Goodbye summer

I'll be offline for two weeks - back in service on 5th September. Based on what my various contacts are telling me today, I fully expect some explosive EuroTelco news to break while I am away. Oh well, when it happens, I guess you'll know what I was talking about.

Where have all the minutes gone?

There's been a lot of coverage lately of the real state and size of Skype's user base, but assuming we won't ever get any audited figures until the IPO prospectus is filed [;-)], I think it might be more instructive to look at usage patterns. Sad though it may sound, I happen to have been tracking Skype minutes of use for nearly a year now (a task helped dramatically by the statistics RSS feeds created by Skype), taking observations somewhat sporadically at 8:00 AM GMT (or as near as I can to it), and typing them into a spreadsheet. My methodology (perhaps too lofty a word) has been to take the number of minutes recorded since the previous observation, and divide by the number of intervening days. Since the start of the year, here's what I have observed, for what it's worth (I don't claim that these are precise figures, just my observations of what Skype has reported, subject to caveats regarding unequal distribution of datapoints, etc.):

Average minutes of use per day

Jan - 28,954,133
Feb - 37,533,906
Mar - 41,745,885
Apr - 41,732,959
May - 39,451,552
Jun - 38,479,729
Jul - 35,754,556
Week of 12 - 19 Aug - 36,601,232

It's interesting to note that downloads of Skype are up 61% since the end of March, and the active user base reported by the company has nearly doubled, yet looking at the concurrent user stats, we seem to be stuck at a high point of just over 3m on any given day, and average minutes of use in the most recent week (again based on my calculations) appear to be down a little more than 12% from March levels. I'm at a loss to explain why such strong growth in the user base should not translate into heavier usage figures, unless the IM functionality of Skype is acting to dilute voice. One Platinum Circle reader pinged me yesterday with a timely observation:

"My kids spend hours a day using Skype IM, but never use the voice features."

Portrait of obscurity

Those clever and passionate guys over at VoIPUser have been posing the question - whatever happened to Microsoft's Portrait, which on the surface seems like a natural contender in the video VoIP field. It talks SIP and interfaces with MSN Messenger, runs on a variety of devices, and claims to adjust image quality and frame rate to bandwidth conditions. If anyone (particularly anyone from MSN) can share any insight into where this is heading (or not, as the case may be), give us a shout.

Mind-bloggling

If you live in the UK, or perhaps if you are a foreign guest looking forward to being marooned in one of our many outstanding airports on Friday, 9th September, you could do worse than to head up to Cambridge for this promising-looking symposium on blogging. Only GBP100 (Euan Semple alone is worth that, but look at who else is appearing), with lunch and free parking thrown in - who could resist? I unfortunately have a pre-existing work commitment, but if I am successful in cloning myself by then, one of us will certainly turn up.

Googles of cash

I've always expected that Niklas and Janus had Sergey and Larry in their future, though there are many who have argued with me on this. Om speculates on what network investments Google might make and why. Whatever they're up to, I'd say it looks like pretty serious stuff - today the company has filed a shelf registration to sell up to 14.8m shares, which at the current price implies $4.2bn proceeds. That's a major chunk of change, to be used for "general corporate purposes, including working capital and capital expenditures. In addition, we may use proceeds of this offering for acquisitions of complementary businesses, technologies or other assets. We have no current agreements or commitments with respect to any material acquisitions." Watch this space.

UPDATE: A Diamond Cluster mega-value reader kindly calls my attention to a stealth acquisition reported here yesterday, which adds some new ingredients to ponder. His take on the end-game:

"I'm thinking presence here. Search (and advertising) is the main perspective I'm sure, but the implications of a convergence later with a VoIP/presence product is intriguing."

Think you got problems?

A North American Platinum Circle value reader takes up the gauntlet thrown down here last week with regards to run rate line loss for incumbents, and replies, "You ain't seen nothin' yet." Certainly, it would seem that 4 - 5% annualized line loss is fairly trivial when compared to the following tales of woe out of North America in the Q2 earnings season (annualized run rate = Q2 sequential loss x 4):

Overall lines lost

Bell Canada -5% vs. -2.68%
Telus -4.33% vs. -1.8%
SBC -6.36% vs. -4.92%
Verizon -6.52% vs. -4.96%
Bellsouth -7.32% vs. -4.76%

Residential lines lost

Bell Canada -7.44% vs. -4.32%
Telus -5.28% vs. -3.00%
SBC -9.08% vs. -5.72%
Verizon -9.32% vs. -5.8%
Bellsouth -10.12% vs. -6.32%

...and it gets worse on a state-by-state level

Verizon
Rhode Island residential -16.16%
N.Y. residential -13.68%
N.J. residential -9.64%
Wash. D.C. residential -9.52%

SBC
Michigan overall -11.8%
Ohio overall -10%
Texas overall -8.2%

More fun with numbers

Dean over at VoIP User has embarked on an ambitious project to track VoIP-to-PSTN traffic from as many service providers as he can rope in, and is in the preliminary stages of collating and analyzing some of the data collected so far. Check out this interesting thread, in particular the statistics he reproduces (for Europe only, so far). I can't wait to see the finished product, which will undoubtedly serve as a nice complement to some of the other impressive efforts elsewhere to document this fast-evolving space.

