Tuesday 25 April 2017

Telcos locked in battle royal for billion-euro prize

With hundreds of millions being ploughed into networks, winners and losers are emerging, writes Adrian Weckler

John Malone, owner of Liberty Global Picture: Bloomberg
John Malone, owner of Liberty Global Picture: Bloomberg
Adrian Weckler

Adrian Weckler

Sky has been the biggest cross-platform gainer in the Irish market in recent years thanks to two things. First, it has grown a broadband business from nothing to almost 12pc of the market.

Sky

Ownership: British Sky Broadcasting

Irish boss: JD Buckley

Quadplay: No

Strengths: TV subscriptions, programming investment, flexibility of access

Weaknesses: No mobile and increasingly vulnerable to rising content costs

As such, it has now expanded a 'Big Three' (Eir, Virgin and Vodafone) into a 'Big Four' in Irish broadband competitors. (Outside these four, all other fixed broadband competitors have just 9pc of the market combined.)

Sky's second notable feat is not losing many of its television customers in an era when the Irish pay-TV market is undergoing massive fragmentation. Comreg puts Sky's TV customers base close to 700,000, more than twice that of its nearest competitor, Virgin Media. Five years ago, the two companies were neck and neck in the TV subscription market. But market entrances by Eir (63,000 TV customers), Vodafone (estimated 15,000 TV customers), Saorview (estimated 300,000 TV users) and Netflix (estimated 200,000 subscribers) have all taken big bites out of what was a stable, consistent pay-TV business. Sky seems to have emerged unscathed, with Virgin taking much of the hit. This is partially down to Sky's nationwide availability and partially due to its massive investment in premium content (mainly football, HBO TV shows) that people seem willing to pay for.

Sky is potentially vulnerable on two fronts. It is now the only major telecoms player with no mobile offering. Its main competitors use mobile as a weapon to poach - or retain - customers from rivals with discounted 'bundle' deals. In Britain, Sky is remedying this with a new mobile offering that went live last month. In Ireland, there is no mobile service imminent. It is understood it is not ruling such a move out, but it won't do so without a decent deal. There may not be such a deal currently available to match the terms that Carphone Warehouse ('iD') and Virgin Media got when Three was obliged to provide generous terms to two new entrants as part of its regulatory obligations when acquiring O2 in Ireland. Sky's wariness will also be informed by the economics of mobile 'virtual' operators in Ireland, which are challenging. Only Tesco Mobile has made a notably successful go of it here. Even with its advantageous network-access terms, Carphone Warehouse ('iD') and Virgin Mobile have struggled to make significant inroads into the market bases held by the big three mobile players in Ireland, Vodafone, Three and Meteor.

If Sky doesn't launch a mobile offering in Ireland, it risks handing rivals an extra element for households considering 'quad play' deals. Sky is also arguably more vulnerable to soaring TV programming costs. It has largely driven this rise with eye-watering amounts shelled out for premium football rights.

Nevertheless, other television segments are starting to look at price increases, with the loss of several Discovery channels only averted by a last-minute deal last week. If Sky were to be outbid in any of its key content categories, it would arguably hurt the service more than rivals.

However, Sky has things on its Irish agenda that could help to bolster its subscriber base. It plans to start selling its TV services over broadband next year, meaning people won't need a dish on their house. In a climate where local authorities are starting to get stricter on the rules around domestic satellite dish attachments, this could help its sales pitch. Sky is also understood to be looking at the introduction of an online-only version of its TV offerings, similar to the 'Now TV' service available in the UK.

This Netflix-like format lets people sign up to specific niche packages ranging from £7 (general entertainment channels) per month to £32 per month (sport and football). This could be of significant interest to a growing market segment who use physical television sets less than tablets, laptops and phones.

Virgin Media

Ownership: Liberty Global (US)

Irish boss: Tony Hanway

Quadplay: Yes

Strengths: Broadband speed and quality

Weaknesses: Struggling TV subscription figures, network reach still limited

Market prognosis: Virgin Media is at a pivotal point in its Irish operations.

Its main challenge has been a decline in TV subscriptions, which have fallen from 495,000 in 2010 to 312,000 today, even as the company's network expanded from 621,000 to 850,000 homes. This has largely occurred due to competition from new entrants to the TV market, particularly Saorview, Eir, Vodafone and Netflix. (Although its main rival, Sky, increased its TV subscriber base from around 500,000 to 700,000 in the same five-year period.)

