inside telecommunications - issue 11 · along with in-market consolidation, a number of players are...

Issue 11

Jonathan Dharmapalan Global Telecommunications Leader

Smarter homes, smarter business developments in the telecoms sector. In this issue, we consider a number of industry themes, from operator smart home strategies to data center investments and cloud service provision to SMEs.

of my colleagues at EY.

InsideTelecommunications

Service innovation 4

Differing designs on the smart home opportunity 4

Operators target cloud software gains with small businesses 6

Regulation 12

Regulators take new steps on spectrum sharing 12

India, South Korea lift foreign investment caps 14

Mergers and Acquisitions 16

Introduction 16

Verizon gains full control of its wireless assets 18

Mobile consolidation moves forward in Germany 18

Assets change hands in Africa 19

Consolidation continues in Indonesia 20

Contents

Technology 8

Riding a new wave of operator data center investments 8

Mobile operators prepare for explosive LTE signaling growth 10

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Along with in-market consolidation, a number of players are seeking to widen their service propositions, trusting in the opportunity to up-sell new services and create a stickier customer base. For operators serving residential customers, this means moving more aggressively into the provision of pay-TV services and associated content rights.

In November, UK incumbent BT announced the acquisition of exclusive rights to show UEFA Champions League and Europa League soccer for 3 years at a cost of £900m. This outlay follows the award of live Premier League soccer rights in 2012, and launch of the BT Sports channel in August. Rising interest in premium content rights from incumbents and cable operators is evident in growing broadcast revenues

leagues. The latest cycle of rights sales has fuelled a 25% uptick in revenues to US$6.7 billion per season.1

As a result, competition in the triple-play market is scaling new heights. Players with a heritage in pay-TV are heavily discounting the broadband elements of their bundles, while newcomers in premium content provision are hoping to undercut legacy sports broadcasters.

As such, understanding and segmenting consumer needs has never been more important. Attitudes to bundle packages are shifting, with even home automation and monitoring services beginning to features in some high-end packages.

Foreword

Adrian BaschnongaLead AnalystGlobal Telecommunications [email protected]

The third quarter of 2013 has underlined a number of industry

deal value hitting a new high in the three months to September.

to the region’s low valuations. Much will hinge on regulators’ willingness to accept a narrowing of the competitive landscape if large-scale consolidation is to occur.

1 “Top Soccer Leagues Get 25% Rise in TV Rights Sales, Report Says,” Bloomberg, 11 November 2013.

2 Bundle Jungle, EY, November 2013.

Figure 1. UK consumer triple-play and premium content attitudes2

Source: Bundle Jungle 2013, EY, November 2013 (online survey of 2,500 UK consumers)

Q. Do you agree with the following statement? “ My household gets good value for money from the TV services we purchase from our broadband supplier.”

18

35

34

93

Strongly agree

Slightly agree

Neither agree nor disagree

Slightly disagree

Strongly disagree

However, some 50% of overall respondents strongly disagree that their households are willing to pay to watch sport on TV. As such, it will be interesting to see whether lower price points can alter this antipathy to paying for premium sports content. Meanwhile, the role of mobile in residential bundles remains uncertain – less than 1 in 20 UK households currently take a quad-play of broadband, TV, telephony and mobile.

On the pivotal issue of consumer appetite for premium content, evidence suggests a complex interplay of attitudes and needs. In EY’s survey of 2,500 UK households –

existing triple-play customers are largely

4 | Inside Telecommunications

The smart home concept remains a nebulous concept to many, incorporating a range of proposed residential information and communications technology (ICT)

applications such as smart metering to residential packages incorporating a suite of home automation services. As it stands, the smart home is currently characterized by the ability to automate, control and interact remotely with household appliances and electronic systems.

As households aggregate various devices and carrier network reach and penetration rates improve, the opportunities to

provision, health care and entertainment services increase. Crucially, the standards landscape has also improved, paving the way for “The Internet of Things” to come of age. Low-cost devices based on accepted networking protocols, such as Wi-Fi, ZigBee, X10, Z-Wave and Insteon, are increasingly available, eliminating the need for expensive wired home automation systems.

Differing designs on the smart home opportunity

1.Service innovation

As a result, a range of entities from different industries are targeting this space, whether as a disruptive play or as a natural extension of existing service propositions for the home. Home security specialists, technology giants, telecommunications operators, cable players and utilities all have designs on emerging needs in the home, and revenues generated by innovative residential services are expected to rise in years to come, both in terms of hardware and services.

Figure 2. Revenue forecast for smart home systems hardware and services

Source: “Smart Home & Home Automation: Analysis & Market Forecast 2012-2017,” NextMarket Insights, October 2012.

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3 “AT&T Digital Life,” Cisco Customer Case Study, 2013.

4 “Orange Poland offers Smart House remote monitoring system,” Telecompaper, 13 May 2013. 5 “US cable companies home in on security,” Reuters, 10 October 2013.

Fierce Cable, 20 August 2013.

Business models and technology approaches remain a work in progress for many players. As such, operators with large residential customer bases are taking different approaches, depending on which value positions appear most attractive.

US carrier AT&T launched Digital Life, a home security and home automation package, in April this year. The service offers 24-hour home security with monitoring centers that respond to emergencies. Customers can operate the service via smartphone, tablet or PC. Designed to run on 3G mobile networks, it is open to any end-user within its markets of coverage and is run as an end-to-end solution.3 Bolt-on devices and services are available, including motion sensors and energy management systems and water control packages.