To everything churn, churn, churn

The smart folks over at Back Channel have wasted no time in sinking their teeth into today's acquisition of Energis by Cable & Wireless, using their Zero Sum solution. If their analysis is indicative of the true state of play at Energis, then it is understandable why C&W pushed the button sooner rather than later, and left no room for negotiation.

What's in a number?

German broadband contender United Internet today reported Q2 results, and while we still have no VoIP subscriber numbers, the company now claims to be invoicing 100m minutes per month. Actually, the long form of the report states that 90m minutes were generated in June, so this marks a pretty strong volume growth rate. This is pure back-of-the-envelope stuff, but assuming that usage per sub is in line with PSTN voice usage in Europe (let's say 8 minutes per day), I think this 100m minute figure could imply a user base of around 420k.

Liberty and VoIP for all

Liberty Global (previously known as UnitedGlobalCom, or for the really old people in the house, UIH) reported Q2 numbers today, and states that it is now doing 7 - 8,000 VoIP connections a week combined across its territories in the Netherlands, Hungary, and from this quarter, France.

Another day, another 4000 lines...

This results season is leaving me with a profound sense that we are reaching some sort of tipping point when it comes to PSTN abandonment. Just to recap, on Monday, we observed that KPN's rate of voice line loss in Q2, at an annualized run rate, had risen to 5.3%, more than double the rate of a year ago. Similarly, the run rate line loss for Swisscom yesterday was 4.2%, also more than double the level of a year ago. Today, in Deutsche Telekom's numbers, we witnessed the same pattern - 400k lines in Q2, that's 4.4% run rate annualized line loss, double the level of a year ago. And none of these cases seem to be seasonal blips either - in every case the rate increased in Q2 over Q1. Scaaaaaary.

SkyPO

The Godfather of Broadband, Om Malik, is unconvinced by reports of Skype's plans to go public. He cites the BusinessWeek article as an irritant, which has vague similarities to the Independent coverage from last week. I'm wondering if we're starting to see the same thin leads being regurgitated in a daisy chain (the Independent piece was a fairly transparent rehash of the Cringely blog post on NewsCorp, though it ended up sounding like he was an interviewee of the Independent - and now they expect you to pay one pound to read it!). The Independent and BusinessWeek pieces also share an odd tendency to namecheck Howard Hartenbaum (hello, Howard - you rock!) as though he's somehow separate from Draper Fisher Jurvetson - which also makes me a bit suspicious. What I am hearing is that a number of investment banks are pestering Skype to go public, but not at the company's invitation (this is a key area of expertise of investment banks - pressuring companies to go public when they're not really interested/ready). A cynic might say that with MSN licensing GIPS wideband codecs and Yahoo! clearly out for blood, there's no time like the present. I, like the Ominator, am unconvinced.

The return of Cybertelly

Just got an email alerting me to the existence of (BEWARE - THIS CONTAINS A PORN-RELATED POP-UP) OnlineTVRecorder, a P2P based virtual PVR from the man Guido Ciburski.

More Q2 signs of strain

Today Swisscom reported, and as with KPN yesterday, there's some intriguing stuff going on under the hood. As with KPN, PSTN line loss accelerated in the quarter, to 3.4% YoY, up from 2.9% in Q1. Moreover, the annualized run rate loss (i.e., the sequential quarter-on-quarter loss, multiplied times four) was 4.2%, more than double the rate of a year ago. So, what has changed in the intervening year? Cablecom has launched VoIP, that's what, and by May of this year had seen uptake of 130k users. That doesn't sound like a huge number, but in the context of the Swiss market, we're talking about 5% of the voice access market. I can easily see this number doubling over the next year. Swisscom's not suffering as much as it could be, however, because of the absence of ULL (there's a will, but no way at this point), which enabled it to generate enough DSL wholesale revenue this quarter to offset half of the traditional revenue loss in calls and access, while racking up 76% of the net additions in the retail DSL space.

What's in the packet?