Virgin Media now has to fight more aggressively on a new competitive front: broadband. Although still considered the fastest in the market, Virgin's broadband penetration has stopped growing. Crucially, this comes at a time when arch-rival Sky has raced to a 12pc market share in just four years, thanks to the resilience of its own TV business and 'bundling' offers. Eir and Vodafone, meanwhile, are building out their own fibre broadband connectivity that could significantly challenge Virgin as the country's out-and-out broadband king. By the end of 2017, both Eir and Vodafone's ESB joint venture (Siro) will each have at least 100,000 homes within connection reach of their new fibre broadband and TV services.

(The two telecoms firms, however, have said they will avoid direct competition with Virgin on fibre services in the short term.)

The company is responding with a significant network expansion plan that will see it building out to a further 200,000 homes. Chief executive of the company's Ireland operation, Tony Hanway, recently told this newspaper that Virgin would soon reach almost a million homes and businesses around the country. The operator is to expand into large commuter towns such as Gorey, Tullamore and Balbriggan, taking its network close to one million homes.

This is part of a wider €3.5bn upgrade investment program being undertaken by Virgin Media across the UK and Ireland.

Its mobile operation, launched last year, now has over 20,000 customers, still a modest amount in Irish market terms. However, this may be helping the company in financial terms.

According to its most recent accounts, its revenue grew 20pc last year (to around €350m, based on nine-month figures) with more money eked out of each customer.

Virgin Media now has two feet in the broadcasting business, having acquired both TV3 and UTV Ireland.

As such, it may be slowly coming around to a Sky-style strategy of making and buying more programming that is viewed on its broadcasting and broadband platforms.

Virgin Media's billionaire Irish-American owner, John Malone, is a long-term investor in his businesses and usually ramps investments up rather than down. Virgin Media may have become challenged in recent years, but it looks like a long-term player here.

Vodafone

Ownership: Vodafone (UK)

Irish boss: Anne O'Leary

Quadplay: Yes

Strengths: Biggest Irish mobile network, strongest corporate base

Weaknesses: Limited fixed line network

Market prognosis: Vodafone is busy diversifying on its core business, which remains a premium mobile operator to businesses and people willing to spend slightly more on their mobile service.

By the end of this year, the company says that it will have 100,000 available fibre landlines in the country due to a €225m investment in Siro, its joint venture with the ESB. It is still promising that it will have 500,000 such connections at the end of its investment phase sometime in the next three years. Because most of these will not go head to head against Virgin Media's network, it has a reasonable chance of grabbing a significant number of more profitable landline customers than it has today. Although it has 20pc of the landline market in Ireland, those subscriptions are based on existing Eir network lines, meaning it only gets a tiny portion of profit from them. Having its own network should eventually result in much higher margins.

Siro is one of three shortlisted entities to win an upcoming National Broadband Plan tender, the State-subsidised plan to roll out fibre broadband in rural regions. If either of the other shortlisted entities (Eir or Enet) wins, it would be a major blow to the company, with the possibility that the Siro investment may not make a profitable return for many years.

In mobile, Vodafone continues to reap some advantages over its nearest competitor, Three. This is mainly because it has had the relative luxury of investing most of its three-year, €550m network investment into linear upgrades on 4G and regional expansion. While Three has also done some of this, it has had to earmark much of its own investment to patching up or replacing entirely the O2 network it bought two years ago for €780m. This has contributed to Vodafone's 4G network speeds surpassing those of its two main rivals, Three and Meteor.

But a look at the underlying numbers reveals where Vodafone's strategy in mobile is paying off. It has retained its share of revenue in the Irish mobile market (at 42.4pc), compared to a fall in revenue in market share for its main rival, Three (33.8pc, down from 35.7pc a year ago). It has done this at the same time as its share of subscribers has actually fallen (36.8pc, down from 38.2pc a year ago) while Three's share of subscribers has risen (to 32.6pc, up from 32pc a year ago). In other words, Vodafone has been willing to let tens of thousands of low-yielding prepaid customers go to Three and other rivals while doubling down on the more lucrative business market whose subscribers are still willing to pay over €60 per month.

