G isn't going to yield much for Apple because ATT is retailing it at 199 USD. It will take some time before Apple can derive scale economies and the biggest risk here would be the launch of WiMAX/LTE networks by rival operators. For that matter, with congested 3G networks all throughout the mature markets (coupled with limited 3G networks in the third world countries) and femtocells pleading for more time, delivering a satisfactory 3G experience will be challenge.
• The possibility of more number of unlocked iPhones storming the market cannot be completely discounted with the locked phones being made available at such cheaper rates. With this, the revenue realization strategy of Apple will go for a toss.

Well you cannot help but undermine the above comments as a classic "doom-monger's" view countering anything new and anything good that hits the market. But that was why this post was updated. Apple till date has been a company which was mostly untouched by the "volume" bug and concentrating mostly on premium pricing on its brand. With the pricing of iPhone 3G, it looks like this bug has hit Apple and it stands the risk of joining the rest of the mobile pack. The pack which fights day in and day out (after deciding to play the volume game) to prevent their respective brands from becoming commodities. One final food for thought for all the friends around me who are doubly or triply excited about iPhone debuting at less than Rs.9000/- in India. I seriously doubt if its going to retail at that price and even if it does, they are better advised to take one good-deep look at the contracts they'll get into with Airtel/Vodafone.

Music to your ears - Light on your pockets

The post this week is on a topic on which i have been dwelling on for quite some time now. Its on this whole concept of free music. It has been long time since most of us have actually bought a new audio disc. Lets be fair, it has been ages since we have bought music for that matter. Piracy, P2P, online music recording etc have made buying music too cumbersome(and lets not forget, costly) a task for the buyer. If we are getting something for free, then someone else must be paying for it. It is the music companies and the artists (Sadly !!!) who have to suffer.

Not so long ago, this landscape was dominated by music companies who control not only the music distribution but also the music itself. Today, I'd doubt if they make half of what they made out of music a decade ago. It is said that artists(singers and writers included) roughly earn 72 cents out of every $20 audio CD and the rest is retained by the audio company as standard markup plus selling and distribution expenses. The real money that the artists made was out of the touring that they'd do post album release. With the dawn of the new millennium, more and more users were finding even more options of accessing music for free. With the internet and the fact that a large portion of the population is becoming more savvy and alert to new sharing/socializing networks it was only a matter of time before the fans were able to do without the big labels. But this was definitely not the win-win situation that the artists wanted for long. Although it is fair to say that even they were not happy with the revenue share with music labels, they still required an additional popular medium to reach their fans

Something dramatic happened recently that promises to change this and a whole lot of other things as well. Two music bands tried something innovative which was driven more by need than anything else. Nine Inch Nails (one of my personal favorites) and Radiohead were out of contract with their music labels which enabled them walk the path rarely treaded by any of the bands/artists. A renowned metal band, Nine Inch Nails(NIN), released their album "Ghosts" for free on their website. What followed was tremendous online buzz. No one ever tried the "freemium" business model in the music industry at such a large scale. The Artists managed 8,00,000 downloads of the album from their homepage. And it was not all pain no gain. They managed a cool $1.6 million in the first week of launch by giving offers to online down loaders like $5 for a digital copy of the entire album and $75 for 2 CD's of the entire album plus one DVD. The second band which tried something similar was Radiohead. But they tried a different version of the same idea. Their fans were offered the album at "pay-whatever-price-you-are-willing-to-pay" model. But thats not all, they are offering their fans much more than just the music content. In their own terms, they offer their fans a "discbox". The discbox not only has songs but also additional tracks, exclusive artist photos, artwork and lyrics. This band again ended up making a cool $6million in sales.

The best thing about this model is that the entire proceeds out of the online sales would go to the artists themselves. It is startling that the music industry never visualized that something similar would hit them in the future. The artists realised early that no matter how loyal the fans really are, they are still averse from buying music in its present form and package. There are some who believe that Radiohead and NIN lost millions of dollars of potential revenue by not following the classic model(There is no dearth of the classic doomongers in any industry). What these people dont understand is that there are more people outthere who dont pay for the music than those who do. The people who dont pay for the music still get access to the content of their favorite artists through internet (albeit illegal !!). By making content free/subsidized for their fans, the artists, who till date have ben denied their equitable share of profits, still end up making handsome money at the expense of big music labels. Some would say that an NIN or a Radiohead may have the guts to do that with their loyal fanbase, but for any new artist, a music company is still the only resort to reach music lovers. This is a genuine concern but once this landscape completely emerges one has to agree that an album of a new entrant will never sell at $20 when a more popular artist sells at a fraction of that price. If the music label has to survive by reducing the prices and offering more value then so be it. Reduced prices, wider audience and a satisfied fan base can be the only outcomes of this evolving landscape.

