Issue 8 Inside Telecommunications - EY Japan€¦ · Welcome to the eighth edition of Inside Telecommunications, Ernst & Young’s review of the most signi ﬁ cant developments in

InsideTelecommunications

Jonathan DharmapalanGlobal Telecommunications Leader

Challenges of rapid changeWelcome to the eighth edition of Inside Telecommunications,Ernst & Young’s review of the most signifi cant developments in the telecoms sector. In this issue, we consider a number of important themes, from operators’ new approaches to investment funds to the growing importance of traffi c management and optimization technologies.

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.

Issue 8

Service innovation 4

Operators target improved call quality through high defi nition voice 4

Nurturing innovation facilities and funds for new services 6

Regulation 10

Contrasting outcomesin spectrum auctions worldwide 10

Shifting landscapes in public sector spectrum release 12

Mergers and Acquisitions 14

Introduction 14

Consolidation underway in US mobile market 15

Tower deals make theirpresence felt in Europe 16

Asian operators maintain their foreign focus 18

Consolidation andrestructuring continuesacross Asia-Pacifi c 19

Strong investment opportunities remain in the wireless tower market 20

Contents

2 Inside Telecommunications

Technology 8

Mobile traffi c management and optimization technologies set for growth 8

Operators and vendors move forward on LTE Advanced 9

3Issue 8

Important deals announced in the United States and Japan show that consolidation remains very much a key component of transaction rationale. Operators are committed to generating scale in core market segments, such as mobile, with spectrum holdings acting as an extra catalyst for tie-ups. While regulatory concerns over national spectrum distribution and antitrust issues still represent barriers to new market structures, there are already signs that policy makers recognize the benefi ts of consolidation. For example, in December the EU approved Hutchison 3G’s takeover of Orange Austria.

At the same time, some operators, notably in Asia, remain keen to expand their globalfootprints in both developed and emerging markets. Although moves into adjacent market segments are important for many players, leading operators are overhauling their approaches to innovation well beyond acquiring or partnering with established peers in other industry sectors. One key development in recent months is the formation of new venture capital funds, often in tandem with innovation facilities.

Such moves signal the emergence of a shared approach to innovation. Operators are now keen to identify and support promising technologies and services at an earlier stage while also recognizing that traditional R&D approaches fi t less well with new ecosystems that straddle different industry verticals or emerging geographies where effi cient routes to innovation are critical. For their part, technology start-ups can take advantage of operators’ network and marketing capabilities as they look to widen their own addressable markets.

Nevertheless, an enabling environment for innovation in the sector hinges on effective policies and regulation as much as new investment strategies or partnering models.

In this light, the European Commission’s list of digital priorities for 2013–2014, announced in December, is notable for its focus on increasing broadband investment and maximizing the socio-economic benefi ts of infrastructure roll-out. Nevertheless, even investment-oriented digital policies are themselves at the mercy of the wider EU commitments, as demonstrated by the reduced funding for the Connecting Europe Facility project in the wake of EU budget cuts.

Data privacy and protection is another sphere where policy makers are under pressure to align consumer interests with actionable rules for the industry. Negotiations on updated EU data privacy regulation are entering a critical phase, with industry players highlighting the need for a reduced regulatory burden with some member states themselves wanting more optionality built into new laws.

Further, fears are growing that new policies will be unworkable at a global level as different regions seek to safeguard data protection in different ways. Meanwhile, the prospect of a new technical standard for Deep Packet Inspection (DPI) — thereby helping operators manage their data traffi c more effectively — has also drawn criticism as a potential catalyst for blocking competitor services, or increased government censorship and surveillance.

Although privacy and security issues remain important sector themes, the pace of innovation across the industry shows no signs of slowing. Ernst & Young’s global telecommunications team attended the GSMA Mobile World Congress in February, where operators and technology vendors alike showcased an ecosystem in transformation. An overview of highlights from the event will feature in the next issue of Inside Telecommunications.

Foreword

Adrian BaschnongaLead AnalystGlobal Telecommunications [email protected]

The last three months of 2012 saw a number of key transactions worldwide as in-market consolidation spurred an increase in deal activity compared with the previous quarter. At the same time, carriers are reconsidering their approaches to innovation as they leverage venture capital and operational capabilities to support technology start-ups.


Service innovation


1

1 “Mobile Phone Problems,” Pew Internet & American Life Project, 2 August 2012

Operators target improved call quality through high-defi nition voiceAs the mobile industry continues to focus on the migration to LTE services spurred by a new generation of smartphones, it is easy to overlook the continued importance of voice as a core operator offering.

Despite growth in data revenues, voice is still expected to account for half of operator revenues in years to come. At the same time, one recent survey shows that dropped calls are still a serious problem for end-users, with 72% of US handset owners experiencing this at least occasionally.1 Indeed, this lack of functionality is more pronounced for owners of high-end devices, with smartphone users proportionately more likely to cite such issues compared with feature phone owners.

Figure 1. US mobile users experiencing dropped calls

0 10 20 30 40

Smartphone owners

Other handset owners

Experienced dropped calls at least weekly (%)

Source: “Mobile Phone Problems,” Pew Internet & American Life Project, 2 August 2012.

