Mobile-only operators are set to become a thing of the past as telcos increasingly seek to own the infrastructure that connects up their base stations.

Over the past 12 months the mobile operator business model has begun to unravel.

2013 marked the beginning of the end for the mobile-only operator. For some time mobile players have sought to offer a more complete service offering, by adding fixed broadband into their portfolios. But with 4G rollouts well underway–and the next generation of mobile technology just over the horizon–operators are having to think seriously about how they will cope with smaller cell architectures and the fixed assets they will require to support them.

Vodafone is leading the way, but it is not the only mobile player to have addressed the fixed networks issue in 2013. Mobile operators worldwide are looking to hook up their base stations to their own fixed infrastructure one way or another, and that gives rise to one key question: whether to buy or build.

Fresh from acquiring Cable & Wireless Worldwide and New Zealand’s TelstraClear in 2012, Vodafone this year picked up where it left off, launching in July a €7.7 billion tender for German cableco Kabel Deutschland, a transaction it completed in October. It was also linked with a move for Italian fixed-line provider Fastweb in June.

“There’s room for mobile-only in certain countries for a certain amount of time,” says Andy Hudson, head of spectrum policy at Vodafone. “But I don’t think we’ll be talking about it in 10 years,” he predicts.

Indeed, a number of major mobile operators are already moving in a direction that suggests they will not be able to call themselves mobile operators for much longer.

“We would be interested to own our own fixed network,” says Omar Saud Al-Omar, CEO of Zain Kuwait. “It makes a lot of sense...The demand for data showed us how much it is costing us to buy the required bandwidth and to eventually provide it to our customers.”

Zain generates 25% of its revenues from mobile data in Kuwait and buying the backhaul to support that traffic is proving costly. It is all very well growing or maintaining your top line, “but EBITDA and net profit are different when it comes to data because the cost structure is different than voice,” Al-Omar explains.

Zain operates in eight markets across the Middle East and North Africa, which makes the business case for owning fixed infrastructure more valid, Al-Omar says. “The [Zain] group has started building their own network,” he says. “We should own our own network and provide this connectivity to our operators, instead of buying it from international carriers.”

At present Zain partners with Vodafone for international connectivity, Al-Omar notes. “They skipped so many steps by buying Cable & Wireless...They provide to others, but most importantly to their own operators,” he says.

But while a group like Zain might have the money to build out its own network, that sort of project doesn’t come cheap. For many, buying ready-made infrastructure will be a more cost-effective method than building.

“I think you’re going to see more deals like Vodafone/Kabel [Deutschland],” predicts Alcatel-Lucent CTO Marcus Weldon, who says that acquiring a fixed network will likely prove a more economical way for operators to backhaul large numbers of small cells, compared with leased lines.

Operators are certainly concerned about the financial implications of moving to smaller cell networks. “Small cells are a bit of a nightmare,” says UK mobile operator EE’s head of spectrum Inge Hansen. “We know we will need them at some point in the future, but it is just way too expensive to contemplate in the environment we live in, with falling industry revenues,” she says. “How are we going to get backhaul...to all of these small cells?” she asks, also listing site rental and maintenance as key cost issues for network operators. “This is a real headache.”

That backhaul challenge is one of the things that could push more mobile operators into the M&A market. “Backhaul pricing is based on peak usage, not average, which makes it a difficult model,” Weldon explains. “Unless you can somehow get really cheap backhaul, you’re going to have to buy the backhaul company.”

However, telcos need to move quickly if they want to acquire fixed-line assets since there are a limited number of fixed networks out there.

In Europe there are around 1.5 fixed networks per market–typically one national player and one cableco with 50% coverage–and three-to-four mobile operators, points out Stephen Howard, head of global telecoms, media and technology research at HSBC. “We will see more [fixed-mobile] convergence over time,” Howard says. “Some of it will be driven by operators with the cash and confidence to invest themselves, some of it will come from regulators that move from cost-oriented [access pricing] to equivalence,” he predicts.

“They need to move early because there aren’t many companies to acquire [and] there aren’t many options that give you scale,” Alcatel-Lucent’s Weldon warns. There are alternatives, such as building your own network, but “that takes time; you can spend a decade building it,” he says.

Sometimes though, that is the only option, “particularly in markets with a strong fixed-line incumbent,” says Vodafone’s Hudson. In these markets it can be difficult to get access to the incumbent’s network at all, let alone on reasonable terms, he says, and there may be a lack of viable alternative operators.

Vodafone is pursuing this strategy in Spain in partnership with Orange. The two are co-investing in a €1 billion fibre-to-the-home (FTTH) network with which they aim to pass 6 million premises across 50 major cities by September 2017. They plan to launch commercial services early next year.

But not everyone will be able to build or to buy.

“The safest option is a cableco allied with a mobile operator; not necessarily through mergers but through partnerships as well,” says Weldon.

HOOKING UP
Partnerships featured prominently in 2013, as telcos in a number of markets sought to rein in costs with network-sharing agreements.

