To many, the deal seemed like a foregone conclusion, and we had been looking forward mostly to the negotiations that would steer it to completion (see the attached press release). It is hard to know exactly what motivated the Bouygues Board’s decision.
We ourselves had underscored the tremendous complexity of such a deal that involved the acquisition of the number three operators’ customer base and the sale of its network and a portion of its frequency holdings to the country’s number four operator, Iliad/Free. This dual negotiation was nevertheless necessary, for both financial reasons and to get a jump on the Competition authority’s expected reservations about the merger. Here, we understand that Bouygues was very reluctant to endure the uncertainties of a long period of anti-trust investigation, with no guarantee of substantial compensation should the deal fail to win approval.
To this can be added the federal government’s very strong reservations, and the difficulties in negotiating credible guarantees for the future of the company’s teams and jobs.
Lastly, without underestimating the ability of the Bouygues Telecom team, its 4G network and its frequency holdings to achieve pre-Free EBITDA (25%) by 2017, we cannot discount the possibility of further merger and acquisition deals in the French telecom market.
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CEO, IDATE DigiWorld
It is a surprise?
No, everyone was expecting it. First, because Altice/Numericable-SFR spokespeople had underscored the appeal of such a deal and, second, because in most European countries we are seeing national market structures going from four to three mobile operators. Such is the already the case in Germany and the UK, and very likely in Italy and Spain.
If we look at the situation outside the European Union, we see that in the United States there are four national operators for as many people as there are in Europe’s five biggest markets combined.
Would this means an increase in retail market prices?
Let’s not forget that, in France and in most other countries in Europe, the sector is in a state of deflation, and has been suffering a steady decline in revenue since 2008. Another outstanding feature of the French market is particularly low prices. While this is of course a positive thing for consumers, it can also be at the expense of investment (which decreased in France in 2014) and innovation: in a healthy competitive environment, price alone must not be the sole element of distinction between vendors.
Second, predicting what the landscape will look like after this merger occurs, Free will no doubt remain very aggressive on the pricing front for mobile products as it works to close the gap with its rivals: it would represent only just over 7% of the sector’s revenue, well behind Orange (43%) and the new SFR with just under 50%. In the fixed line market, the breakdown of market share would be less dramatic (23.5% –41.5% – 35% respectively) but competition should remain quite lively.
Would this mean a decrease in investment?
Theoretically, it is possible that we will see a decrease in telcos’ combined CAPEX. But this remains theoretical if we take into account the situation of a sector that is struggling to get back on its feet, and to invest at a rate that keeps pace with the ongoing increase in superfast fixed and mobile network traffic. Remember that telcos’ spending in France was down in 2014. Here again, it is interesting to compare with the situation in the United States: over the past two years, telcos’ combined per capita spending on mobile networks in the United States was roughly double what is was in Europe’s main markets.
The goal for public authorities and consumer associations examining the deal should include an expectation that it would accelerate the pace of superfast fibre and 4G+ network coverage nationwide.
What have we seen, in terms of prices and investment, in other European countries that have experienced a similar consolidation?
In Germany, it is still too early to draw any conclusions. In the UK, in a market once populated by five operators, the merger of T-Mobile UK and Orange UK in 2009 – which were the country’s third and fourth largest operators, respectively, at the time, with a close to 20% market share each – resulted in the creation of a new leader, EE, with a 37% market share at the outset, but which fell to 32% in 2014. Calling prices in particular decreased steadily: the average price of a mobile calling minute dropped by 17% between 2009 and 2012. The company’s spending decreased in 2010 but rose again in subsequent years: T-Mobile UK and Orange invested an average 9% of their network revenue in 2008, compared to close to 10% for EE in 2014 – although it is also true that the company’s combined revenue decreased by 22% during that time.
In Austria, Hutchison’s takeover of the local Orange subsidiary, which took the market from four operators to three, had the opposite effect: putting an end to ongoing price decreases, and even resulting in a significant increase in 2013 of around 20% on the previous year. Although it should be said that prices in Austria had been very low for a long time. The consolidated entity’s capital expenditures (as part of the 3 conglomerate) dipped slightly, but relative CAPEX rose from 16.5% of the company’s revenue in 2012 to close to 20% in 2014.
What can we expect from the players if the deal goes through?
