Convergence might seem right back on the agenda for major telcos now that the long-awaited merger of Canada’s Rogers Communications with cable operator Shaw Communications has been approved at last. As further evidence for this view, Orange has been cleared to acquire two Belgian cablecos and increase its fixed/mobile capabilities in that market, mirroring similar moves by the French operator in several of its other European territories.
Certainly, the past decade has seen mobile-only operators racing to build or acquire fixed-line assets, as the commercial challenges of being too mobile-centric intensified. Vodafone, highly valued at the turn of the century because it was not bogged down by legacy fixed-line burdens, later found that it lacked the scale and range of service revenues that a modern fiber network can support. As the old wireline dinosaurs invested in shiny FTTx networks, Vodafone rushed in to become a fully converged operator.
But the picture is far less clear in the opposite direction. For years, it has been assumed that fixed-only operators needed to add mobile services to their portfolios in order to expand their customer bases and boost ARPU and scale. That might seem to have been confirmed by BT’s case in the UK, having been involved in cellular almost from the outside with its 60% Cellnet subsidiarity starting operations in 1985, but then after becoming 100% owner in 1999 selling the company to Telefonica in 2006 for £18bn (then $28bn) after it had been rebranded as O2.
BT then came to regret exiting the cellular business and came back in with its £12.5bn (then $19bn) acquisition of EE from Deutsche Telekom and Orange in February 2015.
Despite such shuffling among some of Europe’s major telcos, many fixed-line operators have been steering clear of mobile, at least in terms of investing in their own networks rather than relying on MVNO or WiFi-first strategies. And those that have crossed the divide, such as Germany’s United Broadband or the leading US cable operators, are finding the cost of deploying and running a 5G network can significantly outweigh the commercial upside in markets where existing MNOs can only be dislodged by ultra-low-cost tariffs and expensive marketing campaigns.
The question then becomes whether the shine gone off the convergence story for broadband providers, and if so, will that leave the remaining mobile-only players and their assets stranded, even as the large, converged MNOs retain their market dominance (whether through direct retail operations or MVNO deals)?
The Rogers-Shaw merger is the latest in a long line of M&A deals between operators, geared primarily to increasing economies of scale and therefore market share and cost efficiency. Other examples across the years include Vodafone’s purchase of Kabel Deutschland in 2013; China Mobile’s purchase of broadband provider Tietong in 2015; multiple acquisitions by Hutchison Group in Europe and Asia; Thai mobile player AIS buying broadband provider Triple T last year; and many more.
Most of these are either deals between two converged operators, or they see a mobile-centric player bolstering its fixed-line assets and customer base. But it is notable that few of these deals have resulted in network convergence – in commercial terms, they mainly allow the operator to provide quad play options with a single bill spanning fixed, mobile, voice and TV.
Control of the fixed lines is seen as an asset by mobile-centric operators as it gives them access to the premises of the household or enterprise, on which other services, such as smart home or video, can be layered. Control of the mobile network, to fill in the cellular piece of the quad play, is a more uncertain benefit. The marketing option can be supported via an MVNO, and ownership of the mobile network entails the huge costs of operating such a network. This contrasts with the relatively low opex associated with FTTx, once the initial capex hit has been taken (and if an operator buys a fiber network by acquisition, which has already been factored in).
When BT did acquire EE as the country’s largest cellular operator, it was indeed widely greeted as the start of a wave of wireline acquisitions of MNOs. In particular, US cable operators were expected to go after wireless providers such as T-Mobile USA. But in fact, TMO merged with another MNO, Sprint. And while the large cablecos, led by Comcast and Charter, have invested in some spectrum, mainly in the CBRS band, they are clear that their build-out ambitions are limited to local hot zones or enterprise extensions rather than a nationwide network. That coverage is supported by their WiFi hotspots and by their MVNO deals with Verizon, so their appetite to acquire an MNO now seems considerably reduced.
And there are other ways for fixed-centric operators to expand their business and reduce their TCO. Some are highlighted in the latest M&A deals, which entail mandated infrastructure investments and/or open access provisions from the buyers. These will result in an expansion of wholesale options on large-scale networks, which broadband providers can leverage to add mobile services and even to extend their fixed-line footprint without significant capex or acquisitions costs upfront.
The CAN$20.4bn (US$15.1bn) deal is now set to close this week, after two years of regulatory negotiations. The transaction also involves the sale of Shaw’s wireless business, Freedom Mobile, to Quebecor’s Videotron. Freedom Mobile has around 1.7m customers in Ontario, Alberta and British Columbia in Western Canada.
Rogers’ CEO, Tony Staffieri, reiterated the objectives that had played well with competition authorities, saying in his statement that the firm could now “proudly deliver on our commitments to enhance and expand network coverage, connect underserved communities, and improve access for low-income Canadians”. Greater infrastructure and market scale should bring many commercial benefits and make Rogers much closer to incumbent BCE in terms of size and scale, though approval has come with a range of conditions, such as a mandate to invest $1bn to improve connectivity for rural, remote and indigenous communities and remote highways in Western Canada; plus a range of other infrastructure investment and job creation pledges for the underserved and remote regions of the country’s vast western region.