Other US players have also taken strides into home automation: Verizon Communications, Time Warner Cable and Comcast offer bundled packages for energy monitoring and management. Pricing strategies vary, with one-time installation fees and monthly rates

connected home systems alongside their traditional services, while home automation specialists are now providing products at lower price points.

European players are also innovating for the home. In September, Deutsche Telekom launched Qivicon, a platform underpinned by an alliance with power utility EnBW, appliance manufacturer Miele, device specialist eQ-3 and Samsung. Based on the appeal of a wide range of offerings, Qivicon is the result of shared innovation – Deutsche Telekom plans to charge a licensing fee to

partners who push smart home services direct to their clients. The German market is itself the scene of overlapping partnerships: E.ON has partnered with Deutsche Telekom but also works with other platform providers, for example.

Neighboring operators are also exploring wholesale business models. Last year, Swisscom created a joint venture, MyStrom, with powerline communications vendor Asoka to push energy management as a white-label service. France’s Orange has also

remote home monitoring to its broadband customers.4

Operators certainly have advantages that they can leverage in the home automation space – well-established residential customer bases, credible household brands and substantial marketing budgets are all formidable attributes. Smart home offers can make existing residential bundles more attractive: Comcast has reported that half of its security customers are new to the company

take at least two additional Comcast services.5 In many markets, services are offered at a discount for customers already taking broadband services.

Operators themselves are already working on more sophisticated

by Verizon and Comcast show the companies are exploring NFC to enable interaction with home devices like set-top boxes or pair devices used in home automation systems.6


010000200003000040000500006000070000

2011 2012 2013 2014 2015 2016Applications System infrastructure softwareApplication development and deployment

US$m

Figure 4. Worldwide SaaS and cloud software revenue by segment

Source: “Worldwide SaaS and Cloud Software 2012-2016 Forecast and 2011 Vendor Shares,” IDC, August 2012.

7 “Bundled services and new IP features generating churn and new subscribers in monitored security,” Parks Associates, 20 September 2012.

8 “Open standard for the smart homes of the future,” ABB, Bosch, Cisco and LG, 28 October 2013. 9 “IDC Forecasts Worldwide Public IT Cloud Services Spending to Reach Nearly US$108 Billion as Focus Shifts from Savings to Innovation,” IDC, 3 September 2013. 10 “Worldwide SaaS and Cloud Software 2012-2016 Forecast and 2011 Vendor Shares,” IDC, August 2012.

Customer demand for new home automation services will also need to be nurtured carefully. Thus far, consumer research suggests promising levels of interest. One report has found that 14% of all US broadband households are “highly interested” in receiving home security services from their ISPs, with 40% of those who currently have a security monitoring service willing to switch to a new provider that can offer more value-added features.7 Furthermore, EY research recently conducted on the UK residential market found that 27% of respondents were interested in remotely controlling devices in the home:

Improvements in standardization will also help unlock new use cases, and entities from different geographies and market segments will need to ignite new forms of collaboration to make the most of the smart home concept. In October, ABB, Bosch, Cisco and LG announced a memorandum of understanding to develop open architecture for a software platform providing data exchange between devices running on different protocols.8 Such moves will help cement the landscape for smart home innovation.

Although demand for home automation and security services is

depending on whether they are cross-selling opportunities into existing customer bases or targeting a wider addressable market through platform- or device-led innovation. Partnerships with equipment and software suppliers must be durable, while legacy players offering high-end customizable systems and over-the-top (OTT) players combining cheap sensors and smartphone apps will also have a say in how the market develops.

Operators target cloud software gains with small businessesThe market for cloud services continues to evolve at a heady rate. Enterprise demand for cloud services continues to rise, and worldwide spending on public IT cloud services is expected to more than double in the next four years, reaching US$107b in 2017.9

The software-as-a-service (SaaS) segment is set to remain the dominant category within cloud services over this period, although both infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) are set to account for a greater share of the cloud market in years to come. Looking ahead, the global market for cloud software is expected to grow at 23% CAGR between 2012 and 2016.10

Source: Bundle Jungle 2013, EY, November 2013 (online survey of 2,500 UK consumers).

Figure 3. UK consumer demand for remote home monitoring servicesDo you agree with the following statement: “I want to be able to access and control devices in my home via the internet while I am out”?

Strongly agree

10

23

17

26

25

Slightly agreeNeither agree nor disagree

Slightly disagreeStrongly disagree

% respondents

While different industry actors are seeking competitive advantages by adding smart home capabilities to their portfolios, collaboration remains a hallmark of emerging use cases. Cooperation is required at all levels of industry for the smart home concept to deliver on its long-term transformational promise.

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11 “Russian telecoms offer cloud services,” PMR, 21 June 2013. 12 “Worldwide SMB Mobile Workforce will grow to 298 million in 2016 at 6.3% CAGR,” Techaisle, 5 February 2013.