Numericable-SFR should take in around €2 billion in cash from the sale of the Bouygues Telecom network to Iliad/Free. It should also be able to enjoy economies of scale in the revenue generated from Bouygues Telecom customers, thanks to the new entity’s improved OPEX and CAPEX ratios.
Bouygues is given an exit strategy under terms that are far better than what was on the table six months ago, even if the short-term outlook for free cash flow is not guaranteed.
Iliad can look forward to putting an end to its roaming agreements with Orange, and gaining a 4G network with one of the two best rates of national coverage, without having to have built it itself. The company is also likely to gain access to new frequencies, either directly under the terms of the deal or indirectly as the result of imposed “remedies”.
As to Orange, it will suffer from the lost roaming revenue from Free, earlier than planned, but could also benefit from more stable market prices.
How are antitrust authorities, and public policy-makers in general, likely to react?
The new SFR would become the mobile market leader, earning just under 50% of the sector’s revenue, ahead of Orange with 42% and Free with >7%. This market structure is not likely to curry favour with the competition authority. As concerns the deal itself, the competition authority should view the Bouygues Telecom-Iliad aspect as a guarantee of ongoing competition, as the smallest operator would enjoy a real gain in assets. Depending on the frequency-related options that are included in the terms of the deal, France’s anti-trust authorities could impose further spectrum sales and terms in support of MVNOs.
The biggest issue for public authorities is the destabilising impact on the rules for upcoming auctions being held by market regulator, ARCEP. The original rules had been designed to maximise bidding incentives for a four-player market. Now, they will need to consider how these rules will be affected by the likelihood of a three-player market, keeping in mind that, even if it does go through, the merger is not likely to close before the auctions are held later this year.
In the fixed access market, public authorities could see the deal as a way to strengthen guarantees from operators for superfast fibre network rollouts: chiefly Numericable-SFR and Orange, which are by far the heaviest investors in new gen systems.
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IDATE, Europe’s premier digital economy think tank, uncovers major disruptions in the telecom, Internet and TV markets
Over the past 15 years, IDATE’s DigiWorld Yearbook has become a vital source of information for industry players, delivering analysis of the developments that have shaped the telecoms, Internet and media markets during the year gone by, identifying core global trends and providing snapshots of what lies ahead. The purpose and scope of the Yearbook has expanded as digital technologies have become an increasingly central component in the different sectors’ transformation: connected cars, financial services, insurance, healthcare, retail sales, the collaborative economy…
IDATE Chairman, François Barrault, is delighted to be celebrating this 15th edition, noting that, “we have entered into a new stage in the digital transformation over the past few months. Today, new intermediaries are coming to shake up the status quo, many of them from outside the industry, taking advantage of new technologies and new consumer cultural behaviour to revolutionise the value chain. Everybody knows how Uber has disrupted the taxi business, and Airbnb the hotel market. But finance, insurance, health and automotive industry leaders have all had to sit up to the risk of digital innovations shaking up their ecosystem, and forcing them to depend on external, unavoidable platforms.” This echoes the central theme of the upcoming DigiWorld Summit (17 – 19 November 2015), as IDATE’s annual conference will be held this year under the banner of: “Digital First”.
“For we here at IDATE,” says CEO, Yves Gassot, “whose business it is to wade through the latest market developments on a daily basis, the process of looking back over the year’s events only confirmed the significance of certain game changers such as mobility, the cloud, the Internet of Things, big data and social media. Some would also add 3D printing and artificial intelligence to the list.”
Scorecard for the digital economy in 2015: back on a growth path, but Europe still lagging behind
After the recovery announced in 2013, DigiWorld markets confirmed a stronger rate of growth in 2014, generating 3,700 billion euros. All segments combined, growth increased to 4.4%, which is 0.5 points more than the year before. These figures are still below those being reported for the economy as a whole: global GDP rose by 5.9% in current value in 2014, compared to 5.3% in 2013. This global recovery will become stronger still in 2015, with DigiWorld markets generating 3,900 billion euros, and climbing to 4,400 billion in 2018.
