Mobile Point View by Paul Ruppert

Mobile Carriers of the Dragon & Elephant: Global CapEx & Rev Leaders

Infonetics Research reports that worldwide service provider capex (capital expenditures) totaled $248.8 billion in 2007, a 7% increase from 2006. Infonetics' report projects a spike in worldwide carrier capex in 2008, followed by a plateau in 2010 and a decline in 2011, and emphasizes that the weak US dollar is inflating current growth rates in Brazil, Canada, China, Europe, India, and Japan.

Their analysis indicates that the mobile industry is in the fourth year of an investment phase, and we may be reaching the plateau this year in both North America and Europe, where large service providers' capital intensity (the ratio of capex to revenue) will likely be as low as 12%.

But the hyper growth economies of China and India will drive a significant jump in carrier capex in 2008 as a result of network construction projects combined with currency appreciation against the US dollar, meaning the Chinese RMB and Indian Rupee are buying much more these days. "Both countries are still posting double-digit revenue growth in their native currencies, which, converted in US dollars creates a big spike in worldwide carrier revenue as well," said Stéphane Téral, principal analyst at Infonetics Research.

Interesting Aspects of the report include:

Telecom service providers earned a combined $1.5 trillion in annual worldwide revenue in 2007, up 10% from 2006, with currency appreciation making up the bulk of the growth, while the rest came from wireless services.
Carriers are increasingly investing in application software (vs. hardware) for media rich applications such as content, storage, and security for broadband based wireline and wireless services
Current investment drivers for carrier spending: convergence between IT, media, Internet, and telecom, which is adding new competitive pressures to carriers, and the shift from legacy TDM to next generation IP networks
The world's 10 largest service providers (ranked by 2007 revenue) are AT&T, Verizon, NTT, Deutsche Telekom, France Télécom, Vodafone, Telefónica, China Mobile, BT, and Sprint.
The next largest service providers include Telecom Italia, Comcast, and KDDI, which, according to their most recent growth rates, are poised to join the top 10.

The Asia Pacific telecom industry is squeezed between 2 opposite market forces: a saturated market made of Australia, Hong Kong, Japan, South Korea, Singapore, and Taiwan characterized by flat to decreasing capex, and a fast growing market driven by China and India, characterized by double digit growth for both capex and revenue

Caribbean and Latin America (CALA) service provider revenue jumped 29% between 2006 and 2007
Mobile infrastructure makes up the bulk of total equipment capex in 2007, accounting for about 20%, followed by voice infrastructure, optical equipment, and broadband aggregation equipment

WiMAX equipment spending by service providers as a portion of total carrier capex has roughly doubled each year since 2004, and will continue to increase its share in the near term, driven by major WiMAX projects in the US, India, and Latin America.

Notwithstanding the constant barrage of negative coverage of the price of oil, rising inflation, and the bursting of the housing bubble in the US, UK, Spain and elsewhere, the mobile industry still reflects people's needs to communicate.

MTN Deals OFF!: Bharti & Switch in SA

According to Reuter's Bharti has withdrawn from the discussions with MT over the weekend. Shares in Bharti rose 4.2 percent to 872 rupees, their highest since May 6, when they slumped more than 5 percent on news that Bharti was in talks with MTN. So, Bharti is off the table. Cue #2 in India, Reliance enters the picture.

South Africa's MTN is now reporting that it has initiated talks with the #2 Indian mobile operator Reliance Communications (RLCM.BO: Quote, Profile, Research) that could create a $66 billion emerging markets telecoms group if the two companies merge.

A combination of MTN, valued at $38 billion at Friday's close, and Reliance, valued at $28 billion, would create a top ten global industry player to rival Japan's NTT DoCoMo in market value. In terms of subscribers, a merged group would fall just below Deutsche Telekom -- as the world's seventh largest mobile opertor conglomerate. Sources indicate that Reliance would put in play a different structure than the aforementioned Bharti deal. Finacial wags and analysts had speculated that Bharti was eyeing a 51 percent stake in MTN and Bharti said it had pulled out of talks after the South African firm suggested it become an MTN subsidiary, essentially the prey transforming the predator in this play.

