A Pilgrims Progress: Cable & Wireless

As promised we have been keeping a close eye on Cable & Wireless UK operation.

Since the reverse merger with Energis, things seem to have gone pretty well. Certainly the CW people we meet are increasingly chirpy.

As well as showing a notable turnaround in the companies stock market position, they have continued to fare well in the IP Services market and despite some apparent weakness in the web hosting area, they retained their top 3 position amongst the FTSE350 companies and most impressively have experienced no significant churn amongst their largest Internet Access customers.



The chart above is a unique profile of C&W customers segmented by turnover, based around a normalised or "neutral" axis. As you can see C&Ws profile shows a heavy bias towards major accounts and the upper mid-market. Whilst at the smaller end typically served by business DSL their presence is well below the line.

This striking new data supports the decision by CWs management to sell off their struggling Business DSL business to PIPEX. PIPEXs profile by the way is an absolutely perfect match for that low-end of the market.

Having cast off the burden that was Bulldog, cleared out the first layer of unprofitable customers, CW seem to have made it through the Wicket Gate, but still some way to the Celestial City and BackChannel will be there to keep an eye on "their" Progress.

NB: If anyone would like a free copy of the PIPEX, THUS or Verizon profiles please email steveb"AT"backchannel.co.uk, "AT"=@.
NBB: John Bunyans The Pilgrims Progress is available as a free audio book from Librivox , a really different commuting experience awaits you.
NBBB: We promise no more Pilgrims Progress references

Telstra market share slides as former PTT cancels NGN investment.

Rather like its stock price Telstra' share of the business IP services market continued to slide in the first half of 2006.

As the markets tee up for the Australian governments sell-off of 1/3rd of its remaining holdings in former PTT Telstra, BackChannels latest research shows that the G9 Consortium, led by Optus(Singtel) and Powertel continues to pile on the pressure at the high end.

With its market share amongst ASX200 companies slipping to just 30%, Telstra CEO Sol Trujilo must view data for the highly deregulated UK market with trepidation. Here former PTT British Telecom' share of the large business accounts is just 18.2%.

Remarkably for the market leading telco, the company has announced that it has cancelled investment in its Next Generation, or Fibre To The Node (NGN/FTTN) Network. Saying that it prefers instead to wait for the G9 consortium to roll out their own NGN and they will happily buy wholesale bandwidth from them. This could well be a political gambit aimed at reducing the pressure from the Australian regulator , which Telstra has increasingly blamed for its poor results claiming that meddling by the ACCC is impacting its ability to compete fairly.

For a developed country like Australia it is untenable to not have a NGN network spanning the country, and in reality it is unlikely that a consortium like the G9 would ever really be able to come together and roll out a national shared infrastructure, which leaves either the government (hmm, what do you think), or Telstra.

For the momnet it looks like a Mexican stand-off, but Telstra knows what all former PTTs know, ownership of the physical infrastructure. is key to long term survival in the Telco market and that owning the cables will always you give the upper hand.

Service Disruption

Our apologies to those of you trying to reach the BackChannel website this week. This is due to our service provider 186k pulling the plug on our service, and seeming to be unable to get us back on line.

Having raised a couple of trouble tickets recently we also noticed that the incremented numbers on the trouble tickets indicate that they are receiving an staggering number of new trouble tickets a day.

For those who are interested our TT numbers are 180462 and 187683 raised 5 working days apart, therefore 186k are getting 1,444.2 new TTs every day.

186k is a B2B ISP owned by Yorkshire Internet entrepreneur Dominic Marrocco who also acquired Mailbox Internet, Elite, and a stake in Middlesborough based Onyx Internet in 2005.

Verizon Business drops to No.2 Access Provider to the City for the first time in 10 years.

Verizon Business drops to No.2 Access Provider to the City of London for the first time in 10 years.   

Verizon' slide continues their 2005 trend with competition from UK based IP service providers and high levels of customer churn taking their toll on Verizon' position.  Making BT the number one provider of Primary Internet Access to the largest FTSE companies.

Loss of client accounts to a competitor, or "Churn" is one of the most significant factors effecting telco profitability.  Verizon' churn of corporate accounts is around 12% p.a for this sample group.  BT are subject to a churn rate of 6% p.a.  in the same period.  These rates should be compared with THUS who have had 0% churn and a customer "acquisition" rate of 20% p.a.

