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Wednesday, 11 May 2011

The unbearable heaviness of being… CEO of a European Telecom company: Multinational mobile phone behemoths seem totally clueless about their future, due to broadband internet and smartphones.

Being CEO of a multinational company is a job in the Champions League / World Series of doing business. Perks of these jobs are (a.o.):
  • A noble, luxureous car with chauffeur for your working days
  • A fast Italian, British or German ride for the weekends
  • Beautiful women that want to be in your ride when you drive it
  • A multimillion Euro / Dollar / Pound Sterling salary
  • A multimillion appartment at the most beautiful spots of the city as ‘pied-à-terre’
  • Free air time at every business radio and TV station in the Quarterly results-periods.

But sometimes I feel that it is not necessary to be envious of every CEO. Take for instance CEO’s in the mobile phone industry: the chairmen of English phone company Vodafone, Germany-based Deutsche Telekom / T-Mobile, Dutch phone company KPN Telecom or Verizon (US).

As a CEO of a large mobile phone company you suffer from the fact that:

  • Skype took away your expensive paid-per-minute phone calls (about €0.15 per minute) inside your own country and network
  • Skype took away your extremely expensive paid-per-minute roaming phone calls (about €0.50 - €1.00+ per minute) for calling abroad in and outside the European Union
  • Twitter / Whatsapp / Ping took away your even more expensive Short Message Service (SMS): €0.20 for sending 250 bytes(!) of information.
  • Youtube and other streaming video applications are sucking up your bandwidth, while your customers are complaining about the slowliness of your services.
  • You were so stupid to offer your customers unlimited bandwidth usage on their smartphone, if they would sign a 2-yr contract and buy an Apple iPhone for a lousy €150 and €29.95 per month
  • Everybody is angry with you, when you pinch off Twitter / Whatsapp / Skype and Youtube from your mobile internet access.
  • Your shareholders ‘smell’ that your earnings model is under heavy pressure from these developments and they are fearing a losing investment if they keep your stock.

But let’s be honest: the mobile phone industry has gained years and years of supernormal profits, due to the customer’s usage of mobile phones.

It is a fact that creating and maintaining a mobile phone infrastructure is much cheaper than creating a fixed telephone infrastructure:
  • In spite of this, the phone companies charged their customers much higher charges-per-minute for calls with their mobile phone than with their fixed phone. 
  • The costs of sending an SMS for the phone company is estimated (by me) at €0.0003 per SMS, so the profit is almost €100%. 
  • The costs of roaming (outside your native network) phone calls were such a disgrace, that the European Union (EU) put a ceiling on the charges to the customer. 
    • Unfortunately this ceiling only counts for phone calls within the EU. 
  • And last: children of 12-18 were lured into taking cheap subscriptions with ‘free’ mobile phones and extra high calling costs-per-minute. These children started to call and SMS themselves into oblivion, leaving their parents with phone bills, sometimes as high as €1000 / $1500 per month.

And now it seems that this business fairy tale is finally over for the mobile phone companies: their cash cows are slowly brought to the slaughterhouse by the likes of Twitter and Skype. And the CEO’s don’t know anymore what to do to reinforce their earnings model.

As these companies were more into competing with eachother and earning shareholder value for their stockholders, than in reinforcing and improving their network and reinventing themselves when the going got tough, the latest developments in the smart phone-market struck them by lightning.

