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Monday, November 30, 2009

Tele-density and MOU - changing Paradigms

A lot of telecom analyst base their growth forecast on tele-density figures. Tele-density refers to ratio of number of connections to population. It is usually expressed as a percentage. Tele-density determines the upper limit to subscriber growth.

MOU refers to minutes of usage or talk-time of subscribers. “Minutes of Usage” multiplied by Average Revenue per Minute (ARPM) to arrive at Average Revenue per User (ARPU). ARPM has shown a declining trend with respect to time. MOU, therefore, represents growth potential of current subscribers.

The growth potential of any telecom company is a function these two variables. Yet, the concept of teledensity and MOU have not been understood well. A few innovations in the past few years have added new life to both these variables in ways analysts have failed to grasp.

Era of bandwidth Node

The interpretation of teledensity as a cap is remnant of telephone as a voice call device era. This old era represented voice-based communication. We also discovered ways to send data over telephone lines. But this was inefficient. We were sending data over voice networks.

The era has changed and a new era is here. Today, telecom is essentially a provider of bandwidth node at a given location. The question of what to do with this bandwidth is entirely left to market forces. Market forces have deciphered one use of the node through “smart phone technology. Today our networks are essentially dual-mode networks. On the smart-phone or any 3G phone, we have access to a data network AND a voice network. We are no longer sending data over voice network.

So the correct way to look at MOU is in fact, to look at overall consumption of bandwidth. There is no doubt this is only going to go up!

Smart phones boosting data usage

The smart in smart phone is actually in usage of bandwidth tap. The smart phones have, through use of apps, created new uses of data. Further, the presence of 3G implies we are going to listen to move songs and watch more videos on the smart phone. Both these applications are bandwidth-hogging applications.

Overall data requirement of phone user has definitely gone up. And most of the time, data is served by a telecom company. Sometimes, it is your telephone cable connected to a wi-fi modem, other times it is your phones 3G network. As new apps spread, we will have increasing data requirements. So MOU, in terms of overall usage of telecom service will go up. Also, the more connected people are more are voice calls likely!

The upper limit on teledensity

Tele-density has another story. First, there is natural requirement for multiple phone connections per person. In developed countries the number is 2. So we can expect a natural phone penetration limit to twice the population. Further, simply put, there is a potential to connect all the laptops that are in use in the market currently. So the factor of 2 seems pretty understated. Thereafter, anything that is mobile and generates data is a target for embedding a phone connection.

Telecom can definitely cannibalize 50% of the GPS applications. Cars can share location data, engine performance and others. Trucks and delivery vehicles are already using telecom based location services.

Further, it does not take much imagination to foresee new applications. A door viewer that can send photo of visitors is pretty common. Telecom-equipped nanny cams are definitely well accepted. TV set-top boxes can have embedded connections transmitting viewing habits. Buses in Switzerland are already transmitting data about arrival times.

In sum, we can say that older paradigms of Tele-density need to be massively revamped.

It will happen within 5 years

The classical rebuke to these arguments is visibility. Analysts do not foresee such changes happening in near term. I think otherwise. All it needs is right pricing and little bit of imagination. The iPhone, is revolutionary in that sense. It has socialized the imagination part while retaining the basic bandwidth pipe control to itself! I am betting, we will see tremendous explosion in bandwidth consumption in next 5 years and most of this will enrich the telecom companies. That is why I have invested in Bharti Airtel (Bloomberg: Bharti IN).

Download the document in PDF format.Ideapaper - New Teledensity Paradigms

Tuesday, November 17, 2009

The impending Crash...

There is a difference between the recovery rally and the main rally that preceded it. People have started talking about sustainable recovery in equity markets. Still, things are not as they seem. Investors should brace for a rough ride ahead. The rally seems to comprise four phases.

Four Phases of market movement

First phase of secular insanity. In this phase all stocks go up. People ignore the fundamental warning signs. Even companies with questionable managements got sky high valuations. His phase ended with the great crash of 2008. Possibly, what Rob Shiller calls "irrational exuberance" appears to be this stage.

Phase two is essentially over-excitement of the rationalists. Looking at cheap valuations and signs of strength in company performance the rationalists over-extended themselves. Midway, the irrational investors rejoin the party. The phase ends when the cynics join in. We are currently at this stage. I am watching the converstion of cynics. Even this phase ends with a crash. The dimension of the fall now will determine the long term damage to the economy.

Phase three is a placid languishing of the markets at near bottom levels. There is lack of trust and overall cynicism about any future prospects. This is the true bottom. Sweat, sacrifice and prudence regain their respect in this phase.

The hard work in phase three results in growth and proserity that is our final phase. The economy gains traction and with it, a new hope emerges.

Is the crash coming?

President Obama attempted to jump phase three into phase four. For a while it seemed possible. But I do not see the tough choices being made, or vision to take down broken structures. Sadly, we will see our third phase. The time is just about right.

Wednesday, November 04, 2009

Gold backed currency is not viable

There is a big debate about going back to gold-based currency system. It has some obvious limitations. Ellen Hodgson details a simple argument against gold-backed currency in the Web of Debt - Chapter 37 - The Money Question: Goldbugs and Greenbackers Debate.

Constant volume asset-backed currency is deflationary
Broadly, any asset backed currency - asset availability will determine the amount of money in the system. So money supply will be limited to the extent we can find the asset - here - gold. Now,this is by no means a stable solution.

Store of value v/s transmitter of value
The real problem, I believe, is due to design of money. Money was designed as carrier of value not as a store of value. It was designed as a river not as a dam reservoir. The arguments for gold-backed currency stem from "store of value" side and arguments against it originate from "transmission of value" side. Inflation helps transmission but can potentially hinder "store of value" concept. Deflation helps "store of value" but can potentially hinder" transmission" concept.

In sum...
I believe these two functions are separate and must not be confused. We need a new design for money - one that can fit in both roles. Will someone open the financial innovation tool-box please? Anyone? Pandora?