We have mixed feelings about the change as both BackChannel founders and most of the team here have at some point worked for the company that has over time been Unipalm/PIPEX/UUNet/Worldcom/MCI and now Verizon, Steve having been with PIPEX on the day the doors opened.

THUS continue to power up the charts, while BT and Verizon tough it out for the top slot

The Summer season has seen some changes in market position amongst all players

THUS Plc continue their 2006 upward trend, moving up on Cable and Wireless and putting further distance between themselves and Telstra UK.

BT has also moved up and are now level peggings with Verizon Business for Top Slot in this league table.  

Verizons position is consistent with BackChannels wider UK market survey, which shows that whilst having a relatively small overall footprint in the UK, Verizon has a proportionately larger number of major accounts than average, reflecting the businesses historical focus on high end customers.

BackChannel Guest Blog at Telco2.0

The Telco2.0 initiative is a collection of like-minded telecom practitioners and stakeholders: investors, managers, analysts, consultants, suppliers and customers, looking for a sustainable economic model for connectivity providers. Among other aims, the initiative aspires to cure traditional network operators from the fear of dumb pipes. As those of us in the UK already know, utility businesses can be very profitable given the right cost base, and funding/pricing approach.

The golden rule (the guy with the gold makes the rules)

Surfcontrol,(SRF.LN) an Internet content hygiene company based in the UK, has just put down £20m for BlackSpider, one of a number of companies offering Email scanning services such as protection from Spam and Viruses. The spiders are also based in the UK, privately held and venture funded. Their business received £5.7m (£4.6m from VC) of investment in 2004.

Valuation of companies has always been more art than science, and has given rise to a myriad of methods for answering the question, "What's this thing actually worth?". Somewhere between DCF, revenue multiple, and book value, a deal is done and the speculation ends.

It is because valuations are so subjective that analysts are so very interested in recent transactions, benchmarking potential deals against what sold recently. Here is how the UK market shares break-down for BlackSpider and their competitors.


Given the hype levels surrounding managed services of this kind, it is interesting to note the level of penetration of the UK market. BlackSpider and their peers are only 10% into this market.

Secondly, when we look at those who make-up that 10%, not all is as one might expect.

(*) UK business market is comprised of the 80000 largest companies or organisations in the UK.

Messagelabs have capitalised on being the first into their home market, as you would expect they occupy the top spot with an overwhelming majority. However it will come as a surprise to many that BT's very own in-house service takes second place, with BlackSpider a distant 3rd. BT's customers are smaller in size than the others on this chart, but still their sheer number is impressive. Seeing this reminds me of report that crossed my desk from Goldman Sachs Investment Research (Rick G. Sherlund & friends) in January. Their report credited ISPs with the power to impact pricing of pure-play security service providers, by bundling similar services with Dedicated Access or making them easy "+1" sales at point of order. If you can find it, read it. Looking further down the list, the sleeping giant at the moment must be Frontbridge, now owned by Microsoft. The company has been pretty quiet in the UK, how much longer will that last?

Given BlackSpider's valuation of £20m and declared revenues of £1.8m, what can we say about the relative value of the UK business of the other players in this market? Or the whole UK market in total?



Using the BlackSpider transaction as a guide, Messagelabs UK business is worth £112m today (6x the UK customers of BlackSpider, 6x the acquisition price) and Frontbridge UK £8m. This valuation is based purely upon customer numbers.

BlackSpiders revenues were £1.8m, and it was acquired for 11x that. Our table has Messagelabs UK at about £10m in revenues, their annual report doesn't clearly break out UK numbers for just the message scanning business, but a figure of £40m revenue worldwide looks possible, meaning the home market is still responsible for 25% of revenues. A figure of £40m worldwide revenues would suggest a valuation of £440m (11x revenues) for the whole operation ignoring non message-scanning business units. Given the relative ease with which customers can churn from one service to another, does anyone really believe this multiple? Perhaps there was still a lot of cash on hand or assets of value in the £20m BlackSpider price. Figuring £5m of assets leaves us with an 8x ratio of price to revenues.

With any valuation model must come assumptions, and here we've a boatload of them. We assume that a BlackSpider customer has roughly the same value as any other customer in this market, we already know this is not the case for BT with its large number of tiny accounts. We assume that the overseas operations of BlackSpider did not significantly contribute to its valuation. As it happens, the company has no customers among the S&P500 or the ASX200 so this may not be such as bad assumption after all. As stated above we also ignore whatever portion of the £20m acquisition price was for assets and cash.

