Waka Waka : Orange in Africa

Waka Waka : Orange in Africa

General Telecom Market View:

As per analysts’ reports, the Telecom Services revenue in Western Europe is slated to decline at a CAGR of 0.8% between 2012-2017. To add to this in a significant development the European Parliament has now given its consent to put an end to the roaming costs in Europe and up held Net Neutrality. All this means that the Telecom Services providers in Europe are now desperately looking at new markets, cross border consolidations and bundling of products and digital services to arrest the decline in service revenues. The three major Telcos of Europe –OVT, Orange, Vodafone and Telefonica are now more than ever focused on the growing and emerging markets. OVT are now carefully choosing the markets that they want to grow and introduce new products and services, at the same time exiting unprofitable ones. Orange is relying on Middle East and Africa, Vodafone banks on Asia while Latin America contributes more than 50% of the Spanish incumbent Telefonica revenues. 

Africa: Waka Waka Diamond Mine?

Middle East and Africa would register 5.9% CAGR growth in mobile connections from 2012-2017, second only to APAC, whereas the growth in western Europe is 2.3%.  Thus Africa becomes a very important market for most western CSPs targeting subscriber growth. As expected, ARPU across globe is on decline but the volume increase in subscribers means service revenue will have +ve CAGR growth for developing markets like APAC and MEA.As per Informa-There were 778m mobile subscriptions in Africa (Jun-13).

Forecast

• Mob subscribers would be 1.2b by 2018
• Voice revenue would grow from $51b in 2012 to $63b in 2018
• Data revenue to grow from $8.5b in 2012 to $23.2bn in 2018
• Non-SMS data revenue to grow from $5b in 2012 to $20bn in 2018

Thus Africa would play an important role in growth strategy for most CSPs who can play their cards correct. 

Counter view:

Things are not all rosy in this market which is known for its geo political issues. Unreliable and poor infrastructure puts heavy pressure on predictability. Also the Network Opex is very high.Economic issues doubled with corruption makes it very difficult for MNCs to manage their operations effectively

Telecom IQ Analysis for Orange’s Strategy in Africa

There is no one single strategy that will fit all CSPs. Each CSP will have to evaluate their strategy based on their market diversification and product diversification strategy.

Orange in Africa:

Orange has a formidable presence in Africa and the Middle East, with a strong growth in the mobile customer base (+7.9% year on year), and 88.0 million customers at 31 December 2013 (including 3.4 million net additions in the 4th quarter). 3G is now available in 17 countries and Orange Money had 8.9 million customers as on 31 December 2013.  For Q4-13 Africa and Middle East registered a YoY growth of 6.6%,  the highest of all the market facing Units. France and European Countries on the contrary registered a negative growth of -6.2% and -9.2% respectively. Baring 2-3 countries other regions have shown +ve growth in Africa. Senegal (+3%), Ivory Coast (+13%) , Mali ( +26%) and Guinea (+75%) registered a phenomenal growth rate.For Orange, in the Rest of World segment, revenues increased 1.3% thanks to growth of 4.7% in Africa and the Middle East, while Europe, marked by the downturn in Belgium and Slovakia, fell 2.8% 

Thus Africa is an extremely important market for Orange and they have made huge investments in terms for network and R&D labs in the continent. Having said that,  the network Opex is expensive in Africa because of geopolitical issues, poor infrastructure & corruption. So Orange should choose its battlefields and its ammunition of products carefully.

Telecom IQ Recommends:

Key Markets:

Orange should focus on the markets where it is No1 or No2 in terms of mobile customers and markets where it has got both Fixed and Mobile presence. This is very important for its Triple play strategy to its customers. From this viewpoint, the following markets are significant for Orange- Senegal (62.9% market share), Ivory Coast (34.7%) , Mali (63.6%) , Cameroon (43%)  and Madagascar (over 50%). It should exit markets like Uganda, Central African Republic, Vanuatu etc., where it has not been able to create a good market share so far and any attempts to expand will impact EBITDA.

Thus consolidation should be the mantra for Orange in Africa.

Product portfolio:

In terms of services, Mobile Money looks like a killer offering in Africa. MTN, Orange, Airtel and Safaricom all have a thriving mobile money business. As far as the digital strategy is concerned, key focus for Orange should be  mobile payment (Orange money was launched in 2008 in Cote D’Ivoire. Now Orange Money is present in 12 countries), eCommerce (Orange via Orange Horizons develops new businesses like online stores and other digital services) and Music & Games (Deezer and Gameloft agreements for Africa).Orange seems to have got their product strategy right for Africa and should focus on this portfolio instead of further diversification.

In a nutshell, Orange should focus on key markets where they have made good investments and have good presence. They should focus on their product portfolio in the digital space and try and exit markets where they don’t have a strong market share. 

Waka Waka , this time for Africa!

