It seems pretty clear that the motivator behind the acquisition of BellSouth is to acquire the forty percent stake in the Cingular Wireless joint venture that AT&T doesnt already own. Cingular has been on a growth trajectory for some time, and it seems only natural that AT&T would want to capture all of that growth.

We can bank on the return of the AT&T brand to the wireless space if this merger goes through. How will AT&T manage this to maintain the goodwill contained in the Cingular brand?

On the fixed line side there are some serious issues that should get sorted as part of the DoJ and the FCC review of this acquisition. This has to do with comments made by both AT&T and BellSouth executives related to applying premium charges to particular types of traffic or certain content providers. These have been very troubling suggestions to turn the model for pricing of Internet access completely upside down, and the RBOCs have been employing some very unilateral language in how they are going to go about putting this model in place. The timing of these comments have been clearly a reflection of the perception within the Bell companies that theyve consolidated sufficient market control to tell the rest of the value chain whats what. Review of this acquisition is an opportunity to really clarify what is and is not going to be acceptable. Of this issue the WSJ had this to say:

Although AT&T and Verizon’s last mergers passed both FCC and Justice Department review with little major problems, the latest proposed merger may face more hurdles. Recent comments by AT&T and BellSouth executives about their intentions to explore new revenue streams from their high-speed Internet services by introducing two-tier or “premium” service for Internet content providers. Concerns about those plans and the concept of “net neutrality,” or ensuring that consumers have open access to all Internet sites and services and businesses do not find their content slowed, has become a major problems for the Bells in Washington.

Ive been thinking a lot about the notion of tiered pricing and premium content, and Ive been making some comparisons between all-you-can-eat fixed line broadband Internet access compared to the pricing for wireless broadband content. There are some consumer dynamics that I think the RBOCs are ignoring or forgetting, and this is the fact that their efforts to sell premium, tiered wireless broadband data content have basically gone nowhere. Who the hell wants to pay $3 to download a Shakira video from Verizon Broadband!?!? I wouldnt watch a Shakira video if you paid me $3! If you dont believe me, take a look at this entry from Om Maliks blog summarizing two surveys on this topic from RBC Capital and the disconnect between mobile carriers and consumers on the topic of wireless content. The walled garden model clearly isnt working in the wireless space.

Tags: Net Neutrality

I’m not going to continue to belabor why I really don’t think Skype is worth all that, but rather point to a source that could be said to disagree with me. This article from Lightreading references a voice over Internet traffic analysis conducted by the firm Sandvine to claim that Skype accounts for nearly half (46.2 percent) of the voice over Internet minutes used in North America.

Sandvine claim to have concluded this by monitoring traffic on cable and DSL broadband networks. I’m not sure that’s necessarily the best methodology, because I would be concerned that PC to PC calls would likely be counted twice– once at each end of the call, while PC to phone calls (such as SkypeOut or Gizmo’s Call Out function) and voice over Internet phone to traditional phone calls (such as those offered by Vonage or AT&T CallVantage) would only have those minutes counted once. Somebody could argue that its appropriate to count the minutes on both end of a PC to PC voice over Internet call as VoIP minutes, but if so PC-to-PC clients are always going to have a 2-for-1 advantage. I would argue back that VoIP to PSTN callers should be given odds if this is to be a fairly-measured horse race if we count those PC-to-PC calls at both ends.

If I had more time I would be doing a LOT more analysis on the figures Sandvine are quoting as well. I don’t take them at face value, and I’m curious to know how their final determinants of total VoIP minutes consumed in North America compare to other estimates of same. Also, I’m always a little wary of the vaguer “North America” over the names of specific nations included. I’ve seen too many analysis firms use fuzzy regional designators to be satisfied with that. I will concede that Sandvine probably are more specific in their actual report, but not all firms are specific and many play games like this to avoid direct comparisons of their work to other firms. Even the relatively straight-forward sounding “North America” is rife with considerations about whether or not Mexico, Central America or the Caribbean islands are included.

Do I even need to make the point that minutes are one thing but dollars are something else altogether, or has this late 1990s retro fad taken such hold in business that we once again believe that revenue doesnt matter anymore?

The same MarketWatch piece references over 50 million Skype customers (a press release from Skype issued a few days ago says that they have 553 million customers). Clearly this number does not reflect the number of downloads, because according to this blog entry which references an AP article Skype crossed the 100 million download threshold in April 2005. Seeing significant details on actual usage by Skype customers is hard to come by.

Skype are attributed as having an expectation of $50 to $60 million in revenues this year. Since Skype is a private company there are some key details, such as profits, missing from these details. Most of this is going to be from fees for add-on services such as SkypeOut calling to standard telephones and the SkypeIn feature that allows users to receive Skype calls using regular phones.

