Playing a long game
Deals are continuing to tick over in the land of telecoms, but none of them can compare to this week’s agreed US$8.5bn acquisition of VoIP provider Skype by Microsoft.
Everyone agrees that the price was rich (US$1000 per customer,…
Playing a long game
Deals are continuing to tick over in the land of telecoms, but none of them can compare to this week’s agreed US$8.5bn acquisition of VoIP provider Skype by Microsoft.
Everyone agrees that the price was rich (US$1000 per customer, with what some say are only 8 million paying customers out of the 150 million or so users per month) for a loss-making company (US$7m in losses, US$686m long-term debt, US$860m revenue, US$264m operating profit).
Whether or not that is the case, Microsoft was willing to pay.
At the risk of unscientifically and un-technically comparing apples to oranges, it is interesting to contrast the price with that of some recent large deals in the telecoms space.
The most common figure assigned to the Vimpelcom/Wind Telecom, which created the world’s sixth largest operator by number of subscribers, is US$6.5bn.
Vivendi, meanwhile, paid E7.95bn for 44% of SFR, a successful company with a modernised network covering all of France.
Catch 22
In its statement announcing the Skype deal, Microsoft said “The acquisition will increase the accessibility of real-time video and voice communications, bringing benefits to both consumers and enterprise users and generating significant new business and revenue opportunities.
But isn’t that what telecoms operators should be doing?
“Telcos are not set up perfectly. In an ideal world, they would have been more services oriented. They are doing what they can. They have had a tough time, but a lot of that is to do with regulatory and competition rules”, said one banker.
Instead of enjoying the fruits of high-speed data capability, they are grappling with the cost of building and maintaining LTE and fibre networks to support the high revenue applications and services created by content and service providers.
According to one telecoms executive, “Data is an opportunity if there’s revenue attached, but a threat if operators are not properly compensated for their investment”.
Another executive echoes the point, adding: “Operators should be competing on launching new, valuable products rather than engaging in price wars”.
Is Skype/Microsoft a threat?
The consensus among bankers and telecoms executives is that the Skype deal itself is not a threat to telecoms operators – Skype has been in existence for some time. If anything is worrying, it is VoIP itself.
Analysts at Credit Suisse are not overly concerned, noting that because Microsoft “needs good relationships with carriers to drive the adoption of Windows Mobile OS”, it is unlikely to force a disruptive business model. Secondly, Skype has so far not seriously impacted telco revenue, thanks mainly to unlimited voice plans and cheap international calls, but also since call quality is worse and the service is less convenient. Third, operators such as Verizon and 3 UK have embedded Skype onto devices. And finally, the analysts conclude, Skype drives data adoption and increased call time.
Technology bankers, for their part, are not that interested in the telecom industry’s wider debate about whether it makes more sense to focus on becoming service providers.
According to one, “Operators do need to get involved in new verticals – and payments/banking is likely to be the most successful, but they are not going to radically change their business model. Providing infrastructure is what they do. Big corporates are very much about maintaining revenue and minimising churn. It is not in their DNA to be in the fast-moving part of the communications business”.
Stronger together
France Telecom and Deutsche Telekom may have arrived at the same conclusion. Like their counterparts on the Continent, their first quarter results reflected disappointing growth in Europe and continued reliance on developing markets. (Unlike KPN, Belgacom and Swisscom, however, they did not announce a profit warning).
So they are focusing on sharing as a means to save on cost, which will enable them to develop new services.
Inspired by the successful merger of their UK businesses, the two have now announced a procurement joint venture. This follows exploratory talks around potential partnerships in radio access network sharing, WiFi roaming, equipment harmonisation, M2M and new growth business development, as well as plans to share infrastructure in Poland and Austria.
See page 5
Refocusing on strengths
But should operators be capitalising on their strengths instead of scaling back? Telcos have three main advantages: connectivity, security and a long history of customer relationships. This is in stark contrast to some recent events involving technology companies: Sony’s PlayStation data breach, Apple’s iPhone location tracking, Amazon’s cloud computing outage and Google’s “accidental” collection of personal data from WiFi networks.
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According to one TMT lawyer, “Telecoms operators have a culture that is much more rigorous than that of content providers since there are specific regulations protecting the security and usage of customer data. So there is much less concern about telcos losing data”.
Some believe that telecoms companies should become more active in the cloud and data centre space. In the last month, we saw this year’s third major data centre acquisition in the US, when CenturyLink agreed to buy Savvis for US$2.5bn (page 46).
Acquisitions like this make less sense in Europe, with its different languages and regulations – although EU Commissioner Neelie Kroes has proposed some sort of cloud standardisation.
Surely, though, there is a place for secure, high-quality cloud products as part of an enterprise or SME offering. Some operators such as BT and Cable & Wireless Worldwide already sell this type of service to business customers.
“Cloud can be seen as an extension to the value chain, and the service fits in naturally with the connectivity and basic data they already offer”. The question is demand – can they provide the services customers want?”, one banker asked.
In our Special Report this month, Sophie Papsavva at EM Consulting argues that financiers too should be paying more attention to cloud, using as her case study white label cloud provider EC On Demand.
See page 49
Looking to the future
But maybe all this soul searching isn’t necessary. One US convergence specialist banker saw a rosier future for telcos, once they end all-you-can-eat data plans and transfer more capacity from voice to data.
Operators do not need to worry about competing with software developers: “In the US, the average smartphone customer is consuming US$40/month in data. Even taking a 30% cut, you are going to have to sell a lot of apps to come close to that. Telcos will benefit increasingly as data usage rises. Skype presents a long-term revenue opportunity for operators, as soon as they start charging appropriately for data”.
For those telcos who do want to participate in the app revenue stream, though, there are three ways: API publishing, white label app stores and deals with leading independent app stores such as Get Jar. “Operators will suffer as they spend on network upgrades and work on increasing data pricing, but this is a short-term problem. Over the longer term they will be okay”.
