Thursday, February 23, 2006

Thank you 3GSM Barcelona

I'm not going to post a huge dissertation about the good and bad from Barcelona this year. You can get that from the newspapers and frankly I don't have the time having spent ALL of last week at the show and am now buried under a few thousand emails (WiFi at La Fira was pretty hit and miss and I was too busy partying at night).

Suffice to say, that I was very pleased with the show itself, the facilities at La Fira (except the WiFi), and the city of Barcelona coped very well! There were plenty of taxis and the restaurants didn't run out of food or drink! Lucky for them because the Eastern Research crowd I was with are notorious for their hunger and thirst.....

I will air one complaint here in the hopes that someone from Lehman Brothers will read it and fix it for next year. Lehman - your party at Shoko was lame lame lame. I showed up at 8.45pm (it started at 8pm) and all the food had gone. I had to blag a special plate of sushi for me and my colleagues. The place was dark and not conducive to networking. The cava was good, but the red wine was nearly undrinkable. All in all a big disappointment especially compared to the kick ass parties you've hosted before. Try harder next year. I hope you invite me again!

What's the difference between CAPEX and OPEX?

A buddy of mine was asking me how CAPEX really differs from OPEX. So I put this together for him. Please feel free to post a reply if I'm wrong about anything!

CAPEX is investment in the business. It adds shareholder value. But this new additional shareholder value is almost entirely created by the CASH FLOW created by the investment, not really the physical assets you buy, although there could be an element of this. This cash flow is why you invest in the first place and in the vast majority of cases is the prime component of the shareholder value that is added (ie stock price goes up). Assets depreciate so that value eventually disappears. What is left over is the cash flow. Put another way, CAPEX is the money you stump up today in the hopes of getting a nice stream of cash later on. Physical assets are merely a means to an end. Capital gains do play a part in it as well but let's keep it simple for now.

This is why telecoms companies who invested billions in networks are being sold off for mere millions. The assets are in the ground, and while not 100% depreciated, they will be eventually. Thus, the physical assets are for all intents and purposes worthless. What is valuable is the cash flow you can generate with those assets but this is plummeting daily because of the fall in bandwidth prices, hence the relatively small enterprise values we're seeing.

CAPEX can be externally financed. Collateral for debt financing can be anything you and the lender agree on. Anything. But all they care about is interest payments and getting their money back in the end. Equity investors are different - they're greedy. They want it all. If financing with equity, then you are in essence promising the entire future cash flow of the project to your investors.

OPEX is COGS, SG&A and R&D. It's what you have to spend in order to keep your business running. OPEX is deducted from your revenue to get operating profit. Put another way, OPEX is a measure of the (in)efficiency of your business. It has a direct correlation with enterprise value. You reduce OPEX (without hurting your core business), and you increase enterprise value. Lay off a bunch of people, and your stock price goes up.

More on the accounting of OPEX/CAPEX:
After all of your operating expenses (COGS, SG&A, R&D) are deducted from revenue you are left with operating profit, aka EBITDA. This number is the most basic measure of the health of the business. If you can't make money by selling your products then it shows up here. And warning lights should be going off in investor's heads.

It is from this pile of money that CAPEX is drawn from amongst other things like tax, interest to service debt, and anything left over is put in the bank or returned to shareholders. This is a very simplistic view but is more or less how it works.

EBITDA is also where cash flow and accounting profit/loss (aka earnings, EPS, net profit - all the same thing) diverge. I won't go into it here, but cash flow does have a direct bearing on how CAPEX is allocated in many cases.

I don't know of any variations internationally other than the ability to capitalize labor.

Wednesday, February 08, 2006

Mobile broadband at DSL prices? Maybe.

So, there's this new report by analyst firm Berg Insight which talked about mobile broadband and how it'll be 2006's focus for MNOs.

One quote jumped out at me: "3G networks upgraded with HSDPA technology are going to enable peak data speeds of up to 3.6 Mbps at the end of the year for the same price as a DSL service with comparable performance," according to Tobias Ryberg, senior analyst.

Then they go on to point out that whereas DSL and cable connections are only available at fixed locations, mobile broadband solutions enable users to access the Internet anywhere. That, plus the soaring notebook PC shipments (they esimate 120 million laptops in Europe by 2009) imply a strong demand for mobility. HSDPA will be the mobile broadband technology of choice.

I think it's pretty dubious that they'd price match DSL. The idea that mobile operators will not charge for arguably their only USP (mobility) by pricing the service at DSL levels (3.6M =~ 2 x DSL) seems unlikely. I would expect it will more likely be ~1Mb for DSL prices. Case in point - prices in the US for Verizon EVDO. Sure, operators in Czech, Sweden and Portugal are offering pretty cheap mobile data, but they're still trying to get customers to make the jump to 3G. And the download speeds are still only 384k as far as I can tell.

Eastern Europe will be interesting because of the lack of cable/DSL broadband. The MNOs are stepping up to the plate to fill this gap in the market. Will they create a cozy little duopoly/triopoly and not throw away their pricing power?

I think the consistent coverage of 3G in Europe will probably drive the prices down, but I do not think that MNOs will sell MOBILE BROADBAND without the MOBILITY premium. At least that's what they're hoping - we all know that the market ultimately will decide what value mobility actually has. We have all become very accustomed to very cheap bandwidth these days.

Perhaps the most interesting point of the report is simply the number of people using data cards. But where are the USB dongle and PCI versions for desktop machines? That would really bake the radio planner's noodle.......

Thursday, February 02, 2006

The beginning of the end of the walled garden

Leave it to the Nordics to sort things out (well, sort of). Granted, Saunalahti has been recently acquired by Elisa, but still, an MVNO has been allowed to offer 3G services. MNOs to date have kept their 3G cards *very* close to their chests and left MVNOs in 2G land. They paid billions for licenses and networks based upon flawed business models so I can't really blame them for wanting to keep the outsiders out while they work out how to get out of the shithole they've dug for themselves. So what does this new development in Finland mean? Well, MVNO's have no vested interest in sweating 3G network assets like the MNOs do, which is why the walled garden approach to content is ubiquitous with every MNO. For the MVNO it's all about brand and service quality and building market share. MVNO's will abandon the walled garden entirely by providing open internet access and building commercial links to 3rd party content/service companies rather than try to do everything themselves, ala the MNO. I'm hoping that Saunalahti still operates as a separate entity capable of making its own commercial and technical decisions rather than being forced to repeat the Elisa party line. We shall see.

With 3G finally in their kits, MVNOs will be the ones who actually make the mobile internet indistinguishable from the fixed internet, which is what every customer and their dog wants. Just wait until Virgin gets its paws on 3G. There will be a bloodbath.

From Telegeography, 2 Feb 2006
Saunalahti launches 3G
Finnish MVNO Saunalahti has launched 3G services for mobile handsets and laptop datacards over the W-CDMA network of its parent Elisa Mobile. Saunalahti is offering mobile broadband at speeds of up to either 128kbps or 384kbps for a fixed monthly fee of EUR19.90 and EUR29.90 respectively, without limits on usage. Elisa’s W-CDMA network currently covers around 30 major towns and holiday resorts in Finland. Outside the 3G network, Saunalahti’s service utilises Elisa’s EDGE and GPRS networks; the EDGE infrastructure covers major urban areas as well as road and railway connections.