MARAVEDIS

Business managers and industry analysts must anticipate a range of possible scenarios from favorable robust growth and market position to radical restructuring of the status quo based on feasible market and economic conditions.

Doing a what if 'brain salad surgery' extreme extrapolation can lead to a possible Armageddon business scenario for incumbent mobile wireless operators:

Why discuss disaster scenarios? The incumbents have a huge advantage: massive cash flows and market position. That also leads to volume efficiencies for networks and services. A current winning situation.

But let's face it, the American economic juggernaut has gone from one bubble to the next based on world wide expansion of markets that soak up the irrational exuberance of an ever more lofty derivative economy. Following close behind, and in some cases out-besting the walk to the edge of the economic precipice, the UK and some other economies are in equal if not more vulnerable circumstances. Consumers of goods and services have become detached from producing like value. Derivative financial instruments, the point of the pyramid scheme, create little of usable value. The ability to absorb international float that has grown into the trillions of US dollars is now unwinding, hopefully in an orderly fashion due to spending which adds to the mind boggling national debt. The economic stimulus plans, however well calculated they might be, add to the deficits and perhaps prevent some of the realignments to a less top-heavy economic structure. Only Bernie Madoff could pass off the current situation as sustainable.

So we thought we would take a leap off the edge of the cliff with this article which hypothesizes on the collapse of mobile operator revenues. Come to think of it, this has been contemplated by operators and suppliers for several years: what if the shift to IP networks and services were to result in operators becoming wholesalers of fat pipe broadband? Progress has been made to that removes some of the doubts that customers can be held to the flypaper of sticky packages and hot new devices. Nonetheless, the threat of open IP services running over the top on IP broadband leaves an uneasy feeling with mobile operators.

The Shoe is Yet to Fall for Incumbent Operators as the US Economy is Restructured:

Major international mobile telecommunications companies have developed into debt leveraged enterprises that are dependent on the huge cash flows generated from mobile phone subscription and services revenues. Debt coverage ratios that business schools would have once ruled as extremes have become the commonplace if not the norm. This has seemed tolerable given the leverage that licensed operators have in critical mobile phone service revenues.

However, much of the control over cash flows stems from control over consumer spending that in turn derives from the mobile phone ecosystem that is now changing hands from operators to the combined device-OS-apps trilogy suppliers ushered in by the Apple iPhone. But this lock-in can be viewed as a transition to a flatter open supply environment now depicted by Google Android.

Open apps on iPhone like open access devices (unlocked, Android and other open OS/apps phones that can be used on any network without contract lock-ins) become the norm. That continues to shift the control of the services to the user and apps-Internet and away from operators.

The Incumbent Build for Demand vs. Revenue Squeeze Hypothesis:

Verizon, AT&T, BT and other debt leveraged operators find their mainstream revenues evaporate into thin air... into the cloud. Almost overnight...3-5 years, the incumbents witness a game changing set of events that they are powerless to avert: Users flee packaged services to open source ala carte over-the-top alternatives offered over flat-rate broadband operators including their own deleveraged BB pipe services.

VERIZON 6/30/2009:

Current Liabilities (in 000s $ U.S. )
Accounts Payable 14,685,000
Short/Current Long Term Debt 5,440,000
Other Current Liabilities 6,243,000

Total Current Liabilities 26,368,000
Long Term Debt 59,469,000
Other Liabilities 38,604,000
Deferred Long Term Liability Charges 17,737,000
Minority Interest 40,149,000
Negative Goodwill -

Total Liabilities $182,327,000,000

AT&T 6/30/2009:

Current Liabilities
Accounts Payable 26,064,000
Short/Current Long Term Debt 10,155,000
Other Current Liabilities -

Total Current Liabilities 36,219,000
Long Term Debt 66,565,000
Other Liabilities 45,768,000
Deferred Long Term Liability Charges 20,354,000
Minority Interest 403,000
Negative Goodwill -

Total Liabilities $169,309,000,000

The resulting calamity is they are sitting on costly infrastructure and operations that their revenues no longer support. Some become burdened by heavy debt loads that requires them to drastically restructure, off-loading network operations to all but strategic capabilities and core spectrum assets (Sound familiar? - e.g. Sprint).