5Issue 8

2 “GSA confi rms over 50 mobile networks have launched HD Voice service,” Global Mobile Suppliers Association, 28 October 20123 “Rebtel Brings HD Voice to iOS and PC Apps,” PRWeb, 11 September 2012

In this light, operators have been keen to roll out new high defi nition (HD) voice services in a number of markets. By October 2012,51 operators were offering HD voice in 38 countries, representing a 60% increase year-on-year in the number of services available.2

There are competing operators offering HD voice in 11 markets, including Austria, Canada, Croatia, France, Poland, Russia, Slovenia, South Korea, Turkey and the UK. Device support is also growing, with 127 models enabled with 3GPP-approved adaptive multi rate wideband technology available through 14 manufacturers.

Meanwhile, international HD voice calling has also appeared, with Orange launching a cross-border service for their customers in Romania and the Republic of Moldova in October. Going forward, the France-based group plans to offer HD voice as a wholesale offering to other mobile and fi xed operators. The move into HD international voice is an important one, given the in-roads that VoIP providers have made into international calling minutes.

For operators, efforts to improve call quality offer a new route to combating churn, with HD voice capability offered to end users for free. Clear connections are important to customers: one survey of US mobile phone users conducted last year showed that 78%

would switch carriers due to poor quality voice calls.3 Monetization of HD voice services is likely to be indirect: for example, increases in average call duration for HD voice calls can generate higher revenues. However, operators are not the only entities raising the stakes in call quality. VoIP providers, such as Viber, Nimbuzz and Rebtel, have also taken steps to bring HD voice to different mobile operating systems.

The transition to HD voice is arguably overdue among mobile operators, with improvements to voice codec effi ciency historically made to increase cell capacity rather than the quality of voice calls.Interoperability issues are improving but still there are obstacles to overcome. Transcoding between different HD voice codecs — for example, between fi xed and mobile operators — will be needed for HD voice services to fl ourish further. In this regard, much will depend on the formation of new value chains, with wholesale intermediaries playing a vital role.

Competition between different types of service providers will also determine how the market develops: already both operators and hosted IP PBX providers offer a range of HD voice services for enterprise customers.


Innovation facilities and funds are playing an increasingly important role for operators as they ramp up their investments in adjacent market segments. The fi eld of investment opportunities is widening for carriers as they look to offer new services in order to respond to competitive threats while, at the same, time generating new operating effi ciencies.

Aware that they cannot do all of the R&D they require in-house, operators are looking for alternate routes to innovation by seeking out new talent at its source. As such, operators are keener than ever to deepen their relationships with the developer community as they overhaul traditional approaches to R&D.

Partnerships with start-ups in California’s Silicon Valley have become increasingly important to leading players. In 2011, the likes of Verizon and Vodafone established new innovation centers in order to identify start-ups with potential and take their ideas to proof-of-concept trials. In return, developers gain access to mobile operators’ networks and back offi ce capabilities. One year after launch, Vodafone revealed in September that its tech incubator — Vodafone xone — had already nurtured a dozen tech companies, with participating entities receiving cash through Vodafone Ventures and other resources.

Opportunities in specifi c market segments are prompting other players to ramp up their presence in Silicon Valley. In November, NTT announced plans to establish a cloud computing R&D center in the region, the fi rst-of-its-kind for the operator outside Japan. Employing 100 engineers, the new facility will focus on cybersecurity, among other areas.

Other developments demonstrate a cross-sector approach to R&D, befi tting a converging industry. In October, a consortium of mobile operators and infrastructure providers — including Telefonica Europe, Huawei and Samsung — established a 5G research center in the UK led by the University of Surrey, with state funding also supporting the new facility.

At the same time, operators’ venture capital strategies are being overhauled in order to keep pace with changing industry dynamics. In September, Telefonica launched Amerigo, a €300m network of venture capital funds, which will be open to participation by other companies from both private and public sectors. Interestingly, the initiative is aimed at areas outside of the main centers of venture capital activity, such as Latin America, where technology incubation experience is thin on the ground, yet the demand for service innovation has never been higher.

Nurturing innovation facilities and funds for new services

7Issue 8

4 “DOCOMO to Nurture Growth via New Venture Fund and Incubation Program — Focusing on business models, technologies and services centered on mobility,” NTT DOCOMO, 26 October 20125 “Deutsche Telekom Revamps T-Venture Strategy After Slow Start,” Bloomberg, 4 September 20126 “France Telecom Orange and Publicis Groupe Partner with Iris Capital Management to create a leading European Venture Capital Investor in the digital economy,” France Telecom, 12 March 2012

7

New funds have been established by a number of other players across a growing range of industry sub-segments. In October, NTT DoCoMo revealed plans for a ¥10b fund to nurture early-stage technology and mobile businesses, primarily in Japan, across a range of industry sectors, including fi nance, healthcare and environment. At the same time, the Japanese operator announced an “Innovation Village” to provide start-ups with resources and know-how.4 Early in 2013, an additional wave of investment was announced via its US subsidiary, DOCOMO Capital Inc.

Fellow Japanese operator Softbank has followed suit by announcing a US$250m fund — Softbank PrinceVille Investments — to invest in applications development in areas ranging from social media through to online advertising and cloud computing. Unlike its existing venture arm, Softbank Capital, the new fund will focus on investments in more established players seeking to internationalize their businesses.

Operators are also reviewing existing venture capital arms in order to improve targeting and decision-making. In September, press reports suggested that Deutsche Telekom was re-appraising its own venture capital strategy in order to accelerate its moves into emerging market segments.5 As a result, it allowed its T-Venture arm to acquire majority stakes in start-ups while adjusting the organizational

structure to quicken the decision-making process for attractive targets.