Operators are currently best positioned in the IaaS market,

However, new opportunities are appearing in the market for cloud software and applications, driving telecommunications service providers to sharpen their focus on a range of services, from

Following the success of app stores in the consumer market, business app stores have become an important feature of the cloud software market. In July, Russian mobile operator MTS launched a SaaS marketplace in partnership with NEC Corporation,

Targeted at small and medium enterprises (SMEs), the marketplace

from accounting software to videoconferencing. SMEs are seen as particularly receptive to cloud services, with MTS predicting that 35% of its SME customers will take such services within three years.11

France’s Bouygues Telecom has also partnered with NEC Corporation, launching Solutions Cloud Pro – a SaaS application marketplace for businesses with up to 10 employees – in May. Meanwhile, Saudi Arabian mobile operator Mobily has also leveraged a partnership to bring cloud applications to its business users; in July, it began deploying its Business Cloud Services platform in conjunction with Virtustream, a cloud management software provider.

Operators in emerging markets are also making new moves to augment their propositions for enterprises with cloud applications. In October, India’s Tata Docomo announced the launch of the

offering messaging and collaboration; InstaHRMS, which combines analytics, planning tools and core HR applications; and InstaMeet, which enables employee collaboration. One month earlier, Kenyan mobile operator Safaricom unveiled a host of SaaS solutions for SMEs, including email, HR payroll and accounting software.

For operators, greater visibility in the cloud software market is important. Reselling well-known offerings from software providers enables a strong entry point into an increasingly diffuse market. While ICT providers have historically underserved small businesses, their demand for cloud offerings is strong, particularly among organizations with fewer than 100 employees:

Strong take-up rates of cloud solutions

investments – and thus more innate service switching points to hosted services compared with larger corporates. At the same time, the cost savings that underpin the cloud delivery model are attractive to smaller organizations. Meanwhile, rising

SME mobile workers worldwide, which is expected to reach 298m by 2016.12

For many operators, cloud provision strategies for SMEs are evolving rapidly. On the one hand, strategies that bundle established software with connectivity have the potential to score well in terms of improved customer stickiness. Yet, as partnering ecosystems become more diverse and more operators act as a channel for software vendors, differentiated capabilities will become paramount.

Looking ahead, the most effective strategies will add value through new combinations of voice, data, mobility and cloud applications. Flexible provisioning will be paramount, given that the number of SaaS applications used by a single business is trending upward. Moreover, operators will also need to consider how the complexion of the SaaS market itself is changing, with business process-as-a-service (BPaaS) now becoming more important, for example.

Larger carriers will need to consider the balance between providing cloud software directly or as a channel to SMEs and working within the emerging cloud broker model, where a far larger range of cloud services are provided to intermediaries that serve SMEs themselves. Such a proliferation of business models will put an onus on operators to carefully segment their target customers, identifying which approaches represent the most cost-effective routes to market.

company size

Source: “State of SMB IT 1H 2013,” Spiceworks, 2013

01020304050607080

20–99employees

100–249employees

250–999employees

Less than 20employees

Current usage Planned usage (next 6 months)

% respondents


13 “Cisco Global Cloud Index: Forecast and Methodology, 2012-2017,” Cisco, 15 October 2013.

Riding a new wave of operator data center investmentsData centers remain a pivotal part of operators’ moves into hosted services for enterprises. In recent years, many operators serving multinational corporates (MNCs) have established a solid footprint of data center facilities, at the same time striking new partnerships to ensure

fast-changing needs.

While such strategies are well understood, data center initiatives are now becoming commonplace among smaller operators, or those from emerging regions serving a less-mature base of enterprise clients. This underlines how operators of all sizes have shifted their focus to serving enterprise needs better, with greater demands for latency shaping extra capacity requirements. Looking ahead, data center

rate in years to come, reaching 7.7 zettabytes in 2017. Cloud applications will account for 69% of the total, up from 46% in 2012.13

2.Technology

Source: “Cisco Global Cloud Index: Forecast and Methodology, 2012-2017,” Cisco, 15 October 2013.

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The Middle East has been an important source of activity this year. In January, UAE’s Du launched a US$80m carrier-neutral data center in Dubai, in partnership with US-based Equinix. Looking ahead, Du plans to provide improved connectivity and managed

providers and carriers from other regions. In June, it purchased a 10% stake in data center provider Khazana Data Centre – owned by the Abu Dhabi Government – having previously agreed to be an anchor tenant in two of the provider’s facilities in Abu Dhabi and Dubai.

growth in the region’s IT infrastructure market, with data center consolidation and planned new builds combining to create a positive market prognosis. At the same time, the trend toward locating applications and content within the region, as opposed to being served in Europe or Asia, will spur improved performance for locally based businesses.

plans to transform the region into an ICT hub, new facilities in African markets represent the latest step in the region’s paradigm shift toward a more robust infrastructure landscape. In September,

service provider owned by Econet Wireless – launched a carrier-neutral facility in Kenya. Offering space for dedicated hosting, disaster recovery and cloud services to carriers, it is the only data center in East and Central Africa to meet international data center standard TIA-942, with 99.982% reliability.

14 “Telecom ramps up its data centre and cloud offer,” Telecom New Zealand, 29 April 2013.

data services across Africa, with internet content delivery and lower latencies a growing priority. At the same time, corporate customers are keener than ever on outsourcing data to third parties — to save on costs, focus on core activities and sidestep regional challenges relating to inadequate security and unreliable power supply.

Elsewhere, developed-market incumbents are also ramping up their data center investments. In September, Portugal Telecom opened one of Europe’s largest data centers, in Portugal, designed to act as the cornerstone of its cloud service proposition. A total of US$99m has been invested in the facility, which will offer end-to-end services from storage and connectivity through to cloud services, while also linking to existing Portugal Telecom data centers in Lisbon and Brazil.