Alltel: All is well

Back finally to the crowded by lanes of Mumbai and things don't seem too good here. What more can you expect with incessant rains and cancelled trains becoming part of your daily routine. After a small hiatus, I was back tracking the headline makers in the industry and was pleasantly surprised to see Verizon making an offer for Alltel and thereby becoming the No.1 wireless operator in the US. Needless to say that is the story, I'll try and analyze in this post.

Credit crunch. Commodity bubble. Global recession. Peak oil. Global warming. Times like these can make grown men and women weep. The pessimism and despair peddled by businesses and popular media suggest that no industry can prosper in the current economic environment. Yet there are abundant signs that the telecoms industry is weathering this storm well. If ever there was a doubt, just look at these cases in point: France Telecom making an unsuccessful bid for US$40+ Bn for Teliasonera, First Bharti and now Reliance getting ready to for a deal with MTN for a staggering US$ 30+ Bn, Verizon buying out Alltel for a deal that could go up to US$ 28 Bn. So much for the doomongers of the telecom industry. The Verizon deal has all it takes to change the industry dynamics in the volatile North American market. Initially at least, Alltel's subscribers may not be too happy with the deal because this might mean scrapping of some of its popular plans like Mycircle. But micro aspects aside, this deal promises a lot on the macro front.

There are some crucial synergies that Verizon can realize through this deal. First, there is that ever present GSM-CDMA talk. It would massively help Verizon that both Alltel & Verizon follow the same technology evolution. This has some obvious advantages like better scale when ironing out deals with equipment vendors. Alltel with 13mn subscribers is the 5Th largest cellular operator in US. After the buyout by Verizon, the combined entity will have close to 70mn subscribers, a clear lead of around 8mn subscribers over the erstwhile leader AT&T at the top of the US telecom market. What this deal also means is CDMA re-establishes its lead over GSM in its parent North American market. Additionally, Verizon will also get access to some 50 odd markets which it doesn't currently own. Also on Alltel's behalf, not only have Alltel's investors been saved from expensive 4G investments but also (importantly) that never ending confusion about the evolution path to follow to 4G at a time when industry is divided between WiMAX & LTE.

The combined entity however bodes differently to different entities in the ecosystem. On the equipment vendor side, LG can look ahead and consolidate its leadership position in CDMA segment. LG, a favorite with Verizon will additionally get to address the requirements of Alltel thereby gaining access to new markets and subscribers within US. However, the situations isn't that rosy as far as competition is concerned. AT&T which for a long time held the leadership position has to relinquish it with only a distant prospect of recapturing that position again. A gap of 8mn-9mn subscribers is too tough a gap to close in a saturated market like US. This leaves it with only the inorganic route to follow but not many options exist there as well apart from smaller options like Leap Wireless, Metro PCS etc. Again, these options will not come cheap. With this deal, Sprint, the industry's favorite punching bag, moves to a distant third place behind Verizon and AT&T. With continuously falling subscriber numbers and churn, things surely don't look good for Sprint (how many times have I said that ?). One real possibility and the one which i believe will gather real pace after this deal is Sprint being acquired by Deutsche Telecom to consolidate on its industry position and prevent the likes of Verizon and AT&T from taking unassailable lead.

Some industry voices believe that, Verizon must have bought out Vodafone's stake which would have given it a more operational flexibility than actually focussing its resources on the Alltel buyout. But I believe that buying out Vodafone's stake should not be an immediate priority for Verizon. There are millions of dollars of synergy out there to be realized once LTE networks of Vodafone and Verizon go on online-that's when the roaming revenues will come into picture. Verizon has done the right thing by recapturing its leadership position but the challenge will be to consolidate on the leadership position and maintain it at least till the much awaited 4G networks are rolled out.

Voices from the Dead

Its been quite along time and no, this time the reason is thankfully not laziness but for a change its lack of time !! Never knew life would become so hectic even in Kerala, the Gods own country. The Title of this article might sound a bit scary but no it wasn't meant to create a sensation. I'm no cheap sensation hunter. The Companies in question (or should I say, the dead ones) are Xohm & Pivot. Two very high profile ventures (although Xohm is primarily a brand of Sprint), a seemingly sound business model, a lot of potential promise, investments from a number of big companies, but both going down faster than their rise.

