And the Telecom consolidation continues: This time is Dobson

Rural wireless provider Dobson Communications Corp. is considering strategic options, including a sale of the company as deal activity among the telecom industry's smaller players continues to accelerate. The move comes as private-equity firms are increasingly looking for high-profile telecom deals, leading to higher share prices for some smaller telecom companies in recent weeks. In fact, two private-equity firms agreed last month to acquire Alltel, the nation's fifth-largest cellphone company by subscribers, in a deal valued at $26.3 billion.

Dobson, based in Oklahoma City, markets wireless services in rural and suburban areas under the Cellular One brand, serving about 1.7 million customers. Last year, Dobson got 22% of its overall revenue through roaming partnerships with major U.S. wireless operators such as AT&T Inc. T-Mobile USA Inc. However, it is becoming more difficult to sustain those partnerships as competition intensifies in rural markets and large carriers build out networks to previously underserved areas. The company focuses in several Midwestern states, parts of the Southwest, Alaska and upstate New York. Lately, it has expanded its reach by acquiring smaller operators. Dobson's competitors include such carriers as Alltel Corp., Rural Cellular Corp. and US Cellular.

So, why anybody would be interested in Dobson? For potential buyers, Dobson offers access to markets where cellular penetration is not as high as in major metropolitan markets, thus leaving more room for future growth. However, roaming partnerships with larger wireless carriers will be difficult to maintain. Further, Dobson receives funding from the federal government's "universal service" fund to finance its network build-out in high-cost areas and the FCC is considering a cap on how much carriers like Dobson could receive. That would seriously limit its expansion. In my opinion, this is a happy story for everybody. Dobson should sale the company for a considerable profit (especially in these market conditions), whereas any big wireless carrier that buy them would gain additional cellular coverage without making huge capital investments. More to come for sure.

Business Week: Back from the Dead

Today, I won't be writing anything. I'm simply referring to Business Week's cover story from June 25th, 2007, written by Spencer E. Ante.

The article is an in-depth analysis of the bounce-back in the telecom sector after it hit rock bottom in the early 2000s. Not surprisingly, the popularity of IP/Internet-based video is seen as key factor for the telecom resurgence.

Very interesting data point from the article: "About half of the Internet's transmission capacity was going unused in 2002. Today that pipeline has almost doubled in size, and yet the unused portion is down to about 30%." Though significant challenges are in front of us, there is plenty of optimism in the market with a lot of growth opportunities, such as IPTV.

Enjoy!

http://www.businessweek.com/magazine/content/07_26/b4040001.htm

What is Qwest’s future?

Qwest Communications International Inc. CEO Richard Notebaert has announced plans to retire from the company he has run since 2002. He will step down once a replacement can be found. Notebaert took the helmet from Joseph Nacchio, now in prison, while the company was in the middle of an accounting scandal that left it $26 billion in debt. Mr. Notebaert helped Qwest stop the bleeding enough to return profitability. But the increase in earnings has come as a result of a cost cutting strategy rather than a growing business. While the company is certainly far healthier than it was a few years ago, it relies on partners to help it in the key telco growth areas of wireless calling (offered by reselling Sprint Nextel Corp. services) and residential video (offered by reselling DirecTV Group Inc. services). So, what is Qwest’s future?

While Qwest's peers AT&T Inc. and Verizon Communications Inc. aggressively pursue their own fiber based video strategies, Qwest has taken a conservative wait-and-see approach to see what customers will end up demanding the most in the future. The company says it’s watching the IPTV pioneers and will continue to experiment with several ways of delivering video services to its customers. Let’s take a look at the four main ways that Qwest sees to reach consumers with video service.

Traditional choices
ChoiceTV is Qwest's VDSL-based TV service that passes about 500,000 homes, mostly in the Phoenix area. It's offered over a fiber-to-the-node (FTTN) network with NextLevel hardware and software. Qwest doesn't have any big expansion plans for ChoiceTV. But Qwest does note that an IPTV network is the next generation of a service like ChoiceTV. There are no plans to upgrade immediately but an upgrade would give Qwest the ability to use stronger video compression technologies and more interactive services, as well as offering its own digital video recorder (DVR) service.

Qwest's satellite star DirecTV
Throughout most of Qwest's 14-state footprint, the carrier sells an assisted triple play, a voice, video, and data bundle of services, where DirecTV's satellite TV service makes up the video part of the deal. Qwest describes this as a very successful partnership but won't comment as to whether the reseller model is really a big revenue winner for anything other than DirecTV. What it does is give Qwest something to sell to prevent subscriber move to cable. But the relationship may change in the near future, Qwest says, as it could use its DSL connection to homes to provide a video adjunct to what DirecTV beams down from satellites. That is a video on demand opportunity, which would integrate broadband with DirecTV to provide additional integrated capabilities.

Qwest's broadband video plan
After a long period, Qwest says it will launch a broadband VOD service available to its customers who have PCs running Windows XP or Windows Vista operating systems. The still nameless service will be co-branded with Microsoft Corp.'s Windows Live platform. Qwest says it will be working on deals with content providers to make free, pay-per-view, downloadable, and searchable video content available through this upcoming service.