Three to Tango ? French Telecom Sector warms up to M&A

On March 5, Paris based Vivendi confirmed that it has received two binding offers for a controlling stake in its SFR subsidiary
The offers have been provided by Altice, Numericable’s parent company, and by the Bouygues group, the Telecom and Construction giant. The offers will pit French industrialist Martin Bouygues against Patrick Drahi, the billionaire entrepreneur behind Altice, in a direct bidding war. 

Offers on the Table: Who is offering What?

Bouygues Offer: €11.3bn in cash with 43 per cent stake in the merged Bouygues-SFR entity

Numericable Offer: €11.75bn in cash plus 32 per cent in Nemericable-SFR merged entity

Bouygous trump card: Bouygues has agreed to sell part of its network and wireless spectrum to smaller French competitor Iliad (Free's parent company) for up to €1.8B ($2.5B) if Bouygues succeeds in its efforts to merge its mobile phone unit with Vivendi subsidiary SFR.
                                                                     
 TelecomIQ Analysis

• As of Sep-13 SFR, with 21 Million subscribers was the second largest provider behind the market leader Orange with a subscriber base of 26.8 Million

• A deal with Bouygues would mean that SFR+Bouygues would have a combined market share of 49%, ahead of the current market leader Orange. This deal could raise antitrust issues and thus face intense regulatory hurdles.

• The announcement by Bouygues that once the deal is through, SFR+Bouygues combined entity would sell off part of its network (15000 antennas and part of its spectrum) to Illiad for €1.8B ($2.5B) is aimed at placating the competition authorities and easing the anti-trust concerns. Illiad would also benefit by this as it would help Illiad to break away from Orange . Currently Free , the smallest operator (but by far the most aggressive!) has 7.4 Million customers and piggy backs on Orange's network. It currently pays Orange about €700m a year in network access fees. The sentiments were echoed  by both Bouygues and Illaid's shareholders , with Bouygues shares rising by 7% and Illiad's by 14% , while Numericable shares fell by 15% ( 10-Mar-14).

• Even though Bouygues has played its cards well, still the post-merger scenario would mean that Orange and Bouygues would reduce the number of operators from four to three . All the major European markets have four Mobile Network Operators and any merger which reduces the number of players has been met by stiff resistance from the European Commission.The latest example being is Germany, wherein the European Commission has launched an indepth probe into Telefonica's $11.8 billion bid for KPN's Eplus.

• Orange plus the SFR-Bouygues merged entity  would command a mammoth 90% of the French mobile market share and this could potentially harm retail customers and restrict entry of any new MVNOs (mobile virtual network operators)

TelecomIQ Verdict- Vivendi would accept Numericable offer

Prima Facie, the Bouygues offer looks lucrative but a deal with Numericable would pose fewer regulatory problems and anti trust issues. This would also mean that the merged entity could be listed soon  and Vivendi can easily cash out its stock.

Net Neutrality War -Verizon wins the Battle in US; Regulators holding ground in Brussels

In Jan,14 the DC court has ruled in favor of Verizon and has vacated the anti-discrimination and anti-blocking policies as ruled by FCC in 2010

The Case: Verizon (Appellant) Vs FCC (Appellee)

What was FCC Open Internet Order 2010?

In Dec, 2010, FCC- Federations Communications Commission, issued an order to preserve the free and open internet. Three basic rules were adopted-

1.      Transparency: Fixed and mobile broadband providers must disclose the network management practices, performance characteristics, and terms and conditions of their broadband services

2.      No Blocking: Fixed broadband providers may not block lawful content, applications, services, or non-harmful devices; mobile broadband providers may not block lawful websites, or block applications that compete with their voice or video telephony services; and

3.      No Unreasonable Discrimination. Fixed broadband providers may not unreasonably discriminate in transmitting lawful network traffic.

Verizon's appeal against FCC ruling

Verizon challenges the Open Internet Order on several grounds, including that the Commission lacked affirmative statutory authority to promulgate the above mentioned rules.

Jan, 2014-US Court of Appeals Verdict

· The DC court has vacated the FCC's anti-discrimination and anti-blocking policies 

· But it preserved disclosure  and transparency requirements 

Telecom IQ View: What does it mean for Verizon and others CSPs in a larger context on net neutrality debate

· Service Providers vs OTT players- The regulations have so far favored the latter

o Several cases have been registered over the years where Regulators have investigated CSPs for net neutrality violation. These cases mainly revolve around CSP traffic management, throttling, blocking content of OTTs

oWith the Rise of OTT players, Telecom Operators services have been reduced to "Dumb Pipes"

§ OTT content players have had devastating impact on Telecom service providers. In 2013, free social-messaging applications like WhatsApp cost phone providers around the world $32.5 billion in SMS revenues in 2013. This figure is projected to reach $54 billion by 2016 and $86 Billion in 2020.