Shares in Reliance immediately fell as the markets displayed worry over the costs of a deal while MTN stock fell 7.6%. It was expected that the Bharti deal drove  speculation over the potential premium from a Bharti buyout. MTN is seeking new markets outside Africa and the Middle East and will likely push to retain its brand and culture.

"Whatever the shape of the company moving forward, there is little doubt that the retention of the MTN brand and culture would be two of the most important aspects executive management and shareholders should ensure," Frost & Sullivan analyst Lindsey Mc Donald said.

Reliance Communications and MTN said earlier that the two groups had entered into exclusive talks about potentially combining their businesses. A 45-day exclusivity period will be in force, during which neither can talk to any other entity, so the speculation over Vodafone or China Mobile is now mute. Reliance Communications Chairman Anil Ambani, one of India's richest men, said a deal with MTN could "provide investors, customers and the people of both companies a global platform for exponential growth".

Cobra brings down the Rhino?

MTN had 68.2 million subscribers as of March, compared with Reliance Communications' 48 million. "Reliance Communications is smaller than MTN, and lacks the financial muscle for a takeover, but it is not going to want to be a subsidiary, either," said Ravi Dodhia, a telecoms analyst at KR Choksey Securities in the Reuters piece. Speculation centers on whether the two firms were likely to create a new company with MTN taking a 51 percent stake.

"If MTN is looking to remain listed on the Johannesburg Stock Exchange and remain a South African company and be the aggressor in this deals, having this sort of exclusivity says to everyone else: 'You guys don't approach us, don't bother, we are not looking to be acquired'," Ambekar said. Harit Shah at India's Angel Broking, said Reliance and MTN might swap shares, as the foreign holding in Reliance Communications was considerably lower than in Bharti Airtel, a factor that was seen as a possible roadblock for Bharti's attempted deal.

Foreign ownership of Indian telecom firms is capped at 74 percent, and Bharti is 30.5 percent owned by Singapore Telecommunications.Shares in Reliance Communications, fell 5.7 percent to their lowest since May 12 while in Johannesburg, shares in MTN fell as 7.6 percent to 145.11 rand, their lowest since April 30.

Looks like the financial markets are disappointed that MTN has called off its talks with Bharti. Analysts had speculated that Bharti Airtel was engineering a merger that would value MTN at up to $50 billion.

Recall that last year, Bharti it lost the $11 billion race for majority control of India's third-largest mobile provider to Vodafone , but has made several smaller overseas acquisitions, including a UK-based WiMax operator of 4G services. India's wireless market grew 25-fold between 2002-07, ringing up record profits for telecom firms, but that growth is expected to slow as the percentage of the population with a mobile phone tops 40 percent by 2010 from 22 percent now.

In contrast, MTN is present in some of the world's most lucrative markets, such as Nigeria, Cameroon, Ghana, Zambia and Uganda, and has said it is keen to pursue more expansion opportunities in emerging markets.

Stay tuned.

Bharti Bears down on MTN

MTN succumbing to a Bharti full take over

Bharti and MTN are closing their deal according to Friday reports, with financial terms coming soon according to global press speculation. The acquisition deal may be a two part play comprised of a n a 50:50 cash/shares agreement, creating a fully-merged company. Dow Jones, quoting sources close to the situation, relays that Bharti has set a maximum transaction value of US$45 billion, while MTN is seeking US$50 billion for the full show. Both valuations represent a significant premium on MTN's current market cap of US$38 billion. Bharti originally posited a partial takeover, offering US$19 billion for a 51 percent controlling stake in the South African-based operator. Now they want full control.

Office Curtains & Iranian Loopholes

To reflect the depth and stage of this engagement, discussions have begun regarding who will sit on the NewCo's board. Akin to discussing the curtains in a the new office, I would say this deal is done. India's Business Standard reports that Bharti's Sunil Mittal would be deputy chairman and CEO of the NewCo (new company) while MTN chairman MC Ramaphosa could become new group chairman. The report also notes a number of other hurdles that the companies must overcome to make a deal, including the Indian government's 74 percent cap on foreign ownership and the sanctions in some countries where MTN operates (such as Iran, Liberia and Syria), which could make it difficult for US-based investment banks to fund the deal.