• This improvement can of course be attributed to Internet services which continue to boast more than 20% annual growth and, despite still accounting for only a fraction of the market, are helping to sustain the whole (growing from 275 billion EUR in 2014 to 475 billion in 2018);
• But also to stronger performances from a large number of more traditional segments – which are typically bundled together as core DigiWorld markets, i.e. telecom and IT equipment and services, consumer electronics, TV services, etc. Growth in these markets, i.e. excluding Internet services, rose from 2.8% in 2013 to 3.2% in 2014.
• Europe as a whole continues to lag behind increasingly vigorous North American markets, and the powerhouse that is emerging Asian markets.
2025: snapshots of 10 key trends and three outlook scenarios for Internet, telecoms and TV markets
For the first time, this year’s edition includes outlook scenarios for Internet, telecom and TV markets and players, provided by IDATE’s teams:
• Internet 2025: Will the top platforms become even more powerful?
• Telecoms 2025: Can the top telcos strike a balance between becoming commodities and competing head on with the top OTT companies?
• TV 2025: How can distributors avoid being cut out of the loop?
About the DigiWorld Yearbook
The finest market insights from IDATE experts who track the changes at work in the globe’s telecom, Internet and media industries throughout the year.
The DigiWorld Yearbook is published in English and French and available in print and PDF format.
> The 2014 edition can be downloaded for free on www.idate.org
> The 2015 edition is available for purchase. Print: €100, incl. VAT; PDF: €69, incl. VAT on www.idate.org
For more information: www.idate.org/digiworldyearbook/
Back from a brief trip to San Francisco, I wanted to share some of the industry news making headlines over in the United States.
Now that the Comcast – TWC merger has fallen through, new deals are in the works. As America’s biggest cable company, Comcast, has put an end to its plans to merge with the number two player, Time Warner Cable, largely because anti-trust authorities were proving hostile to the deal, everybody is wondering what will happen next, as there is little doubt that the country’s cable market will continue to consolidate. It is entirely possible that the number four cableco, Charter, will make the first move, reviving an earlier attempt to take control of TWC that was quashed by Comcast’s bid – albeit compensated to some degree as the company was able to pick up a few assets in the bargain.
The deal could start by Charter merging with Bright House, sixth biggest cable company in the US and an old TWC spin-off, before making a play for TWC. This merger would not be without consequence for the Europeans as Charter’s biggest shareholder is Liberty (more precisely, Liberty Broadband and its redoubtable CEO, John Malone. It is also worth considering that John Malone swooping back in into the American cable market might pave the way for a deal in Europe between Liberty Global and Vodafone…
This consolidation in the cable market cannot be seen separately from the growing popularity and presence of streaming video services (Netflix, Hulu, Amazon, HBO Now, CBS, YouTube, etc.) which represent a threat to cable companies’ revenue – with a potential ability to cut them by half. They will need to become more powerful, to stand up to this new source of competition, protect their exclusive rights to feature films, series and sport. Otherwise, they will be pushed out of the market, and reduced to the status of dumb pipe…
Ubiquitous Gigabit networks in the near future?
We still don’t know what Comcast plans to do. If it can continue to improve its clusters in the main markets through customer swaps, it no longer appears to be in a position to expand its footprint by increasing the number of households it covers. In fact, it may become increasingly bent on protecting cable’s supremacy in its broadband market franchises: currently accounting for more than 60% of the market and close to 80% of all new subscriptions each quarter for several years now. The danger here appears to come from the momentum triggered by Google Fiber to deploy symmetrical 1 Gbps access (for 70 USD a month, without the TV channels), with the first plans available in several cities, including Kansas City, Missouri, Austin, Texas and Provo, Utah. Taken first with some scepticism ("Fiber To The Press Release"), today Google’s initiative has translated into subscriber numbers in the tens of thousands, which is making ISPs sit up and take notice. It is a move that has won the support of the Chairman of the FCC who early on stated his plans to abolish the ban on municipal networks that exists in some states, and has attracted real interest from a number of cities. From a list of around 34 cities whose applications are being examined, five – Raleigh-Durham, Charlotte, Nashville, Atlanta and Salt Lake City – were selected early in the year for the next Google Fiber rollouts. As this initiative gathers pace, and feeling their franchises threatened, telcos and cablecos have responded by announcing their own Gigabit network rollouts. AT&T, which had focused chiefly on hybrid fibre-copper networks with VDSL, has begun to deploy FTTH at 1 Gbps in Austin, Texas.