Telecom New Zealand has also been increasing its data center capabilities. In April, the incumbent provider signed a conditional agreement to acquire local data center company Revera Limited for NZD96.5m.14 The deal forms part of Telecom New Zealand’s business strategy to become a provider of communications, entertainment and IT services, with Revera to remain as a stand-alone business, providing customers of Gen-I – Telecom’s ICT services division – with access to additional cloud capabilities and data center capacity. In September, Gen-I and Revera provided an update on the construction of a new NZD60m data center, with completion slated for the second half of 2014.


7 August 2013. 16 “Oracle communications LTE diameter signaling index: Forecast report and analysis, 2012–2017,” Oracle, September 2013. 17 “Cisco visual networking index: Forecast and methodology, 2012–2017,” Cisco, May 2013.

While the democratization of data center capabilities is a welcome development across the carrier landscape, a number of challenges present themselves – especially for operators in emerging regions

facilities represent an important adjunct to operators’ enterprise propositions, and new competencies are essential, given the additional responsibilities required in the day-to-day management of mission-critical corporate data.

Data center construction presents its own unique set of

contracts. Embedding the right kind of technical and legal expertise will take time. There are also impacts on the rest of the carrier’s organization to consider. Dedicated operational teams may not sit naturally within a pre-existing enterprise business unit, for example.

departments, given that data center capabilities enable the creation of new service bundles, while technical sales teams will co-exist with traditional account managers. Meanwhile, long-term customer trust will pivot on operators’ enhanced understanding of the data center landscape. At the same time, the green agenda in ICT will require

architecture design so as to support more effective ratios of power usage and effectiveness.

Going forward, operator data center strategies at large will remain

capital, depth of existing enterprise offers or willingness to partner with third-party providers. Partnerships themselves may pivot on

sharing risks.

For global carriers with multi-market footprints, ecosystem strategies and investment decisions are likely to differ according to regional presence and customer requirements. Nevertheless, the current spate of data center activity in emerging markets and from ambitious incumbents underlines how corporate customer needs are evolving along similar lines, regardless of market maturity.

Mobile operators prepare for explosive LTE signaling growthLTE network rollouts continue to dominate the global wireless landscape: the Global mobile Suppliers Association (GSA) expects 260 commercial networks to be available in 93 countries by the end of 2013.15 Subscriber migration to 4G services is fueling

devices alongside skyrocketing signaling volumes.

of authentication authorization and accounting (AAA) services in the IP multimedia subsystem (IMS) architecture. The two signaling protocols driving IMS networks are session initiation protocol (SIP) and diameter signaling.

These two protocols are designed to perform separate but complementary functions. While SIP is the standard for message signaling, such as voice over internet protocol (VoIP) and videoconferencing, diameter is the protocol for data signaling from smart devices. The diameter protocol is more complex than prior standards, leading to more signaling activity per application and per subscriber.

Worldwide diameter signaling is expected to reach nearly 99 million messages per second (MPS) by 2017, up from just 1.25 million in 2012.16 This represents a compound annual growth rate (CAGR) of

17 Currently, North America is the largest LTE market in the world and

Source: “Oracle communications LTE diameter signaling index: Forecast report and analysis, 2012–2017,” Oracle, September 2013.

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18 “Oracle communications LTE diameter signaling index: Forecast report and analysis, 2012–2017,” Oracle, September 2013. 19 “Diameter signaling controller market set to double in 2013 as LTE deployments take off,” Infonetics Research, 30 January 2013. 20 “Telenor Global Services chooses Oracle’s Tekelec Diameter Signaling Router,” Oracle, June 2013.

21 “BICS IPX platform connects LTE services in Europe, North America and Asia,” Optical Networks Daily, 9 September 2013, via Dow Jones Factiva, © 2013 Electronics International. 22 “T-Mobile’s LTE network to use Tekelec’s Diameter signaling router,” FierceBroadbandWireless, 9 September 2013.

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Policy use cases are the key driver of growth in LTE diameter signaling and are forecast to account for more than 60% of MPS crossing LTE networks globally by 2017.18

increase in both the number and sophistication of policy use cases in years to come as operators expand their data service propositions and pricing models beyond fair-usage approaches to include shared data plans, mobile advertising, machine-to-machine (M2M) services and streamed video service options.

Meanwhile, mobility – in terms of roaming from 3G to LTE networks and vice versa – has a relatively lower impact on diameter signaling growth in comparison with policy rules and online-charging.

In order to manage and secure diameter signaling, operators are deploying diameter signaling controllers. These have a profound effect on the LTE business case, allowing operators to boost the

for new revenue-generating and churn-reducing opportunities via

of service (QoS). In 2012, global revenue from diameter signaling controllers increased by over 900% compared with the year before.19

In recent months, operators have partnered with vendors to deploy LTE diameter signaling infrastructure on their networks. In July, Telenor Global Services selected Oracle’s Tekelec diameter signaling router to support its international network roaming for data and 4G services. The solution will enable Telenor to make its LTE roaming services available around the world.20 In September, Belgacom International Carrier Services (BICS) announced that its

IPX network and LTE diameter signaling service enabled three operators — Rogers Communications, Swisscom and SK Telecom — to offer LTE roaming across Europe, North America and Asia.21 In addition, as part of its network modernization project, T-Mobile USA plans to deploy Tekelec’s diameter signaling router for its LTE network.22

Looking ahead, operators must recognize a number of new challenges that accompany their diameter signaling strategies. For one, the diameter signaling protocol itself is expanding in order to support ongoing migration to all-IP networks, even in 3G networks. Interfaces are also evolving,

in location-based services, for example. Although mobile network owners can

on several criteria, such as subscriber

extrapolating this in terms of diameter

require additional support from vendors.

