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Issue 7

Q3 2012: challenges of rapid changeWelcome to the seventh edition of Inside Telecommunications, Ernst & Young’s review of the most signifi cant developments in the telecoms sector each quarter. The third quarter of 2012 has seen a range of announcements from a variety of sector segments. In this issue, we consider a number of important themes, from the latest developments in mobile payments to small cell network strategies and the growing importance of harmonized spectrum release.

We hope you fi nd this useful. Please do not hesitate to share your feedback with me or any of my colleagues at Ernst & Young.

Inside TelecommunicationsQuarterly talking points from Ernst & Young’s Global Telecommunications Center

Jonathan DharmapalanGlobal Telecommunications Leader

2 Inside Telecommunications

ContentsService innovation 4

Mixed progress for mobile operator payment partnerships 4

Growing diversity of operator approaches to pay-TV 7

Telecom survey fi nds newopportunities for mobile industry 10

City versus country 11

Technology 12

Small cell deployments gather steam 12

E-reader shipments under strain as tablets ride high 13

Regulation 15

EU unveils new regulatory approach to spur broadband investment 15

Spectrum harmonization in Asia-Pacifi c unlocking global benefi ts 16

Mergers and acquisitions 18

Introduction 18

Consolidation continues as mobile players position themselves for data demand 19

Increasing operator moves into new market segments in Asia-Pacifi c 20

Asia-Pacifi c telcos target opportunities in health care technologies 21

Consolidation comes to New Zealand 21

Now available 24

3Issue 7 | July–September 2012

The three months to September bear witness to an industry in transformation. Migration to new network technologies in mobile is quickening — by the end of the third quarter, some 105 LTE networks had been launched worldwide. Yet such rapid evolution is putting pressure on regulators and policy makers to ensure an adequate enabling environment for new growth.

ForewordThere are signs that regulatory policies are shifting with the times. In this issue, we look at how demands for harmonized 4G spectrum are being heeded at both regional and global levels. Long-term planning and consensus building are required if the benefi ts of 4G data speeds are to be accompanied by cost effi ciency for vendors and international roaming capabilities for end users.

At the same time, network upgrades in the fi xed broadband market have been conspicuous by their slow rate of progress. Homes passed by new fi ber infrastructure remain low, particularly in Europe, as incumbents balk at the level of investment involved. For many players, regulatory certainty has been historically lacking — which is why the European Commission’s latest policy positioning as part of its “Digital Agenda for Europe” has been designed to foster investment as well as safeguard competition.

While regulatory policies struggle to keep pace with technology evolution, operators continue to broaden their service offerings. The preferred route for many remains partnerships — and recent announcements have seen global players strike deals with regional operators. In July, Telefonica signed an agreement with UAE-based Etisalat to jointly develop business opportunities and share knowledge on digital services. In September, UK-based Vodafone announced it had partnered with Kuwait-based Zain to expand its partner market presence for mobile services.

Consolidation remains an important theme in the sector as many players eye more effi cient market structures in their core business. In the mobile industry, in-market deals stretch beyond like-for-like mergers, with players holding spectrum assets also seen as attractive targets by mobile network operators. In the United States, consolidation in mobile appears to be back on the industry agenda, following T-Mobile’s announcement in early October that it would merge with MetroPCS.

Meanwhile, leading carriers in developed Asia remain keen on opportunities in adjacent technology segments, from mobile content to IT services. Fearful of relegation to the role of bit-pipe provider, many established players are looking for new ways to cater to consumers and enterprises alike by buying capability in new areas.

Organizational restructuring has an important role to play for operators with wider ambitions in technology, media and telecommunications (TMT). In Asia, the likes of NTT, SK Telecom and Singtel have already announced new organizational structures in recent quarters. In August, it was the turn of Korea’s KT to create new business units to provide a platform for growth in areas such as media, content and convergence.

Adrian BaschnongaSenior AnalystGlobal Telecommunications [email protected]


Service innovation

In the last two years, operators have been reinforcing their presence in the burgeoning mobile payments space through national joint ventures. While such moves are seen as vital to securing scalable solutions for contactless mobile payments, regulatory concerns and business model uncertainties have been acting as a counterweight to progress.

In July, the fi ve partners involved in a Dutch mobile payments tie-up — two operators and three banks — announced that they were dissolving the joint venture. Formed in 2010, the consortium originally consisted of six players until T-Mobile dropped out late last year citing concerns over return on investment. The remaining fi ve members have since announced that the JV model is too complex and time-consuming, yet they remain keen to launch mobile proximity payments and are still exploring an appropriate governance model for further cooperation.

There was more promising news during the third quarter for Project Oscar, the consortium of UK mobile operators looking to launch contactless payments.

In September, the European Commission approved the joint venture — having launched an in-depth investigation into its competitive credentials in April this year.

Following the EU’s approval, the operators involved underlined that they were committed to making their prospective payments platform open to all interested parties, from mobile virtual network operators and banks to advertising agencies and retailers. Some weeks later, the UK consortium announced its fi rst supplier, an HR outsourcing specialist, as it looks to grow its headcount from 40 to 150.

In other markets, operator-led partnerships have already brought mobile payment services to market. In June, the Swedish joint venture 4T launched WyWallet, which provides person-to-person payments as well as online and SMS payments capabilities to 97% of Swedish phone users. Support for NFC-based payments is expected from 2013. Meanwhile, in the United States, the operator-led ISIS payments platform is expected to launch in Q4 2012, initially in Salt Lake City and Austin.