As recent initiatives from operators show, approaches to technology investment are becoming more diverse. There is an increasing focus on both early-stage investment and support for more mature innovators that are seeking global footprints.

Meanwhile, holistic strategies that align venture capital approaches with innovation facilities are also becoming more evident. In addition, operators are also partnering afresh with venture capital fi rms: last year, France Telecom and Publicis Groupe signed an agreement with Iris Capital Management, targeting both start-ups and established companies through the creation of three funds targeting different geographies.6

These developments demonstrate how operator approaches to technology investment are shifting to keep pace with the times. Decentralized R&D is becoming more important as operators widen their addressable markets, while the potential of developing markets is driving the creation of new venture capital funds. Meanwhile, existing incubator networks are being accelerated, refl ecting both the emergence of new innovation ‘hot spots’ in the wake of convergence along with a greater onus on effective decision-making to make the most of global opportunities.

Launch Operator Innovation fund Fund value Notes

Feb 13 SoftBank Corp. SoftBank PrinceVille Investments US$250m Set up through existing fund Venture Capital; to be run in conjunction with Softbank affi liate and semiconductor fi rm MediaTek.

Feb 13 NTT DoCoMo 500 Startups II, L.P. via DOCOMO Capital ¥10b Planned investment in 500 start-ups II via NTT’s U.S. subsidiary NTT

Capital Inc.

Oct 12 NTT DoCoMo DOCOMO Innovation Fund and Innovation Village ¥10b

Focused on mobile services in Japan across eight new strategic fi elds: media/content, fi nance/payment, commerce, healthcare, M2M, aggregation/platforms, environment, security/safety.

Oct 12 Telenet Group Telenet STAP €30m Focused on investment in Flemish language content for TV services over a four-year period

Sep 12 Telefonica Amerigo US$300mA Latin America-focused fund that will be combined with Telefonica’s growing network of Wayra incubators, targeted countries include Spain, Colombia, Chile and Brazil

Jun 12 SK Telecom SK Group Fund* US$85m A private equity fund for direct investment with partner companies in small companies struggling to raise capital.

Figure 2. Selected operator innovation funds

Source: Ernst & Young analysis.


2Technology


Spend on technologies that help mobile operators optimize their management of data traffi c is expected to rise sharply in 2013. According to forecasts from ABI Research, the mobile market for policy service, deep packet inspection (DPI) and web/video optimization is expected to total US$2b in 2013, up 42% year-on-year.7

Growth credentials also appear strong in the medium-term: by 2017, the overall mobile monitoring and optimization market is set to be worth US$8b, with policy, DPI and content optimization accounting for almost three-quarters of the total.

As operators focus on improving Quality of Experience (QoE), vendors are broadening their service propositions. This is placing a greater premium on DPI tools as a way of gaining greater visibility into the traffi c fl owing over networks. Looking ahead, DPI technologies will underpin operators’ efforts to monetize traffi c — and vendors are supporting this growing focus by integrating real-time charging and subscriber analytics to their existing solutions.

As it stands, many mobile operators are already timing DPI investments to coincide with the migration to LTE technology, which is seen as the ideal time to enable tiered service propositions.

In time, DPI tools are expected to push further from the level of networks to devices themselves, enabling service providers to provide different levels of service and network control depending on the access terminal. As such, the wireless segment of the DPI market will outpace fi xed-line in growth terms in the years to come.

While operators are still largely concerned with traffi c management approaches so as to minimize risks emanating from fast-rising mobile data demand — there is growing interest in integrating different monitoring solutions, such as DPI and video optimization, as part of more holistic solution sets that aid new types of customer experience while also supporting new network architectures, such as software-defi ned networks (SON). Meanwhile, the rise of shared data plans — where data is

shared between subscribers or devices — is likely to spur additional operator investment in fl exible policy management solutions.

Mobile traffi c management and optimization technologies set for growth

Despite the positive prognosis for investment in network monitoring and optimization solutions, challenges remain. Privacy concerns are rising in tandem with the new techniques that help determine the

Figure 3. Global mobile policy, DPI and web/video optimization market forecast

0.5

1.0

0

1.5

2012 2013

2.0

US$b

Mobile policy, DPI and video optimization

Source: “Mobile Policy, DPI, and Web/Video Optimization Market To Reach $2 Billion in 2013,” ABI Research, 2 November 2013.

7 “Mobile Policy, DPI, and Web/Video Optimization Market To Reach $2 Billion in 2013,”ABI Research, 2 November 2013

9Issue 8

8 “YOTA Networks and Huawei Launch World’s First LTE-Advanced Commercial Network,” Huawei, 24 October 20129 “T-Mobile tests LTE Advanced technology in Austria,” Telecompaper, 17 December 2012

With the number of commercial LTE networks worldwide now past the one hundred mark, industry players are already turning their attention to the potential for LTE-Advanced technology. Also known as LTE Release 10, it reportedly offers three times the spectral effi ciency of LTE, while offering speeds of up to 1Gbps on the downlink and 500Mbps in terms of uploads.

Operators and vendors move forward on LTE Advanced

types of content consumed by users. In December, the International Telecommunications Union (ITU) approved a new standard for DPI designed to help ISPs manage network traffi c more effi ciently, thereby improving quality of service.

However, civil liberties groups have argued that such moves could encourage surveillance as much as aid service differentiation. The US-based Center for Democracy and Technology has since argued that privacy implications as well as technical considerations should form part of the standardization process for DPI technology. At the same time, negative connotations concerning net neutrality also dog the debate on improving QoE. Looking ahead, clear defi nitions, agreed use cases and ongoing customer assurances will prove integral to the fast-evolving market for network optimization.

