Internet regulation: building consumer trust?

Today’s FT article by Vittorio Colao, CEO of Vodafone, highlights the importance of regulation for all the players in the on-line ecosystem – those building the pipes and plumbing of network infrastructure, those creating compelling content and services and those who provide search, aggregation or other services.

His central thesis is that both regulators and market players should use building consumer trust as their guiding principle.

In concrete terms he suggests that trust will be built by ensuring that the internet has rules (which need to go beyond self-regulation) that ensure respect for:

  • ownership (especially of intellectual property);
  • privacy; and
  • human and social rights.

Digging into the next layer of detail, he supports the ability of national authorities to be able to direct infrastructure providers to block access to illegal content or services, provided that this is extended to providers of internet based communications services and that the costs are fairly allocated.  He also agrees on the importance of competition and non-discrimination for network access whilst arguing that price control for broadband access will not stimulate the investment in broadband infrastructure that governments want.

Ostensibly a reaction to recent comments made by Mark Zuckerberg, CEO of Facebook, at French convened pre-G8 internet summit (or eG8) that called for the internet to be free of regulation, in reality this exchange highlights that the net neutrality debate has really started to cross the Atlantic in earnest. The topic is now on the political agenda at the highest level, so it remains to be seen whether the Commission and national regulators will be able to maintain their so far balanced approach.

Rise of social media means that successful converged services must appeal to early adopters

Today saw the launch of the sixth Olswang Convergence Survey: ‘Does it add up’. I may now be able to see rather more of the authors, John Enser and Matt Phillips, as its preparation has consumed their every waking hour over the last few months.

They carried out the first Convergence Survey back in 2005. Not so long ago, but back then only 30% of the UK had broadband, and only 12% of people would consider watching TV on their computer. 65% of the respondents in 2005 would buy a DVD at least once a week and less than 10% used their mobile phones for email or internet browsing. How things have changed.

Matt and John describe convergence as: ‘the technological developments which result in an end-user having much greater choice and control over his or her consumption of content in the home and/or on the move, such that he or she decides what to watch, when to watch it, and on what devices, rather than this being determined by technological constraints…for us, convergence is…increasingly about how well-informed consumers will use the functionality and content which is available to them across the full range of devices, platforms and services they own or receive’.

The reports trace a history of technology enabled product innovation being able to meet (or not) user demand for convergence. However the proliferation of cross-platform distribution has also shaken up established industry value chains  – think of the impact of internet distribution on the music industry and the shift in value capture from recorded music to live performance. One of the main themes addressed in this year’s survey is whether when the merry-go-round stops if (to mix my metaphors rather horribly) there is enough cake to go around?

Another issue (which I’ll revisit in future posts) is the increasing load being placed on telecoms network by broadcast video content, the challenge for telcos to avoid becoming ‘dumb pipes’ and the net neutrality debate.

However (rather topically for this recent convert to blogging and twitter), the survey found that with increasing product diversity and choice hat consumers are increasingly turning to social media to find out ‘what is hot, and what is not’. Successful services will be those that have a simple user-friendly proposition and appeal to early adopters and social media influencers.

LinkedIn announces first social media IPO of 2011: dot.com hype or sustainable business model?

It is a sign of the changing times that I learnt about LinkedIn’s IPO through twitter last night, and that LinkedIn itself blogged about it.  Seasoned IPO watchers will be aware that process has been started with the filing of their S-1 Registration Statement at the US Securities and Exchange Commission.

At this stage, details of the price and amount of stock to be offered in the IPO has not been finalised, but the S-1 contains (amongst other things) a detailed overview of the business including  financial data and risk factors. For those interested in the business model for social media companies it makes fascinating reading. With rumours of IPOs planned this year for other social media platforms the valuation metrics will set interesting benchmarks, which will also impact the mid-market as the large social media platforms acquire businesses to add incremental capabilities.

As a scarred member of the dot.com 99% club (the company I was then working for had its valuation fall in 2001 to 1% of its value in 2000) the question occurs to me is whether the current interest in social media is dot.com hype or represents sustainable value creation. The things that make me feel like it is 1999 include that everyone is talking about social media, there is conference and news overload and woe-betide any company without a ‘social media strategy’. Even my mum talked about it at Christmas. However, against that, there are a lot of us who remember the dot.com crash and that in the wake of the 2008 global financial crisis valuations seem to be very focused on fundamentals (like cash generation) rather than a story which goes ‘build cool web-site, get funding, worry later about how to make money’.

LinkedIn’s S-1 has its normal quota of risk factors, but also has real revenue streams which were sadly lacking in some dot.com companies. A more subtle difference between social media businesses and web 1.0 is the innate ability of social media networks to benefit from network effects, which raise users’ switching costs and create greater barriers to entry than exist for transactional web-site businesses. However, these are not insurmountable (anyone still use FriendsReunited?).

Thank you to the kind reader who suggested that a Friday round-up of this week’s blog posts would be useful.  In reverse order:

Have a good weekend.  Finally, being a lawyer – I am not connected to LinkedIn (except as a user) and you should make your own mind up before you invest (or not) your own money – don’t take any advice from me.