Mixed progress for mobile operator payment partnerships


Operator payments partnerships are progressing at different rates according to local market factors. Government backing has an important role to play in this regard. Singapore is a good example of this — the Infocomm Development Authority (IDA) has acted as a catalyst for the development of a national NFC platform, with partners including all three mobile operators along with banks, card issuers and technology specialists.

In August, StarHub launched its SmartWallet app, which allows mobile users to use three different contactless payment cards on smartphones alongside other services such as redeeming virtual coupons. During the same month, Singtel announced an NFC payments service in conjunction with EZ-Link, one of its national partners, allowing smartphone payments at over 20,000 points-of-sale.

While payment joint ventures in Western markets have drawn criticism over launch delays, the appearance of NFC functionality in Singapore is notable for its quick development phase: the time taken from the award of a contract to develop national NFC infrastructure to NFC service launches themselves was just 10 months. NFC use cases are also set for expansion, with mobile contactless payments for public transport in the pipeline.

Despite moves towards standardized national NFC platforms, device-based technology options for contactless mobile payments technology are proliferating. In China, mobile operators are using a range of solutions, located on both the device and the SIM itself, while national payments provider China UnionPay has already rolled out more than half a million merchant readers that use a microSD-based approach.

Fears of a fragmented approach in the world’s largest mobile market are long-standing, yet a deal struck in June between China Mobile and China UnionPay, with plans to cooperate on product promotion and technical interoperability, could herald a more homogeneous mobile payments environment.

Despite these signs of increased collaboration in Asia-Pacifi c markets, at a global level the approaches and intentions of large technology players continue to unsettle operators. Although the proportion of smartphone models with built-in NFC functionality is rising — driven by Android and Blackberry operating systems — NFC capability is notable for its absence in leading devices such as the latest Apple iPhone.


Apple is instead favoring its Passbook application, to which a growing number of third parties are signing up. At the same time, retailers are also entering the fray as potentially distinct competitors to other mobile payment platform providers. In August, more than a dozen US retailers, including Best Buy and Walmart, jointly formed the Merchant Customer Exchange (MCE).

Meanwhile, in the start-up sphere, innovation rates show no signs of slowing. Gadgets linking existing credit cards to smartphones continue to appear — and represent an obvious threat to NFC-based solutions that dispense with contactless cards. In Europe, iZettle has launched its dongle-based solution for iOs in the UK and Nordics, launching an Android version in August. In the same month, Starbucks announced that it had invested US$25m

in Square, with 7,000 outlets set to accept payment via credit cards that are slotted into a dongle connected to a smartphone. Such solutions have already found favor in the small-to-medium-size business (SMB) segment and score well as mobile payments solutions that don’t require expensive point-of-sale upgrades.

While questions of customer ownership and new business models are hallmarks of mobile payments initiatives, the very attitudes of customers themselves require closer attention from the various service providers involved. In Ernst & Young’s recent consumer survey, The mobile maze, we fi nd that privacy and security concerns are top-of-mind for potential mobile money users — while greater guidance is also needed on how to install and use such services (Figure 2).

Figure 1. Proportion of global smartphone models with NFC capability NFC-capable devices as % of total smartphone models

0

5

10

15

20

25

30

Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012

Source: Ovum, “Smartphone Capability Analyzer: 3Q11–2Q12,” August 2012.


Figure 2. Take-up drivers for potential mobile payment users % of potential users

0 10 20 30 40 50 60

% citing that greater guidance on installation anduse would make them try it sooner

% citing that greater understanding of servicebene ts would make them try it sooner

% citing that more information on privacy andsecurity would make them try it sooner

Mobile money payment at location Mobile money transfer

Source: Ernst & Young, The mobile maze, October 2012.

Between one-third and one-half of prospective mobile payment users would try these functions sooner if they were more confi dent of how and why they should use them. While device payment functionality represents added convenience, such benefi ts will count for little if anxieties concerning privacy and security are not actively addressed.

Across 12 countries worldwide, 23% and 20% of respondents are regular

or occasional1 users of mobile money transfer and location-based mobile payment, respectively. This represents steady progress — yet potential users represent a similar proportion of overall responses. As our survey indicates, building greater levels of trust among mobile users and identifying the specifi c benefi ts of mobile payments compared to alternative payments instruments will prove vital to operator strategies in the medium term.

In recent years, IPTV services have been vaunted as one of the key services through which operators can make the most of gains in the broadband access market. Pay-TV services allow carriers to provide new types of bundle packages to existing end users, providing new routes both to incremental revenue growth and greater customer loyalty.

Such strategies enable established telcos to punch their weight in the triple- and quad-play market, meeting the threat from cable players and over-the-top (OTT) content providers head on. IPTV customer growth rates remain strong, particularly in Asia-Pacifi c, while a number of markets worldwide are expected to see rising numbers of triple-play households through to 2017 (Figure 3).

Growing diversity of operator approaches to pay-TV

1 Regular usage is defi ned as daily or several times a week whereas occasional usage is defi ned as less than once a week.


Figure 3. Forecast triple-play households in selected marketsTriple-play households (000s)

The three months to September have seen operators widen their TV propositions across a number of domains, from the provision of TV services via alternative platforms, to partnerships with OTT players and the acquisition of content rights.