Lets start with Pivot. Pivot was once thought of as way through which Sprint and the other cable companies can compete with the likes of ATT, Verizon etc in the lucrative bundled services market. But there were inherent complications with this business. The Most important one is surely how to communicate the value of you bundled service to your customer without confusing him/her. The Pivot venture was a messy concoction with different partners planning different priorities out of their investments in the venture. This followed the financial problems that Sprint started finding itself in. The Final nail in the "Pivot" coffin was ready before the end of last year when Sprint called off its nationwide network roll out. Current Pivot subscribers are being given the option to either transfer to a standard Sprint service plan, or terminate without any penalties.

If that was about Pivot, the whole Xohm investment looked a bit more compelling. The amazing thing about Xohm is that it was a brand that never even had a product and it died before it made its commercial debut. Sprint's financial worries seem to be the reason behind Xohm's death with the board always wanting to share the business risk. After two sour experiences of Clearwire and Pivot, Sprint never found that elusive third big partner it was always looking for. That forced Sprint to float Xohm. Another example of how business ideas backed by desperation alone can be harmful. Both Pivot and Xohm were also victims to the edginess of Sprint's investors. This edginess again had its roots in ever decreasing customer numbers, high churn and quarter after quarter of poor financial results.

Although nothing has been officially announced about the future of Xohm but a formal death knell was sounded for it when the formation of a new Sprint-Clearwire Joint Venture was announced. The new company will be called as Clearwire. The Announcement just about saved the WiMAX lobby from further embarrassments and gave them a much needed boost. It must be said that in the short term, this JV has helped WiMAX from going into extinction. Being a critic that I am, I just cannot help but doubt this latest effort. One Messy concoction to replace another ?? A JV including Intel, Google, Comcast, TW Cable etc. No doubt that they really big names in the world of technology but will a hodgepodge of powerful players be able to pull off such a complex deal. What about the openness of the network?? Google, a long term "Open" backer joining hands with the likes of Clearwire & Comcast who have a history of blocking traffic in the name of traffic shaping(VoIP & P2P respectively). Intel has put in money to save the investments that it has already made in WiMAX (again one cover up so that the other doesn't get exposed). The Venture smacks of nothing but desperation. Desperation to hit the market before LTE does. Agreed that for WiMAX to be successful, time to market will be one of the key aspects but that definitely is not the only aspect. If unsuccessful, i think its goodbye for WiMAX (at least in North America).

The dead have gone!! But they have left us some important lessons which some of us are not ready to accept knowingly or unknowingly. There is no doubt that the new JV is well on its way to the graveyard. However, it will be interesting to see who else will follow the JV to the graveyard. Looks like Sprint (along with North America's WiMAX dream) is rushing to reach there first.

Towering Ambitions

Thinking micro seems to the flavor of the season. I always thought that it’s only the insurance industry which makes the most out of fear in the minds of people. But that drastically changed after I entered the new phase of my life. If Insurance industry is thriving on people’s fear, I never believed that such a sound business model can be built on fear (/uncertainty) factor among Organizations. Well, for my own good, its better that I don’t dwell on it for too long.

It is true that I’m struggling to find time to update my blog but no worries because I wont go down so easily. The petty projects and tight schedules cannot hold me back for long. The reason “lack of internet access to update my blog” seems to the flavor of the season, just like the tower hive-off’s in the Indian Telecom sector. The article is about these tower infrastructure companies and how they are helping/will help the growth of the Indian Telecom sector.

Don’t remember who started it all, but the project MoST (Mobile Operators shared towers) was the one which helped operators realize the wonders of passive infra sharing. Project MoST itself was a “towering” failure mainly on the account of unclear and incorrect revenue share arrangements. Lack of clarity from the government over financial support to passive infrastructure sharing only helped hasten its downfall. But it managed to accomplish what it was setup for. Within months, operators started saving on huge capex, opex and manageability costs of network. All this happened on the sidelines of the ongoing Great Indian real estate boom which were driving land prices and stock markets alike.

With the (so-called) intent of increasing shareholder value, companies started hiving off their tower infrastructure into separate companies. Models started to develop around passive infrastructure alone (Quippo, GTL infra etc.). Global majors like American Towers(ATC) were not the ones to be left behind. Infrastructure sharing agreements and Tower company hive-off’s became the order of the day.

Then something dramatic happened. Never before had any industry entered the consolidation phase so early in its life. The Top 3 private GSM operators Airtel, Vodafone and Idea decided that its better to fight a common enemy than to fight each other. A Tower company named Indus came into existence. 42% each in Indus Towers is held by Vodafone & Airtel respectively with the rest (16%) held by Idea. The existing tower infrastructure of the 3 companies will henceforth be transferred to Indus Towers.

