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Will The Decline In European Handset Subsidies Impact Apple's iPhone Revenues? Sanford C. Bernstein Expert Analyst Details The Economics

67 WALL STREET, New York - July 25, 2012 - The Wall Street Transcript has just published its Wireless Communications & Telecom Report. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: 4G Infrastructure Capital Expenditures - Tower Cell Splitting - Global Wireless Spectrum Allocation - Telco Dividend Yields

Companies include: Verizon Communications Inc. (VZ), Nokia Corp. (NOK), Alcatel-Lucent (ALU), Vodafone Group plc (VOD), TIM Participacoes SA (TSU), Apple Inc. (AAPL) and many others.

In the following interview from the Wireless Communications & Telecom Report, Robin Bienenstock of Sanford C. Bernstein & Company discusses her outlook for the sector:

The other thing that you've seen in Europe is that you have this so called "Spanish experiment" going on, which is the Telefonica and Vodafone have removed handset subsidies on new customers, basically trying to see whether they can get out of the business, to stop subsidizing handsets. And in the Spanish market, they're clearly doing something. The other reason they're doing this is because there is increasing anxiety that they are falling behind in terms of LTE because they haven't been investing.

The other reason that I think you're going to see a lot more in the way of network-sharing deals is so that they can accelerate LTE, and hopefully get the same kind of revenue growth, because if you look around Europe, the only place that has had the highest GDP plus revenue growth has been Sweden. And Sweden had a network-sharing deal between Telenor (TEL.OL) and Tele2 (TEL2-A.ST). So notwithstanding those four different players, those two players actively consolidated their infrastructure, and the result was a much faster reward of LTE. They've had LTE in Sweden for a year-plus, and very, very significant revenue growth as a result.

One last thing that is changing is Deutsche Telekom's current plan for its U.S. business, which should come out in the first quarter, is to launch a new subsidy model for T-Mobile in the U.S. with a lot of marketing around their new network. That will be a big change to the U.S. market, is that as of Q4 there will be interoperability between AT&T and T-Mobile USA. As of 2013, there will be interoperability of devices between AT&T, Verizon and T-Mobile USA, which means that the U.S. is actually going to start to look - guess what - like Europe, more competitive because you'll be able to take your device with you. You will suddenly have the option of saying, "Well, actually, I don't want a new device." So now it's fundamentally just the level of competition I think in the U.S market.

TWST: Now please tell us about the trends in Latin America.

Ms. Bienenstock: OK. So from a high level, there are some really interesting things about Latin America. The affordability of wireless telephony in Latin America is lower than anywhere else in the world, so we have this chart showing basically the relationship of price per minute versus GDP per capita. And the price coming at in absolute terms is on par or indeed above the price coming at in Europe, and most cases, in Latin America. Obviously, the affordability is amongst the lowest of any place in the world. In a country like Nigeria, what happens is you drop the price and you get this huge spread of growth of new consumers, who have historically not been wireless customers. Suddenly, they're able to afford it.

In Latin America, you've got 100%-plus penetration in most countries. In some cases, it's 130%, 140%, and in some cases, it's 90%. But the point is that penetration is actually pretty high. As of last year, I think it was in March last year, 40% of Brazilians who had telephones could not afford to make outbound phone calls. So that actually becomes a social issue, because the good thing about very high mobile termination rates - mobile termination rates are basically a regulatory way of getting phones into the hands of lots of people immediately - mobile termination rates basically ensure that you can call someone, and you won't incur cost in terms of minutes on the person who receives the call. In the U.S., you pay for calls received and calls made, which makes sense, because economically that's actually how wireless networks work. In Europe, what they did is they said, "OK, what we'll do is instead of charging the consumer to receive a call, because they have no control over that, we will charge only the person who makes the call, and they as a result will have to pay a higher amount. The way we'll settle this between the operators is what we they call mobile termination rates, which is to see that the operators pay each other to settle the cost of receiving the call." Does that make sense?

So in the U.S., basically you pay for inbound and outbound calls, and in Latin America, Europe, pretty much most of the places in the world, you only pay for outbound calls, never for inbound calls. What that does is it gets more wireless phones into more hands more quickly.

So if you look at the penetration curves of countries that have high mobile termination rate, the penetration curve is amazing because I can go and buy a mobile phone for my aunty, granny, whoever, they never have to incur any cost, they don't have to call anybody, but I can call them, and that means that they are actually connected to the world, right? So you get really rapid penetration, and that's why most emerging markets have got that kind of success. So perfect, makes sense.

I do that, but then I have this problem, which is, "OK, now I'm on a vacation and actually calling is way too expensive, and not only you can't afford the quality, but it becomes a social problem. So what do I do? What I would do is I regulate that price, which is the interoperator price that people are allowed to talk to each other at. That means that prices fall, and at first, you get positive elasticity, but in a lot of cases, mobile termination rates can be as much as 40%, 50% of the EBITDA of an operator. This is what's happening in Mexico in a very, very big way.

So you see huge mobile termination rate cuts, which means huge price falls in wireless. That matters to telephony in a larger sense, because as wireless prices fall, people are incredibly rational. What happens and what people are totally rational about across countries with cheaper wireless is that they start to use wireless more than they use wireline. So as wireless pricing falls, you cannibalize your wireline business. That's a really big deal for all of the telephone companies in Latin America, because a lot of them are making 70% of their revenues on the wireline side and from calling. So when wireless prices fall, the wireline businesses get crushed and the profitability of these businesses gets hurt very badly, because they are high fixed cost businesses.

As a result of the very limited wireline infrastructure that you have in a lot of cases throughout Latin America, you are seeing a bigger push toward basically wireless data, wireless broadband solutions for most countries in Latin America. Wireless voice is still going to keep growing, because there is so much elasticity and so much pent-up demand to make phone calls that previously weren't affordable. Wireless data is clearly also going to grow very, very meaningfully, huge appetite to be connected and almost about 30% fixed line coverage of most households in Latin America. The reality is that most Latin Americans are totally really going to connect via wireless networks.

TWST: In Europe and Latin America, who are your favorite names and why?

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