Since then, the country’s biggest telco has reveal plans to follow up with similar rollouts in 21 more metropolitan areas, including cities such as San Francisco and Los Angeles where Google Fiber has no plans to set foot as yet. Century Link has also unveiled its plans for Gigabit network rollouts. Verizon, meanwhile, has taken something of a back seat, increasing access speeds on its Fios FTTH lines to 500 Mbps, and for its video bundles, but does not appear to have plans to enter the fray and expand its fibre footprint. Over in the cable market the number three player, Cox Cable, was the first to deploy Gigabit networks – in Phoenix, Omaha and Las Vegas – and has committed to steadily expand into other markets. This was the backdrop to Comcast’s subsequent announcement of 2 Gbps connections for 1.5 million households in Atlanta by next month, and for a total 18 million households by the end of the year – but no mention of how the plans would be priced.
Although we are hearing more and more Gigabit network announcements in the United States, a grain of salt would not be unwarranted. First, because we are all aware of the inevitable gap between headline speeds and actual speeds. Second, because figures on the scale of the rollouts, the actual increase in the number of homes passed and the sums earmarked for the deployments remain unclear. And, lastly, because there has not yet been any feedback on the use of these plans speeds…
Will the FCC and FTC also block the AT&T – DirecTV merger?
More than a year after the 49 billion USD merger was announced, the two protagonists are still waiting for authorities to greenlight the deal. In theory, the merger has set off fewer alarm bells than the Comcast/TWC deal, as it involves a telco and a satellite pay-TV provider. But it would nevertheless consolidate the position of the country’s biggest pay-TV provider, which already has 26 million subscribers in the United States, compared to fewer than 6 million for AT&T’s U-Verse and more than 20 million for DirecTV. This tremendous market clout is the central argument being put forth by Netflix and others who are demanding certain commitments in exchange for the deal going through.
Faced with the likelihood that the FCC and the FTC will give the merger the nod, discussions today have shifted to what these commitments might be: an obligation to sell broadband and pay-TV services separately, forbidding the new company from unduly favouring its own OTT TV programmes, for instance by imposing data caps on the use of rival services, etc.
The final thing to remember is that the merger would also provide AT&T with an opportunity to strengthen its offensive on the Mexican market, where it has already made substantial investments in its mobile business via Iusacell and Nextel, and on Latin American in general, where DirecTV already operates.
What does the future hold for T-Mobile?
The first thing to mention is the dip in the US market: after rising steadily, contrary to the European market, revenue (year-on-year) began to decrease for the first time in Q4 2014 – a trend that carried on through the first quarter of 2015 (46.093 billion USD versus 46.880, year-on-year). With 39 million customers, Deutsche Telekom’s 67% owned US subsidiary is poised to overtake Sprint in prepaid/postpaid/wholesale market share – 15.8% versus 15.9% – to become the country’s third biggest mobile operator. In Q1 2015, the telco’s aggressive pricing strategy brought in 1.125 million subscriptions, including 991,000 mobile phone accounts – the remainder being for tablets. At the same time, T-Mobile needs to sustain very high spending levels to achieve LTE coverage nationwide. The company’s finances will also feel the pinch of the second digital dividend auctions (600 MHz band) in 2016.
So it is with all this in mind that market watchers keep waiting for a new merger or acquisition deal to be announced. As it seems unlikely that the authorities will agree to a major merger inside the sector, many see Dish as the most likely candidate. The satellite pay-TV provider acquired more than 100 MHz in the different frequency bands and spent more than 10 billion USD at the latest AWS3 actions, without saying what the spectrum will be used for. Another option would be for Comcast – which, like other cable companies, is very committed to its Wi-Fi strategy – enter the mobile market. One major story making the rounds is the launch of Google’s Wi-Fi First service, based on agreements with T-Mobile and Sprint. Certainly less ambitious in scale and means than Google Fiber, this initiative nevertheless raises the same questions: is this the Mountain View company’s way to stimulate competition in the access market? Or should we see it as a desire to diversify by developing a presence over time in the telecommunications sector?