Already operators are outlining plans to offer LTE Advanced services in 2013, with Russia’s Yota the fi rst to launch a network in October 2012. Statements from the Moscow-based operator and its vendor, Huawei, described the network as both a commercial and test network, which can achieve downlink peak rates of 300Mbps, depending on the capacity of the radio channel.8 In December, T-Mobile Austria was reported to have tested LTE Advanced technology using a test network in the 1800MHz and 2.6GHz bands to reach data throughput of 289Mbps using carrier aggregation.9

Other operators are also limbering up to roll out the latest iteration of LTE technology. Back in 2011, US carrier AT&T announced plans to deploy LTE-Advanced from the second half of 2013, and a number of other operators in North America and Japan have intimated their LTE Advanced intentions. Vendors are also upping the ante: following Huawei’s launch with Yota, Ericsson announced that it had demonstrated LTE Advanced for TDD for China Mobile in November.

Despite these pockets of progress in terms of testing future iterations of LTE, standardization for next-generation mobile technologies as a whole remains a work in progress. Some headway has already been made by the ITU, which in January approved specifi cations for IMT-Advanced.

This umbrella category refers to more than one technology — both LTE-Advanced and WirelessMAN-Advanced, which is an evolution of the 802.16e technologies used for mobile WiMAX. IMT-Advanced also features new techniques for sharing network resources, thus supporting more users per cell, as well as global roaming and seamless handover capabilities.

In this light, the move towards more sophisticated mobile network technologies involves far more than gains in data throughput. Meanwhile, other standardization bodies, such as 3rd Generation Partnership Project (3GPP) and Institute of Electrical and Electronics Engineers (IEEE) will also need to help cement new mobile standards so that vendors and operators can build and deploy new equipment.


3Regulation


reserved one-third of the 800MHz band for a new entrant underscored how the auction was seen as a route to increased competition levels, with a joint venture between two Dutch cablecos, UPC and Ziggo, also entering the bidding for this in-demand band that helped drive up the prices.

While it is not possible to break down the prices paid per band, the overall price per MHz per inhabitant stood at €0.65. This is in line with European averages for the 800MHz band, despite the fact that six other frequency bands — which typically generate much lower prices — were also on offer in the Netherlands. As such, the Dutch auction represented by far the highest prices yet paid for 4G spectrum. Following news of the result, the share prices of all Dutch mobile players dipped, revealing just how closely entwined spectrum costs and mobile operator fortunes are for investors.

In November, Irish regulator ComReg revealed that €855m had been raised through its multi-band auction of 4G licenses. Three of the country’s four existing players acquired new holdings

Contrasting outcomes in spectrum auctions worldwideSpectrum auctions continued apace in the fourth quarter of 2012, with a number of auctions taking place. However, results also challenged current notions as to the value of new spectrum, with industry predictions proving out of line with the results in some cases.

In the Netherlands, GSM licenses in the 900MHz and 1800MHz spectrum bands were up for renewal in December, while new spectrum was also made available for 3G and 4G services at 800MHz and 2.6GHz. In total, some 41 separate spectrum licenses — equivalent to 380MHz of airwaves — were up for grabs, making it the largest sell-off in Dutch history. A reserve price of €478m had been set, yet the auction ended up generating eight times that amount, with a total of €3.8b paid.

Not only did the bidding exceed expectations but also the competitive environment in the mobile sector altered substantially: Tele2, which has acted as a mobile virtual network operator, received signifi cant spectrum in the 800MHz band that is well suited for cost-effective 4G network rollout. That the regulator had

in the 800MHz band, while all four were awarded lots in both the 900MHz and 1800MHz bands.

As with the Dutch auction, the licenses run until 2030, with payment split between upfront fees of €481.7m and €372.9m paid in annual installments for the duration of the license period. Under the obligations of license conditions, all operators must provide minimum population coverage of 70% within three years of receiving the new licenses. The auction itself exceeded expectations, with the total fi ve times more than expected.

Other auction results during this period demonstrated how the availability of sub-1GHz spectrum is catalyzing higher prices. In November, the Norwegian auction of 2.1GHz spectrum was concluded in a single round, with three operators — Telenor, TeliaSonera and Mobile Norway — paying the reserve price of NKr5m per block, which means that they have equal spectrum holdings in this band. Originally, there had been fi ve bidders but two of them withdrew ahead of the auction.

11Issue 8

The November auction of 2G airwaves in India produced only a lukewarm response from mobile operators. Five players received bandwidth in an 1800MHz auction that generated INR 94.1b (US$1.71b), equivalent to one-third of the reserve price.

The auction followed a Supreme Court order earlier in 2012 which canceled the licenses of existing players after ruling that the fi rst-come-fi rst-served policy underpinning the original distribution of spectrum was unlawful. This decision undermined India’s credentials as an investment destination, hurting operators and vendors alike as capex commitments were scaled back.

The lackluster showing at this most recent auction was predicated by a number of factors. Chief among them is the high reserve price, which was derived using prices paid for 3G spectrum and was nine times higher than the 2008 2G spectrum sale price.

At the same time, other uncertainties surrounding the potential to refarm spectrum and additional fees for excess spectrum also undermined operators’ willingness to bid. Ultimately, the need to narrow the country’s fi scal defi cit may have informed the prohibitively high reserve price; this, in turn, highlights how industrial policies should be judged on sector-specifi c merits.