BTW, there are loopholes regarding trade with Iran and the restrictions on companies operating in Iran--I know because I've successfully sold into Iran for a US company. It isn't a complete embargo as is Cuba. There are ways....

Looks like this deal is Done!

Emirate's Arabian Oryx closing on the Lion?

Etisalat eying South Africa's MTN

The saga surrounding the MTN acquisition continues with today's report that the UAE's Emirates Telecommunications (Etisalat) is the latest operator to be linked to activity surrounding the future of South Africa's MTN.

3 Suitors within a Week

"We are always looking for expansion in Africa," Reuters reports Etisalat chairman Mohammed Omran as telling reporters at the ITU Africa 2008 event in Cairo today. "We are evaluating MTN, among other companies." As we've been following this effort over the last two weeks with "Now the Dragon eyes the Lion" and "Poaching in Africa: Bharti's Hunting MTN"  and the kick off "India Eyes Africa: Bharti target's MTN" there are now 3 potential suitors, Bharti, China Mobile and Etisalat.

Government-owned Etisalat, which operates in 16 countries and has 51 million customers, has been on a four-year, US$5 billion spending spree, setting up mobile operations in Egypt and Saudi Arabia as well as buying a stake in a Pakistani unit. In December last year it said it would buy 16 percent of PT Excelcomindo Pratama Tbk to enter Indonesia, the world's fourth most populous country. It is also started an operator in Nigeria. Clearly this gulf based operation is leveraging it's wealth accrued during this oil and mobile-coms boom.

Meanwhile, Vodafone remains on the side lines and emphasizes it has no plans to make a bid for MTN, despite reports in the UK press over weekend to the contrary.

Arab & State Owned likely in South Africa?

Given the clear state ownership of Etisilat, I'm not sure that one of South Africa's crown economic jewels would be likely to fall into foreign state owned hands. After all MTN happens to be one of the six largest advertising spends in S. Africa, with estimates putting their branding efforts as close to $600 million. It's one thing to have a non-controlling interest, it is another to have outright ownership by a foreign state. Stay tuned. It continues to be interesting.

$17 billion off shore gets no respect in the US

Of course, I haven't seen a peep in any US media outlets mentioning a $17 billion acquisition in the mobile telecommunications space is about to come down. The closest I've seen is "Calling Across the Indian Ocean" a piece in this week's Economist, a British publication.

Mobile Porn is up in Japan

Salarymen mainstream mobile porn

Yes boys and girls, mobile video pornography is running rampant with the infamous Japanese salaryman. 

"Phone Sex" no longer pertains to a lurid voice or text message of "What are you wearing?"  With Japan's 3G networks and robust handset functionality, the business of supplying adult movies for mobile phones is steadily swelling according to Asahi Geino---a male oriented Japanese magazine focusing on sensationalized stories, celebrity gossip, yakuza (Japan's organized crime syndicate), and articles with erotic content or about sex. 90% of the readership are middle aged, married, male salarymen.  Think of it as a bizarre blend of Newsweek, The New Yorker, People, Penthouse, and The National Enquirer.

"Stick Flicks"

For a monthly fee of a few hundred yen, that's about US$ 2.75 boys, they have unlimited access to as many Japanese "stick flicks" as they wish. Less than the cost of one ring tone!

"Mobile phone adult movie channels have all the different genres. Some major adult productions normally on sale in the marketplace have also been reformatted to suit mobile phones," a source well-versed in the mobile phone content market tells Asahi Geino. "These options are becoming really popular, mainly among salarymen who want to be able to watch these movies without their families finding out."

Japan's Lovestyle

A Japanese business called "Lovestyle" is providing the adult movies accessible by mobile phones. "We take old contents like the shijuhate (literally "The 48 Hands," the name given to the traditional Japanese charts of different sex positions), give it a new name like 'Titanic' or something and then provide photo and video footage of each of the positions. We use the video footage to show the insertion angles that achieve the greatest feeling and each position has its own individual explanation,"  said a company spokesman. Let's consider this for a moment--rendering a picture down to at most a 2" x 3" screen (the iPhone isn't available in Japan yet) gives how much detail?