Follow-up to the FCC’s net neutrality decision
Debates since the regulator’s decision have gone in two directions. The first are over how the courts will rule in opposition cases. Among the FCC’s opponents is cable association, NCTA, whose former long-time chairman now heads up the FCC, and whose chairman today is Michael Powell who was the FCC chairman in 2005 when broadband access was classified a Title I service. The second topic of debate concerns interpretations of the FCC decision. Those who are criticising Facebook in India and its Internet.org offer are stoking the polemic over how compatible the different zero rating options are with net neutrality. Not least because Canadian regulator, the CRTC, recently cracked down on zero rating offers from Videotron and Bell Canada.
Verizon acquires AOL for 4.4 billion USD
Verizon is pushing through with its strategy to snap up the content that will allow it to sustain its LTE market leadership, and its mobile video business ambitions. In addition to the content brought in from AOL, the deal gives Verizon control of the adap.TV platform that AOL bought in 2013, which should prove an interesting asset when going up against Google and Facebook in the sale of advertising inventory (the two heavyweights currently accounting for close to 70% of the market).
The end of the Patriot Act and the NSA’s unchecked powers?
The House of Representatives voted in favour of a bill that would put an end to the most controversial sections of the law that was passed after the events of 9/11. Topping the list, wire taps will once again need to be authorised by a judge. The bill is still being hotly debated in the Senate, but hopes are high that it will go through.
Google cars hitting the road in California
We may well see city road testing begin on the first driverless Google cars this summer. Although authorities have demanded that Google put a steering wheel and brake pedal back in the cars, to allow the user to take control of the vehicle if necessary.
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IDATE’s latest report explores telecom carriers’ strategies with respect to Content delivery networks (CDN). It analyses the impact of telcos’ arrival into the CDN value chain, especially with respect to pure-player CDN companies and equipment suppliers.It concludes with an analysis of the market that telcos can expect to capture over the long term, especially in the realm of mobile solutions which today are few and far between.
Telco CDN: strategic business for telcos and two-sided market enabler
As internet traffic continues to grow, spurred in large part by video consumption, most incumbent carriers have become engaged in a strategy to deploy their own content delivery network (CDN), which is integrated into their access network. Telcos will use a fixed CDN for their internal purposes, to improve the quality of the content services they distribute. This allows them to earn revenue from users, notably on managed services like IPTV, to offload traffic and to reduce their network expenditures. As to mobile networks, we have not really seen any native mobile CDN solutions as yet, but rather fixed solutions adapted to mobile systems. We are nevertheless starting to see initiatives from mobile equipment suppliers such as Samsung and Ericsson, in partnership with Akamai.
Operators are using telco CDN as a way of shoring up their two-sided market strategies, by generating new revenue streams, notably from OTT vendors. In other words, operators are looking to to be both a both technical and economic solution to their development issues. But the way they are positioning their CDN is somewhat tentative, and they are struggling on the sales end of things when targeting media or internet companies, as both have a range of alternatives for distributing their video services, such as paid peering.
An increasingly complex CDN value chain
The direct competition that telco CDN are facing has more or less required them to embrace coopetition, and create partnerships with their rivals. Traditional CDN players developed their solutions to target telcos, offering CDN resale and managed CDN solutions as well as licensing schemes. Some operators, such as AT&T and Orange, stumbled when initially rolling out their own CDN, before turning to more long-established CDN players as partners, in particular via distribution deals.
So CDN market competition has heated up since telcos entered the fray, and become full-fledged links in the newly revamped CDN value chain. They are part of what is now a complex ecosystem where players often occupy dual positions:
• telcos are both rival and customer for long-established CDN players, in both the retail and wholesale markets;
• with respect to internet companies, telcos may be both their wholesale supplier and their retail market competitor;
• equipment manufacturers are also positioned in the value chain, targeting client telcos and competing with traditional CDN companies.
The CDN market is in the throes of a second wave of consolidation, which will result in an even more competitive environment as telcos acquire traditional CDN players, a case in point being Verizon’s recent takeover of EdgeCast.
Expected boost from mobile traffic and non-video services starting in 2016
Telco CDN accounted for a mere 0.7% of the global CDN market in 2013. But the long-term outlook is good, and they are forecast to grow by 90% annually over the next five years. 2016 is expected to be the year that operator CDN really take off, spurred by growing distribution on mobile networks and distribution of non-video content. By being indispensable players in the mobile ecosystem, telcos will be able use CDN to optimise traffic on cellular systems. The creation of CDN federations also opens up new opportunities for CDN market players to expand their footprint.