Indus Towers today is world’s biggest tower infrastructure company overtaking the world’s leading tower company, ATC (with most of its assets in the Americas) at one go. Indus Towers approximately has around 60000 towers in its network. This along with the tower arm of RCOMM will take the total figure to a staggering figure of 1, 00,000 towers in India alone. Compare this with almost 30000 towers owned by ATC worldwide. ATC has been scouting for to buy a stake in an Indian operator for quite some time now.

With the consolidation of Indus towers, the only possibility for ATC at the moment is to either buy a company much bigger than its original size (Reliance tower infra) or buy into Tata’s tower business(around 16000 towers throughout India). They have already walked out of a stake buyout in Tata’s tower arm due to valuation concerns and only a wild one will believe that RCOMM is will let go of its Tower infrastructure company. Will the much smaller “leftovers” like Quippo, GTL infra etc suffice their ambitions?

The Aggressive plans of new entrants and the expansion plans of the existing ones is music to the ears of these tower companies. But things don’t look all that hunky dory. The new entrants like Unitech, Swan, Videocon etc have to counter not only the existing players with years of expertise but also high access rates that the tower companies charge. Indus has still not made it clear whether they’ll share their towers with the new entrants and Reliance has always maintained that the excess capacity on its tower will be used primarily to cater to its own expansion plans. That leaves the new entrants with only Tata’s to approach for a pan-india access of towers because the smaller tower players are still just that – smaller.

Keeping the aspect of spectrum dearth aside, a sustainable business model (especially for smaller tower firms) would have been the building and leasing of both active and passive infrastructure. But can we actually keep that spectrum dearth aspect aside? What was more disappointing was that none of the smaller players were interested in applying for telecom licenses. It would have been great if a GTL won a telecom license in at least some of the circles. A Telecom license would do a lot more than just complement its tower infrastructure. With the government in a hurry to allow active infrastructure sharing (to avoid more “Virgin” scenarios in the future), the demand from MVNO’s, 1-2 years down the line will be for real. The Issuance of telecom licenses was one great opportunity for these players to counter the scale of established players like Indus, RCOMM etc.

As far as the bigger ones are concerned, there is only one way for them to go - upwards. Sitting on a huge subscriber base, with access to crucial real estate and expertise, they are best positioned to make a killing out of any market condition.

The Apple of your Eye

A new phase in life brings about new challenges. Have to admit that I’ve still not fully come to terms with it. Agreed that the times surely are testing but they are exciting as well. Newer challenges bring out different aspects of a man’s personality – something which he himself doesn’t know. Without dwelling too long on philosophy lets see what’s in store for iPhone is India. Recently there was a news story making rounds about Apple’s iPhone plans in India and rumors about the operator tie-ups. As of now the launch date is sometime in September, 2008 and the operator (reportedly) is Vodafone.

India will become part of the privileged league of countries where Apple “officially” (more on this later) markets iPhones. The market surely looks set for the iPhone. One has to see it to believe it. Don’t think apple would like admit it but the sheer numbers of unlocked iPhones which are circulating in the market would have been one of the key indicators of how the market would respond. Unofficial reports peg the total number of missing iPhones in western markets at 1.4 million and the figure surely looks staggering when you compare it with the total number of iPhones sold (3 million according to Apple). Ever increasing disposable incomes in India have given rise to a new generation of gadget enthusiasts. Why are they part of the new generation? Because it’s not just the features that appeal them but they also long for killer looks. The Ever increasing consumption of XBOX’s & Playstations form only a small part of the story. Prahlad wrote a very good book about exploring profitable economic opportunities at the bottom of the pyramid but what about pampering those at the top of pyramid? Pampering is something the Indian upper middle & upper classes thoroughly deserve.

Many people talk about the revenue losses for Apple because of unlocked iPhones. I don’t quite believe people who say this is a wrong scenario for Apple to be in. Almost 80% of the “missing” iPhones find its way into the Asian markets. It was recently booted out of talks with China’s dominant operator, China Mobile because they could not finalize on a revenue share agreement. Rampant smuggling is a reality in South Asia and an Indian entry should ensure that more number of iPhones enter China. One way or the other, it can only result in increased sale of iPhones.

And what about the technology? No I am not getting into the good-old GSM Vs. CDMA debate because it’s a foregone conclusion that the technology in iPhone will be GSM. But it’s the generation of technology that is the point in discussion. The Market for 2.5G iPhones will surely decline sometime in the next few months and Apple has to find an ideal dumping ground for the 2.5G handsets & technology. What better place to dump the handset and technology than India? The Government’s confusion about 3G policy and spectrum auctioning looks never ending… The Consumers don’t seem to worry…. And the market is still a voice centric one. In India, Apple will surely find an ideal cemetery before ditching 2.5G handsets and technology.