Understanding the implications of

support operators’ accurate planning of network architecture. At the same time, understanding new use cases in terms of customer behaviors and third-party relationships will become more important:

be informed by a wider range of inputs than the number of subscribers on the network at a given time. As such, signaling intensity will become a crucial metric for network planning — driven by different types of applications and their unique forms of interaction with various network elements.

Source: “Oracle communications LTE diameter signaling index: Forecast report and analysis, 2012–2017,” Oracle, September 2013.

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23 Nick Wood, “Ofcom opens spectrum sharing consultation,” Total Telecom Plus, 12 August 2013, via Factiva, © 2013 Terrapinn Holdings Limited.

Regulators take new steps on spectrum sharing Regulators and mobile operators continue to explore policy and technology solutions

in many markets, spurred to action by the perpetually accelerating demands on mobile data networks.

Operators are doing the best with what spectrum they do have by leveraging developments in technology to improve

of mobile networks play a part here, as do technologies to densify networks, including small cells and distributed antenna systems.

Efforts to reallocate spectrum are under way in several markets. Regulators are contending with a patchwork of spectrum allocated to several uses, including

and broadcasting. Some of the spectrum in this mix is unutilized and could be transitioned so that operators can pair

use. While operators favor spectrum

in many cases it presents a challenge

The reallocation of spectrum for mobile use will certainly help over the long term, but there is a limit to the amount that can be repurposed for mobile operators. The sharing of frequencies — for single or multiple use cases — is becoming an increasingly important tool in managing demand for spectrum and reducing barriers to entry in new technologies.

Spectrum sharing involves a variety of geographical and frequency elements, and

arrangements. In August, the UK telecoms regulator, Ofcom, launched a consultation on spectrum sharing, seeking views on the implications of spectrum sharing for both licensed and unlicensed frequencies, as well as its impact on the M2M market.23

3.Regulation

Figure 9. Different approaches to spectrum sharing

Source: “The future role of spectrum sharing for mobile and wireless data services,“ Ofcom, 9 August 2013.

Increasing service range and quality Ability to prioritize some users over others

High

Low

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Low

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License exempt

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Medium

Dynamic spectrum access

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24 Mary Lennighan, “EU calls for mobile spectrum sharing,” Total Telecom Plus, 3 September 2012, via Factiva, © 2012 Terrapinn Holdings Limited. 25 “Presidential Memo Pushes Spectrum Sharing, Commits $100 Million for R&D,” Communications Daily, 17 June 2013, via Factiva, © 2013 Warren Publishing, Inc.

26 Anandita Singh Mankotia and Gulveen Aulakh, “Telecom department to seek Trai’s views on allowing spectrum trading,” The Economic Times, 27 August 2013, via Factiva, © 2013 The Times of India Group; Anandita Singh Mankotia, “Government likely to issue spectrum sharing guidelines before auctions,” The Times of India, 9 October 2013, via Factiva.

In the European Union, the European Commission’s telecom reform package aims to harmonize rules around spectrum. The proposal allows operators to share and trade spectrum, vital if a growing range of use cases are to be provided through a wider competitive landscape.24

In the US, spectrum sharing is featuring as part of the debate on how best to repurpose government-held spectrum for mobile use. In 2012, the President’s Council of Advisors on Science and

3.5GHz band that can be shared with other users.

Since then, a debate has been brewing in the sector. Some industry players are advocating a three-tiered spectrum sharing arrangement that would cater for “General Authorized Access” users such as small businesses, while other players have been recommending a two-tiered system that would preserve more spectrum for small cell deployments. Meanwhile, the government has allocated US$100m in R&D to address interference issues relating to spectrum sharing.25

tone for future spectrum-sharing agreements.

In India, rules surrounding spectrum sharing have been discussed as part of wider stipulations accompanying spectrum auctions scheduled for January 2014. While 2G spectrum sharing was approved in 2012, the overall policy for sharing and trading frequencies has remained unclear.

The Telecoms Regulatory Authority of India (TRAI) has called on the Department of Telecoms (DoT) to provide a new framework for spectrum sharing, yet new rules would have to dovetail with related regulations on M&A and spectrum trading. Under the current regime, an operator seeking to exit the market would have to forfeit its purchased spectrum because selling it back to the Government or other operators is prohibited.

In this light, spectrum sharing and trading policies will act as a key element in overall sector regulation designed to enable mobile market consolidation and attract foreign investment.26

Latin America is another region where spectrum sharing rules are in the spotlight, both as a means to increase competition and overcome the innate scarcity of spectrum itself. Brazilian regulator Anatel is planning to include rules governing the sharing of spectrum as part of its policy on mobile infrastructure sharing.