In European markets where pay-TV services are well established, operators are pressing ahead with multiscreen strategies. In August, Belgacom launched its TV Everywhere service (“TV Partout”), allowing end users to watch TV on a range of devices, including PCs, laptops, tablets and smartphones. In the same month, Deutsche Telekom revealed plans to make its Entertain IPTV service available across a range of device types.

A number of incumbents have also acquired premium content this year. In June, BT Group won the rights to screen 38 of

the most popular English Premier League games for three years starting from August 2013. The UK incumbent now plans to offer a dedicated football channel, with interactive features available over a fi ber broadband connection. This was followed in September by a US$245m Rugby TV rights deal. Premium sports content remains a vital differentiator for a number of different industry actors — in August, France’s Canal Plus bought the rights to the international football matches of over 30 national teams, including qualifying matches for the 2014 World Cup.

As with other industry segments, partnerships are becoming a defi ning feature of the pay-TV market. Operators without an existing TV foothold are cooperating with pay-TV providers: in September, Malaysia’s Maxis struck an alliance with Astro, combining each others’

0

10,000

20,000

30,000

40,000

50,000

2011 2017

USA France South Korea Japan Germany

Source: Digital TV Research “Triple play forecasts,” March 2012


access and content options. Partnerships are also driving hybrid pay-TV platforms: the Youview service backed by UK operators and broadcasters was offi cially unveiled in July. At the same time, new combinations of content delivery and access platform are emerging, as highlighted by the September announcement of a partnership between Netfl ix and Freesat, the free-to-air satellite platform in the UK.

Operator tie-ups with OTT service providers and device manufacturers are becoming ever more apparent. In August, Samsung and Verizon agreed to offer IPTV content — including video-on-demand (VOD) — through the US operator’s FiOS App on Samsung’s smart TV. In the same month, Sweden-based TeliaSonera revealed it was collaborating with Samsung on a smart TV solution, one that dispenses with the need for an external set-top box. Then, in September, Taiwan’s Chunghwa Telecom struck a deal with Google, gaining access to Youtube’s application programming interface (API) and authorized content for its IPTV platform.

Such developments are vital if operators are to offset the potential threat of OTT services. While such offerings may not impinge on legacy platform share of primary pay-TV services, many industry watchers see pay-OTT services making inroads in secondary pay-TV services, where services are delivered to connected TVs and consoles. By negating the need for an additional set-top box and offering more choice than free-to-air (FTA) services, OTT service providers will be focusing on opportunities in this space.

Looking ahead, the evolution of pay-TV services will often hinge on local market factors. For example, in markets where pay-TV penetration is historically low, pay-TV provider partnerships with connected TV manufacturers can open up new market opportunities. Yet in countries where pay-TV penetration is already high, the balance of power between suppliers and competitors will produce different partnering approaches.


2 “Regular” mobile web browsing is between several times a week and every day.

Telecom survey fi nds new opportunities for mobile industryRohit Puri

Telecommunications Sector ResidentErnst & [email protected]

Unlike past communications revolutions, the mobile revolution is occurring at nearly the same rate all over the world. However, a global market does not mean the end of local opportunities.

Navigating the mobile maze, a recent Ernst & Young study based on a survey

of 6,000 consumers in 12 countries, found that although smartphone usage is climbing generally, market-specifi c opportunities abound and operators could be doing more to promote the use of data services in their markets.

For example, in 11 of the 12 countries surveyed, at least 40% of the population regularly2 uses mobile phones for web browsing (as much as 79% in some countries). This includes major emerging markets such as China, India and Indonesia. The exception, Brazil, sees regular mobile web browsing by only 12% of its population.

Neither network usage nor network capacity explains the low uptake in Brazil. Instead, the difference may be that many Chinese and Indian consumers own inexpensive domestically manufactured smartphones whereas Brazilians don’t have an equivalent. Trying to use a BlackBerry, for example, to surf the web, is more diffi cult than using an iPhone or an Android device.

China also sees heavy use of OTT instant messaging. Some 73% of respondents in China use instant messaging services regularly. The next runner up is India, with only 36% penetration.

The attraction is easy to understand: these kinds of instant messaging services don’t charge by event. Unlike operator-delivered SMS, instant messaging via an instant messaging application is generally free.

This pattern could be repeated elsewhere. Although it won’t necessarily be the same in all countries, we do believe the percentage of frequent users of instant messaging will start to go up, particularly where network effects gather momentum, such as we see in China today. Instant messaging applications, such as BlackBerry messenger and WhatsApp, tend to create their own communities.

C U L8R, SMS It’s plausible services such as WhatsApp will become more popular. Those days of endless SMS messages shooting back and forth are rapidly coming to an end. In the future, customers will generally prefer an extended text chat to be routed through an OTT instant messaging service, because OTT will be much cheaper than conventional SMS. That said, a short message is perceived to have more security and less latency and may remain the channel of choice for onetime, priority messaging.

China tunes inSome markets are marching to different drummers musically, as well. In most of the Western world, Apple is a massive


Another surprise analysts found in the data was that although 21–34-year-old urban smartphone users in the US used their phones more than rural users of the same age, they actually paid less for the service.

Part of the difference could be explained by the urban users’ sophistication and openness to promotions and new devices. The rest had to do with the greater availability of Wi-Fi to the urban consumer. Rural customers are less likely to have complementary devices like Wi-Fi and therefore will be spending more because wireless is their only form of broadband.

The data suggests that the current model of the US market is out of sync with the reality of how American consumers are using their smartphones. A more detailed segmentation of the mobile user base is needed.