There’s some more data in this piece from Forbes, which states that Skype has over 2 million SkypeOut customers. At a minimum EUR 10 (approx. $12.40) per SkypeOut account (at least at the start) there is a minimum of $24.8 million in revenue since the launch of SkypeOut in July 2004. Considering the big brand competitors such as AOL, Yahoo and Google coming on board with VoIP calling, it remains to be seen how Skype are going to increase the penetration of SkypeOut among their installed user base or otherwise get customers to commit to significantly higher usage of Skype to drive average revenue per user up to deliver on their revenue targets. There may be other opportunities for revenue with Skype Voice Services for call centers and content providers, but it’s hard to see where Skype sees huge revenues here, either. Some of the breakdown for Skype and partner TellMe’s take on the total revenue for Skype access to content looks pretty daunting, and content providers might shy away.

The Forbes article title best reflects why I am most skeptical about the high valuation of Skype: Skype Proves Anyone Can Sell Phone Service. This is very true, and with AOL, Google, Yahoo and other big brands entering this space, things are going to get extremely crowded.

One thing I don’t expect users will tolerate in this space as well as they’ve tolerated in traditional instant messaging is the lack of cross-platform operability. I don’t expect users to tolerate the notion that they can only speak to their friends and family on the same platform. If services such these are ever expected to replace traditional phone lines (a concept which I know is highly debatable) interoperability is a must. By comparison, imagine that a Cingular customer would ONLY be able to call other Cingular customers, and that user would be out of luck to call a Verizon Wireless or T-Mobile customer. Even more strangely, imaging if you could only call other people using Nokia phones. Right now, if youre a Skype user, you can only use the software to talk to other Skype users unless you pay for SkypeOut minutes to talk to someone via a standard telephone number. So, if youre using SkypeOut to dial out, and your buddy is using whatever AOLs equivalent of SkypeIn will be (where they have a number people can call on a regular phone to talk to them via their voice over Internet software), youll BOTH be paying for the call regardless of where in the world you both are locatedand voice over Internet is supposed to be the end of per-minute charges. OR one of you switches voice clients, which serves to alienate you from your other friends with an installed base of said client. OR you run multiple software clients, which is just lame, lame, lame.

This entry is all over the place today, I will admit. My own being all over the place reflects everything that’s been going on with Skype this past week or so (or maybe its just the cold meds). Suffice it to say that I think the rumors, if true, reflect a far over-valuation of Skype. I should hope eBay come to their senses.

Disclaimer: I am one of Skypes 53 million customers but not a very thrilled or even a paying one. Ive only used it a few times with friends in the UK, and just wasnt really all that impressed with anything above and beyond being able to talk for free. Ive come to enjoy the Gizmo Project voice over Internet software from SIPphone much more for some reason, and there seems to be a greater commitment to interoperability with the folks at SIPphone. Thats just what voice over Internet needs if its going to succeed.

The article points out that the talks are in a very sensitive phase and could potentially fall apart, so nothing is set in stone. Either way, the fact that eBay is involved in these talks at all is a very interesting development. This seems like a strategy right out of right field and only tangentially related to eBays core competency– and only then if you use a lot of imagination and perhaps drink a lot of hard liquor. The Journal points out that eBays core revenue is reaching a likely plateau, so maybe this is a good strategy for diversification.

One thing I do hope eBay doesnt do, for their own stake, is overpay for Skype. Theres been a lot of hype about the market capitalization of Skype and likely suitors, one such rumour indicating that News Corp. was considering offering $2 billion for Skype. Granted Skype has a large base of downloads and has made impressive inroads into an already very crowded market for instant message software, but some studies have indicated that usage for the service on a per user basis has gone down significantly as the user population has grown. Perhaps Skype has yet to reach a tipping point in terms of penetration, but Im of the opinion that its potential as a platform for ad-based revenue (which is where I would see eBay going should it acquire Skype) is somewhat limited unless eBay could find a way to make Skype sticky for those people who download it.

Specifically the DoJ are requiring the liquidation of assets is rural Arkansas, Kansas and Nebraska. It seems the DoJ have some growing concern over the lack of competition for wireless services in rural markets.

Having spent a lot of time in a rural market when I go home to visit my family it always amazed me how very different the rural market is. For one, the cast of characters is different. Alltel are almost unheard of in the major coastal markets, as are the Midwestern carrier US Cellular.

One consequence of this that I have noticed is the choice of handsets is narrower, usually favoring the inexpensive end of the spectrum, and therefore the equipment has a tendency to be less feature-rich. The customers tend to be much more oriented towards simple voice services and maybe SMS, with skepticism about the utility or functionality of advanced data services.

