Lenders over-exposed to real estate move into TMT

I was lucky enough to chair Olswang’s semi-annual CPD catch-up day for in-house lawyers today. It was a very interesting set of talks (for those who are interested I commented using twitter, see: #olswangcpd), which covered a wide range of topics:

Session Speaker
biographies
Materials

Employment update: the latest red tape changes and other hot topics
(Daniel Aherne, Partner, Employment)

Daniel Aherne

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Commercial tax update post Finance Bill 2011
(Natalie Coope, Senior Associate, Tax)

Natalie Coope

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Dispute resolution: What are my options – which one should I choose?
(Anna Caddick, Associate, Commercial Litigation)

Anna Caddick

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Bribery Act 2010 – When? What? Why?  A practical look at what businesses need to do to comply
(Steven Corney, Partner and Oliver Gayner, Associate, Commercial Litigation)

Steven Corney
Oliver Gayner

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Click for Practice Note

Hot topics for borrowers: what increased regulation means for you (including the cost of borrowing, Basel III and accounting for leases)
(Charles Kerrigan, Partner and Jane Innes-Jones, Associate, Finance Group)

Charles Kerrigan
Jane Innes-Jones

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Social media marketing and the law: an overview of the relevant legal principles and risks,  including the new ASA CAP Code provisions effective from 1 March 2011
(Ashley Hurst, Senior Associate, Media Litigation)

Ashley Hurst Click for Slides

Commercial boilerplate quiz:  a practical look at recent case law developments and how these impact on day to day drafting
(Rob Bratby, Partner and Claire Walker, Head of Commercial Know How, MCT)

Rob Bratby
Claire Walker

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Click for Guide

Convergence: does it add up?  Highlights from Olswang’s 2011 Convergence Survey
(John Enser, Partner, MCT)

John Enser

Olswang Convergence Survey 2011

Rather than attempt to summarise everything, I thought I’d pull out from the morning a couple of take-away issues that impact telecoms and technology.

The first was the observation that as banks were diversifying their lending books that some banks with historic over-exposure to real-estate were nevertheless open for business to borrowers from the TMT sector. The second was the impact of the extension of the CAP code to social media – the full impact of which has yet to play out. The final thought was the continued life of linear TV programming – isn’t it interesting that although technology may enable us to watch whatever we like, whenever we like, human psychology still prefers watching programmes with friends so you have someone to chat to?

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.

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?’