Another auction is slated to take place in March 2013, offering airwaves in the four circles that did not attract bidders in November, as well as spectrum held by incumbents in the 900MHz band in metro areas that are set to expire in 2014.

Reacting to the underwhelming response to the November auction, the government has approved a 30% cut in the reserve price for the

sale of 1800MHz spectrum in the four zones of Delhi, Mumbai, Karnataka and Rajasthan. Nevertheless, industry bodies have pressed for additional cuts to the reserve price, also arguing that reductions should be extended beyond circles that saw no bids made.

These contrasting auction outcomes in different markets demonstrate that spectrum release is a key determinant of the long-term health of the mobile industry. Government assumptions should be realistic, while auction designs have to cater to the needs of new entrants as well as established players. Such concerns are particularly acute given the multi-band auction frameworks favored in some markets.

Figure 4. Prices paid in selected Q4 2012 spectrum auctions

0

1,000

2,000

3,000

4,000

€m

India Netherlands Ireland

Reserve price Total amount paid

Source: Ernst & Young Analysis; “India Telecom Spectrum Auction Generates $1.71 Billion,” Wall Street Journal, 15 November 2012.


Shifting landscapes in public sector spectrum releaseSpectrum release policies are gaining attention worldwide as governments and regulators look to secure suffi cient spectrum for mobile broadband over the next decade. While 800MHz and 2.6GHz spectrum auctions continue apace in many Western markets, policy makers are also turning their attention to higher frequency bands held by the public sector as they review national spectrum holdings in their entirety.

Airwaves held by the military are proving particularly appetizing. In December, the UK’s Ministry of Defence (MoD) announced plans to auction some of 200MHz of radio spectrum under 15GHz in 2014. The MoD holds three-quarters of the UK’s publicly-held spectrum, of which a third lies under the 15GHz mark. Other public sector entities with signifi cant spectrum holdings include emergency services and transport authorities.

Previously, the UK Government had promised to release an additional 500MHz of spectrum under 5GHz over a ten-year period to cope with fast-rising demand for mobile broadband. The MoD’s move forms a pivotal part of a long-term policy designed to boost the availability of 4G services, which, in turn, will help bridge the digital divide.

Other recent news fl ow has also highlighted the importance of new spectrum for public sector entities given the enriched diagnostics and communications capabilities inherent in LTE services. In October, the Australia Communications and Media Authority (ACMA) confi rmed that national emergencies would be given 5MHz of dedicated paired spectrum in the 800MHz band to operate a LTE network, less than the amount originally requested.

13Issue 8

Following this move, New Zealand’s Business, Innovation and Employment Ministry revealed in November that it was weighing up a similar approach to safeguarding digital dividend spectrum for emergency services use. In the same month, Argentina’s federal government announced plans to auction 4G spectrum, while at the same time underlining that it would retain a signifi cant quantity. This followed the cancellation of a national 3G spectrum auction in September, with frequencies handed instead to federal communications company Arsat, which now holds 20% of Argentina’s available 3G spectrum.

Looking ahead, the primary challenge for policy-makers is that long-term spectrum release agendas require careful co-ordination if appetite for new airwaves is to prove sustainable. In the case of military spectrum release, it is worth noting that many of the blocks set for release are in very small blocks, suggesting specifi c use cases, such as M2M monitoring services.

At the same time, balancing private and public sector demands for new spectrum is challenging, as highlighted in Australia where safeguarding public sector spectrum for LTE requires buy-in from local government as well as public safety agencies.

Timing issues also need to be addressed: the prospect of repurposed public sector spectrum may undermine other auction processes, for example. Nevertheless, use cases are now widening to include whitespace and backhaul services, which may offset the risk of “cannibalization” of spectrum demand. In addition, the opportunities deriving from new frequency bands will, in part, hinge upon levels of support from vendors in terms of network equipment and compatible devices.

Source: “Spectrum Framework Review for the Public Sector,” Ofcom, January 2008.

Figure 5. Weighted use of public sector spectrum holdings in the UK

Defense, 30

Fixed/Satellite, 24Broadcasting, 13

Science, 1

Aeronautical & maritime, 14

Other, 7

Cellular, 4

Business radio, 6Emergency services, 2

13


4


Mergers and Acquisitions

The last three months of 2012 saw a surge in deal activity, which totaled US$47.8b for the quarter, up 101% on the deal value registered in Q3 2012. Japan-based Softbank’s US$20.1b bid for US operator Sprint accounted for the lion’s share of the disparity. There were 168 deals accounted, up from 108 in the preceding quarter, with average deal value standing at US$294.8m.

In terms of deal activity by region, Japan led the way on account of both Softbank’s move into the United States and two other sizeable transactions — mobile operator KDDI’s stake increase in domestic cable operator Jupiter Telecommunications and Softbank’s acquisition of domestic rival eAccess.

The US was the scene of the quarter’s second-largest deal, the merger between US mobile operators T-Mobile and MetroPCS announced in October, while Sprint’s announcement that it was taking full control of mobile data network provider Clearwire for US$2.2b was the sixth-largest deal during the quarter.

Deal-making by Asian operators was more subdued than in the preceding quarter, the highlight being China Unicom’s acquisition of fi xed-line assets in Southern China from its parent company for US$1.9b. Deal activity in Europe, the Middle East, India and Africa was broadly in line with Q3 2012. Stand-out deals included Liberty Global’s bid for the remaining stake in Telenet Group, which provides quadruple-play services in Belgium, for US$2.6b. This followed its US$2.26b deal to acquire a 49.6% stake in September 2012.

