Putting things in context a bit, readers will appreciate that telecoms are generally not the most vulnerable industry when it comes to inflation. At the same time, they are not immune from inflationary pressures. In developed markets, for example, Telecoms are only a small part of the typical consumption basket. According to Eurostat, Telecom services make up only 3.3% of a typical consumer’s consumption basket in Europe.

Little revenue impact of inflation: For telecom incumbents, inflation has little fixed-line revenue impact. The big picture is that, in general, regulations worldwide do not provide a supportive environment for passing on price increases (or reductions) to consumers. Wireline operators and wireless operators in competitive markets have the additional issue of a lack of pricing power to push price increases on to consumers.

Taking Europe as an example, with the exception of a few countries (e.g. Belgium) there is little direct inflation linking of retail prices. Regulators worldwide are increasingly focused on wholesale pricing and the latest EU overhaul of the regulatory framework eliminates almost all retail price regulation. We think that the absence of regulations at the retail level actually reduces the ability of operators to pass on inflation-linked pricing to consumers, primarily because of a lack of pricing power and the increased level of competition.

Looking line-by-line at incumbent fixed-line revenues in Europe, we reach some interesting conclusions:

•When it comes to ADSL, voice, and leased-line tariffs, once again, we think that most operators (wireless or wireline) are constrained by the level of competition and regulation in the telecoms sectors in most global markets.

•When it comes to wholesale tariffs (including interconnects), our analysis shows that these tariffs are mostly cost-based, so there is a pass on effect. However, most fixed-line operators are only able to pass on increases in costs after they have been incurred, creating a lagged effect on the top line of past inflation. Also, in countries where future assessments of price increases are used, equipment costs need to be depreciated and netted out before cost increases are passed on to wholesale customers.

•The only inflationary revenue stream tends to be line rentals, but recent increases have been limited to only a few incumbents in Europe (British Telecom, France Telecom, Telefonica, and Belgacom have raised line rentals in 2007). There may be several reasons for this inability or unwillingness to pass on price increases to consumers. We think that operators may be wanting to avoid accelerating migration to mobile or ULL.

For mobile operators, the story on the revenue impact of inflation is pretty much the same. Using IEMR’s Global Mobile Forecast model, we show that for the 2002 – 2007 periods, average ARPU growth among 200+ mobile operators in 50 markets is generally not related to consumer price inflation in these markets. In the figure below, we plot Inflation against ARPU growth, and find that the relationship is weak at best.

While the terms of the agreement were not disclosed, the agreement does include up-front payments, ongoing royalties and pass-through rights - similar to the structure Qualcomm has with other handset vendors. I view this settlement as a positive for Qualcomm as it lifts a major pall on the future direction of the company and strengthens the company’s strong royalty position in the 3G handset market.

Potential for a 10% upside to EPS: Qualcomm has in the past discussed an exclusion of about 25¢ to 30¢ of EPS from Nokia. Discounting a preferential royalty rate for Nokia (Nokia’s statement that the new agreement lies within its original expectations, leads me to believe that a 25% - 30% discount on royalty rates is prudent); and also assuming a $150 - $200 million decline in legal fees; I think that net net EPS upside of 20¢ or 10% upside to Qualcomm’s EPS estimates.

Deal is a positive for Nokia as well: Strategically, I think that this deal is a positive for Nokia as well. In its current “fourth screen” strategy, Nokia needs the assistance of innovators like Qualcomm if it is going to dominate the next generation of mobile multimedia devices. A deal with Qualcomm opens the doors to a closer working relationship in chipsets and an improved position for both Nokia and Qualcomm in LTE (4G wireless), where carriers has been reluctant to start deployment before a clear industry view on patent ownership and royalty rates.

I also think that Qualcomm has probably signed some kind of a cooperation side agreement with Nokia for expansion into North America.  This is because, as part of the agreement, Nokia will have rights to use Qualcomm’s technology including Mediaflo (which is only currently available in the United States with carriers and broadcasters). 