29 Christine Dobby, “Rogers signs LTE deal with Vidéotron; Joint network will help battle with Bell, Telus,” Financial Post, 31 May 2013, via Factiva; Kamarul Anwar, “Celcom, Altel team up for LTE spectrum sharing,” The Edge Financial Daily, 5 July 2013, via Factiva, © 2013 The Edge Communications Sdn Bhd. 30 “FCC and Industry Canada Agree on Spectrum Sharing Arrangements,” Radio Resource, www.radioresourcemag.com/newsArticle.cfm?news_id=9853, 21 August 2013. 31 “Ofcom unveils participants in wireless innovation trial,” Ofcom, 2 October 2013.

Several operators already have arrangements that cover infrastructure only, but spectrum sharing has yet to be embraced. Anatel is also considering mandating the sharing of frequencies in Brazil’s interior and rural areas, and it may include this requirement as a term in the 700MHz spectrum action planned for early 2014.27

In Ecuador, telecoms regulator Superintendencia de Telecomunicaciones (Supertel) is considering a range of spectrum regulations to inject competition in a mobile market where the top two operators have a combined 98% market share. The scarcity of spectrum has proved a barrier for new market entrants to obtain licenses, and in response, Supertel is considering spectrum sharing as part of its recommended policy changes.

The regulator also wants to encourage the entry of mobile virtual network operators (MVNOs) and is proposing regulation that allows or requires spectrum holding operators to share spectrum as well as other network resources with MVNOs.28

While spectrum sharing is proving a challenging issue in markets where regulators are planning to re-use public sector spectrum for

policies, there are plenty of instances where operators have already struck commercial agreements to share spectrum, often as a way of reducing network rollout costs.

In May, Canadian operators Rogers Communications and Videotron struck a 20-year deal to share networks and spectrum assets as they roll out an LTE network in Ottawa and Quebec. As part of the deal, Videotron has been given the option of selling its Toronto spectrum license to Rogers for US$180m, subject to regulatory

approvals. In July, Malaysia’s Celcom Axiata Berhad and Puncak Semangat’s subsidiary Alltel Communications Sdn Bhd agreed to pool their spectrum holdings in the 2.6GHz band, leveraging this for an LTE network that they will jointly develop, build and operate.29

Beyond in-market deals to share spectrum, there is also a growing need for governments themselves to co-operate on spectrum sharing arrangements. In August, US-based FCC and Industry Canada agreed on new spectrum sharing arrangements across

of spectrum for business and industrial users while accelerating mobile broadband deployment, the arrangement includes

to expand backhaul for wireless networks, high-speed wireless local area networks and broadband internet access over high-bandwidth point-to-point links.30

This follows a deal struck between US and Mexican regulators in 2012 that focused on spectrum sharing along their borders to aid the provision of mobile broadband and emergency response communications.

Given the diverse drivers that are prompting regulators to focus on spectrum sharing, it is vital that all industry stakeholders can

regulators contend with freeing up public sector spectrum or the use of white spaces spectrum, spectrum sharing agendas are likely

Looking ahead, there is scope for industry and government to work more closely together on developing positive outcomes. In the UK, BT and technology specialist Neul are working alongside the Department of Transport to test white spaces for the use of intelligent transport solutions, for example31. For regulators themselves, spectrum sharing approaches may differ markedly depending on geography or the range of industry actors currently or prospectively using spectrum in a particular band. As such, balancing a holistic view of national spectrum needs against more

India, South Korea lift foreign investment capsIn many markets the question of foreign sector participation in telecommunications is becoming more important. Last year, the Canadian regulator lifted foreign ownership restrictions on telecommunications carriers and in recent months, both India and South Korea have been making moves to relax restrictions on foreign ownership in their respective telecommunications sectors.

27 “Brazil’s government prepares spectrum sharing regulation,” Business News Americas, 5 June 2013, via Factiva. 28 “Supertel issues recommendations on MVNOs, spectrum management/sharing,” TeleGeography, www.telegeography.com/products/commsupdate/articles/2013/07/12/supertel-issues-recommendations-on-mvnos-spectrum-managementsharing, 12 July 2013.

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32 “Indian Telecom Industry: Dilemma & Way Forward,” EY-ASSOCHAM report, 2013. 33 “Fitch: Removal of FDI Limit Positive for Indian Telcos,” Reuters, www.reuters.com/

accessed 31 July 2013.

15Issue 11 |

Sources: “FDI statistics,” Department of Industrial Policy & Promotion – Government of India website, http://dipp.nic.in/English/Publications/FDI_Statistics/FDI_Statistics.aspx, accessed 24 September 2013.

0

500

1,000

1,500

2,000

2,500

FY11 FY12 FY13

US$ million

In August 2013, the Indian Government increased the FDI limit in telecoms to 100% from the current limit of 74%. While 49% of the FDI will be allowed through the automatic route, the remaining will need the approval of the Foreign Investment Promotion Board of India. The increase in the FDI limit is expected to provide the much-

of 2G licenses and an uncertain regulatory environment.

The move is likely to attract investment to the tune of US$10b in the near-to-long term, important given that total service sector debt in 2012 stood at US$29.3b, above net revenue of US$28b.32 In addition, at least 40% of Indian telecoms operators’ debt is denominated in US dollars, and India is suffering the brunt of a weaker rupee which has depreciated by more than 20% in the last two years.33

Against this backdrop, the removal of the FDI cap is likely to help reduce the debt burden on Indian telecoms operators. It could attract overseas investors at a time when operators are struggling to accommodate rising capex burdens involved in 3G and LTE rollouts. Nevertheless, foreign investors are likely to seek greater regulatory certainty in areas such as M&A given the expectation that large-scale consolidation is required in the mobile sector.