Meanwhile, Russian mobile operator MegaFon ramped up its retail presence through the acquisition of a 50% stake in retail chain Euroset, which has a footprint of 5,500 stores in Russia and Belarus. The acquisition was made through Lefbord Investments, in which MegaFon has a 50% stake, and is valued at US$1.07b, with an additional US$100m payable if the retailer meets certain targets going forward.

IntroductionFigure 6. Telecoms deal value by area, Q4 2012

Asia-Paci c

EMEIA

Americas

Japan

$4,865$5,499

$2,383$14,807

$4,121$14,655

$25,148$51

Q4 2012 Q3 2012

Source: Ernst & Young analysis.

15Issue 8

It was a very busy quarter for North American players, with US$26b worth of transactions announced by US mobile operators between October and December. Japan-based Softbank’s acquisition of a 70% stake in number three US mobile operator Sprint was the largest telecoms deal of 2012 at US$20.1b — and the largest-ever overseas acquisition by a Japanese company. The deal, announced in October, immediately provides a much needed capital injection to Sprint’s balance sheet, roughly US$8b in cash. This will help drive

Consolidation underway in US mobile market

network modernization alongside strategic investments. At the same time, Softbank’s expertise in smartphones and mobile data technology can be leveraged in the world’s leading LTE market in terms of subscribers.

However, this sizeable transaction comes amid a backdrop of consolidation within the US mobile market. Also, in October, T-Mobile USA announced a reverse merger with prepaid mobile operator MetroPCS, the country’s number fi ve provider. The transaction will give the new company a deeper spectrum position, while also paving the way for the MetroPCS brand, which provides fl at-rate mobile data services for prepaid users, to expand its presence in the US market. Network-based synergies are also important: T-Mobile plans to incorporate MetroPCS’s existing LTE network within its own planned 4G rollout, while refarming its smaller competitor’s 1900MHz CDMA spectrum for HSPA+ services.

Figure 7. Top telecoms M&A by deal value, Q4 2012

Softbank/Sprint $20,140

Buyer/Target Deal value ($USm)

MetroPCS/T-Mobile USA $3,690

KDDI/Jupiter Telecom $2,691

Liberty Global/Telenet Group $2,595

Softbank/eAcess $2,266

Sprint/Clearwire $2,156

China Unicom/Unicom New Horizon Telecom $2,156

Berkshire Partners/Lightower Fiber Networks & Sidera Networks $2,000

Bain Capital/Telefónica Atento business $1,345

MegaFon/Euroset $1,170

Source: S&P Capital IQ, accessed January 2013.


Sprint itself also made a US$2.2b bid in December to acquire the remaining stake that it did not already own in Clearwire, the specialist mobile data carrier. On the back of this acquisition, Sprint would be the leading owner of mobile spectrum in the US, with combined holdings of 184MHz, more than double the amount held by its closest rivals.

Nevertheless, the 2.5GHz frequency band in which Clearwire holds spectrum is ill-suited to providing long-range and in-building coverage, meaning that Sprint may have to invest further in cell towers to make the most of its enlarged spectrum haul. At the same time, device support for the 2.5GHz band is lacking, which creates a further set of challenges in terms of time-to-market. However, in November, Sprint acquired certain assets from smaller rival US Cellular in Midwest markets, including 20MHz of spectrum in the 1900MHz band and 585,000 subscribers for US$480m. The acquisition will boost its presence in the region but, most importantly, will bring new LTE spectrum holdings at a time when rivals are also aggressively expanding their holdings of 4G frequencies.

The US mobile transactions announced during the fourth quarter signal far-reaching change in the competitive landscape, as the need for spectrum drives smaller players to seek greater scale. However, following the collapse of the proposed AT&T and T-Mobile tie-up in 2012, regulatory approval is by no means certain.

Even so, the fact that smaller players are driving this spate of deals is likely to sit better with regulatory demands that competition levels be safeguarded in the mobile market. At the time of writing, the US Department of Justice had reportedly asked the Federal Communications Commission to defer the tie-up between Sprint and Softbank in order to review the proposal for national security, law enforcement and public safety issues.10

Tower deals make their presence felt in EuropeTower deals remain an enduring feature of transactions. The transactions landscape and Q4 2012 saw a number of deals struck worldwide as operators look to free up cash by divesting non-core operations and tower companies take advantage of favorable borrowing conditions. In recent quarters, a number of deals have taken place in Africa and the Americas — in the last three months of 2012, some important transactions also took place in Europe.

10 “DOJ Asks FCC to Defer Action on Softbank-Sprint Merger,” Bloomberg, 30 January 2013

17Issue 8

In November, KPN sold 2,000 of its mobile towers in Germany to US-based American Tower for US$501m. The Dutch incumbent said it expects to book a profi t of about US$127m from the sale and will use the cash proceeds to speed network rollout at E-Plus, it’s German mobile subsidiary, and improve its net debt position. The transaction follows the sale of a large portion of KPN’s mobile towers in the Netherlands between 2008 and 2012. For American Tower, the deal forms part of an ongoing strategy to grow its footprint inorganically, representing its fi rst foray into Germany. In addition to extensive holdings in the US, the company also operates towers in Brazil, Chile, Colombia, Ghana, India, Mexico, Peru,South Africa and Uganda.