Europe saw a lot of activity, with network-sharing deals between Vodafone and Wind Hellas in Greece, and Orange and Vodafone in Romania. In the Netherlands, T-Mobile and Tele2 struck a 10-year deal to share cell sites, in a move aimed at lowering the deployment cost of the latter’s 4G network. France’s ongoing mobile price war encouraged SFR and Bouygues Telecom to enter into network-sharing talks, which at the time of going to press are ongoing. New entrant Free Mobile–which sparked the French price war–is hoping to join the discussions.

In India, Mukesh Ambani’s Reliance Jio Infocomm, the only holder of a nationwide mobile broadband licence, made progress towards deploying its network by striking a deal to share fibre, undersea cables and cell towers with Bharti Airtel. In April, the company also established a tower-sharing pact with Reliance Communications, owned by Mukesh Ambani’s brother Anil. We’re cautiously optimistic about the impact that Reliance Jio will have on India’s mobile broadband market. While it has a licence that allows it to offer a full suite of services, it remains to be seen how affordable they will be.

In March, Telefonica’s Brazilian arm Vivo entered into a network-sharing pact with local rival Claro, owned by America Movil. The companies received regulatory backing in May. More recently, three of Israel’s mobile operators–Cellcom, Pelephone, and Golan Telecom–agreed to form a joint venture tasked with building a shared 4G network, and agreed separately to share 2G and 3G infrastructure.

STITCHING IT TOGETHER
As always, M&A was high on the agenda in the telecoms space in 2013 as operators sought to build scale.

One of the biggest transactions, not just in telecoms but in corporate history, saw Vodafone agree in September to sell its 45% stake in Verizon Wireless to Verizon in a deal worth $130 billion. The move marks Vodafone’s exit from the US and the cash it receives will enable it to invest in those all-important fixed networks elsewhere.

Vodafone shedding its Verizon Wireless stake led to speculation that AT&T is preparing a bid for the UK operator, retaining some assets to boost its own business overseas and selling off others. Such a move might seem like a step too far for the US giant, but AT&T was no stranger to brokering sizeable deals in 2013. In September it closed a deal to buy $1.9 billion worth of spectrum from Verizon and completed its $780 million acquisition of Alltel, and in November shareholders of Leap Wireless gave the go-ahead to a $1.19 billion takeover by AT&T.

AT&T was not the only player in the US at the centre of M&A talk this year. The long-running battle between satellite operator Dish Network and Japanese telco Softbank for control of Sprint captured the headlines for months, coming to a head in June when Softbank upped its offer to $21.6 billion. Dish pulled out and Softbank took control of the newly-created Sprint Corp in July; just days earlier Sprint completed the acquisition of the remainder of Clearwire that it did not already own, its $5 per share offer valuing the US telco at around $14 billion.

This time last year we suggested that there would likely be more consolidation to come in the US. Not only did that prove to be the case, but that same prediction is still valid 12 months on. As we went to press, there were rumours that Sprint is working on a bid for number four mobile operator T-Mobile US, which came into being in its current form in May, following the completion of its $1.5 billion merger with MetroPCS.

There were major telecoms deals elsewhere in the world too. Cross-shareholders Oi and Portugal Telecom agreed to merge to create a new, Brazil-headquartered telco headed up by current Oi chief executive Zeinal Bava.

After much negotiation Abu Dhabi-based Etisalat in November signed a €4.2 billion agreement to acquire Vivendi’s 53% stake in Maroc Telecom. The deal is due to close early next year, subject to regulatory approvals.

Meanwhile, Germany will get a new mobile market leader in 2014 if Telefonica gets the regulatory go-ahead for the €5 billion cash and stock deal it brokered for KPN’s E-Plus unit in July. It plans to merge E-Plus with its O2 Germany operations.

The most active player in the European M&A space in 2013 was arguably Hong Kong’s Hutchison Whampoa, which started the year by wrapping up its acquisition of Orange Austria in January, before moving on to new targets. In June Hutchison’s Irish unit agreed to acquire O2 Ireland for €850 million; the deal is still being examined by European regulators. Hutch also approached Telecom Italia about merging their Italian mobile operations, but discussions over a potential tie-up ultimately came to nothing.

The cable market was also a hive of activity. In February US-based Liberty Global agreed to acquire Virgin Media in a $23.3 billion deal, adding the UK company to its European cable footprint. Later in the year Liberty Global made a bid for Dutch cable operator Ziggo, in which it already holds a 28.5% stake. Ziggo rejected the offer, but as the year drew to a close it admitted that it is holding talks with the US outfit. Meanwhile, in the US there is ongoing debate over the future of Time Warner Cable, which is reportedly drawing takeover bids from rivals Charter Communications and Comcast.

If the world’s mobile operators are keen to snap up some cable assets to help future-proof their networks, they had better not wait too long to make a move.
 
(By Mary Lennighan and Nick Wood)