What about IPTV?
The company says it is preparing to be a "fast follower" in the IPTV space, as soon as it sees the technology and services catch on. Qwest's FTTN expansion will be big, but it will be gradual. And, as such, the carrier isn't saying much about the scope of its plant upgrades. Qwest’s fiber network can provide 20 Mbit/s of bandwidth. Obviously FiOS (Verizon) can provide higher. The question is how much bandwidth do you need? Clearly, Qwest and AT&T both think they can satisfy what the customer demand is. There is some good judgment to the Qwest "fast follower" approach. “If you are sitting on $13.4 billion of net debt like Qwest, you don’t have the luxury of thinking about a massive FTTH deployment", says Heavy Reading senior analyst Stan Hubbard. "And that may turn out to be a good thing from a strategic point of view in the near term, as this whole battle between IPTV and Internet TV plays itself out." Definitely, more to come of this, but I think the IPTV alternative will ultimately be the winner.

Juniper to launch the T1600

Juniper Networks plans to sell a new core router, called the T1600, in the fourth quarter of 2007 that will direct Internet traffic for large networks such as telecoms and cable television companies. The T1600 has higher capacity and density than Cisco’s CRS-1, with lower requirements for power and cooling. It will be Juniper's first major upgrade to its core router line-up in five years.

It is true that Juniper will likely gain share in the router market in 2008 with a new product due for sale later this year, although rival Cisco Systems will not cede its dominance. Today, most analysts estimate Cisco's market share in core routers to be around 60 percent, compared to around 30 percent for Juniper.

No question that this was a much-needed move for the company after it lost share to Cisco's high-end router, the CRS-1, in the past few quarters. Telecoms carriers and cable television companies have been upgrading their networks to handle increasing data traffic, including Internet-based video services, which require advanced core routers. So, Juniper really needed to make a come back in high-end routers if there are in fact serious about competing with Cisco.

What’s the real impact for Cisco? Probably, very little. This is more good news for Juniper than negative for Cisco. The T1600 certainly does improve performance. However, any shift in market share is likely to emerge in the second half of 2008 into 2009, and Cisco could also announce some improvements to its CRS-1 in the meantime. Some analysts said Cisco and Juniper will remain leaders in core routers for a while, but there may be more competition ahead from French equipment maker Alcatel-Lucent and smaller firms like Foundry Networks. However, with the heavy investments required to develop such types of core routers, there is modest risk that it would affect market share for Cisco and Juniper.

iPhone’s launch countdown

Apple Inc.'s imminent iPhone is quickly rising in the ranks of popularity before it has even hit store shelves. It is almost exceptional that we know so little about a high-profile mobile phone this close to its launch. For now, we know that the 4GB model is priced at $499 and the 8GB model at $599. However, the true price of a mobile phone is a combination of the device's price, the applications it offers and the price of the service contract.

For instance, an unlocked expensive phone that features GPS support and VoIP applications can save considerable sums over a period of two years. That's because its users can switch freely to low-cost mobile service providers, substitute it for a dedicated GPS device and use WiFi for long-distance calls. Of course, there are lots of unknowns. How well do consumers factor in long-term cost and substitution? How much do they care about mobile VoIP's cost-saving potential and the ability to switch carriers? At this point, there are no right answers for these questions, just speculations.

Apple and AT&T, the iPhone's exclusive distributor, have battled over many issues in their deal. In fact, some of Apple's demands were so unusual that they drove away Verizon, the original choice for the iPhone carrier. Thus, AT&T became the only alternative in the U.S., as Sprint-Nextel and T-Mobile would be too small for a major launch like this. This gave AT&T genuine leverage over Apple and that has likely resulted in some restrictions that may turn out to be controversial.

So, what’s the real interest and demand for the iPhone? M:Metrics, which tracks wireless trends, found that iPhone has gained the attention of 56 percent of British and 64 percent of U.S. mobile phone users who are aware of the new touch screen phone. The survey also said that 19 million Americans reported a strong interest in buying the iPhone, and two-thirds of about 11,000 polled are subscribers on other carrier networks. This is an early indication that AT&T's strategy to use the device to attract customers from competitors could pay off. Let’s wait until June 29th to see how this story plays out.

Here comes Warner Bros.

Warner Bros. plans to release selected movies to video-on-demand services at the same time they come out on DVD in a test that may probe whether Hollywood can expand one distribution method without hurting another. Today, Warner and other studios already release downloadable copies of movies onto online sales services such as CinemaNow and Movielink on the same day they come out on DVD.

The idea seems to be an attempt to influence consumers to rent movies from video-on- demand services rather than from retailers who rent out physical DVDs. Economically, it may make sense. Studios typically keep 15% to 20% of revenue from video-store rentals, compared to 60% to 70% of a VOD rental. So far, so good. But then it comes the tricky part. The studio wants to do that without cutting into the sale of DVDs to consumers, one of its most important revenue streams. In the past, we’ve seen never-ending stories of cannibalizing revenues at the expense of new products, so it’s hard to predict the outcome. However, based on data from several cities which already tested the service, Warner believes it won't cannibalize DVD sales, because the advertising it does for the VOD also boosts DVDs.