Coverage is KEY in these markets and to these subscribers, who have to cope with large areas in which they regularly travel having a complete lack of coverage. Rural customers also see the negative aspect of poor inter-carrier roaming arrangements, incompatible wireless standards and equipment more readily than those of us in the big cities. For example, customers using US Cellular’s CDMA network might find themselves out of luck in a location where they have no signal but that has service from the likes of Nextel, which use the iDEN standard or even a Verizon Wireless CDMA signal. The general lack of roaming agreements and cross-standard equipment hurts rural customers the most.

Truth be told, if the DoJ wanted to ensure quality coverage in rural America, they would do well to entice a little collusion in those markets by facilitating joint ventures to build out network facilities and roaming agreements among carriers. Wireless penetration is generally less in rural America, and theres room to grow average revenue per user (ARPU), so rural markets represent one of the last frontiers in wireless growth.

I’m not entirely surprised, but these back and forth leaks from “unnamed sources” often do have an element of truth to them even as corporate parents are denying them. Please note that even the piece references by Forbes denying that Deutsche Telekom is not going to sell the unit is citing more unnamed sources.

Perhaps these dueling sources are the same ones spreading rumours that Valerie Plame’s identity was compromised by Karl Rove.

The cost of upgrading the T-Mobile USA network to support next generation data technologies is evidently the sticking point for Deutsche Telekom. Unnamed analysts referenced in the Reuters piece indicate that an upgrade to third generation wireless technologies (UMTS, I presume they mean) would cost approximately $10 billion. This price tag sounds a bit high to me.

According to one piece Ive read, Vodafone are not considering making a bid for T-Mobile USA. Vodafone are 45 percent partners in Verizon Wireless. The heartbreak for Vodafone has always been around the issues of brand and technology. On the brand front, Vodafone have worked very hard in their European markets to build a leading telecommunications brand. On the technology front, Verizon Wireless run their network using CDMA, which is not compatible with the GSM network which predominates in Europe. This puts Vodafone in a tough spot, not even able to leverage their US property for the benefit of their European customers roaming in the United States. They must lease roaming capacity from GSM carriers Cingular and T-Mobile USA and cede back significant lucrative roaming revenue to those carriers. Verizon have indicated several times a willingness (nay, enthusiasm) to buy Vodafones stake in Verizon Wireless, and put options have come and gone for Vodafones stake.

It remains to be seen who could make an offer for T-Mobile USA. If the executives and Vodafone truly are not interested, it may not be a carrier, but rather a set of wealthy investors, that make the bid for T-Mobile USA. With Cingulars acquisition of AT&T Wireless and Sprints pending merger with Nextel, the wireless market is well consolidated with four major wireless carriers.

These unsubstantiated figures come from TNS Telecom 1Q 2004 report linked here. I have modified the numbers in the report to reflect completed and pending acquisitions. Also please note that market shares have shifted since 1Q 2004, with a general recognition that Verizon Wireless have gained market share since the completion of the Cingular acquisition of AT&T Wireless. Here is a Forbes story on that shift. For the record this is market research on the fast and cheap.

When one looks at those numbers, it is difficult to see any room for an outright acquisition based on likely objections to a market that is seen to be too rapidly consolidating.

One possible scenario I would like to posit, as a purely speculative possibility, is that Vodafone would sell their stake in Verizon Wireless and purchase half of T-Mobile USAs infrastructure, creating a GSM infrastructure joint venture. Vodafone and T-Mobile would then effectively become mobile virtual network operators (MVNOs) on the new joint venture network. This would infuse sufficient cash to allow the third generation investments to take place and give Vodafone the freedom to enable roaming and establish their brand in the United States. This could work so long as the immediate technical way forward was agreed and capital investment agreements put in place.

A few days back I wrote about some potential applications of social networking. It seems the guys at Google are way ahead of me on this, and have this week snapped up the start-up social networking operations of Dodgeball. Im sure theres some potential for Google to combine the mobile element with their social network site Orkut. It will be interesting to see where this goes.

Over all this is good news for MCI shareholders, customers and employees alike. Verizon brings much deeper pockets to the situation. Deep pockets which are needed to re-build a still badly-wounded MCI.

In the end, I actually think this will be a better result for Qwest, too. There just was no real room for Qwest to achieve the synergies they needed in order to make this deal cost-effective. You just cant wring that much out of MCIs operations. This company has been battered down so much from the WorldCom collapse that its like a skeleton crew is running the ship. An acquisition by Qwest would have destroyed both companies. It appears to me that MCI’s major customers realized the extreme impact Qwest’s custs would have had on the level of service they would receive from the merged company and made their opinions known.