South Korea has also taken steps to lift foreign ownership restrictions on telecoms operators – raising the cap from 49% to 100% in August 2013. However, the move comes on condition that foreign investors set up an investment vehicle to own the stake in question.

trade agreements with the US and the European Union. However, the country’s leading carriers – SK Telecom, KT Corp and LG Uplus remain – are not affected by the new rules. In this light, the change in FDI limits is likely to apply only to a few small entities involved in


Introduction

While total announced deal volume declined slightly from 165 in Q2 2013 to 155 in Q3 2013, total deal value of US$173 billion represents a more than eightfold increase from the US$21 billion registered in Q2 2013. The US$130 billion acquisition by Verizon Communications of Vodafone’s 45% stake in Verizon Wireless accounted for 75% of deal value in the three months to September. Even without this sizable transaction, deal value increased more than twofold from 2Q13.

Roughly 40% of deal volume came from the US, as mobile assets changed hands and small operators joined together to gain scale. Consolidation in Europe continues: the region accounted for one-third of deal volume, and the merger between Telefonica Deutschland and E-Plus in Germany was the quarter’s second-largest deal.

4.Mergers and Acquisitions

Overseas players continue to eye Europe for opportunities as the consolidation story gathers pace on the continent. This year has already seen Asian conglomerate Hutchison Whampoa acquire Telefonica’s Irish mobile business, while America Movil continues to seek further exposure to European telecommunications, having gained a foothold in both the Austrian and Dutch incumbents.

In August, the Mexican operator announced a US$9.6 billion bid for the 70% of Netherlands-based KPN that it does not already own, underlining its commitment to the European market. However, a full buyout was complicated as a foundation set up to protect the Dutch incumbent’s interests – Foundation Preference Shares B KPN – exercised a call option to take 50% minus one share of KPN. KPN revealed that it sought a higher price from America Movil – and renegotiations were attempted – but both parties remained at odds on valuation, and the Mexican player withdrew its bid in October.34

There were no deals in Japan during the quarter, though the incumbent NTT continues to tap international markets for assets.

34 “Carlos Slim’s America Movil Withdraws KPN Bid,” The Wall Street Journal, 16 October 2013.

17Issue 11 |

Source: Thomson One, S&P Capital IQ, Mergermarket, accessed November 2013

$27$0

$335$1,124

$17,842$30,743

$3,014$1,41,518

Japan

Asia-Paci c

EMEIA

Americas

3Q13 2Q13


35 “Vodafone to realise US$130 billion for its 45% interest in Verizon Wireless,” Vodafone, 2 September 2013. 36 “Investor presentation,” KPN, September 2013. 37 “German regulators cast doubt on E-Plus O2 merger,” Deutsche Welle, 21 August 2013. 38 “KPN EGM approves sale of E-Plus,” KPN, 2 October 2013.

Verizon gains full control of its wireless assetsIn the third-largest corporate deal in history, Verizon Communications has taken full control of its subsidiary Verizon Wireless, acquiring the 45% stake held by UK-based Vodafone for US$130.1 billion. The transaction consists of a combination of cash (US$58.9 billion), Verizon common stock (US$60.2 billion) and other items.

Verizon has long sought full control of its domestic mobile business and expectations have mounted this year that a deal was on the cards. With sole ownership of Verizon Wireless, Verizon

platform “One Verizon” strategy of operating seamlessly across all

headroom for investment, important at a time when consolidation is under way in the US market.

For their part, Vodafone shareholders will receive US$84 billion in the form of stock and dividends. The UK-based player will use the remaining proceeds to reduce its debt and to further its organic investment program. As part of this, Vodafone has announced Project Spring, a three-year, US$9.35 billion initiative to improve

and customer experience across all of its markets. Key targets outlined as part of the program include accelerating 4G rollout to

deployment of mobile payments.35

Mobile consolidation moves forward in GermanyConsolidation remains a key theme in the European telecommunications industry, and Germany has been the scene of some of the biggest deals worldwide this year. In July, Dutch incumbent KPN and Spain’s Telefonica announced plans to merge their assets in Germany, with the aim to unlock mobile synergies estimated at €5 billion in the quarter’s second-largest deal.

Under the terms of a sweetened offer from Telefonica, KPN is to transfer 100% of its interest in German mobile operator E-Plus to Telefonica Deutschland, in return for a 20.5% stake in Telefonica’s German arm.36 The deal is worth US$11.4 billion, and the combined entity would become the new market leader in German mobile, with more than 43 million customers.

While the rationale for the deal is undeniable — greater scale and a reduced capital expenditure burden in Europe’s largest mobile market – the merger of the number three and number four players has been seen as a test of regulators’ mettle. Balancing the needs for competition with the opportunity to create more rational mobile market structures has proved an area of contention across the industry: EU calls for the creation of a single European market in telecoms have been underscored by growing pressure on regulators to allow more consolidation.

In September, the European Commission announced that it — not the German authorities — would review the deal, improving the

voiced fears that the deal would limit competition levels.37 In October, KPN announced that shareholders had approved the sale of E-Plus at an extraordinary general meeting of shareholders (EGM).38 All eyes are now on the EU’s antritrust regulators, who are to make a decision on the deal in December.