Financial technology, cloud, mobile data and social networking will drive deals and valuation multiples in technology sector

As a new blogger, site statistics are a source of endless fascination.  They are however useful – my post on TMT valuation multiples seems to have been wildly popular, so I thought it worthwhile to trawl through some other reports to see what commentators were predicting.

PwC‘s technology insight presentation caught my eye.  It is a perceptive commentary on M&A trends in the technology sector, not only identifying hot areas, but also the drivers behind those hot-spots.

The first area identified is financial technology, with ongoing regulatory scrutiny and change within the banking vertical driving demand for integrated software and outsourced platforms. They highlight the Misys acquisition of Sophis as an example of this type of deal.

The second area is cloud services and the various activities within that space such as hosting, virtualisation and security. Reinforcing the theme of my last post, PwC sees relatively high valuation multiples for deals in this segment.

The third area is mobile data, which again is something of a recurring theme for this blog. The sub-segments highlighted include applications, gaming and advertising – all of which I agree with based on the recent deals we have seen.

I am less convinced with their last identified area – that of the public sector. As a result of the cuts in the UK, overall revenues are likely to fall so I would see deal activity being primarily defensive and with somewhat depressed valuations as compared to other segments.

Finishing with a personal view on another hot-spots for the year,  one segment that I think will be very hot is social media, with both IPOs for the large players possible, and also mid-market deal activity as the larger players acquire smaller players for capabilities to integrate into their platforms.

Valuation multiples up in TMT sector: trade buyers are back for 2011

I get a regular selection of recent corporate finance deal activity summaries in my email.  Last week, I got one from Regent.  Their view was that with the exception of a dip in August, valuation multiples in the European TMT sector have steadily edged upwards over the year, with:

  • price / earning at 16 (as opposed to 14 this time last year); and
  • price / sales at 1.1 (up from 1.0 this time last year).

However, for me, the story behind the story (so to speak), is the return of the trade sale.  The IPO market for tech companies has been ‘sleeping’ for some time (although with Facebook and LinkedIn rumoured to IPO for this year it is starting to feel oddly like 1999 all over again) and post-Lehman the lack of (as much) leveraged debt has removed one of private equity’s key advantage over trade purchasers. 

As a result the activity across the market (and certainly the cross-section of deals I am seeing) are, by and large, trade deals.  Expectations of slow growth for some time in European markets has led to sellers being realistic about valuations and my expectation is that 2011 will see continued deal-flow, with trade buyers and sellers predominating.

And the killer application for 2011 is …

I’m very excited to have had my first re-tweet, so today’s post develops the thought further.

The retweet was of an economist article which, in contrast to the emerging consensus that traditional telephone calls are dead quotes a recent Ofcom international research report as evidence that whilst fixed line volumes are declining across the world, their decline is more than offset by the volume of mobile calls. The Economist suggests, quoting Nielson and CTIA, that the US is the exception that proves the rule, and that voice is here to stay.

However, the Ofcom research covers a lot more than voice traffic volumes, and to really understand what is going on you need to look at a few more statistics:

  1. First, fixed voice minute volumes are declining in all markets (driven by substitution to mobile and VoIP), and with continued per minute price decline, fixed revenues continue to slide.
  2. In contrast, mobile voice minutes continue to grow, and whilst it isn’t possible to unpick exactly what is going on in every market, it would appear that inbound substitution (from fixed) and usage increases are  currently still more than offsetting outbound substitution to e.g. mobile VoIP.  However, price pressure means that voice revenues are falling, albeit not as precipitously as in fixed voice.
  3. Whilst data connections and usage (both fixed and mobile) are rapidly increasing, the general failure to move from ‘all you can eat’ to usage based tariffs mean that this trend is not yet offsetting voice revenue falls.  However, mobile carriers in particular have woken up to this and are using device introduction (cf the iPad in the UK) to move towards usage based pricing.

This is neatly summarised in this table extracted from the Ofcom report: Global Telecoms Revenue Trends.

So far, nothing earth-shaking.  However, its time to answer the question posed in the title of this post: what is 2011’s killer app?  Of course, it all depends on how you measure ‘killer-ness’ – economic utility, user numbers, revenue growth or something else.  If (for the sake of argument) we use 2010 revenues, then it is very instructive to compare estimated total revenues for Facebook and Twitter with service revenue for traditional voice minutes.

Now, as Facebook and Twitter are not yet public (on that, see http://bit.ly/dPjK4w), sources are somewhat unreliable.  My best crowd-sourced estimates are $1-2 bn for Facebook, and perhaps $50m for Twitter in 2010.  Compare those revenues to the Ofcom global figures for voice revenue in 2009 of c $680 bn  (= dollar equivalent of £511bn (fixed voice + mobile services) – £73bn (mobile data)). Even if you include $25bn for Google, you still end up with the revenues for Google, Facebook and Twitter combined being around 4% of traditional voice revenues.

This leads me to the rather contrarian conclusion that the killer app for 2011 (at least in terms of extracting cash from customers) is old-fashioned voice calling.

Now the problem with statistics is that you can use them to prove anything, so I shared this post in draft with my wife for a common-sense check.  She glazed over in the middle, but then brightened towards the end.  ‘You mean you have spent all this time writing a post that comes to the startling conclusion that people still like talking to one another?’