I think that Warner Bros.’s move into video-on-demand is just the beginning of something much bigger. And that is movie distribution using the Internet. The final result, again, is very difficult to foresee, but without question Warner is heading to the right direction.

Mike Volpi joins Joost as CEO

Mike Volpi, a Silicon Valley executive and former senior vice president at Cisco Systems Inc., was named chief executive of Joost Inc., which distributes television programming over the Internet. Joost, started in January 2006 and based in London, makes software and runs a service that lets makers of content such as television shows stream their programming to consumer PCs equipped with Joost software. Consumers view the shows on the full-screen of a PC and with Joost software can also instant-message and search for content on the service. The Joost service also collects a lot of information about its users, which the company will use to attract advertising.

Mr. Volpi comes to the start-up after a 13-year career at network-equipment maker Cisco, where he helped drive an aggressive acquisition strategy in the 1990s that fueled the company's growth. Most recently, he headed the company's $11 billion division that builds network equipment for telecom companies and network providers. The appointment punctuates a boom of new-media companies that are racing to establish businesses supplying video and television content over the Internet.

No question Mr. Volpi is ready for the position. Joost has the opportunity to make a huge impact on television; however, it also represents big risks and challenges. Nevertheless, at 40, Mr. Volpi has already proved that he is up to them.

Finally Private Equity won the battle for Avaya

On Monday, private-equity firms Silver Lake and TPG Capital agreed to pay $17.50 in cash for each share of Basking Ridge, N.J.-based Avaya. The buyout represents a 28% premium above Avaya's closing price of $13.67 on May 25, the last day prior to initial reports about a potential sale. Other companies in the telecommunications-equipment industry, such as Cisco and Nortel, also showed an interest in acquiring Avaya, but the high price offered by TPG and Silver Lake pushed them to the sidelines. Analysts say those companies might eventually renew interest if TPG and Silver Lake succeed in making Avaya more profitable.

By going private, Avaya executives say they'll be able to move faster to improve the company and worry less about meeting the short-term concerns of public investors. Yet the acquisition does nothing to diminish competition in what's a very tough market. Avaya has been battling Cisco Systems Inc. for the right to supply corporate customers with Internet-based phone systems. Other major rivals include Nortel Networks Corp. and Siemens.

So, what did Silver Lake and TPG see in Avaya that was so attractive? If they can work their financial and operational magic again, the equity firms should be able to reinvigorate the company and perhaps resell it at a profit. However, such a process could take three years or longer. Avaya’s business is very complicated to manage, that’s why equity firms have asked senior management to stay on to run the company. But there will have to do some tough restructuring.

First, the new owners have to fix Avaya's lower margin and less predictable service business and reduce the company's 20,000-strong workforce, even though no major layoffs are expected. Secondly, Avaya has to continue to invest significantly to retain its leadership in the corporate phone market. Actually, competition is intensifying in this space as a lot of players are trying to get into it. Aside from operational issues, Avaya and its new owners need to figure out how to generate faster sales growth, boost market share and improve mid-single-digit profit margins. Stronger growth is expected because of an anticipated global upgrade cycle. Corporations want to combine separate phone and data networks into one system to trim costs and take advantage of the new features offered by Internet technology. Let’s see whether management is up and around for the monumental challenge.

Google: Mobile Strategy in the Works

Few people could argue that Google is putting lots of efforts and resources to bump up its cell phone strategy. Eric Schmidt, Chief Executive at Google, said the Internet company’s mobile strategy centers on building software applications for cell phones as well as a platform on which other software developers can build. But there is much more flavor on his plain statement.

Google's strategy for cell phones has been identified as one of the company's priorities as it tries to extend its services and advertising to the roughly two billion consumers world-wide who use mobile devices. But to be successful, better mobile applications need to come out to the marketplace. In fact, Google is cooperating with telecom operators to develop new mobile applications. They have already discussed bringing such enhanced applications and services to market with at least two of the three major U.S. mobile carriers, AT&T Inc. and Sprint Nextel Corp., and several operators in Europe.

Today, Google already offers some mobile applications on a stand-alone basis, such as the Gmail email service and Google Maps. Problem is that they aren't available on all phones and carriers and aren't integrated into a single Google suite of services. Further, the small screen size of phones means that some mobile Internet services must be different from those used on computers, which makes developing new applications even more crucial. A Google's spokesman said the company has talked with handset manufacturers in Asia about putting all its applications into a line of new devices, but he didn’t provide any details.

Also, rumors are that the company is building its own operating system to run a suite of mobile-phone services. Even Mr. Schmidt said many more Google mobile applications are in the works. To be sure, the combination of a new set of phones with innovative applications is going to be person-to-person experience with people exchanging videos and other types of data. I still remember the first time I sent out an SMS (Short Messaging System) message from my mobile phone back in the 90’s. With all this new cool technology coming out soon, the experience will be like SMS on steroids.