Yet, the service is ringing up attractive profits. But given the "face culture" of Japan, it has become a source for scam artists preying on the pride of some. Many whose identities have been stolen have ended up with large bills from mobile phone adult movie content providers whose services they've never heard nor frequented. But they pay anyway rather than taking up an embarrassing fight that wrongfully exposes them as having a proclivity for "portable porn."  Umm, "portable porn" used to be a hard copy of Playboy. My how things have changed....

The men's weekly says that though the market is limited to Japanese operator au (KDDI), that should also serve as a safety valve for users because they know if they use a service on that carrier it should have been confirmed as a legitimate provider. On the other hand, any adult movies connected with companies like Softbank or NTT DoCoMo should be approached with caution. "That's true, but even so adult movie makers are setting up sites for DoCoMo users one after the other and mobile phone AV is on the verge of becoming an everyday service," a writer on the flesh film industry tells Asahi Geino.

"Some adult movie production companies have mobile phone site links on their official sites. If you check these out, it greatly reduces the risk of getting caught up in a scam."

There you have it. Soon to be arriving in the US...probably 5 years from now.

Poaching in Africa: Bharti's hunting MTN

Remember "India Eyes Africa" where I covered a possible takeover of MTN by Bharti?

Well, we've got market action in "the Bush"--both financial and commercial--indicating that MTN is in the cross hairs of Bharti.  Bharti, which operates India's Airtel as well as being a massive conglomerate, has a bid reported at US$19 billion for a 51 percent stake in the Johannesburg SA based MTN.

Shares in MTN surged to a two-and-a-half year high yesterday after both companies confirmed that an offer had been tabled following weeks of speculation. The bid, which reportedly includes US$12 billion in financing from investment banks Goldman Sachs and Standard Chartered, values MTN at US$37 billion.

India: The new source of Global Conglomerates--Is China on Deck?

If Bharti is successful, this would be the high water mark for an overseas acquisition by an Indian company. True to the stages of "M&A dance" Bharti continues to deny, issuing a statement yesterday relaying that "discussions are still at an early stage, are exploratory in nature and may or may not lead to any transaction."  Yea, right.  The champagne is already being chilled in the offices of speculators in London and Jo'burg. Did you buy MTN as a result of my last post? Obviously, we both should have!

Bloomberg is reporting any confirmation from Bharti could spark a bidding battle for MTN, citing a UBS report that suggests Vodafone, India's other industrial conglomerate Reliance and China Mobile, one of the highest market cap companies in the world, could ALL be interested in bidding for the operator--that would be the story of the year in the industry. Bloomberg also notes a report from Citigroup that claims that Singtel, which owns 30.5 percent of Bharti, may be "directly" involved in the MTN bid--I already covered that four days ago, gents...MTN has 68.2 million mobile subscribers covering 21 markets across Africa and the Middle East.  Bharti would be spending US$542.52 per sub in a region where the average ARPU (average revenue per user per month) is less than US$5.

Stay tuned. Only fools think that you can't make money in the low ARPU, high growth areas of Africa, and Bharti is not run by fools.

Speaking of fools, anyone besides me wondering why there are no American operators in this game of global investment and consolidation within the mobile industry? After all ATT's CEO stated earlier this year they wanted to expand internationally including India. Why not Africa? Oh, and don't forget T Mobile--from UberDeutchland--is looking at Sprint. And for that matter what would Verizon do with a GSM operator anywhere anyhow? Right. Don't hold your breath for the American operators.

The tanking dollar prohibits these big plays. Plus, the core American operators are too parochial to have a global vision, with most execs believing that the US market is big enough--of course that begs the question what about share value when the US reaches 100% mobile penetration in the next few years? Reverting back to classique Bell Head mentality. Takes a global vision, awareness of differences, creativity and a propensity for action to claim value around the globe these days. Seems the Indian operators have the fortitude for the fight....Look to see MTN falling into the hands of Bharti before the US Independence Day.