Investors should disabuse themselves of notions that TD-SCDMA will be the albatross that will have an impact on China Mobile and its share value. China Mobile’s management, brand, network, subscriber base, and business models are second-to-none in the world and the other operators in China’s telco space have a VERY long way to go to compete with China Mobile. Moreover, its long-term expansion strategy is based not just on urban consumers but will happen in rural areas of China.

Is the decline in China Mobile’s stock justified? China Mobile’s share price declined sharply on mention of possible asymmetric policy introduction in the government’s public statement of Chinese telecom industry restructuring. We think that the market over-reacted, especially given that China Mobile’s management has always viewed TD-SCDMA as a necessary choice over a possible regulatory penalty and that there is a high degree of co-operation between MII officials and China’s largest mobile operator. In other words, we think that MII is not going to risk value destruction of its most valuable asset (the largest operator in the world) by announcing a policy that favours other telcos over China Mobile.

Moreover, capex, subscribers and services of TD-SCDMA are all under the unlisted parent company and should have no bearing on the listed company.

Will urban wireless competition affect China Mobile? If we assume the worst case scenario in the post-restructured Chinese wireless space, there will be three wireless players compared to the current two. The disposal of the CDMA business by China Unicom will help it focus on its GSM business while China Telecom emerges as the new CDMA player.

The difference, therefore, is that China Telecom will be the new competitor in China’s cellular space. However, readers will recall that back in 2002 and 2003, China Telecom defied regulations to deliver inexpensive mobile services in the form of PAS. We think that PAS convinced many consumers to try mobile services, brought down overall mobile pricing, and helped to expand the customer base for the cellcos’s (China Mobile and China Unicom).

The problem is that China Telecom will live with that brand image as a provider of low-cost mobile services for a very long time to come. So how does its acquisition of a CDMA network allow it to get traction AND beat China Mobile’s GSM network in a relatively higher-priced urban market? No one has been able to explain that logic to us. Further, compared to China Mobile, China Telecom has much to learn about branding, marketing, and provision of value added services in the mobile space, let alone try to manage a cellular network.

When all is said and done, we think that China Mobile is still unbeatable and Unicom and Telecom have a long way to go, with or without TD-SCDMA.

This relatively secure position is set to change, dramatically. Vodafone now has mobile products available as direct substitutes for both the home phone and broadband connection.

Vodafone eating away at landline, broadband, and mobile verticals: Vodafone recently launched another home phone replacement product, “Local Zone” which allows for a mobile to be used to make unlimited landline calls while at home. These offers are incremental to existing Vodafone mobile plans. The local zone product is Vodafone’s second direct challenge to TCNZ’s access revenues following the “Home phone plus” service. Costing as little as $25 per month, Home phone plus is a direct home line replacement using the 3G or GSM network. Customers plug their landline phone into a Vodafone box which plugs into the wall for power but uses the mobile network for transmission. This can be bundled with wireless broadband and various calling options.

Vodafone is targeting select groups with these products, tradespeople and others that operate home offices. However, we believe that this could have much wider appeal, making it much more practical for households to disconnect the landline and go mobile-only.

Competition in wireless broadband in NZ is still in its early stages. Vodafone enjoys a speed advantage over TCNZ by offering services over HSPA compared to TCNZ’s EV-DO network. While monthly charges are the same for both Vodafone and TCNZ, Vodafone is more competitive in terms of subsidizing the upfront costs of accessories such as laptop cards. Vodafone is also bundling wireless broadband with its Home phone plus service, offering 1GB of data each month for an additional $40, or 3GB for $60.

What strategies are open to TCNZ? Like most incumbents in developed markets, TCNZ faces declining earnings in the traditional fixed line business. We expect a sustained decline in access and calling revenues which will only be partially offset by growth in its broadband base. TCNZ will have to look at mobile, IT services, and strategic expansion into overseas markets to ensure that its revenue and profits continue to meet investor expectations.

Wireless broadband is becoming a major driver of revenue growth for mobile operators in other developed markets. We believe this is a prime opportunity for TCNZ following the launch of the WCDMA network. However, TCNZ will likely be reluctant to address the market aggressively ahead of bringing the new network online. This has been an element in the decline in TCNZ’s wireless data ARPUs as the limited growth of wireless broadband has failed to offset pricing pressure on SMS/messaging products.

