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European Research Notes |
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Internet Strategies Europe
by Scott SmithEvent
On November 5, Ahold, the Netherlands-based global food retailer, will flip the switch on Albert, its new home shopping service that will host its five key Dutch domestic brands. Online shoppers will be able to purchase goods from Albert Heijn supermarkets, Gall & Gall wine and liquor stores, the Etos health and beauty chain, De Tuinen natural products stores, and the DeliXL institutional foodstuffs unit. Key to this is that all brands will be present under one interface, with one payment for all stores rolled up at the end of the transaction.
Market Impact
Ahold's Albert service is notable in that, following Tesco's huge UK success and the transfer of its know-how to the United States through a partnership with Safeway, the once moribund home grocery shopping market has now leapt to life, and competition is heating up. While there in no direct geographic competition between the two grocery giants in this service, Ahold's substantial U.S. holdings mean it can test a concept in the Dutch market, then execute in the United States and other markets. It is also a notable commercialization in Europe of technology and process learned from the U.S. online grocery pioneer Peapod, of which Ahold owns 58%.
Recommendations
Ahold:
- If Ahold can make a quick success of Albert, it stands to be able to transfer the lessons and practices to other markets. The remaining hurdle will be addressing markets where centralized distribution breaks down due to regional clustering of stores and distances needed for distribution.
- A good experience should be quickly taken out to other Ahold holdings in Europe, particularly in Internet-dense markets like Sweden.
Competitors:
- One of the most important aspects of what Ahold is announcing is the multi-brand, single portal aspect of Albert. Such a strategy allows the company to achieve real economies of scale in IT, as well as reinforcement of brands not possible in the physical retail world. Tesco and those like it can only do this by developing new service brands underneath the single Tesco umbrella. Brands such as Kingfisher could follow Ahold's lead.
- Common IT infrastructure and a clear view of IT investment priorities is what has enabled companies such as Tesco and Ahold to make successes of online home shopping services. Ahold itself points to its intention to reinvest up to $3.15 billion of internally generated cashflow in common IT platforms and database sharing.
Convergent Communications Europe
by Jonathan DoranMarket Event
At the end of October, the North American investment company, Liberty Media was reportedly in advanced negotiations to purchase Germany's third largest cable operator, Telecolumbus, for as much as US$1.25 billion (€1.38 billion). The deal would bolster Liberty's plans to become the country's biggest cable multiple system operator (MSO), pending regulatory approval to acquire six of Deutsche Telekom's (DTAG) regional networks for US$4.97 billion (€5.5 billion). Meanwhile, in early September, another U.S. investment firm Callahan Associates International (CAI) took a 60% stake in DTAG's Baden-Württemberg network, along with options to purchase the remaining equity in this and the Nordrhein-Westfalen network, which it acquired last year.
Analysis
Germany is the latest of Europe's main cable markets to undergo consolidation, following the incumbent's long-delayed sale of its infrastructure. Another major MSO, UPC, had also set its sights on securing a position within the region's biggest market, having acquired stakes in two independent operators, PrimaCom and EWT/TSS early in 2001. However, the company is no position to continue the aggressive expansion with which it is traditionally associated. UPC, like so many others, is suffering serious debt problems, with its share value falling by 97% since. LibertyMedia, which already owns 45% of UPC's parent, UnitedGlobalCom, is planning to acquire US$1.55 billion (€1.72 billion) of UPC's debts, a move which would enable it to take control of the troubled MSO for an estimated US$200-$300 million (€221-€332 million).
Recommendations
- Following on from Liberty's earlier US$910 million (€1.01 billion) loan to UPC earlier in the year, the planned debt purchase is sure to help revive investor confidence in the ailing company.
- Players such as Callahan and Liberty are taking bold steps in an increasingly unsure environment and their acquisitions show encouraging signs of faith in the potential of Europe's broadband cable industry.
- However, these consolidators are taking on a huge burden of debt as well as future commitment to infrastructure upgrade and service development. Over the next few years they will face an increasingly difficult job of securing further finance for their rollout plans while continually striving to appease their creditors.
- Once consolidation of the German cable market is settled and rollout is underway, operators' biggest challenge will be to persuade customers that have received multichannel TV for years at minimal cost, that the proposed broadband and interactive services are worth the price hike required to yield a return on investment.
Convergent Communications Europe
by Justin Neville-RolfeMarket Event
Telia, under pressure from the regulator, has backed down on a planned 28% price rise for fixed telephony. The charge, which has already been implemented for some customers, saw the monthly line rental increase 28% from €13.5 (US$12.20) to €17.2 (US$15.60). Comparative (residential) line rentals in the Nordics are €15.1 (US$13.70) in Norway, between €9.7 (US$8.80) and €12.7 (US$11.50) in Finland, and €12.2 (US$11.00) in Denmark. Prices in Germany, France, Spain, and Italy are all close to €10 (US$9.00) and in the UK line rental is €13.9 (US$12.60). The proposed new price would make Telia the most expensive basic line rental in Europe. The company says that price rises are required to continue provisioning of Sweden's superior telephony system, which is more expensive per capita in Nordic countries. The price rise would have added 3% to Telia's group revenues.