Meanwhile, the European Commission has approved Orange’s acquisition of Belgian cable operators Voo and Brutélé, a next step in Orange’s pan-European convergence strategy, with which it plans to replicate the range of services and the economies of scale it experiences in its home market, through control of a widespread FTTx network.
Orange will pay €1.35bn on 75% minus one share of Voo’s capital. There are conditions to this deal too. Orange must provide Belgian cableco Telenet with wholesale access to the fixed network it is acquiring, and any future FTTx build-out, for 10 years, allowing Telenet to expand in the areas where Voo is strong, such as Brussels.
These conditions highlight the ways that fixed-centric operators can expand their range of services and their coverage without making huge and risky acquisitions of their own.
They may increasingly be deterred from a direct mobile entry by the experiences of some of those that have tried to be new 5G entrants. Even acquiring an existing MNO is challenging for any but the biggest incumbents, because of the costs of integrating and operating the new networks. But some broadband providers have tried to leap into the wireless market by upgrading their MVNO deal to a fully owned network from scratch, rather than by acquisition.
Even with new tools at their disposal, such as Open RAN, which were supposed to reduce the cost of entry, this strategy has proved enormously challenging, as United Internet’s efforts in Germany demonstrate. And companies seeking to emulate the German player and build out ‘affordable’ Open RANs may well be deterred by the rising costs incurred by other new mobile entrants from adjacent sectors, such as Rakuten Mobile in Japan (expanding from the ecommerce and cloud segment) and Dish in the USA (from the satellite TV market).
United Internet gained 5G spectrum and is in the process of rolling out an Open RAN, based on Rakuten Symphony’s platform and integration services, under the brand name 1&1. However, it has suffered significant delays, deploying just three towers by the end of 2022, rather than the 1,000 it had targeted. Higher costs, mainly driven by the mobile roll-out, led to an 11% year-on-year drop in net profit in 2022, to €465m ($506m), though overall revenues remained healthy. In 2021, the United Internet group spent €290m ($315m) in capex, but 1&1 has increased that figure to €681m ($741m) in 2022, and this year capex is expected to reach €800m ($870m)- all for a very limited build-out so far, and no commercial upside.
The future for fixed-line operators moving towards converged services is likely to be in line with the US cable picture rather than the United Broadband adventure. Most US cablecos do not plan a nationwide build-out to rival that of Dish (though there is still logic for Dish to merge with one or more cablecos to increase scale and addressable customer base). The largest cableco, Comcast, will deploy its own 5G in high traffic areas that will support key residential and enterprise customers, and many of its own base stations will be small cells. It will aim to support high quality of service, especially indoors, for existing and new subscribers, and to build up enterprise and city revenues. It is likely that its 600 MHz spectrum will be valuable less for its wide area coverage, the usual benefit of low bands, but its indoor penetration.
The new buildouts will help Comcast reduce its MVNO fees to Verizon and differentiate itself in high-margin environments, building on its existing and large-scale WiFi network, to which it already offloads a great deal of cellular traffic to reduce MVNO costs.
Meanwhile, fellow cableco Cox Communications recently set up a new “growth group” to work on private wireless offerings using the firm’s CBRS spectrum. It spent $212m on CBRS priority access licenses in the 2020 auction. It said it has pilots with two cities, Las Vegas, Nevada and Mesa, Arizona, working with Intel and private networks integrator Future Technologies and Intel. Next it will work on a commercialization strategy.
The second cableco, Charter, has greater spectrum ownership ambitions than the others, but is following a similar hotspot strategy to that of its 5G development partner Comcast, while the fourth player, Altice, has only added modest numbers of mobile customers via its MVNO deal with T-Mobile.
And some fixed-line US operators see limited demand for bundles from customers. “Right now, we don’t see the consumer demand for that bundle,” said Maxine Moreau, CMO for Lumen’s fiber services for consumers and businesses, speaking at an investor event. “We think the value of our fiber broadband capability stands on its own. We’ll continue to evaluate our customer needs. And if the need arises, we’ll explore wireless partnerships if it makes sense. But right now we don’t see the customer demand for it.”
And smaller players are even less bullish about mobile. For instance, rural broadband operator Cable One said it will remain focused on fixed-line services, according to CEO Julie Laulis. She said on a Yet Another Value podcast for Rangeley Capital: “Right now the signs are pointing to: It’s not our time.” M&A activity among smaller cable firms is more likely to focus on consolidation and broadband scale rather than fixed/mobile convergence.
Even TMO is cautious on the need to follow fellow MNOs in other markets into converged networks. CEO Mike Sievert said, on the operator’s most recent earnings call: “So far, we haven’t seen a benefit to convergence that really translates into consumer value beyond just a discount. There are plenty of ways to deliver customers discounts.”
That sums up the shift in thinking on wireline expansion into mobile, whether through acquisition or build-out. In a world of software-defined networks, network-as-a-service and flexible wholesale/MVNO deals, there is far less requirement for operators to own their mobile infrastructure. Control of the fiber that underpins all network services can be a strategic and defendable asset – that argument is far less clear when it comes to cellular, with its high opex and 10-year replacement cycle.