There's no sign of it in their website at this writing, but the folks at CacheLogic have recently conducted an updated study of what sort of content is moving on P2P networks. They found the following:

The mix of P2P traffic by volume, across the 4 major P2P networks:

• Audio: 11.34%
• Video: 61.44%
• Other: 27.22%

Microsoft video formats represent 46% of aggregate worldwide P2P traffic

65% of all audio files by volume of traffic are still traded in the MP3 format, but fully 12.3% are in the open-source OGG file format (almost all exclusively traded on the BitTorrent network, particularly in Asia)

BitTorrent is increasingly being used for the distribution of legitimate content

eDonkey is now the network of choice for video file trading

I'm supposed to be having lunch with the company next week, and will report back.

UPDATE: In the event, I had to cancel the lunch unfortunately due to other commitments, but the data can be viewed here.

From the Q2 results front

Spent all of today working through the rather good results from KPN, which surprised everyone (yours truly included) with some subscriber mix improvements and better margins in the mobile division. However, looking at it from the disruptive angle there was a lot of fairly negative stuff to get excited about too. I've got a negative rating on KPN, for many reasons which I've documented exhaustively here in the past. But stepping back from the situation, it certainly is an interesting case study of the pressures facing telecom.

On the one hand, we have here a company which is well on its way to returning over EUR2bn cash to shareholders in the space of a year - that's roughly 12% of its current market value, and it seems to feel confident that it has the headroom to take on bolt-on acquisitions, such as Telfort (a sizeable one) or the 60k DSL subs bought from Tiscali.

On the other hand, we have a management team which seems to have no qualms about speaking frankly on issues of market turmoil and lack of visibility. One great question from the audience today to CEO Ad Scheepbouwer: "Do you think your voice lines could go down by 6 or 8% next year?" "Yes, quite possibly, no one knows." (I'm paraphrasing here.) Another classic question was, "Do you expect the fixed line margin to continue to decline?" "Maybe, but not in huge increments. However, if we begin mass-market migration to VoIP, then we would see a profound effect." Here is a man who is publicly embracing the fact that many of the key value drivers of his core business may have huge swing factors in them, even over the next 12 months. It's an unenviable position to be in, but I like his style.

Looking under the hood, there are some true signs of strain. This quarter KPN began reporting its fixed line results in three segments: Consumer, Business and Wholesale. This affords us a lot more clarity on what's happening in the various segments - and it ain't that pretty. The line loss in the Consumer segment in the quarter, annualized (i.e., multiplied by four), was 5.3%, which is a real step-change from the 2.4% seen a year ago. Also, because we now have the line bases broken out clearly, we can see that the rate in Q1 was 5.1%, and moreover, that there has been a steady acceleration in line loss over the past year. We knew it was happening, but we couldn't see it in such clarity before. The other interesting shift here this quarter was that previously, some of this line loss could have been passed off as ISDN-to-DSL migration; however, this quarter ISDN lines were flat and all the pain came from people ditching their PSTN lines, plain and simple. Business line loss is not as linear as Consumer, but this quarter was sufficiently ugly at 4.3% annualized, and the ARPU number I calculate was down 7% YoY. One other disturbing trend was that the uptake of discount calling packages, both in Consumer and Business, hit a wall this quarter. This is one of the key defensive weapons of the legacy telco, and it's worrying to see previously very strong growth grind to a halt so suddenly before penetration has even hit 30%.

So here we come to the dilemma for everyone who cares about our beloved sector: how long does the cash thrown off by the business continue to allow the kind of payouts seen so far to compensate investors for risk, how quickly does the situation deteriorate from here, and at what point do things really start to go wrong? We can play with spreadsheets and flex assumptions until we're blue in the face, and the analysts tried to do that today verbally, but management weren't willing to show all their cards, if indeed they had even seen them.

More power to me

I picked up on a couple of interesting changes in the messages coming out of last Wednesday's presentation from BSkyB - one was an apparent acceptance that the internet is indeed a serious issue to confront (interesting that this came against a background of a mooted bid for Skype by parent NewsCorp), the other was the emphasis placed on the wholesale side of the business, i.e., selling channels to UK cable operators. A cynic (such as me) would view the subtext of this (as I stated in my note to clients) as preparing the investment community for an impending resurgence from cable, backed by VOD and better PVRs than Sky currently has in circulation. Today we get another indication, as NTL follows the lead of European cable players, and leapfrogs DSL in the bandwidth stakes. As an NTL customer, I'm thrilled. I guess NTL had better hope my internet consumption doesn't grow so great that I decide to churn off my ridiculously bloated "family pack" of cable channels. After four days in a tent in Suffolk, I know my kids can actually live without TV...