In the same month, French mobile operator Bouygues Telecom announced it was selling 2,166 towers to Antin Infrastructure Partners for US$266m. The number three operator will use the proceeds — estimated at €185m — to invest in its business and pay down debt. Some 1,873 towers have already been handed over to Antin, with the remainder set to be transferred by the second quarter of 2013. Antin is establishing a company called France Pylones Services (FPS) to own the towers and rent capacity to all French operators, with Bougyues announcing it will take a 15% stake in the business.11 The deal comes at a time when all operators are feeling the effects of severe price competition in theFrench market.

Tower deals remain in evidence in developing regions too. In December, US-based SBA Communications announced it was acquiring 800 towers from Vivo, Telefonica’s Brazilian subsidiary, for US$178m. Telefonica also sold 405 Chilean towers to Peru-based Torres Unidas for an undisclosed amount. Africa remains an important source of tower deals. In October, towerco IHS Nigeria entered into an agreement with MTN to acquire 1,758 base stations in Cote d’Ivoire and Cameroon for a consideration of US$284m. Already present in Nigeria, Ghana, Sudan and South-Sudan, this latest acquisition expands IHS’s country footprint while also increasing its sites under management to 5,500, of which 3,000 are owned.

11 “Bouygues Telecom Sells 2,166 Telecom Towers To Antin Infrastructure Partners,” Bouygues Telecom, 26 November 2012

17


Source: Mergermarket, Telecom Asia, Factiva.

Figure 8. Top telecoms M&A in Asia-Pacifi c, Q4 2012

Date Bidder Target Stake (Value) Business nature of target

21 Dec 2012 SK Telecom (South Korea) SK Marketing & Company 50% (US$178m) Marketing and effective communication services

13 Dec 2012 Axiata Group (Malaysia) Latelz Co. Ltd. (Cambodia) 90% (US$163m) Mobile operator

12 Dec 2012 NTT Data Business Solutions (Japan) Innogence (Australia) NA SAP business analytics

11 Dec 2012 NTT DoCoMo (Japan) Rsupport Co. (South Korea) 19% (US$13m) Remote support service for computer systems

27 Nov 2012 VelaTel Global Communications (US) China Motion Telecom (HK) Limited (Hong Kong) 100% (US$6m) MVNO business

21 Nov 2012 China Unicom (China) Unicom New Horizon Telecommunications (China) 100% (US$1,953m) Company operating fi xed-line telecoms

network assets

24 Oct 2012 Telstra Corp (Australia) Adam Internet Pty (Australia) 100% (US$52m) Internet service provider

15 Oct 2012 Softbank Corporation (Japan) Sprint Nextel Corp (USA) 70% (US$35,544m) Wireless communications service provider

5 Oct 2012 Softbank Corporation (Japan) Avex Entertainment Inc. (Japan) 40% (US$38m) Music recording company

1 Oct 2012 Softbank Corporation (Japan) eAccess Limited (Japan) 100% (US$4,436m) Wireless operator counterpart

Asian operators maintain their foreign focusLarger Asian telcos remain in footprint expansion mode, particularly as they eye opportunities in adjacent TMT market segments. Softbank’s move into the US market was the quarter’s most eye-catching deal, yet there were plenty of cross-border moves within Asia. Viettel Global, the overseas arm of military-run Viettel in Vietnam, was selected as the third mobile operator in Cameroon in December, with plans to invest US$400m in a national network. The central African country becomes part of a growing roster of developing markets in Viettel’s footprint, which includes Cambodia, Haiti, Laos, Mozambique and Peru.

Korea’s KT continues to seek leverage growth opportunities abroad, announcing in December that it had submitted a preliminary bid for Vivendi’s 53% stake in Moroccan incumbent Maroc Telecom. This marks its second attempt to gain a foothold in Africa, having attempted to take a minority stake in South African incumbent Telkom earlier in the year. Going forward, the Korean incumbent hopes it can leverage its expertise in IT consulting and mobile content in markets that are at an earlier stage of penetration growth.

Japan’s NTT has been highly active in recent quarters and made two acquisitions in Q4 2012. Its mobile subsidiary NTT DoCoMo acquired a 19% stake in Rsupport Co. Ltd, a Korean provider of remote IT support services, while NTT Data Business Solutions acquired Australia-based SAP Partner, Innogence, for an undisclosed sum in December. This move forms part of a broader plan to create the region’s largest SAP business analytics and database technology provider.

19Issue 8

12 “Telstra-Adam takeover decision delayed again,” Zdnet, 29 January 201313 “Units’ merger signals SK restructuring,” Korea Herald, 5 December 2012

Consolidation and restructuring continues across Asia Pacifi cWhile footprint expansion remains a key sector theme in Asia, consolidation is also playing an important role in sustaining industry growth. In both developed and developing markets, operators are improving their market positions and exploiting cost synergies by acquiring rivals. In December, Malaysia’sAxiata Group acquired 90% of number two Cambodian mobile operator Latelz Co. Ltd for US$155m to merge it with its existing Cambodian business, Hello Axiata.

Market share gains and improved spectrum holdings in Japan also underpin Softbank’s US$2.3b acquisition of domestic rival eAccess. The combination of the two businesses will create a clear number two in the Japanese mobile market, while also giving Softbank access to e-Accesses spectrum holdings and base stations in the 1.7GHz band.

Consolidation remains a feature of the Australian market, as established players target specifi c customer segments. In October, Telstra announced the acquisition of Adam Internet, a regional low-cost retail broadband provider that comes with fi ber assets and a data centre. The Australian incumbent plans to retain the ISP as a separate brand and stand-alone entity, while targeting growth at a national level for customers who favor online sales and support. However, the Australian Competition and Consumer Commission (ACCC) has expressed concerns about the deal’s potential to undermine competition and has deferred an approval plan until 2013.12 The prospective tie-up is the latest in a spate of deals in Australia’s ISP market.