City versus country

China also sees heavy use of OTT instant messaging. Some 73% of respondents in China use instant messaging services regularly. Next runner up is India, with only 36% penetration.

driver of music services, but in China and India, the number of consumers using local music services and operator app stores is increasing rapidly. The iTunes store may have the Beatles, but the new music services and operator application stores play localized content Chinese and Indian consumers can’t necessarily fi nd anywhere else.

This may be only the beginning of many more local content opportunities, particularly in three of the world’s largest emerging markets: China, India and Indonesia.

Prepaid breaks outBut perhaps the biggest opportunity identifi ed by the study lay in the fi nding that the industry’s long-standing aversion to prepaid customers is no longer justifi ed in the smartphone era.

Traditionally, operators have made value judgments about customers from the way they pay. Outside of China and India, where it remains the dominant form of payment, prepaid was looked at as the low-value market segment favored by students and retirees.

However, that view is no longer accurate, according to the survey data. Instead, the survey found customers are choosing prepayment as a way to monitor their data expenses. Worldwide, we found that there is only a minor difference between the amount of money spent by prepaid versus postpaid customers.

Such a realignment is good news for operators. A prepaid customer is much easier to support. By getting paid up front, many back-offi ce operations are avoided, including billing and collection management.

12 Inside Telecommunications12

Technology

3 Telecompaper, “SFR to launch 3rd generation femtocell this month — report,” 10 September 2012.

4 FierceWireless, “Study: Small cell market to hit $2B by 2016, driven by capacity needs,” 28 March 2012.

5 Infonetics, “Femtocell market ignited by tight vendor battles, price erosion, shift to the enterprise,” 3 July 2012.

Small cell deployments are becoming a more prominent part of operators’ network strategies. Mobile traffi c growth profi les are well understood by the industry, yet the benefi ts of ongoing spectrum release, greater spectral effi ciencies through LTE, offl oading through Wi-Fi and greater policy management may be insuffi cient to meet burgeoning demand for data.

In this light, small cells have emerged as an integral part of a new network paradigm for operators, helping to add capacity, extend coverage and offl oad traffi c from larger cells. Operator announcements are arriving thick and fast, with femtocells the leading small cell category. Bouygues Telecom, O2 UK and Orange UK announced femtocell rollouts in June, meaning that all network operators in France and the UK have committed to the technology. Upgrades of existing services remain important — in September, France’s SFR announced it would launch a 3G incarnation of its current femtocell product.3

LTE small cell rollouts are also coming to the fore. In the United States, Sprint Nextel has announced it will deploy metrocells in its 4G network, while SK Telecom is rolling out public access small cells in South Korea as part of its LTE plans. By the end of next year, Infonetics believes that LTE will account for 37% of global small cell shipments.4

While early deployments have been largely residential, capacity demands are also driving deployments of metrocells and enterprise femtocells. In July, O2 UK launched its fi rst femtocell for business — known as BoostBox — with two versions offering different call reception areas, depending on the size of the business. Looking ahead, commercial premises with deep interiors and heavy insulation stand to gain signifi cantly from improved indoor mobile coverage. Industry forecasts likewise predict strong take-up from businesses: by 2016, enterprise femtocells are seen accounting for almost half the global market.5

Small cell deployments gather steam


Although confi dence is high in the small cell opportunity, plenty of challenges remain. For one, operators still lack the planning tools to isolate the areas where data traffi c demand is highest — while accompanying issues such as interference mitigation and network management are still works-in-progress.

In addition, deciding where to locate small cells in an outdoor environment and obtaining the relevant rights to lampposts or other property could well prove troublesome. Finally, ensuring reliable backhaul capacity for large-scale LTE-based deployments will be a concern for many.

As a result, vendor solutions are already evolving to provide greater cost-effi ciency compared to traditional approaches.

In the long term, operators and their suppliers will have to collaborate in new ways if they are to make the most of changing network topologies.

Even so, the overall outlook for small cells remains very promising — a new high in deployment rates is expected in 2014, while Wi-Fi and small cell strategies are seen as broadly complementary. By 2016, the number of small cells rolled out is expected to top the 90m mark. Moreover, the increasing appeal of small cells as a means to higher capacity in high-traffi c, urban environments could see operators look more favorably on spectrum bands at 2.2 GHz and above as part of their 4G strategies.

E-reader shipments under strain as tablets ride highUnit shipments of e-readers are expected to fall year-on-year in 2012 as the rising popularity of tablets eats into the appeal of e-book devices. A greater choice of tablets at lower price points from a larger pool of vendors is seen leaving e-readers in the shade, with IDC predicting a 15% decline in shipments this year versus 2011.

As tablet product portfolios offered by leading vendors expand, e-reader manufacturers have been focused on introducing new, premium-priced products

to make the most of a smaller base of committed users of e-readers.

New after-dark reading features allow greater scope for differentiation as larger players branch out into tablets themselves. In September, Kobo unveiled a new range of e-book devices, including the Glo, which features a built-in light for reading in the dark. Its top-end product, Arc, runs the Android mobile operating system and features a 7-inch display.

Figure 4. Global small cell rollout forecastTriple-play households (000s)

0

20

40

60

80

100

2012 2016

Source: Informa via Total Telecom, “Informa raises its small cells forecast as operator rollouts increase,” 26 June 2012.