Tiana RAMAHANDRY, Consultant
Net neutrality : From one extreme to the other or the great transatlantic divide
Should we take legal measures (and if so, which) to prevent internet service providers (ISP) from becoming the web’s gatekeepers, and undermining the open internet?
The question is apparently far from resolved, and recently gave rise to two completely opposite set of events on either side of the Atlantic.
In the United States, two potential game-changing moments have occurred. First is the decision from the federal Court of Appeals in Washington that seriously undermines the principles laid down by the FCC. Once again, judges have ruled that FCC provisions forbidding operators from blocking access to lawful sites, or slowing a connection when they decide that generated traffic is preventing the network from running efficiently, have no legal foundation. If they do not contest the FCC’s power to regulate the internet (and have admitted the legality of the obligation to be transparent in the commercial information provided to consumers), they decided that the federal agency’s stipulations cannot go beyond that, once ISPs’ services are not governed by the principles of common carriage (which are imposed on telecommunications services and forbid any form of discrimination).
We should also remember that cable companies have always refused to bow to common carriage rules, including when they began to provide broadband access via cable modem. The FCC did not want to introduce asymmetrical regulations when telcos began providing ADSL access, and confirmed at the time that internet access would be considered an information service. Even if it wanted to, the FCC today would have little chance of persuading Congress from changing its mind about this. It does, however, have some power when it comes to imposing remedies as conditions for approving mergers or acquisitions (as it did on Comcast when it took control of NBC).
Which brings us to the second major bit of news: the interconnection agreement between Comcast and Netflix. In the past, the SVOD service – which is thought to account for a quarter of internet traffic during peak hours – had consistently refused to negotiate any paid peering agreement with telcos and cable companies, preferring to use the services of the transit operator in charge of its content delivery network (CDN) and managing peering locations with ISPs. Hence the surprise over the deal with Comcast, even if we do not know exactly how much Netflix has agreed to pay (as the deal is a commercial one) or what we should make of it. Some are seeing this as the natural outcome to the Washington court ruling, and its de facto eradication of net neutrality rules. Although, in fact, interconnection agreements have never been covered by the FCC’s guiding principles. What we can take away is the clout that the number one ISP in the US was able to wield over Netflix. But we may also discover an agreement that is in fact advantageous for the SVOD service. One that allows it to avoid having to got through a transit operator, and improve the quality of access to its programming in the bargain. Some market watchers are saying that the planned merger between Comcast and Time Warner Cable, which is currently being scrutinized by antitrust authorities, may have forced the cable giant to offer proof of its ability to play well with a major service provider.
So what happens next? Comcast is not the only ISP, so we are waiting to see what kind of deals Netflix might strike with the markets other two heavyweights, AT&T and Verizon. And Netflix is not the only content provider. In addition to ISPs’ services, we need to remember the competition brewing between the various TV access device providers (Roku, Amazon Fire TV, Chromecast, Apple TV…) and online media (video, game, music) stores that combine their own content and access to third-party services. A few days after the Comcast – Netflix deal was announced, we learned that Apple was negotiating a deal with Comcast to have guaranteed bandwidth for the supply of its own VOD service…
Meanwhile, on the other side of the Atlantic, the game changer came from the European Parliament. Taking up the report released by Ms Kroes last September, it sought to strengthen Europe’s net neutrality legislation. Rather than sticking with a balanced text that gives NRAs the power to oppose ISPs’ discriminating against content and application providers, it adopted a definition of net neutrality that we had thought confined to only its most stringent proponents: ““Net neutrality” means the principle according to which all internet traffic is treated equally, without discrimination, restriction or interference, independently of its sender, recipient, type, content, device, service or application” (amendment 234, retained). Under these circumstances, the ability to differentiate access offers or to charge extra for preferential treatment on ultra high-speed fixed and mobile (1) networks will have been nipped in the bud.
Of course, it is likely that the European Council will want to make changes to the text before it is passed into law. But it is curious to see how the Kroes report, which was supposed to focus on creating investment incentives, resulted in this proposal.
And astonishing to see such extreme and opposite directions taking shape at the same moment on either side of the pond.