Meanwhile, restructuring needs are proving increasingly central to operators in the Asia-Pacifi c region, particularly those who have extended their service capabilities. In November, China Unicom acquired its parent company’s fi xed-line assets to drive operational and management effi ciencies, while Korea’s SK Telecom plans to merge two subsidiaries — SK Planet and SK Marketing & Company — to streamline its business and combine overlapping products, such as location-based shopping and online services.13

20 Inside Telecommunications20 Inside Telecommunications

Think of infrastructure investment and dams, roads and runways probably come to mind. But some of the most promising infrastructure investments for the 21st century may involve a ubiquitous yet largely invisible structure: the cell phone tower.

With six billion mobile users worldwide, according toUnited Nations fi gures, and many networks in the process of an upgrade, either from 2G to 3G, or 3G to LTE/4G, the cell phone tower represents a growing opportunity, according to Rhys Phillip, Chief Commercial Offi cer, IHS Group. Previously the Head of Transaction Advisory Services for the telecommunications sector at Ernst & Young, Rhys has acted as lead advisor on many tower transactions in Africa over the last few years.

Critical infrastructure considerations “These are investments in a fundamental piece of a country’s infrastructure, vital for trade, inter-governmental relations and the social fabric of a nation. Contracts are long — 10–15+ years — and the cash fl ows are predictable,” says Phillip.

The stability of those assets and the general reliability of the counterparty — the larger mobile network operators (MNO) — combined with the material growth potential in many markets, make it possible to design a variety of investment opportunities to suit the needs of particular investors, including long-term holds and three-to-fi ve year private equity deals with an exit through IPO to trade of secondary buy out.

The largest tower businesses are based in the US where the likes of American Tower, Crown Castle and SBA Communicationshave been growing since the late 1990s. India has also spawned a number of signifi cant tower businesses such as Indus, created by three of the country’s operators combining their assets. In Africa — a younger market for tower investments — a

Strong investment opportunities remain in the wireless tower market

21Issue 8 21

Rhys PhilipChief Commercial Offi cerIHS Group

number of tower companies have arisen, the most successful of which to date has been IHS group, based in Nigeria but which has secured the tower assets of MTN in Cote D’Ivoire and Cameroon on a buy-and-leaseback basis.

A range of benefi ts industry and socio-economic benefi ts“The benefi ts to operators of outsourcing towers, the network’s passive infrastructure, are clear,” says Rhys Phillip, continuing, “A sale-lease back of their towers fi rstly provides a lump sum of cash at the beginning of the contract that can be returned to shareholders or invested in the customer proposition. Secondly, it reduces their operating and capital expenditure costs, replacing those considerations with a rental fee. Crucially, it frees managers to focus on opportunities elsewhere in the business.” Regulators and governments applaud the job creation and the ecological benefi ts associated with these transactions in that fewer towers are built in the country as a whole.

As in other sectors, growth credentials make value accretion that much more straight-forward and this has driven the accelerated

adoption of the tower outsourcing model in Africa, Latin America, South east Asia and India. These territories are characterized, in signifi cant regions at least, by lower mobile penetration rates, a higher proportion of youth in the population, and greater scope for technology migration — 3G requires about three times more towers than 2G for a similar area.

These factors mean there is signifi cant a network build requirement for operators to meet national and regional coverage levels in line with their license terms, while it makes more economic and commercial sense for a single, shared passive network to be built rather than three to fi ve duplicated versions.

That said, there are plenty of tower outsourcing transactions underway in the mature markets of Europe, albeit the drivers are somewhat different and are more weighted to cash conservation and balance sheet distress on the side of the operators rather than growth. This is refl ected in the somewhat lower multiples at which these mature market assets transact.

Welcomed by fi nancial marketsFinally, fi nancial markets tend to smile on the standalone physical network: tower assets tend to be valued at more than 12x EBITDA compared with 4–6x for MNOs. Where the MNO retains a stake in the spun-out tower business, the analysts give credit for the higher multiple on a sum-of-the-parts valuation. The spin-out provides visibility on the fi nancial benefi ts of the transaction, both immediate and longer term.

Issue 8

Inside Telecommunications22

Issue 8 23

Metrics transformation in telecommunications

Across the global telecommunications industry, the fast-changing technological, competitive and customer environment is calling for a renewed look at the metrics operators use to measure and report their financial performance.

The changes impacting the industry are pervasive and profound, and they occur in several dimensions. It is vital

that metrics keep pace with changing market conditions, business models and service offerings. It is also important to maintain global consistency in these new and evolving metrics as operators widen their service propositions and as investors and regulators demand new insights into addressable markets and end users.

Now available at www.ey.com/telecommunications.

Meeting the challenges of communicating performance in a shifting industry landscape

Now available

Jonathan Dharmapalan Global Telecommunications [email protected]

Holger Forst Global Telecommunications Markets [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]

Masahiko Tsukahara Telecommunications Leader — Japan [email protected]

Contacts

Ernst & Young

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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.

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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 specifi c matter, reference should be made to the appropriate advisor.

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Issue 8 Inside Telecommunications - EY Japan€¦ · Welcome to the eighth edition of Inside Telecommunications, Ernst & Young’s review of the most signi ﬁ cant developments in