India Eyes Africa: Bharti targets MTN

India's Bharti Airtel is considering making a bid to acquire South Africa-based MTN Group, in a move that would be valued at around US$17 billion and make the Indian operator among the largest in the world according to the Financial Times.

Notwithstanding the usual posturing of such acquisitions---deny, announce, rejoice--Bharti's founder and chairman, Sunil Mittal, denied that the operator's board had met to look at making a formal approach for MTN, adding that no decision had been made. "We talk to people all the time and don't preclude anything," Mittal was quoted as saying. "I do not want to be compromised by ruling anything out for months." Akhil Gupta, joint managing director of Bharti added: "There is nothing on the table as of now."  Clearly, we're in deny phase.

Africa is where it's At!
Africa's mobile markets are ripe for international investors thanks to low penetration levels (24% against 30% across Africa), fast-growing population , and regulatory regimes encouraging competition. Analysts at Informa Telecoms and Media forecast that the market will reach 158 million mobile subscriptions by 2012 - a 78% growth.

In this context, international investors are entering the market aggressively, Middle Eastern groups invested in new licenses (Etisalat, Comium, HiTs Telecom, and Warid Telecom), and other operator groups like Bharti are making the region an integral part of the global expansion strategy. This is the case for Orange, which launched new operations in four countries in 2007/2008 (Central African Republic, and the three Guineas), and for Zain, whose Celtel operations in the regions are scheduled to re-brand to Zain by the end of 2008.

MTN has the largest footprint in the region's markets, including the three leading markets (Nigeria, Ghana and Ivory Coast) and an expanding portfolio of ISPs. It is no wonder then that the group is attracting the attention of outside investors looking for a way into one of the world's most promising telecommunications markets.

No Means Yes?
MTN has relayed in the past that it would be open to evaluate an offer from a global player, though it issued a vanilla statement that it "receives tentative approaches from time to time, which are always evaluated." It added that "the board of MTN has not received any specific proposal, and if and when there is anything specific to report, the market will be notified." I'm sure the bankers have been busy in the background especially given the credit crunch for such large transactions. If its in the public press then its on. These things are usually started via a phone call, not a formal offer.

MTN has a solid reputation in the operator community reflecting its ability to grow and profitably prosper in low ARPU markets in across Africa. MTN is an obvious target for major investors looking to increase their presence in high-growth emerging markets. MTN had a total subscription base of 68.2 million at end-1Q08, according to the operator, up from 58.6 million at end-4Q07, while Bharti is known to be eager to pursue an aggressive M&A strategy to spur growth and apply some of the growing capital and power accruing to global Indian brands. Any initial bid for MTN from Bharti would most likely be a partial tender offer for 51% of the group.

MTN by the Numbers
MTN, which has operations in 21 countries, is 76.9% publicly traded on the Johannesburg Stock Exchange, so Bharti or any other would-be buyer would have to make an offer to institutional and private investors to acquire a majority stake in the company. It has a market capitalization of US$33 billion, so a 51% stake in the company would cost US$16.83 billion at current values.

MTN's US$5.5 billion acquisition of Investcom in 2006 expanded its footprint outside South Africa, but many of the markets in which it operates have relatively low penetration rates, making it a prime candidate for an acquisition approach.

Bharti is benefiting from very strong growth. It had the second-highest number of net additions in 4Q07 in Asia Pacific, with 6.28 million, and India remains the world's fastest-growing country in terms of net adds, with 23.9 million in 4Q07, ahead of even China, which had 23.3 million.

To the Bankers Please
Standard and Chartered is reported to be advising Bharti on its options, and SingTel, which owns 35% of Bharti, is thought to be supportive of a bid for MTN.

China's 3G Soft Launch planned for Beijing Olympics

3G in China hits the Olympic Track

According to Xinhua, China's government news service, third-generation (3G) mobile phone service will be available for use at August's Beijing Olympics as the high-speed wireless connection service and related products were presented as SWAG to Olympic VIPS on Monday.

China Mobile and South Korean mobile phone producer Samsung presented 15,000 3G handsets, plus data cards and nearly 3 million yuan (US$ 428,600 ) of calling fees to the VICs (Very Important Chinese) of the Beijing Organizing Committee for the 29th Olympic Games in Beijing on Monday.