Vendors are also expanding selectively beyond their home markets. In August, US bookseller Barnes & Noble announced it was bringing its Nook e-readers to the UK, having struck agreements with online and brick-and-mortar retailers. Consumer demand for e-books in the UK is strong, with Amazon revealing in August that — two years after launch — more UK customers are buying e-books than print books.6 Meanwhile, the US e-commerce company is launching a Japanese language version of its latest Kindle device in the fourth quarter, following Kobo’s similar move in July.

Regional e-reader manufacturers are also making their presence felt at new price points. German manufacturer txtr is launching a low-cost e-reader for €9.90 — a device without 3G or Wi-Fi connectivity and no rechargeable battery. The company is reportedly in talks with mobile operators over potential partnerships.7 This initiative comes at a time when tablet manufacturers are themselves targeting price-sensitive buyers with smaller, lower-cost devices.

For their part, mobile operators in Western Europe have established digital bookstore offerings in recent years. Now, emerging

market operators are also leveraging demand for e-books. In September, Vietnam’s Viettel launched an offering called the Anybook store, while Malaysia’s Maxis introduced a digital bookstore offering in April this year.

Meanwhile, some operators see a role for specialized tablets to act as a differentiator in the enterprise market. In May, Verizon Wireless premiered a new solution for enterprises that features “blank slate” tablets, so called because they do not come pre-loaded with applications: companies can use the operator’s Private Applications Store for Business to authorize the download of enterprise applications.8

Looking ahead, the trade-off between functionality and price has some way to evolve in both the e-reader and tablet markets, while consumers’ appetite for accumulating additional devices remains to be seen. Tablets and e-readers have different strengths — backlit screen displays and e-ink technologies are primed for video and e-book content, respectively — but the boundaries between the two device categories will continue to blur as vendors expand their portfolios.

Figure 5. Worldwide e-reader shipments 2010–16Unit shipments (m)

0

10

20

30

40

2010 2011 2012 2013 2014 2015 2016

Source: IDC, “Worldwide and U.S. eReader 2012–2016 Forecast Update,” October 2012.

6 ZDNet, “Amazon: UK users now buying more e-books than print books,” 6 August 2012.

7 “Kindle under from low-cost ‘txtr beagle’ e-reader,” The Guardian, 11 October 2012

8 Verizon, “New Tablet-Based Solutions From Verizon Employs Industry-Specifi c Mobile Tools to Boost Sales and Service,” 8 May 2012.


In its latest drive to increase investment levels in new broadband infrastructure, the European Commission has outlined plans to increase regulatory certainty for operators. Having launched two public consultations into regulated wholesale access to telecoms networks last October, the EU has underlined the need for regulation that is stable over time and consistent throughout the continent if investment levels are to increase.

In July, the European Commission released a policy statement emphasizing long-standing tenets such as a level playing fi eld in competition and the importance of technology neutrality.9 In addition, the EC points to the direct and indirect effects of regulation, highlighting how regulated copper access prices can affect the pricing and return on other infrastructures, such as fi ber, cable and wireless. This follows the consternation felt by operators last year when faced with proposals to reduce copper access prices in a bid to encourage investment in fi ber broadband networks.

This time round, the EU has returned with a set of edicts designed to reassure incumbents while creating better conditions for industry investment. On one hand, non-discrimination rules are to be toughened by ensuring equivalence of inputs for all market actors; on the other, copper access rates are to be kept stable. The EU sees no grounds to question price signals apparent in current average copper unbundling prices that are €9 per month on average, while allowing for local variations.

At the same time, the EU stresses that its future regulatory guidance will allow for more fl exibility in next-generation wholesale products. As such, national regulators will no longer be required to apply cost-oriented price regulations in almost all circumstances. However, the extent of this fl exibility will be tied to the application of non-discrimination rules, so that alternative operators receive equal treatment when accessing the networks of dominant rivals.

EU unveils new regulatory approach to spur broadband investment

Regulation

9 European Commission, “Enhancing the broadband investment environment — policy statement by Vice President Kroes” 12 July 2012.


The EU is also priming other, related measures that will help provide a more robust investment scenario, namely the establishment of public-private funding models, the creation of best practises in areas such as the reuse and sharing of duct infrastructure and moves to ensure a single market for online content through various reforms. The new regulatory approaches are to be solidifi ed into formal recommendations by the end of the year and will apply until at least 2020.

The EU’s new stance has been broadly welcomed by incumbents, given that reduced copper returns are no longer seen as a potential tool to boost levels of fi ber investment. Even so, critics argue that existing VDSL network upgrades are no more than partial at present. What is certain is that the EU’s existing fi ber penetration targets — 100 Mbps services used by half of European homes by 2020 — remain ambitious.

EU fi gures collected from national regulators for January 2012 show that the per-person penetration of 30 Mbps connections remains below 10% in all 27 member states, with only 5 countries above 5%. Meanwhile, the penetration of lines offering at least 100 Mbps is above 1% only in Finland, Latvia, Romania, Lithuania and Sweden.10

Many of the leading European countries in this regard benefi t from favorable demographics and market structures, where municipal local authorities or power utilities have helped to establish new infrastructure. Other industry data shows that countries like Russia, Turkey and Ukraine are currently scoring strongly in fi ber broadband net additions, while, at a global level, Europe is lagging other regions in fi ber broadband subscriptions.

10 European Commission, “Electronic Communications Market Indicators 2012.”

Figure 6. FTTH/FTTB subscribers by region at mid-2012Subscribers (m)

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10

20

30

40

50

60

Asia-Paci c North America Russia Europe Middle East

Source: FTTH Council Europe, “Creating a brighter future,” 16 October 2012.