A year ago, the company completed its 'quad play' bundle bid by launching a television service to go up against Sky, Virgin, Eir and Saorview. However, it still won't say how many customers it has signed up, although industry executives suggest that the figure may be around 15,000.

Three

Ownership: Hutchison Whampoa

Irish boss: Robert Finnegan

Quadplay: No

Strengths: Growing mobile base, competitive data allowances

Weaknesses: No other significant telecoms or television business

Market prognosis: 2017 should be the year when Three leaves much of its O2 integration hassles behind. When it acquired the old Telefonica network in 2015 for €780m, it knew that it was inheriting a creaking, under-invested entity.

Having to rip out bits of the network and rebuild other parts has not cost it in overall market share, with the company seeing an increase from 32pc to 32.6pc of Irish customers in the last year. But it has delayed the company in terms of technical advancement to attract higher-yielding mobile customers. While 88pc of its Irish network has been upgraded to 4G, that's still some way behind main rival Vodafone, which has over 95pc of its network upgraded to the higher standard. This has perhaps contributed to Three seeing its share of market revenue falling from 35.7pc to 33.8pc in the last year, while Vodafone's has remained steady (at 42.4pc).

Company executives say that Three is currently in a €400m upgrade program, although some of that is still tied up in bringing the old O2 network up to scratch. However, some of the benefits of acquiring the O2 network are filtering through. While its 2016 accounts figures aren't yet available, the O2 acquisition helped turn a €334m operating loss in 2014 into a €28m operating profit in 2015. O2 customers, like Vodafone customers, are used to spending more on their monthly bills and asking for less in return. This means that there is finally light at the end of the tunnel for Hutchison Whampoa, the Hong Kong conglomerate that spent almost €1.1bn (before the €780m O2 acquisition) on Three in Ireland without turning a profit.

The company's profitability will be keenly watched this year. With no fixed broadband, TV or landline phone (bar a tiny number of legacy O2 landline customers) offering, Three is testing the conventional wisdom over whether you need to have 'quad play', or even 'triple play' services to retain and win customers.

Eir

Ownership: Assorted banks and shareholders

Irish boss: Richard Moat

Quadplay: Yes

Strengths: Biggest national network on which many rivals depend

Weaknesses: Uncertainty over future ownership and investment levels

Market prognosis: Eir is pretty unrecognisable from the company that came out of examinership five years ago. It has bitten the bullet on broadband investment, motivated equally by a desire to modernise and to stop competitors getting an advantage for future-oriented business.

However, its recent financial results suggest that its wholesale business may be the part of the business it is starting to rely on most. With rivals such as Vodafone and Sky (and, to a limited extent, BT) depending more on access to Eir's landline network for their own business plans, Eir has once again become the pivotal player in the future of the Irish communications landscape.

The company appears to be hedging against the possibility that it will not win the State's crucial National Broadband Plan tender by announcing ambitious fibre rollouts in regional and rural areas considered borderline in terms of economic viability. It knows that the government cannot award a state-subsidised contract to a company for the provision of a service (broadband) in an area being administered to by a private company. In this way, its plans foresee the shrinkage of the government's current map of 900,000 rural homes and businesses to something under 500,000.

Mobile arm, Meteor, is holding its own at just over 20pc of the market and has done well in the business subscription category - up from 8.1pc to 9.5pc over the last 12 months, taking that market share equally from Vodafone and Three. This has led to a small increase in overall revenue market share for Meteor, from 18.1pc to 18.5pc.

It is doing well on TV, too, with 63,000 subscribers. The company says that almost one in three 'efibre' customers takes the service now.

Eir's challenges reside in regulatory and investor-led initiatives as much as competitive ones from rivals such as Siro. Competitors are persistently unhappy over relations with its wholesale division's activity, particularly in the areas of access and repair times. Comreg has not ruled out some sort of separation of Eir's wholesale division, although it seems highly unlikely to advance this year.

Of all the networks, Eir remains the one that faces nagging questions over the long-term intentions of its owners. With a history of being financially leveraged beyond its means by temporary owners, shareholders are still thought to be open to a way of exiting the business, either through a flotation or industry sale. This may not help when it comes to the decision-making process around who is to win a long-term, 25-year National Broadband Plan contract.

Sunday Indo Business

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