§ There is not only loss in service revenue but OTT content players (mainly players like YouTube, Skype, Netflix etc.,) are responsible for driving up the network traffic on the Service providers network. Between 2012 and 2017, mobile traffic would grow 13 fold and video would account for 66% of all mobile traffic. This is turning up pressure on Service Operators to increase Capex and invest more on Network Upgrades. 

§ CSPs are struggling to monetize this investment but OTTs are making the most of the ubiquitous network thus adding to CSP’s frustration Regulators so far have been apathetic to the plight of communication service providers

· The court ruling in US , now paves the way for  new dynamics in the OTT-Regulators-Service Provider tussle. Operators for a change, now have a upper hand and potentially can resort to traffic optimization and blocking strategies or could start charging OTT content providers. Interestingly, one month after the ruling by the DC court, Comcast and Netflix announced an agreement  in which Netflix will pay Comcast for faster and more reliable access to Comcast’s subscribers. The market would start witnessing more such agreements.

· It would not be long before the tremors of this ruling would be felt in Europe, wherein leading providers like Telefonica, Vodafone and Orange would start taking European Commission and NRAs to court. 

Brazil: Telefónica's next move? Break up TIM Brasil?

The Issue: The Brazilian Competition watchdog, Cade, has ruled against Telefonica and has said that ‘it has identified potential risk to competition’ since Telefónica bought a larger stake in Telecom Italia’s dominant shareholder this year

Telefonica has a controlling stake in Vivo , which is the leading mobile operator in Brazil.In 2010 ,Telefonica agreed to pay $10 Bn to Portugal Telecom for a controlling stake in Vivo. 

Telefonica has 14.76% stake in Telecom Italia , which owns the majority stake in TIM Brasil.Telecom Italia own 67% stake in TIM Brasil, which is a strong competitor to Vivo.In September, 2013, Telefonica increased its stake from 46% to 66% in Telco SPA, which controls Telecom Italia with a 22.4% stake. 

Thus indirectly Telefonica has 14.76% stake in Telecom Italia, which owns controlling stake in TIM Brasil.

So Telefoncia has a stake both in number 1 player , Vivo (direct stake) and the numbet two player , TIM Brasil (indirect stake).

Options before Telefonica: 
1.Reduce stake in Telco SPA? 
Why Telefonica might choose this option?
By reducing stake in Telco SPA, Telefonica would indirectly reduce stake in TIM Brazil, which is a strong rival to Vivo, thereby overcoming the antitrust issues in Brazil. Also Telefonica is trying to shed its debt continuously and exit non key markets. At the end of Sept,2013, its debt was Euro 46.1.Billion Reducing a stake in Telco SPA , could further help in improving its debt position
Telecom IQ View
Telefonica recently (Sep-13)increased its stake from 46% to 66% in Telco SPA, which controls Telecom Italia with a 22.4% stake. This was a very strategic move and Telefonica is very unlikely to go back on this decision anytime soon. Also Telefonica has already achieved its 2013 target of reducing debt to less than 47 Billion euros.
Thus Telefonica would not sell off its stake in Telco SPA any time soon!


2.Reduce its Majority Stake in Vivo
Why Telefonica might choose this option?
By reducing its stake in Vivo, Telefonica can successfully address the antitrust concerns and pacify the regulators in Brazil

Telecom IQ View
LatAm contributes 51% revenues for Telefonica and 68% of the accesses. Brazil is the biggest market in LatAM for TEF, and ranks next only to Spain in terms of revenues and OIBDA.

• Revenue: Spain contribution:-23%; Brazil:- 22%
• OIBDA:- Spain contribution:- 34%;Brazil-21%
• Accesses:- Spain 13% ;Brazil-29% (Sep-13)
• Vivo with 28.49% share in Brazil, is the market leader

Telefonica is very unlikely to exit the lucrative Brazilian market!

3.Force Telecom Italia to sell off its stake in TIM Brasil? 
Why Telecom Italia would resist?
Brazil is a very important market for Telecom Italia

• 26% of Telecom Italia revenue and 17% of EBITDA comes from Brazil. 
• Brazil registered a 7.3% YOY growth in revenues as against a 10% decline in revenues in Italy (Sep-13)

Telecom IQ view 
Why it makes sense for Telecom Italia? 
Telecom Italia is reeling under a debt pile of $38 Billion and in the longer-term, it must raise about $9.9 billion to prevent its credit rating from being downgraded to junk. The market capitalization of TIM Brazil is $11.9 billion. Telecom Italia could reduce its debt burden by selling of its stake in TIM Brasil.
Why it makes sense for Telefonica? 
This would help Telefonica tackle the antitrust concerns in Brazil, retain its share in Telco SPA and Vivo as well! Killing three birds with one stone!

This we foresee, would be the most likely outcome of the impasse in Brazil. Already there are rumors in the market of Telefonica forming an investment vehicle with Claro and Oi, to break up TIM Brazil.