Spectrum harmonization in Asia-Pacifi c unlocking global benefi tsLTE network rollouts are under way in all parts of the world as operators prepare to meet the growing demand for mobile data. Greater access to spectrum is a vital enabler for rising mobile data consumption, and regulators in many markets have been auctioning new frequency bands, typically digital dividend spectrum at below 1 GHz as well as higher frequencies suited to boosting capacity in urban areas.

However, recent news fl ow on the incompatibility of cutting-edge 4G devices in certain countries highlights a very real sector threat, namely the fragmentation of spectrum policies that hinders the provision of low-cost, standardized services.


11 GSMA, “GSMA Announces Asia-Pacifi c could generate US$1t in GDP through spectrum harmonisation for mobile broadband,” 9 July 2012.

In Europe, 800 MHz and 2.6 GHz bands are in the process of being opened up to mobile operators. Yet, in Asia-Pacifi c, spectrum release approaches vary considerably from market to market. Mindful of the long-term risks this brings, such as a lack of roaming and high device costs, the GSM Association has called for harmonized adoption of the 700 MHz band across the region, underlining that a shared framework could generate US$1t in GDP growth by 2020 and create 2.7m new jobs.11

A number of markets in the region have already committed to freeing this band for mobile use in order to provide cost-effi cient coverage to rural populations. In Japan, a 700 MHz auction was held at the end of June, while a digital dividend auction in Australia is slated for April 2013. Other markets, including India, Indonesia,

South Korea and Thailand, have all made formal commitments to the Asia-Pacifi c Telecommunity (APT) band plan.

However, the benefi ts of releasing 700 MHz spectrum according to the APT model are now being explored by countries beyond Asia-Pacifi c. In September, Mexican regulator Cofetel announced it was adopting the APT band plan, citing economies of scale and cost effi ciencies in network rollout as its motivation. This followed announcements earlier in the year from regulators in Chile and Colombia that they would adopt the APT plan, with both countries set to hold auctions in 2013. Ecuador became the latest Latin American country to adopt the APT band plan in October.

Looking ahead to harmonized low frequency spectrum on a global basis, there is a growing case for the APT recommendation to be adopted by other regions. This year’s ITU World Radiocommunication Conference saw the allocation of the 700 MHz band for mobile use in Europe, the Middle East and Africa on a co-primary basis with broadcasting services. Although the APT 700 MHz band is not fully compatible with Europe’s 800 MHz band due to overlapping frequencies, adaptations can still be made that can create further harmonization benefi ts.

While progress at a global level on the harmonization of digital dividend spectrum is under way on a number of fronts, spectrum policies should prize fl exibility as much as consensus. Re-farming existing mobile spectrum for LTE has gathered pace in recent months, particularly in the 1800 MHz band, where operators have the most substantial holdings. In August, UK regulator Ofcom cleared Everything Everywhere to deploy LTE in this band, while Hong Kong operator SmarTone launched LTE on re-farmed 1800 MHz spectrum in the same month.

Figure 7. Market commitments to Asia-Pacifi c Telecommunity’s proposed 700 MHz band planTriple-play households (000s)

Telecommunity’s proposed 700 MHz band plan

Source: 4G Americas, “The Benefi t of Digital Dividend,” September 2012; Ernst & Young Research.


Global M&A activity in the telecommunications sector picked up in Q3 2012, standing at US$23.8b, up 29% from the previous quarter. During the three months to September, 108 transactions were announced, compared to 91 in the preceding quarter. As such, average deal value increased by 9% quarter-on-quarter

to reach US$220m for the third quarter. In regional terms, Asia-Pacifi c led the way, with deal value totalling US$14b, while EMEIA was slightly ahead of the Americas, with transactions totalling US$4.9b during the quarter.

Mergers and acquisitions

Introduction

Figure 8. Telecoms M&A deal value by area, Q3 2012

EMEIA

Americas

Japan

Q3 2012 Q2 2012

$3,851$4,121

$65$51

$12,645$4,860

$14,565$1,910

Source: S&P Capital IQ, accessed October 2012.


Consolidation continues as mobile players position themselves for data demandSome of the leading deals during the three months to September have been driven by mobile operators looking to cement their positions as demand for data services continues to rise unabated. In August, AT&T agreed to acquire NextWave Wireless, which holds spectrum licences in the Wireless Communications Services (WCS) and Advanced Wireless Services (AWS) bands. Access to spectrum has become a priority for US players building out LTE capacity, especially since important swathes of mobile data-oriented spectrum are still in the hands of non-telco players.

Meanwhile, TeliaSonera acquired Kazakh WiMAX operator Alem Communications for US$170m, giving the Scandinavian operator access to 2.6 GHz spectrum along with WiMAX networks in six major

cities. At the same time, TeliaSonera has taken a minority stake in Kazakh network operator KazTransCom, and its Kcell mobile subsidiary has also signed a fi ve-year lease agreement for backbone capacity with the operator.

Consolidation across market segments is also becoming an important driver of in-market deals. Mobile operator Millicom’s Paraguay subsidiary acquired the assets of Cablevision in July. These include a cable network that covers nearly half a million households and has more than 120,000 pay-TV customers. While other operators raised concerns about the deal’s impact on the competitive landscape, regulator Consejo Nacional de Telecomunicaciones (Conatel) approved the deal in August.12

The largest deal during the quarter was China Telecom’s agreement to acquire certain CDMA mobile network assets owned by its parent in August. The move is expected to help reduce costs over time, given continuing rises in CDMA network lease fees, while giving China Telecom direct control over future network investment decisions. In addition, the deal paves the way for improved operating effi ciency through the tighter integration of mobile infrastructure to service offerings.