19Issue 11 |

39 “Vivendi to sell Maroc Telecom stake to Etisalat for US$5.7 billion,” Reuters, 5 November 2013.

Airtel, 26 April 2013.

19Issue 11 |

Assets change hands in AfricaA long-running acquisition saga in Morocco recently ended with UAE-based Etisalat acquiring a 53% controlling stake in Moroccan incumbent Maroc Telecom for US$5.7 billion. Both Etisalat and fellow Middle Eastern telco Ooredoo had submitted bids in April, before the latter withdrew in June. In November, Maroc Telecom owner Vivendi agreed to sell, allowing Etisalat to widen its exposure to African markets.

Morocco and also has operations in Mali, Gabon, Burkina Faso

this decade, following US$12.6b worth of overseas acquisitions between 2004 and 2009.39 Meanwhile, Vivendi has been shedding some of its telecom assets as part of its ongoing restructuring to focus on its media and content businesses.

Etisalat is not the only multi-market operator growing its footprint in Africa. In April, India’s Bharti Airtel acquired Warid Telecom in Uganda, adding an additional 2.8 million customers to its Ugandan operations to take its mobile market share to 39%, while in November, the India-based mobile operator acquired Warid’s Congo Brazzaville operations.40 Mobile data usage in Africa is rising fast as handset prices fall, and Bharti Airtel is hoping to capitalize on strong demand levels as it rolls out 3G networks across the continent.

Source: Thomson One, Capital IQ, Mergermarket, accessed October 2013.

$0.8

$0.9

$1.1

$1.2

$1.7

$2.2

$4.8

$5.7

$11.4

$130.1

BTG Pactual/GlobeNet Cable System from Brasil Telecom

PT XL Axiata/PT AXIS Telekom Indonesia

Eutelsat/SATMEX

AT&T/Leap Wireless

MegaFon/Maxiten Co

DISH Network/LightSquared Inc.

American Tower/Global Tower

Emirates Telecom/Maroc Telecom (53% stake)

Telefónica Deutschland/E-Plus Mobilfunk

Verizon Comm./Vodafone's 45% stake in Verizon Wireless

Buyer/seller Deal value (US$b)


41 “Axiata buys into Axis Telekom,” The Edge, 27 September 2013.

Consolidation continues in IndonesiaIn-market acquisitions have proved an enduring theme in Indonesia, one of the world’s largest telecommunications markets. In September, PT XL Axiata (XL), the Indonesian mobile division of the pan-Asia operator Axiata Group Berhad, announced the acquisition of mobile rival PT Axis Telekom Indonesia from Saudi Telecom and Teleglobal Investments in a deal worth US$865 million. As a result of the acquisition, number three player XL will increase its subscriber base from 54 million to 65 million, in the process becoming the second-largest mobile operator behind Telkomsel, which has 120 million subscribers.41

XL spectrum position in the 1800MHz and 2100MHz bands, paving the way for improvements in 2G and 3G service quality. XL’s enhanced spectrum position in 1800MHz is particularly

band. A shortage of attractive spectrum has long been viewed as an impediment to mobile data growth in Indonesia, and the national regulator has explicitly backed consolidation as an antidote to the lack of frequencies.

A number of smaller transactions also took place in other Indonesian market segments during the quarter. In September, PT Centrin Online – an Indonesian provider of dial-up, internet, data center and hosting services – announced the US$9.4 million acquisition of a 99.9% stake in PT Indo Pratama Teleglobal, an ISP offering internet access, internet telephony, data center, broadband wireless access and disaster recovery.

21Issue 11 |

Date Bidder Target Business nature of target

26 Sep 2013 PT XL Axiata (Indonesia) PT Axis Telekom (Indonesia) 100% (US$865 million) Mobile operator

3 Sep 2013 NTT Data (Japan) Allinfnt Finance and Technology Development (China)

42% (NA)

28 Aug 2013 Telstra (Australia) DCA Health (Australia) 100% (US$36 million) eHealth software company

27 Aug 2013 DoCoMo Deutschland (Japan) Fine trade (Austria) 100% (NA) E-commerce trading solution provider

22 Aug 2013 Telstra (Australia) NSC Group (Australia) 100% (US$45 million)integrator

15 Aug 2013 Telstra Ventures (Australia) IP Health (Australia) NA eHealth operator

22 Aug 2013 CityNet Infrastructure Management (Singapore)

OpenNet (Singapore) 100% (US$99 million) NetCo of NGNBN

5 Aug 2013 iiNet (Australia) Adam Internet (Australia) 100% (US$54 million) Internet service provider

10 Jul 2013 Charm Success Group (BVI) China Motion Telecom International (Hong Kong)

55.1% (US$44 million) MVNO and telecom service provider

42 “CT Corp Buys Telkom Pay TV Stake to Boost Media Business,” The Jakarta Globe, 6 June 2013.

Meanwhile, integrated incumbent Telkom Indonesia paid US$4.5 million in August to raise its stake from 40% to 80% in Patrakom,

June where CT Corpora, a media content owner, took an 80% stake in Telkomsel’s pay-TV unit, Indonusa Telemedia. Both parties believe that Indonesia’s pay-TV market is ripe for growth, with penetration standing at just 7%, well below the level of other markets in the region.42

Source: Mergermarket, Telecom Asia, Factiva, accessed October 2013.

23Issue 11 |

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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Holger Forst Global Telecommunications Assurance Leader [email protected]

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