Wireless broadband pricing is likely to get much sharper as Vodafone and TCNZ duke it out. At the same time, margins on wireless broadband are exceptional (85% - 90%). TCNZ should be aggressive at utilizing its network capacity and address some of the in-roads made by Vodafone into its core customer base.

Our 2008 Global Enterprise Telecommunications Survey shows that while there is a need felt for TEIM systems and services, most suppliers of these services may not be meeting the demand criteria of their customers.

Here are some results of what is important to Global 2000 enterprises when it comes to TEIM solutions:

Global 2000 companies are looking to outsource TEIM functions. This is good news for companies such as ProfitLine, Control Point Solutions that offer BPO-based TEIM offerings. 66% of Global 2000 companies (329 out of 500 companies surveyed) felt that having a supplier that is capable of completely taking on all TEIM solutions on an outsourced basis, was an important value proposition when it came to selecting a TEIM vendor (rated 5 – 7 on a 7 point importance scale).

Pure software licenses or ASPs may only get traction among Global 2000 enterprises that have a geographically diversified workforce and only in specific industry segments. The executives we surveyed did not feel that a “software-only” or a “software-plus-ASP” model was an attractive value proposition for a TEIM solution. Only about 10% of respondents (50 out of the 500 respondents) felt that a software only or software-plus-ASP model was an important factor when selecting a TEIM vendor.

Value-added managed services such as telecom price benchmarking, RFP management, and carrier negotiations may need more traction among Global 2000 TEIM customers. Given the increasingly competitive environment in the TEIM vendor space, many TEIM suppliers have added new functions that traditionally have been outside of core or ancillary TEIM capabilities. For instance, many BPO/managed services TEIM suppliers (like ProfitLine) are entering the lucrative telecom price benchmarking, request for proposal (RFP), and service provider negotiations markets. Our survey results suggest that uptake of these value-added managed services may be slow among Global 2000 companies, with only 16% of Global 2000 companies saying that these value-added managed services are an important factor when considering a TEIM vendor.

Regional Presence close to Head Quarters of Global 2000 companies is important. IEMR’s 2008 Global Enterprise Telecommunications Survey found that most Global 2000 companies prefer to have their TEIM services rendered close to Head Quarters (HQ). 64.6% of respondents said that having a TEIM supplier delivering services in the country where their HQs are located was important. 

Given current SME demand for managed services, positioning of these services is going to be key to sales success. Value-added resellers, hardware and software vendors, and telecom service providers need to focus their sales and marketing efforts on a few key points that are top-of-mind among SMEs.

Here are some results on the managed services section of our 2008 Global Enterprise Telecommunications Survey:

Global SMEs are demanding managed services: IEMR’s 2008 Global Enterprise Telecommunications Survey has found that global SMEs, firms with 6 to 999 employees, are turning to managed services to address their telecommunications technology and networking needs. Our data shows that, approximately 62% of SMEs in our global panel of 3,200 respondents use managed services such as VoIP services, network security services, email, and network management services. The incidence of managed services increases with the size of SMEs with those employing 500 – 999 employees statistically more likely to deploy managed services compared to SMEs employing 6 – 99 employees.

Demand for managed services is strong in the financial services, media, and IT sectors: Our survey found that demand for managed services among SMEs is fairly strong across various sectors covered. Global SMEs engaged in banking, business services & supplies, diversified financials, insurance, media, software & services, and technology hardware & services are statistically more likely to use managed IT and telecom services.

Key value propositions for managed services are: total cost of ownership savings, service quality, focus on the core business of SMEs, and an in-market presence: We asked our SME panelists to rate some key value propositions highlighted by most value added resellers, systems integrators, hardware vendors, software vendors, and telecom service providers that compete in the managed services arena.

Absolute “must haves” for managed services providers when dealing with global SMEs include security, data integrity, and integration into existing corporate systems: While value propositions are important as a marketing and sales tool, going the managed services route raises a number of concerns and issues with IT managers at SMEs. Our 2008 Global Enterprise Telecommunications Survey found that network security, integrity of data, and integration into existing corporate systems are three of the most important “must have” factors stressed by SMEs across the board.