The Financial Times ( and Dutch Business News Radio BNR ( wrote a number of stories on the utter panic in Telco country. I will show the pertinent snips of each of these stories:
Vodafone skips Footsie gains ahead of results
Vodafone missed out on the FTSE 100’s biggest gain in three weeks amid concerns that its results next week might disappoint the market. Its shares were one of only three blue-chip fallers in London as analysts cut numbers.
Profit warnings from KPN and Belgacom have pointed to smartphones cannibalising voice usage, suggesting consensus expectations for Vodafone’s margins still need to fall, Nomura said.
It cut forecasts to “pre-empt cautious margin guidance” at full-year results next Tuesday.
Credit Suisse also predicted that Vodafone Europe would miss forecasts for 2011, though it expected US and Indian operations to compensate.
Vodafone ended weaker by 0.3 per cent to 169½p even as all three brokers kept “buy” advice.
European telecoms groups feel the pain
Leading European telecoms companies provided a batch of disappointing results on Friday, underlining how they are getting hurt by economic, competitive and regulatory pressures.
Deutsche Telekom and Telecom Italia both released first-quarter earnings that fell short of expectations, and Belgacom issued a profit warning.
Investors have been fretting about European telecoms companies’ results since KPN issued a profit warning on April 21, and analysts said the latest slew of figures showed that revenue growth linked to rapidly increasing smartphone ownership among consumers was not offsetting competitive and regulatory pressures.
Deutsche Telekom reported revenue of €10.8bn from its continuing operations for the three months to March 31, down 9.8 per cent compared to the same period last year. Net profit fell 37.4 per cent to €480m.
The fall in earnings was most acute at the group’s operations in southern and eastern Europe countries – led by Greece and Romania – that have been savaged by the economic downturn.
René Obermann, Deutsche Telekom’s chief executive, accused European regulatory authorities of making matters worse, partly by insisting on steep cuts in wholesale charges for connecting phone calls to mobile networks.
However, Deutsche Telekom’s earnings were also depressed by T-Mobile USA, the group’s US mobile business, which lost 471,000 customers tied to monthly contracts in the first quarter.
Investors feared KPN’s problem was the start of a negative industry trend given rapidly growing smartphone ownership.
Deutsche Telekom suffers 37% drop in profits
Deutsche Telekom’s first-quarter earnings fell short of analysts’ expectations, with a 37 per cent decline in net profit stemming from weak performances at the telecoms company’s operations in the US, Greece and Romania.
The results highlighted why Germany’s leading telecoms group announced in March that it would sell its US mobile business to AT&T, in a $39bn cash and stock deal.
Deutsche Telekom sought to reassure investors by confirming existing guidance that it would generate €19.1bn of adjusted earnings before interest, tax, depreciation and amortisation in 2011.
Deutsche Telekom reported €10.8bn ($15.7bn) of revenue from its continuing operations for the three months to March 31, down 9.8 per cent compared with the same period last year.
The decline is partly explained by how, last April, Deutsche Telekom put its UK mobile business into a joint venture with France Telecom that has been named Everything Everywhere.
Deutsche Telekom reported net profit of €480m for the first quarter, down 37.4 per cent compared with the same period last year.
The fall in earnings was most acute at the group’s operations in European countries hurt by the economic downturn, led by Greece and Romania, and has been partially offset by cost-cutting at Deutsche Telekom’s German fixed-line and mobile business.
Tuesday May 11, stocks ’KPN Telecom’ toppled over at the Amsterdam Stock Exchange, in reaction to the presentation of the company’s future strategy by newly-installed CEO Eelco Blok in what can be considered his maiden speech.In the afternoon KPN dangled at the bottom of the AEX index with a loss of 3.3%.
According to analyst Victor Bareño of SNS Securities, the lack of financial targets poses questions on the sustainability of the profitability (ebitda) and the cash flow. Other analysts were also disappointed in KPN not setting financial targets.

KPN stated Tuesday that the dividend in the period up to 2014 will progress step-by-step to €0.95 per share. The free cash flow will amount about €2.4 bln in 2012. KPN discloses no turnover and profit targets.
These articles all seem to point to the same facts: the happy days are soon over for the large European telcos and their CEO’s are utterly clueless in finding a solution for their disappearing earnings models. 

It are not only the recent investments in the PIIGS countries with their disappearing prosperity and their more austere (calling) behavior, that puts the telcos to the test. The changing usage of smartphones will be the bigger issue in the end, is my opinion.

Although the earnings for Deutsche Telekom and Vodafone still seem enormous (billions of euros), it is a fact that these companies still don’t have a definitive answer to the changing usage of especially smartphones and tablets. Instead of being mainly used as a phone with on top of that some internet access, these devices are used as mobile office computers that offer all the advantages of wireless broadband internet with its gazillions of free services.

Pinching off all free services that threaten the phone company’s cash cows, is just as succesful as putting your thumb in the dykes and levies when the Mississippi is flooding. It might help for a while, but in the end the water runs over you, or in this case: the competion that does offer access to the free services of internet for a low fixed price per month. 

That the competition than will not earn as much money as the original telco’s did, is something that the new telco companies can account for in their business models. But the old telco’s will not win this battle in the end when they don’t change their attitude and behavior.

Hopefully it is not too late for the phone companies to think of a new business model: blaming the EU regulation and the competition is definitely not a winning strategy.

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