At the end of the day, something is worth what someone will pay for it.

THUS Plc "hot on the heels" of Cable & Wireless, again.

These updated figures come from BackChannels 2006 half year figures for ISP performance amongst the FTSE350, the UK largest commercial users of telecoms services.

THUS Plc power up the charts increasing their share from 4.6% to to 6.8% of this most valuable group of customers, adding amongst others United Utilities, Bodycote and Temple Bar Investment Trust to their list of major corporate customers

The first 6 months have shown mixed fortunes for the challengers THUS, C&W and Telstra. Whilst C&W continued to hold firm on high value Access services. Contender THUS are also putting some serious Surf between themselves and Aussie owned Telstra, who dropped to 4.3% this year.

Proposed deregulation in Europe ignores convergence

At BackChannel we normally maintain a neutral view on de-regulation, with all it's ups and downs without it there would be no public internet, no near universal Broadband etc. etc. But sometimes you have to hop off the fence.

The vision behind the proposed creation of a European Uber-regulator seems more suited to the mid 80's than the late Naughties.

Viviane Reding, the commissioner responsible for Information Society and Media has been speaking about possible moves by the European Union to increase deregulation in Europe by forcing the Former PTTs to 'structurally separate' their various telecoms business as was done by the UK regulators Ofcom in the early 80's.

The proposed deregulation would only effect former PTTs and would undermine the ability of these largely successful European Operators to compete in their own markets. Whilst at the same time handing a significant competitive advantage to US, Far Eastern and even Australian based companies, who would be able to leverage infrastructure and cross subsidise to their hearts content

The move would force them to break up their existing business, seperating telephony fixed from mobile, internet business from consumer each from the other and don;t even talk about content delivery. All this just as the technology starts to converge, just as companies gear up for triple and quad play, and just as interest in converged telecoms is starting to rise.

In future, virtually all telecoms services will have an element of Internet in their fundamental make up. So it will become technically impossible for Telcos to "Structurally Separate" Telephony, from Datacomms, from IPTV.

The impact of the cellular networks, the Internet and in particular the underlying IP (Internet Protocol) technology is largely missed in Ms Redings statement.

Pilgrims Progress

Cable and Wireless have set out on a seldom trod path, turning down unprofitable business and losing un-economic customers as a route to higher profit. As widely reported in the papers, the boss has gone so far as to offer the biggest "non-city broker" bonus scheme ever seen to the new management team. £220m ($390m) is a big bonus, and as you can imagine they have some serious numbers to hit.

CW is the number 3 UK Business ISP, and currently the top hosting provider to the London FTSE. Their published plans are to become the Armani of Telecoms, serving the top 3,000 companies with profitable and high value services.

As well as being able to see who is connected to the IP service providers, one of the things BackChannel is good at is tracking change, so over next year we will post up what we can on CWs performance, analyse the customers leaving & staying, and see if the team are on track for a monster payout.

Good luck chasing that bonus guys, this should be interesting.

Verizon market share slipping as BT and C&W close gap

After more than 10 years as the UK's No.1 provider of Internet services to big business, Verizon is close to slipping behind BT for the first time.

In 1997 Verizon predecessor UUNet/PIPEX share of the UK business market was at 45%. As WorldCom then MCI, Verizon has seen a sequential drop in market share, a trend that continued over the last 12 months. BackChannels current analysis predict BT will move into the No.1 slot within the next few weeks.

But it is not all gloom for Verizon - BackChannels figures reveal the fact that Verizon acquires customers faster than BT. If Verizon can reduce their higher than average churn, their ability to acquire customers will quickly arrest this slide. It will be interesting to see if the new Verizon team are ready to fight back.

Download free UK market data

Globalisation - Australian pipe power

Former PPTs and the power of pipes, has been a bit of a theme for the BackChannel team lately with clients showing interest in the coverage of smaller regional network operators.

This need to own fibre or copper to ensure that your company has a future, was recently highlighted by the re-merge of AT&T and BellSouth.

Unlike Europe and the USA, where government sell-offs, breakups and deregulation, have to some extent curbed the power of the former PTTs. Australia' is running about 20 years behind with the Howard government just now planning to sell it's controlling share in Telstra.

Australia, where the government has been accussed of letting Telstra ride rough-shod over the regulator, where Telstra has managed to defend it's corner.