With the limited base of staff and volunteers for the Games who can utilize high-speed data transmissions, allowing them to view mobile televised games, play videos, and surf the Internet on cell phones, it signals the Chinese government's intent and interest to issue licenses and finally enter the foray of 3G mobility. CMCC's technology is the Chinese 3G standard, known as TD-SCDMA (Time Division Synchronous Code Division Multiple Access), and has been conducting limited trials of 3G service in China.

China Mobile has building out their TD-SCDMA network in eight cities, five of which are to host events for the Beijing Olympics in August, including Beijing, Shanghai and Tianjin, advised company insiders.  China Mobile is the sole Olympics partner/sponsor for the Beijing Olympics for mobile communications services while Samsung is the only sponsor for mobile terminal supply.

The beginning of the beginning of the 3G wars

With the ITU (International Telecommunication Union) having recognized TD-SCDMA as one of the world's three official 3G standards in 2000 it is inevitable that the next mobile technology wars will be started soon. The other two are Europe's WCDMA and North America's CDMA 2000. With close to 600 million mobile users in the Chinese domestic market, close to twice the US population, as well as the twice the population of the EU, where do you think this market battle will be settled--out of the US, Europe or China?

China Mobile: It Pays to be a Winner

US$3.4 billion revenues in one quarter

China Mobile (CMCC) the world's largest mobile phone carrier, announced today that its first-quarter profits are up 37%. China has the largest population of mobile users, with around 520 million subscribers. The Chinese government predicts that this number will increase to 600 million by the end of 2008.
China Mobile posted a profit of 24.1 billion yuan (US $3.4 billion) in the first-quarter that ended on March 31. Subscriptions rose 6% for a total of 392 million users. New accounts accelerated by 33% to 7.6 million per month in the quarter, driven mostly by new business in rural China. China's eastern cities are near the saturation point, so the company is targeting the countryside. With everything in China on hold post the Olympics, the closely awaited issuing of third-generation (3G) licenses will probably be announced sometime in October.  Just imagine two years from now how much influence will have in the mobile business. CMCC as a buyer with close to a billion users of handsets, infrastructure, applications and content needs. Wow.

China Mobile's iPhone BATNA

What is CMCC's BATNA point ?

Reports from Beijing indicate that China Mobile is taking a silence is golden approach with Apple over the introduction of the iPhone in China. Of course the phone itself is already there being hacked and  sold in the after market to interested inhabitants of the middle Kingdom willing to shell out about 3400 RMB

"We are keeping in touch with Apple over the iPhone, but details such as business models and commercialization should be settled before we enter into formal negotiations," said Chairman Wang Jianzhou at the 2008 Conference of Boao Forum for Asia on Saturday in South China's Hainan Province. 

Reports in January indicate a breech between CMCC and Apple on the amount of revenue share Apple expects and the cost of the iPhone relative to the Chinese market. Some Chinese mobile observers are claiming that Apple is expecting a 20%-30% share of air time revenue from China Mobile. A potentially staggering sum for such a small slice of the Chinese market. I don't think it is worth it from the Chinese side, and their negotiating gambit is a good one.

Given the extreme costs of roughly $500 for a mobile phone expectations are naturally low from the Chinese side on the number of potential units to be sold relative to the over all market, and the trade off in revenue from a high end user is very high for the "opportunity" to carry the iPhone. No wonder the Chinese rightfully stepped back from the negotiations. Their BATNA, or Best Alternative to a Negotiated Agreement, is to do nothing. They loose nothing in doing nothing.

The after market is small enough that those who really want the phone are being supplied sufficiently with hacked iPhones. Scarcity keeps the black market price high enough that only highly motivated buyers seek one out, for mostly the status of it. For example, in the most mobile messaging dense nation on earth, the iPhone is hardly messaging friendly. So China Mobile looks at this and probably thinks "Much ado about nothing." Meanwhile the mostly internet driven media, especially web based writers, pant and sweat as though it is the second coming.

Like so much else in China right now, the Chinese are waiting the west out, and don't expect anything concrete to happen until after the Beijing Olympics.