The choice of the operator surely looks a tough one. Airtel surely is in a position of advantage but Vodafone isn’t far behind and Reliance’s iStore tie-up with Apple throws up more possibilities. An Apple/Vodafone looks a distant possibility because they couldn’t reach an understanding for the UK market before because of differences during Revenue Share discussions (Again!!!). But that was before Vodafone entered India. After the acquisition of Hutchison Essar, Vodafone added roughly further 40Mn subscribers in its world kitty and it may currently look at the entire scenario in a different light. I think Apple should go for multiple operator partnership models in India. It is looking at a huge target market here and a single operator tie-up may not be ideal as far as its market penetration targets go. This will be something that Apple has never tested or implemented (at least for iPhone) but there is a first time for everything.

Touch Me Not !!

Relocation blues have well and truly taken the toll on my life. This can only lead to one outcome – Me not contributing enough to my blog. But somehow managed to squeeze time out of my schedule to write this article. Well, I have to admit that I’m not in touch with the world of Telecom & Technology since the past one week because of lack of Internet access. But doesn’t the world today have alternative modes for information access…. This article is about the company which prides itself as being the Indian Multinational. OK! Videocon may bid for the handset business of Motorola… So what’s the big deal!!

The Problems faced by Motorola and the circumstances which lead to the business getting divided into three Business Units is no secret to anyone. The Mobile handset business of Motorola has been registering negative growth since quite some quarters now. Much of this negative growth in the handset business is because of the failure to replace the very popular Razr model, thereby leaving Motorola with no other option but to extend the Razr line of handsets beyond what market demanded (Razr 2 for example). Apple’s successful iPhone launch only added to its woes with investors demanding a product response to iPhone (which never came). Eventually, it lost the highly regarded 2^nd place (behind Nokia) in the World handset market share to Samsung recently and LG is already hot on its heels for the 3^rd position. Motorola eventually decided to split the troubled mobile handsets division after sustained pressure from one of its key investors Carl Icahn who wants the business to be sold.

Videocon on the other hand is charting unexplored territories. The Indian Consumer Electronics major was recently issued mobile licenses by the Department of Telecom in over 20 circles (Datacom). Although Videocon is still awaiting spectrum to start operations, it is first in the queue for spectrum in most of the circles where it has been issued license. Currently, it is on the lookout for strategic investors (preferably a foreign mobile operator) before the launch of Mobile Services. This will present an excellent opportunity for the likes of AT&T, FT etc who have made no secret of their intention to enter the Indian mobile space. Videocon also has got quite aggressive in the consumer electronics market in the last few years and to be fair, it is doing a pretty good job competing with the Korean powerhouses like LG, Samsung etc, chipping away their market share. Videocon believes that the timing of its entry into the Indian Mobile space with about 25% penetration is just about perfect, mainly because of the reduced capex requirements of operators (thanks to passive infrastructure sharing) and a proven business proposition. The Indian Mobile Market has been adding between 8-9 million subscribers each month in 2008 and about 75% of the additions are GSM based.

At the face of it, Videocon’s interest in the Mobile handset business of Motorola does seem sound. But it is not without its own share of challenges. The Indian handset market is estimated at approximately 100 million (new) units a year. If Videocon does succeed in its pursuit to buy the handset operations of Motorola, it will enjoy controlling the entire revenue chain. There are no major references that can be drawn for this kind of a model (operator cum handset manufacturer) apart from the Korean Market. The Loophole with this model is that you tend to alienate other operators from bundling their service with your handset. This may however, succeed in India because the market is largely prepaid and popularity of bundled handset-service is still very limited. With Motorola’s Global handset business valued at over US$ 3Bn, it may not be a risk worth taking. Videocon surely doesn’t have that sort of money internally and it may be left with no other option but to lend money from the market at a time when credit is at a premium and worldwide financial markets are dogged with uncertainty. Also, handset business is inherently innovation driven, something that Videocon seriously lacks. If it were the handset businesses ZTE or Huawei which was up for sale, it would have made good sense (because of market & cultural similarities) but Motorola has got high penetration in the western markets and this is where the whole acquisition would render unfeasible. Motorola also has a handset manufacturing facility in Chennai and Videocon will hope to move some of the jobs offshore. Videocon may succeed on the low cost front but what about High Innovation? This is reason behind the problems faced by Motorola today and unless Videocon has an answer to that question, it should stay away from the idea of acquiring the handset business of Motorola.

One Final Word before I end. If the acquisition does go through, it would mean a market full of hot opportunities for Videocon. My Heart says “Yes” for the acquisition urging Videocon to go the distance but my mind, in one stern voice says “No”.

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.