BackChannel shows Telstra retaining a dominant position with 32% of business Dedicated Internet Access, where they pretty much own all the pipes, fiber and copper.

But despite what the alt nets would have you believe, Telstra don;t have it all their own way. Where competition is free of the constraints of access, that position is strongly challenged with business hosting market share at just 10% for Telstra noticeably behind OPTUS and WebCentral.

It is clear that the majority of ASX200 companies prefer to host with providers who offer a specialist, or more personal service.

This data was collected on the 30th January 2006 using BackChannels proprietary search engine and covers the primary web hosting of the Australias most significant companies.

The AT&T and Bell South - Failure of de-regulation heralds end of the public Internet

Watching AT&T and Bell South come back together is a little like watching Terminator 2, the once exploded body of the early ‘80s monolith slipping back together stronger and faster and more intimidating than ever. What does it mean, and how could it impact the progress of deregulation around the globe.

The US led the way in deregulation by breaking up AT&T and for a while it looked like BT would go the same way, luckily (sic) for BT OfTel was created (some suggested at the time this was in a bid to build some competition into the market, without damaging the BT floatation.)

Now the US is leading the reverse cycle and Europe is not far behind with a bumper few years for M&A already under way, EasyNet/BSkyB, CW/Energis, BT/PIPEX etc. etc.

Deregulation brought innovation, and hundreds of new companies into the national telecoms market; it is safe to say that without deregulation the Public Internet would never have taken off. There would have been no financial imperative, consumers would know no better and besides for business there was always x.25.

Now the experiment is over, IP has won and Big Telco is moving to leverage its control of the pipes and with them the Internet.

From reading Power of the Pipe, you’ll know we believe it is inevitable that the companies who own the fibre and copper will be the winners in the long game. For the national players in Telco and Media, like AT&T, BT, NewsCorp and Time Warner, their long-term growth relies on being able to close the network and own the triple play, delivering their own high value content to the consumer.

The merger of AT&T and Bell South is the auger of a consolidation that will progress country by country. Those companies that have invested in national copper and fibre over many years will snap up those who have invested in regional copper and fibre, closing the networks and charging for access to external sites like eBay, Amazon and even your email in the same way fixed line phone companies charge for calls to mobiles.

In USA for example AT&T CEO Ed Whitacre has been a vociferous opponent of of network neutrality, arguing that AT&T should be allowed to set up tiered services for bandwidth-eating companies. There, legislators are hoping to pass provisions that would prevent or limit carriers from treating different services differently, elsewhere in the world it isn’t even on the government agenda.

Will it happen? Yes, unless the regulators get the national governments to stop it. Can they stop it? No, not unless they are able to beat the interest groups who are already spending hundreds of millions to lobby congress.

Cable and Wireless - Reprise?

The markets have been very hard on CW over the last few months, but over the last few days the mood has started to turn, telling the world the business is "a crappy player in a crappier market" (their words), announcing staff cuts and an intent to lose 8000 customers from the books should have seen the stock fall through the floor.

However the presentation today by Richard Lapthorne and John Pluthero seems to have hit a number of cords. Fewer but more profitable customers, focus on reducing churn and building margins, reducing Capex by exiting unprofitable sectors.

For CW this re-positioning makes a great deal of sense, they have a significant presence in the FTSE350 and other potentially high value accounts, whilst the business overall hasn't exactly led the field in acquiring new customers in the last year or two, they have performed well in notably in Finance sector winning and retaining high value customers like Egg, HSBC and Prudential.

All the volitility in Telco is no doubt tremendous for the hedge funds but maybe, just maybe those analysts still following telcos will give CW a bit of space to prove that sound business fundamentals, like financial prudence and economic profit, have to return to the industry before the telecoms sector can stabilise.

Anyway, it will be a few days before we know if the city plans to punish CW for their audacity in coming clean.

NOTE - For those of you interested in ISP/Telco performance in the FTSE, BackChannel will shortly be publishing our 2005/6 report. This will be ther first time we have published data that drills down into customer churn, hosted services and market sector performance data for all the major business ISPs. This is the stuff that has previously only been available to our clients.

The Power of Cables

Something we noted recently when comparing the UK and Australian markets, is the similarity. Interesting as one has been deregulated for a number of years and the other moving quickly to further deregulation.

For instance:

The players: BT, Verizon(MCI) and C&W in the UK, and Telstra, Optus(SingTel) and PowerTel in Australia. One local former PTT incumbant, one large international and another local player struggling in 3rd place, then whole raft of others going into a consolidation phase.