Source: Nokia Siemens Networks March 2009 - Heading modified

Incumbent operators must balance spending on new network deployments, marketing and operations costs to develop and support new networks and the pressure from competition to ride the successive waves of devices, network functionality, and new services. These are matrix decisions for which there are few if any pat answers.

Given the Armageddon scenario, looking back in five years, WiMAX and LTE have been the disruptive 'all IP' wireless Ethernet services in the hands of the new operators and open services segments within incumbents. These next generation low cost infrastructure and services capabilities become not just competitive but they cause a drastic restructuring of the operator business model. Some licensed operators help adjust to this by shifting out of a facilities based model to a service and marketing model. Even though WiMAX and LTE extended operators do not reap similar fat ARPUs as the beleaguered incumbents once enjoyed, they grow lean but healthy businesses based on a lower cost and more efficient structure that is welcomed in the 'New Economy' of the post economic bubble restructuring. And new business developes that operators engage in with various levels of direct participation, resource leverage, and degress of success.

---

Epitaph:

AT&T and Verizon are broken up under bankruptcy proceedings. The shells of the former companies cater to key markets: AT&T to their closest constituents - government, and fortune 500 corporations. Verizon, hunkered down to streamlined packaged services as a 1/5th sized shell of its former self.

Feet Back on the Ground: Is This Scenario Possible?

If the U.S. derivatives economy is forced to rapid economic adjustments that deleverage trade and government deficits, then yes, this scenario is within the range of possibilities. It is not at all outside of the realm of possibilities that the financial structures of AT&T and Verizon would require dramatic restructuring to prevent collapse if a deep recession were to take place. The chances of that occurring now look slim but the underlying problems have largely not been solved because of their scope and systemic nature. It may be argued, in very simplistic terms, that the American economy is too 'top heavy' because some industries have been accommodated over others to the extent that they raise costs. Medical, military and similar industries are a direct cost but also raise the level of the overall cost structure in which all companies must compete. If that contributed to favorable export trade commensurate with the costs, the structural impact on the economy would balance. But it doesn't. As with any business, the economy has to balance between goals and attainable reach: too much spending, too little regulatory controls, too little investment in basic research, education and export oriented industries and too much reliance on internal consumption is unsustainable and becomes an effective tax on us all.

This drastic 'Armageddon Scenario' is not likely. There is merit in contemplating extreme 'what ifs', so often considered on the upper range of possibilities than the Armageddon scenarios.

A very plausible flow of industry events over the foreseeable future as the economy adjusts to leaner spending habits will see smaller mobile operators under pressure, leading to consolidation to the extent allowed. Consolidation is very likely to continue for equipment suppliers: as strong competitors have emerged from China including Huawei and ZTE, North American and European suppliers have consolidated. Going forward it is likely that further consolidations will take place.

Nokia's new CEO, Rajeev Suri, has recently said that the remaining half dozen leading suppliers would consolidate down to three.

While we generally agree with the view, we also think that the market will become layered: while we will see greater use of WiMAX and LTE to fill a wider range of applications that overlap both mainstream consumer, cloud ICT and specialty niche supply ecosystems, an environment will also develop around more diverse broadband applications, many of which the large suppliers are either unsuited or too large and slow to move to master. Wireless will become more like the IT industry which has witnessed a dramatic leveling of media and applications development: users become a primary source for content and applications creativity. Moreover, the networks remain essential but become secondary to the devices, content and applications that run over them and increasingly more diversely sourced. We already see this take a toll on Nokia: no better example of the changes reshaping the industry is the relative failure of Nokia OVI efforts to garner the degree of success that correlates with the degree of investment and corporate emphasis: Nokia OVI had only 10 million downloads as reported in Moconews and elsewhere over the first three months. This contrasts with downloads of Apple iPhone applications downloads of over 2 billion among the over 65,000 available. Google Android downloads trail by a large margin but have seen a ramp corresponding with the availability of devices and plug-ins.

How do the incumbents build 'buisiness partnering frameworks'? How do they leverage their important tie to subscribers? There are new opportunities that can outweigh the challenges but little should be taken for granted.