The second-largest deal of the third quarter saw Russia’s Altimo, the telecoms arm of Alfa Group, increase its stake in Russian mobile operator Vimpelcom by acquiring a 14.8% stake from Weather Investments II. Following this deal and additional purchases on the market, Altimo has 40.5% of voting rights. The Russian investor also withdrew its complaint against Weather Investments II and Telenor, which claimed that Telenor’s stake increase in February violated the company’s statutes.

12 Telegeography, “Conatel approves Tigo’s acquisition of Cablevision,” 29 August 2012.

Figure 9. Top telecoms M&A by deal value, Q3 2012

$150

$170

$215

$390

$660

$663

$785

$2,561

$3,600

$13,788

Telefónica Celular del Paraguay/Grupo Clarín's Paraguay Operations

TeliaSonera/Alem Communications WiMAX operations

China Mobile/Anhui USTC iFlytek

América Móvil/Telefonos de Mexico

AT&T Inc./NextWave Wireless

Vodafone New Zealand/TelstraClear Limited

VTB Capital & CB Corporate Commercial Bank/Bulgarian

Liberty Global/Telenet Group Holding

Altimo/VimpelCom

China Telecom Corp. Ltd/China Telecom Group

Buyer/target Deal value (US$m)

Source: S&P Capital IQ, accessed October 2012.


13 Reuters, “Update 1 — Fujitsu, NEC, Docomo launch smartphone chipmaker,” 1 August 2012.

Increasing operator moves into new market segments in Asia-Pacifi cRecent quarters have seen established operators in East Asia move into adjacent market segments — a strategy that has continued in the three months to September. Technology applications are seen as a route towards a wider presence in an increasingly aggregated value chain. In August, China Mobile acquired a minority stake in Anhui USTC iFlytek, a Chinese IT company that creates voice recognition software that converts text into speech. Both companies have also entered a strategic partnership agreement to cooperate on new products and applications.

Singtel, too, is building its presence in mobile application platforms. In September, it acquired Pixable, a New York-based social photo aggregator, which uses predictive analytics to analyze user interactions and consumption habits as part of its range of social media applications. More than 4 million users have installed its service and engagement rates are high — for Singtel, the platform helps it enhance the way mobile users are able to discover and store content from a range of devices.

Local content applications also remain an area of interest for the Singapore-based player. Having acquired HungryGoWhere, a web food guide, in May, its Optus subsidiary acquired Australian food review site Eatability for US$6.4m in July. Once again, this is designed to expand its presence in lifestyle categories that are seen as important to its customers.

NTT of Japan has continued to be very active in a number of adjacent market segments. Having acquired IT services

companies in Australia, India and the UK in recent months, the Japanese incumbent took full control of Centerstance, a US-based consulting company. The move is set to expand NTT’s capability in cloud services as existing enterprise customers migrate to new solutions. Earlier in the year, NTT announced plans to launch a new cloud service for multinationals at nine of its data centers in eight countries by March 2013. The new offering will enable clients to deploy server resources such as virtual fi rewall and CPU.

NTT’s mobile subsidiary has also been active on a number of fronts during the third quarter. In August, NTT DoCoMo Pacifi c acquired a Guam-based multi-service provider, MCV Broadband, owned by Guam Holding Corp., the country’s sole cable operator. Having entered the market via the acquisition of HafaTel in 2006, DoCoMo Pacifi c will look to up-sell new services to MCV’s existing subscriber base.

Earlier, in July, NTT DoCoMo joined forces with vendors Fujitsu and NEC to create a joint venture, Access Network Technology. The new entity will produce smartphone chips and is driven by NTT DoCoMo’s need to reduce reliance on foreign chip vendors. The three partners believe their combined technology heritage and past collaborations will drive the new joint venture to a 7% share in the global market for smartphone chips by the end of 2014.13 The alliance follows a previous plan by the partners to work with Samsung on chips; that deal was called off after the companies failed to agree on partnership terms.


Asia-Pacifi c telcos target opportunities in health care technologiesIn July, NTT DoCoMo also announced a joint venture with Omron Healthcare, a leading Japanese manufacturer of medical equipment. NTT DoCoMo has taken a 66% stake in the venture, DoCoMo Healthcare Inc., which is set to design and develop innovative services such as cloud-based health care instruments for patients.

The Japanese operator is not the only telco in the region with ambitions to extend its service offerings into the health care

market. In September, South Korea’s SK Telecom acquired 49% of China’s Xi’an Tianlong Science and Technology Co., which produces medical equipment. Earlier this year, SK Telecom launched Health Connect, a joint venture with Seoul National University Hospital designed to bring to market innovations in disease prevention and management.

Consolidation comes to New ZealandThe largest deal of the quarter in Asia-Pacifi c saw Vodafone New Zealand acquire rival mobile operator TelstraClear for US$660m in July. The transaction brings together TelstraClear’s fi xed-line business and corporate clients and Vodafone New Zealand’s mobile offering and retail subscriber base, creating a larger player across various market segments.

Prior to the transaction, TelstraClear was already the market’s second-largest full-service player, with more than 300,000 customers. For Australian owner Telstra, the disposal adds to its growing stockpile of cash. Meanwhile, Vodafone extends its presence into residential fi xed-line services,

while TelstraClear’s corporate client base also allows the acquirer to widen the reach of its enterprise solutions.