The regulator plans to coordinate a new pricing strategy for Telia and its competition, which should be implemented by the middle of 2002.
The Analysis
In the past, call charges have subsidized access charges. However, wholesale prices, which supposedly reflect the real costs, are regularly higher than the retail price in many countries. In order to offer a wholesale price that allows a competitor to compete with the incumbent telco, the retail price from the incumbent telco must be higher than the wholesale charge to competitors. This can only be satisfied if the retail price increases or the wholesale price is reduced. Additionally, since regulators discourage cross-subsidization between access revenue and call charges, access revenues must increase if they don't cover the incumbent's costs.
The regulator is in a difficult position. The consumer must be protected from unnecessary price rises, Telia's competitors must be able to purchase wholesale access lines cheaper than Telia retails them, and yet, Telia cannot be expected to subsidize wholesale lines from which it receives no call revenue. Unless the regulator can demonstrate that Telia is overestimating its costs, the result next year will be a price rise to satisfy the second two criteria, but we would be surprised if it is as much as 28%.
Telia will want to raise the access charge as far as possible, even if it has to throw in free local calls or other similar benefits to the consumer. And by reducing dependence on call revenues, it also minimizes its exposure to customer churn.
Recommendations
- Telia has in effect started the bidding at 28% by introducing this price rise and the regulator will have to come back with an alternative bid. The regulator will have to negotiate this rise to the lowest value that allows competition to offer wholesale access, or instead prove that Telia's analysis of its costs are wrong, and even though they have been compiled in accordance with EU directives, the company is overestimating its true costs.
- Competitive telcos looking to own the customers through an offering that includes the access line—mostly companies wanting to offer DSL—will be most interested in the mark-up between Telia's retail price and the wholesale price rather than the actual price level, apart from the affect of market price on the overall adoption of broadband; and
- However, if the regulator determines that Telia's costs are indeed what it says they are, it will also need to find out why, and see if there are ways in which it can bring the Swedish incumbent into line with its European peers.
Wireless/Mobile Europe
by Declan LonerganEvent
In the week beginning October 22, two of the world's largest mobile operators reported some important third-quarter (July to September) performance statistics. They talked primarily about trends in customer numbers, revenues, ARPU, and utilization of mobile data services. On the whole the results were encouraging, though the pace of ARPU stabilization and data service growth must be seen as steady rather than spectacular.
Market Impact
First, let's look at some of the key trends and statistics revealed, focusing here on ARPU and data services:
- Vodafone reported slightly improved total ARPU in Germany, Italy, and the UK, compared with the previous quarter, but a further decline when measured on an annual basis;
- Data services accounted for 9.1% of the group's total revenues in the year to September 22, compared with 8.7% in the year to June;
- For Orange, ARPU remained more or less stable in the UK, but continued to fall in France (down by 10% in the third quarter of 2001 compared with the third quarter of 2000); and
- For Orange, the UK also leads France in terms of mobile data contribution, with 11% and 3% of revenues derived from this source, respectively.
Conclusions
- In a challenging economic climate, both companies have turned in some solid operating results. The Vodafone Chief Executive Chris Gent even went as far as to say that the ARPU stabilization now being achieved is occurring a year sooner than they had anticipated. This trend has come partly at the expense of slower customer acquisition, as the operators increase their focus on high-value customers. Nevertheless, these latest figures from Vodafone and Orange lend further weight to the Yankee Group's view that ARPU in Europe will bottom-out in 2001, and begin a steady climb thereafter.
- The results for mobile data service contribution to revenues are also right in line with our expectations, though Orange in France continues to suffer from low penetration and use of SMS. Based on these results, however, we are reassured that our recent projections for mobile data to contribute 36% of European operators' service revenue by 2006 is very achievable.
Storage Management: Vital to Storage Area Networks
enbav2n14, Report, October, by Jamie Gruener
Long Haul Carriers' Carriers React to the Marketplace
wcsv1n11, Report, October, by Nancy Bedard
Application Integration and the Changing Face of Middleware
wmtv2n13, Report, October, by Francesca Mabarak
Technical Issues Involved in Implementing Next-Generation Networks
wmtv2n14, Report, October, by Phil Marshall
Wireless Messaging Solutions for the Enterprise, Part 1: An Overview of the Options
wmsv2n13, Report, October, by Linda Barrabee
Network Integration Services to Carriers: by System Integrators and Network Consultants
cciv2n13, Report, October, by Jay Patel2001 Media Gateway Market
cciv2n14, Report, October, by Mindy Heibert
Supply Chain Management for the Communications Vertical, Part 1: The Next Market Opportunity
tebv2n13, Report, October, by Sharon Ballard
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November 8 2001
An Internet Market Strategies Audio Conference
Determining the Business Need for Streaming Media Management and Retrieval SolutionsNovember 15 2001
A Wireless/Mobile Services Audio Conference
Wireless Data in the Enterprise: A Segmentation AnalysisNovember 16 2001
A Telecom E-Business Audio Conference
Supply Chain Management Solutions for Communication Service ProvidersNovember 19 2001
A Convergent Communications Latin America Audio Conference
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