Telco 2.0 had the opportunity to attend Telecom Finance last week, a conference for investors, bankers and advisors working in the telco industry. Here are some of our impressions of the key themes…
1) Fear and loathing
Everyone was putting on a brave face and trying to talk up M&A deals, but there was an undercurrent of dread. As one of the speakers said, “the Macquarie deals aren’t coming back”; finance for big LBOs and mergers is no longer available, and you’ll struggle to get big network upgrades in developed markets funded. Further, whatever major deals do manage to get financed are likely to come on very strict terms. The days when infrastructure funds, like Macquarie, was able to borrow dirt cheap and take out equity from their investments have gone with the crisis.
2) The vital importance of holes in the ground
There was a lot of interest in holes – the civil engineering infrastructure. Specifically, everyone at TelecomFinance was keen on buying towers, rights of way, dark fibre etc, as well as promoting network-sharing deals. Of course, these are the kind of low-risk projects, backed up by steady cashflows as well as a near-indestructible asset base, that are likely to be feasible in a traumatised financial environment. And they are also large. No wonder the financiers like them. But it wasn’t just that – access to ducts, towers, and passive infrastructure generally was highly popular as a strategy for FTTH and LTE deployment and also for managing regulators.
Darragh Stokes from Hardiman Telecom made the excellent point that operators and their financiers had imagined that all the value would be at layer 3, the network layer, and above, and had therefore gone into the whole telco-as-media company vision in a big way. That had proved to be totally delusional. Web 2.0, software, and content players had won, and now a lot of the operators who did it were stuck without the key assets they sold. There is of course a curious tension here; on one hand, stressing the importance and value of the civil works infrastructure, and also vigorously promoting the idea of selling it to a bank or other investor.
Investors Dread Multiple LTE Rollouts
The explanation of this paradox is that, we suspect, a lot of investors see selling off layer zero assets (like towers or ducts) as the fastest way to get network-sharing implemented. There is real dread among investors at the prospect of multiple LTE roll-outs. On the fixed side, duct-access is also seen as a sensible way to deliver the promises of FTTH – especially the potential OPEX savings – while also pleasing the regulators.
Losing the local loop
The dominating factor here is that the ex-incumbents still probably see their control of the local loop as being valuable – it’s the cost of civil works, not anything else, that protects them from other players just laying their own lines. Without it, the whole intricate dance of regulation wouldn’t get started. But the deep, dark secret is that they desperately need to do the job; not only is the copper network limited, it’s also a fearsome OPEX sink, and its value is draining away.
PSTN – a Spent Force
At the event, Eircom described how customers were actually churning from their ADSL service towards cellular broadband, now about 30% of the market. Of course, this probably isn’t a sustainable deal from the backhaul point of view, but it demonstrates that the users perceive less and less value in the copper line, and in fact, it may be losing its traditional status as a recession-proof utility. As Ireland is battered by the economic crisis, rather than cut back on “luxury” mobile services, subscribers have kept the mobile and cancelled the PSTN line. Line loss was running at 7% annually.
Similarly, Portugal Telecom (PT) has been running a major ad campaign to encourage its subscribers to use fixed voice; according to their CFO, since the cable operators bundled it, it’s been essentially free but usage has been falling steadily.
Infrastructure sharing, at home and abroad
PT also gave some of the most convincing arguments for FTTH deployment with duct-sharing – they have around 25,000 route km of access fibre in service. In most of Portugal, they don’t have to provide wholesale service, but they do have to provide duct access at regulated prices. (Where they don’t have to provide duct access, they do have to offer wholesale.) About half the total has more than one operator’s fibre in the ground, and PT is pressing on with deploying more. A major driver of deployment is that they can also provide multichannel TV and send it directly into existing in-building co-ax cables to serve the 2.5 TV sets in an average Portuguese household. They put the cost of FTTH deployment on a par with ADSL2 – as long, of course, as you’ve already got the ducts.
Jumping on the Tower Bandwagon
The same arguments hold for emerging-markets infrastructure, but more so due to the lower ARPUs and unusually high costs of civil infrastructure. Les Baillie of Safaricom put the cost of a rural tower in Kenya at $250,000; Darragh Stokes put the cost of one in India at $70,000. The enterprise value of that India tower is $225,000, so you can see the attractiveness of investing in towers – under a network-sharing deal, he said, carriers would expect to pay $600 a month in rent to use it. At the moment, 1.26 operators use an average Indian tower, so the potential for savings on the carriers’ part (and profit on the part of tower-owners) is considerable.
3) The howling void
Strangely, in the light of the black picture above, there was very little interest in or awareness of voice as a product. Nobody seemed to have considered that part of the problem is the product, not just the price, and that voice could be better, as we discussed in the Voice & Messaging 2.0 strategy report.. Eircom talked of being keen to capture corporate customers in Northern Ireland and the UK more broadly; but the Derry-based Asterisk specialists Synetrics are doing a roaring trade in enterprise voice deployments, with the biggest so far being a 150,000 line monster. It’s hard to see why anyone would want a traditional Centrex system these days, with companies like the ones in Voice & Messaging 2.0 Innovators’ Directory about.
(An honourable mention goes to PT, who noted that if consumers wanted good prices on mobile voice, enterprises wanted special features on fixed.)
Also, with the exception of Safaricom and mobile money transfer, you had to wait the whole conference to hear about transactional B2B Value Added Services (a key Telco 2.0 concept) or better content distribution. In that sense, there was every reason for fear to reign; nobody had very much in the way of progressive proposals to offer other than selling all the towers and paying a special dividend.
The main exception was the emerging markets. Investors are gagging for emerging market projects, especially in Africa; the buzz factor now that the major submarine cables have landed is fearsome.
Consolidation Coming…
However, on the other hand, there’s a tension between the fact that the bankers are desperate to get big African projects out of the door and the blindingly obvious point that Uganda does not need or want six GSM networks. It’s very likely that a lot of investment is not so much going to over-building infrastructure, as over-starting networks – it could be better used building up capacity, or getting any connectivity at all out to the bush, or building missing infrastructures like long haul terrestrial fibre and data centres, but instead it’s being used to start up the sixth mobile network over the capital city’s downtown. The outcome – too many MSCs, not enough trenches by the roadside.
Elephant in the Room
There’s an African elephant in the room. As Mike Peo of Nedbank pointed out, it’s very unlikely that networks 3, 4, and 5 will ever be able to build out to the scale networks 1 and 2 have achieved, so they’re going to be stranded investments unless they either consolidate or network-share. Which brings us back to the vital importance of holes. The alternative, of course, is a shakeout with capital destruction.
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