Friday, July 30, 2004

Daiwa EuroTelcoblog No. 63: Friday 30th July, 2004 - Friday afternoon tidbits

Blip or new downdraft?

The Q2 reporting season for the Northern European incumbents has been a wild one so far. Following on from our sector pick Telenor's strong results last week, this week we got a very mixed bag from the next three to report (France Telecom, TeliaSonera, BT Group). The growing competitive tension in the Nordic and UK mobile markets were in evidence once again in the margin compression associated with just maintaining subscriber levels, let alone growing them. Carphone Warehouse management stated in its conference call that in the Dutch mobile market the company is seeing evidence of pricing aggression in the prepaid segment reminiscent of the 1999/2000 insanity, which probably bodes poorly for KPN results on 9th August. Fixed line volume decline moderated somewhat in Sweden versus Q1, but both France Telecom and BT Group exhibited signs of an acceleration of traffic decline significantly beyond our expectations and previous trends. Unbundled local loops in France now account for 15.6% of the total DSL line base, and have grown by over three percentage points each quarter (or 157%) since the start of the year. We believe the remainder of the reporting season may hold some other disappointing data points, with the central question being: is this a blip or the start of a new, more intense deflationary downdraft for the sector? We'll have to wait until Q3 for the answer, but the evidence at our fingertips suggests things may look rough once again. Take the announcements so far in the quarter by a couple of the key disruptors in Europe: Carphone Warehouse and Iliad, parent of French enfant terrible ISP Free.

Carphone Warehouse signed up 9,700 net new subs per week to its Talktalk carrier pre-select product during the quarter in the UK, has launched the product in France, and intends to roll it out in Spain, Switzerland and Germany by year-end. Based on previous statements from the company we expect these international Talktalk users will receive free on-net calls, regardless of where the call terminates. There is also an expanded European MVNO strategy in the works, as well as entry into the UK broadband market by year-end, and the discussion of VoIP on the call left us with the impression that it might be deployed opportunistically where there was a rationale for it. Compared to many players in Europe, we're talking about fairly small numbers here, but this is a company with 2m controlled wireless subscribers and 1300 stores across Europe. The UK stores reportedly account for half of the new subs signed up to Talktalk, and we wouldn't underestimate the potential of the company to cross-sell and bundle products in various markets across Europe longer term in a way that we haven't really seen from a newcomer before.

Iliad today announced ISP revenues up 84% YoY in the first half, and a 58% growth in its DSL subscriber base since the start of the year. More importantly, the proportion of unbundled subs expanded from 34% at the end of last year to 46%, giving it more control over product quality and better margins. Additionally, since mid-June the company has started pushing a fully unbundled product to customers, meaning that technically speaking, naked DSL has now come to France. Removing the incumbent from the customer relationship entirely is a key element in driving usage on its bundled IP phone available as part of the Freebox triple play product, which since March it gives to all DSL customers, not just unbundled lines. In other words, the 133k subscribers added in Q2 are all VoIP customers. One other thing we noted with interest was that Free's share of unbundled lines in France, though an impressive 48.6%, actually fell in the first half, as the other unbundled lines in the market grew by 208% in the first six months of the year. If the market continues at this pace, we may easily see one quarter of the market unbundled by year end, with a substantial number of VoIP users. No wonder France Telecom is serious about VoIP and TV over DSL.

More on Flarion

Last week we had a conference call with Flarion Technologies and wrote extensively about it here. A lot of the information in it probably sounded too good to be true for many readers, but this interesting product test review from Nextel's trial area in North Carolina seems to support the view that the product is robust and attractive. Similar to our conclusions last week, the reviewer nails it on the head in terms of broader market implications:

"It could replace your home broadband RoadRunner or DSL service and still be around the same price, with the added benefit of mobility....We predict that when Nextel rolls out this service on a national level, there will be many satellite broadband Internet providers, cell phone firms, and others who will lose customers immediately to this great new service."

We tend to think that this conclusion would hold true equally well in Europe, and if our speculation regarding T-Mobile and either the UK or Dutch markets turns out to be correct, then entrenched players in these broadband and mobile markets probably have trouble, and DT has a big opportunity. The review is here ( and the marketing site for the North Carolina trial is also interesting (

Analyst, blog thyself

Our leader piece in Daiwa's July Global Telecom Monthly ( made a case for why telecom analysts may face superannuation at the hands of a new, more interactive and independent group of bloggers writing to a very high standard. I also argued that the brokers have an opportunity to harness RSS and other technologies in the pursuit of new distribution and marketing strategies. Lo and behold, last night I stumbled across (, which is the collected blogs of analysts at research consultancy Jupiter Research, some of which have been running since 2002. This makes for interesting reading, ranging from some opinionated and amusing material to a disturbingly broker-like review of the Time Warner Q2 results. It is even more interesting when we consider that this is a business where the revenue model is based largely on selling access to research products (and the seminars and conferences that are built on top of them), and we normally wouldn't expect to see such a company giving away intellectual property. However, the informality of the blogs lets readers get some insight into the personalities and views of the analysts, and the posts are peppered liberally with references and links to research products which must be purchased. I expect the revenue conversion factor may be fairly low, but this approach probably generates more interest, and is certainly friendlier, than a webpage displaying the message "access denied to non-registered users."

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