Apocalypse, eventually

Versatel, soon to be part of the Tele2 group, has let slip that its much-heralded DSL 2+ rollout has only captured 20k subs to date, with only 12k lines connected and ready for next week's first Eredivisie match broadcast. One structural problem it claims to face is notice periods of up to 12-months for customers seeking to switch from another supplier.

Like watching paint dry

Just back from four days in a tent in a British seaside holiday camp, I know the true meaning of tedium (just kidding, it was lovely, apart from the weather and the food). For those interested in truly tedious pursuits, such as measuring glacial advances in real time, here is the July update from the UK Telecoms Adjudicator. 90k lines unbundled - my granny could do that with one arm tied behind her back!

$3bn?

A Platinum Circle reader just sent me this extraordinary link from late last week. Rupert Murdoch? $3bn? I must go home, have a glass of wine and contemplate this. It's an intriguing post, and brings up some interesting questions which not many people have dared raise - with the exception of a valued client of mine about a week ago. Indeed, why doesn't one of the carriers take Skype out? So far we're seeing the EuroTelcos doing what they have always done, i.e., buy more network. However, if footprint expansion is what they're after, they couldn't do much better than Skype, and at ultra-low opex and microscopic capex. Who dares wins, but it takes imagination and a grasp of long-term strategy. Eventually we'll find out who has it.

An open plea to Charles Dunstone

There's an old joke which goes something like this:

A rude English tourist is in a restaurant in France and gets irritated by the imperious attitude of the waiter. He blurts out, "Bloody French, always putting on airs. 'Ere, what's so great about France? If you take away the art, the cuisine, the philosophy, the literature, the fashion, the beautiful women, what have you got left, tell me?" The waiter responds curtly, "England."

Over in the broadband paradise which is France (yet another reason for UK residents to feel resentful) Yannick has an impassioned plea for Carphone Warehouse to take over Iliad before it falls into the hands of an inept and backward looking telco. I agree, it's a sexy idea, but I can see two potential issues: 1) CW has traditionally not gone in for telecom businesses involving a lot of network infrastructure; 2) CW is only capitalized at EUR2.35bn at current exchange rates, while Iliad's market cap is EUR1.88bn. An outright takeover would either involve a massive amount of leverage or a lot of CW paper, which I doubt Iliad shareholders would want. Sadly, I think this one may fall to an incumbent, and my bets would be on Teutonic or Iberian players.

UPDATE: A Platinum Circle reader subsequently writes in to challenge my statement on network assets, pointing out that CW's Opal unit carries a lot of CPS traffic in the UK. I had a feeling someone would make that point - what I should have said was that CW has previously avoided owning assets at the local loop level, as well as the kind of CPE/inventory issues involved in the kind of model which Iliad operates with Free.

100% natural disruption

This morning a little bird told me that there may be some serious disruptive wireless happenings taking shape in relation to a place in the UK called Kennet. Don't know yet if that's Kennet in Wiltshire, or this place here. For those unacquainted with UK geography or corporate trivia, Newbury (the bullseye in the map linked above) is the corporate headquarters/company town of Vodafone, which makes the irony even sweeter if this turns out to be the one.

Freestylin'

French enfants terribles Iliad have just reported Q2 numbers, showing that Free had 1.135m VoIP subs at the end of June, up from 850k at the end of March. That's an 86% take rate on voice! The company is also unbundling at an unprecedented pace - now accounting for 67% of their 1.3m DSL lines, up from 53% at the end of 2004.

Maintaining control

Much of what BT management said last week at its results indicated a greater enthusiasm for the role of wholesale provider, which is what it should be saying in light of the OFCOM settlement. That's fine, as long as BT can remain in control at the wholesale level, but this deal between OneTel (telecom/internet unit of multi-utility Centrica) and Easynet (on my list of emerging takeover candidates in the PTT battle for the IP Holy Grail) is a real poke in the eye for BT, and a sign of things to come. There is at least one other (largely unknown) player waiting in the wings to push this business model forward in the UK.

UPDATE: An uber-value reader writes in to suggest the following:

"How about the next big one being Telefonica? Looking at their aggressive line sharing-based announcements in Germany and their know-how, I could very well imagine them taking that business model to the UK as well - even more so after the establishment of BT's Access Division and the new governance rules for dealing with third parties."

Telefonica hadn't crossed my mind, but I can't argue with the scenario laid out here, particularly following the tortuous logic of the "IP-as-weapon-of-mutual-annihilation" thesis. In light of recent cross-border M&A trends, I might be inclined to think that Telefonica might turn up in France first, but maybe there's more upside left in UK market.