Thursday, May 06, 2004

Daiwa EuroTelcoblog No. 39 - Thursday 6th May, 2004: PCCW goes wireless in the UK/talktalk channel check

PCCW goes wireless in the UK

Just in from our colleague Jenny Szeto in Hong Kong, news of PCCW's impending softlaunch of wireless broadband in the UK:

><><><><><><><><><><><><><><><><><><><><><><><><>< PCCW announced its soft launch of wireless broadband services in the UK today. Overall, we believe the plan is largely in line with what management told us in early March in its 2003 annual results briefing. Initially, we believe that the service quality and pricing to be offered by PCCW sound competitive. However, we incline not to understate the execution risk of the project given the company's limited overseas (ex-China) experience. Additionally, we believe that it remains to be seen whether the technology will be well-received by customers as it seems to be still quite new to the market. Our current rating on PCCW is 4 [UNDERPERFORM] due mainly to its demanding valuations.

In summary, six areas in the Thames Valley, including Aldershot, Maidenhead, Reading, Slough, Windsor and Wokingham, will be the first places to launch the services. PCCW will continue to soft launch the services this month, targeting coverage of 300,000 households. In the press conference call it held in the afternoon (HK Time), management cited that the roll out areas are specifically chosen so as to make sure that it can achieve the market share it targets. It also expected to announce the nationwide launch plan in August after it received a better indication of the market from the soft launch.

The company will initially target the residential market. Two services will be offered: (1) 512Kbps for a monthly fee of GBP18 and (2) 1Mbps for a monthly fee of GBP28. Management believes that the service is very attractively priced. British Telecom charges its broadband services at GBP20-30 per month for 512kbps and GBP38-41 per month for 1Mbps services. Besides, management also said it will offer 24 hour delivery for the serivces, call center services 7-day a week and engineer support (can go to the customer site the next day) and look to change the nature and quality of services in the UK.

There will be two vendors for the services, IP Wireless and Navini, with IP Wireless as the major supplier. PCCW will test two different technologies in the soft launch (one allows soft handoff and one does not).

PCCW has spent US$35-40m on opex and capex for the soft launch and there will be 30 base stations at the end of soft launch. It declined to disclose the financial requirement for a nationwide launch as it will largely depend on the launch plan to be finalised after the soft launch. Management targets a 10-15% market share over a number of years and looks for cash flow positive within 2006 or at the latest early 2007.

><><><><><><><><><><><><><><><><><><><><><><><><><>( This is a particularly interesting example, as the service, theoretically for the mobile data environment, sounds fully able to function as a viable alternative to wired residential broadband (average data rate of 1.5Mbps, latency of 35ms, which is more than adequate for VoIP). In other words, we may have the first example of a major cellular player entering a previously untapped segment of the market. Exciting stuff. (Just a moment ago we received a press release from Flarion confirming the reporting on Reuters this morning, that Vodafone will test Flarion equipment in Tokyo from mid-2004.) Now PCCW jumps into the increasingly complicated UK market, diving in at the deep end, in the Thames Valley area of the UK, something of a hi-tech corridor with potentially very discerning customers. The area also includes Telewest's cable footprint. Nevertheless, the pricing looks attractive relative to either of the incumbent providers (Telewest's 1Mbps offering costs GBP35 when taking another Telewest service, GBP37.99 as a standalone). We will continue to track this story, and the entire theme, as it evolves, as we think it is yet another potential source of the market fragmentation we have been monitoring.

talktalk channel check - weekly net adds continue to rise?

At lunchtime today I stopped in at the Carphone Warehouse store on Cheapside, the beating heart of the City of London (just around the corner from BT Centre), ostensibly to buy a replacement for the execrable DECT phone which broke two weeks ago, leaving my household as "mobile-only" converts (and the longer it continues, the less I miss the PSTN). In any event, while attempting to find a model which was both attractive enough not to offend the eye, but durable enough to withstand repeated assaults from an 18-month-old, I made small talk with the staff. In response to my queries, they indicated that they are currently signing up roughly 30 new customers to the talktalk ( carrier pre-select plan every week. (As we've mentioned previously, talktalk is interesting to us in this context because its creators seem to have taken a few pages out of the SIP service providers' strategy book: viral marketing and free on-net calls, which we think will eventually be extended across the company's 11-country European footprint.) Now, the Cheapside branch is probably something of a flagship location for Carphone Warehouse, so we would hesitate to say with confidence that every location is seeing as much traffic. However, if that rate were to be applied to all 475 UK stores, we would be talking about a weekly net add rate of 14,250, through the direct channel alone (talktalk is also available via the website). At the end of Q1, Carphone Warehouse reported 385,000 talktalk subscribers, which we calculated to equal a weekly run-rate for net adds of 11,231 (up 49% on the previous quarter). One store visit doesn't equal a forecast, we know, but it is interesting to hear news like this from the field, particularly in light of reports in UK paper The Business last weekend that BT Group may be seeing a net loss of up to 100k subscribers per month, principally to CPS offerings. The other key player in this area, Tele2, is still refusing to divulge subscriber numbers. The Business article speculated that the gross loss to CPS players (before returning cable customers) could be between 150 - 200k per month. We will be looking for any signs of pressure when BT reports on 20th May.

James Enck
European Telecom Analyst
Global Telecom Strategist
Daiwa Securities SMBC Europe Ltd.
5 King William Street
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