Cost and capex savings are expected from the combination of the two companies’ networks, commercial operations and administrative functions. TelstraClear’s fi ber assets will benefi t Vodafone’s wireless backhaul approach, while its spectrum holdings in the 1900 MHz and 2100 MHz bands are also attractive. The move comes at a time when a wholesale fi ber access network is being rolled out to three-quarters of New Zealand’s population by 2019.14

Figure 10. Top telecom M&A in Asia-Pacifi c, Q3 2012

Date Acquirer Target Stake (value) Business nature of target

23 Sep 2012 SK Telecom (South Korea) Xi’an Tianlong Science and Technology Co. Ltd.

49% (US$21m) Medical diagnosis equipment provider

20 Sep 2012 SingTel (Singapore) Pixable Inc. (US) 100% (US$26.5m) Social photo aggregator

18 Sep 2012 NTT Corporation (Japan) Centerstance, Inc. (US) 100% (US$51m) Computer software and services fi rm

30 Aug 2012 DoCoMo Pacifi c (Guam) MCV Broadband (Guam) 100% (NA) Digital TV, internet and voice service provider

23 Aug 2012 China Mobile Communication Co. Ltd.

Anhui USTC iFlytek Co. Ltd. (China) 15% (US$215m) Software company in intelligent voice and language technology

22 Aug 2012 China Telecom Corp. Ltd. China Telecom Group N/A (US$13.8b) Fixed line and mobile telecom service provider

10 Aug 2012 Viettel (Vietnam) Epocha & Golden Ocean (Tanzania) 65% (US$18m) Mobile telecom service provider

26 Jul 2012 Optus Mobile Pty Limited (Australia) Eatability Pty Limited (Australia) 100% (US$6m) Restaurant review portal

12 Jul 2012 Vodafone New Zealand TelstraClear(New Zealand)

100% (US$668.5m) Telecom carrier

Source: Mergermarket, Telecom Asia, Factiva.

14 Vodafone Group, “Vodafone to Acquire TelstraClear in New Zealand,” 12 July 2012.

Ernst & Young

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About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

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About Ernst & Young Global Telecommunications CenterTelecommunications operators are facing the challenges of growth, convergence, business transformation, technological change and regulatory pressures in increasingly difficult economic conditions. Operators choose Ernst & Young because they value our industry-based approach to addressing their assurance, tax, transaction and advisory needs. They know that they have much to gain from our clear understanding of the opportunities, complexities and commercial realities of the telecommunications industry — wherever in the world they’re operating.

What gives us this understanding is our Global Telecommunications Center. Operating from Paris, Cologne, Johannesburg, Riyadh, Delhi, Beijing and San Antonio, the Center brings together people and ideas from across the world, to help our clients address the challenges of today — and tomorrow. Our clients benefit from our insights on key trends and emerging issues. These may relate to the economic downturn, next-generation services, infrastructure sharing, outsourcing, revenue assurance, operational efficiency, regulations, future growth markets or mergers and acquisitions. We help our clients react to trends in a way that improves the financial performance of their business.

© 2011 EYGM Limited. All Rights Reserved.

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

Navigating consumer usage of mobile data

The mobile maze

The mobile mazeWhat are the current and future customer needs and the competencies operators need to meet them? Find out in The mobile maze, now available from Ernst & Young’s Global Telecommunications Center.

Consumers’ rapid adoption of internet-enabled smartphones and tablets has been one of the most significant social, business and technology trends of recent years, resulting in a fast-changing market and technological environment that we have termed “the mobile maze.” In this report, we share our findings from our recent consumer survey, along with insights from Ernst & Young’s Telecommunications practitioners. Now available at www.ey.com/telecommunications.

Now available

Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member fi rms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

How Ernst & Young’s Global Telecommunications Center can help your businessTelecommunications operators are facing a rapidly transforming business model. Competition from technology companies is creating fi erce challenges over the ownership of customers and service innovation, and pricing pressures and network capacity are intensifying scrutiny on return on investment. Additionally, regulatory pressures and shareholder expectations require agility and cost effi ciency. If you are facing these challenges, we can provide a sector-based perspective to addressing your assurance, advisory, transaction and tax needs. Our Global Telecommunications Center is a virtual hub that brings together people, cultures and leading ideas from across the world, to help you address your global, regional and local challenges. These may include next-generation services and product profi tability, customer lifecycles and revenue assurance, working capital management, risk, regulatory strategies and compliance, potential cost reductions, mergers and acquisitions, fi nancial and operational improvements, accounting and tax strategies. Whatever your need, we can help you improve the performance of your business.

www.ey.com/telecommunications

© 2012 EYGM Limited.All Rights Reserved.

EYG no. EF0113

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specifi c matter, reference should be made to the appropriate advisor.

ED None

ContactsJonathan Dharmapalan Global Telecommunications Leader

[email protected]

Holger Forst Global Telecommunications Markets Leader [email protected]

Prashant Singhal Global Telecommunications Markets Leader [email protected]

Olivier Lemaire Telecommunications Leader — [email protected]

Luis Monti Telecommunications Leader — Americas [email protected]

David McGregor Telecommunications Leader — Asia-Pacifi c [email protected]

Rhys Phillip Transaction Advisory Services Leader — [email protected]

Bart van Droogenbroek Tax Leader — [email protected]

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