In both countries the profile of service providers looks the same. A service provider is either excellent at Internet Access, or Data Centre Solutions e.g. Web Hosting, but never both.

What predicates success, well curiously those companies with cables in the ground are winning hands down on the Access services, those without are romping ahead in the provision of DataCentre solutions. Our research shows that this trend is accelerating with companies taking their access services from those who own the cables and hosting from companies that offer specialist services, or more personal approach.

When you have the data in front of you it makes a lot of sense, but the concern for the Cable guys is that with the growing dependency of business on Online services and the coming boom in consumer focussed content the value in the chain is moving more toward the Data Centre. All the fabled 'sticky services" are in the data centre and the cables are becoming a utility.

BT mulls £350m bid for PIPEX

Telco watchers have noted with interest recent speculation surrounding the future of PIPEX, one of the UK's best known suppliers of Broadband and Dial-up Internet access to small businesses and professional home users. The latest rumors are of a £350m (presumably cash) bid from BT. The job lot consisting of:

• PIPEX brand, less of a draw than it once was, still has cachet.
  
• Fast growing ADSL ISP, under margin pressure at the low end.
  
• Domain business, slick provisioning and low running costs.
  
• Hosting and Collocation, majoring on low-end shared servers.
  
• Wimax license, proof of concept trial, lacks capital for build-out.
  
• LLU proof of concept trial, but lacking capital for build-out.
  
• Seasoned management from the XO, GX, and PIPEX family.
  
• £12m cash.
  

Lots of obvious potential, strong broadband market share and growing, technical (but not financial) capability for entry into the LLU market, and an option on the future market for Wimax delivered services. With seemingly so much going for the business, some may be surprised at the premium of only £50m of this offer over PIPEX recent market cap.

Maybe BT knows something we dont'?
I'll leave you to chew on that while we move onto matters regulatory. One of Ofcom's largest projects has been the creation of a market for local loop unbundling. Simply put, granting the ability for other operators to place equipment in BT local exchanges and connect over the last mile directly to customers. The first mention I can find of Ofcom's (then Oftel's) support for unbundling was way back in the autumn of 1998. Formal announcement of a policy would have to wait till March 2000. Only now are we seeing in-scale deployments and smoother processes after many initial problems. Its been a long wait, and as former regulator David Edmonds described it a... "painful and often miserable process". Finally we have the beginnings of a competitive market in the last mile.

How can Ofcom wave through the removal of one of only a handful of potential market-makers in LLU at such an early stage? Providers have not yet finished LLU roll-out, let alone seen a penny of economic profit from what promised to be a disruptive technology. Perhaps if a deal does go through, conditions would be imposed similar to the failed BT/MCI merger of 1997, where certain business units would be spun out or sold to further buyers, if such buyers exist. One thing is for sure, after 12-18 months of deliberation and planning, what lead any such business unit may have had will have been lost to customer confusion and staff fatigue. At the end of such a process, you are lucky if either of the parties can maintain momentum. Which parts would BT retain? Wimax and the high volume, highly automated hosting and domain businesses.

Even if Ofcom is content to see a potential force in the LLU market de-fanged, why would PIPEX shareholders feel the same? After all, we have yet to see LLU deliver economic profit to shareholders, come to think of it.. we have yet to see broadband deliver sustainable economic profit. If shareholders bought into the growth story and the brave new world of broadband and LLU why would you cash-out this early?

Maybe the shareholders know something we dont?
What does this early surrender of a potential LLU player mean for other alternative network operators? With talk of C&W backing off from direct sales of its Bulldog products and going wholesale, when can the customer expect delivery of a rash of new and innovative products?

What if...
What if BT completes the build of 21CN just as the remaining LLU operators are delivering economic profit on their investments? We know that LLU is a 'bolt-on' and 21CN is a from-scratch new network, designed for lowest possible cost of delivery. BT then has the option of dramatically lowering prices, thereby stranding LLU investments of the competition just when their shareholders are due a return (or the bond holders are due a payment). Fire-sales, bankruptcy, and restructuring ensues (again) among the alternative providers while BT welcomes back old friends.

Maybe BT knows something we dont, maybe PIPEX shareholders know something we dont, either way both would do well to remember these rules:

• Something is worth what someone will pay for it.
  
• It takes at least 2 to make a market.
  
• Never forget the golden rule (The guy with the gold makes the rules).