Quarterly World Review: Q2 2010

The worldwide cellular market grew by 159.6 million connections in the second quarter of 2010, reaching 4.98 billion connections in total. In terms of significant milestones, the cellular industry passed the 5 billion connections mark shortly after the close of the quarter, during the first week of July. The number of operators reporting data dipped slightly from previous quarters, due to several notable mergers and acquisitions, not least the purchase of Zain’s African assets by Bharti Airtel. 377 operators reported data for Q2 2010 and despite the fall in absolute operators, this figure still represents over 87% of worldwide market share by connections.

Continued volatility in mature markets (as well as an increase in the number of countries where consumer spending is affected by slow macroeconomic recovery) meant that 71 operators reported a quarterly decline in net additions while 54 announced an annual decline. In total across the two groups, 93 operators were affected by declines with a cumulative loss of 12.9 million connections quarterly and 24.8 million year-on-year.

There were 16 new network launches or upgrades during the quarter. Two launches in Canada – Mobilicity (DAVE Wireless) and Public Mobile – constituted new operator start-ups while the remainder were HSPA and EV-DO network upgrades.

GSMA Intelligence continuously benchmarks the accuracy of its short-term connections estimates and longer-term forecasts as actual data is released by the operator community. Despite ever-uncertain market conditions, the delta between the GSMA Intelligence estimate for Q1 2010 total connections at the beginning of the operator financial reporting season and the reality at its completion was just 0.63%.

Africa

The most significant development in the region during the quarter was the completion of Bharti Airtel’s acquisition of Zain’s African operations (excluding Sudan and Morocco) for US$10.7 billion in early June. According to Bharti Airtel the 15 newly acquired markets (Burkina Faso, Chad, Congo, Democratic Republic of Congo, Gabon, Ghana, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda, and Zambia) have a population of around 459 million and mobile penetration of just 38%. In August, Bharti Airtel announced the acquisition of a 16th African market with the purchase of Telecom Seychelles for US$62 million from Bharti Enterprises. Telecom Seychelles already uses the Airtel brand while the newly acquired Zain operations are also expected to be rebranded to Airtel shortly. Bharti Airtel reported its African operations ended Q2 with a combined 36.4 million connections, an ARPU of US$7.40, and churn of 5.60%. This compares to the 136 million connections with an ARPU of US$4.60 and churn of 5.80% in its home market of India. One area where Airtel will undoubtedly look to focus is on increasing non-voice revenue which represents 7.9% of service revenues across its African markets compared to 11.6% in India. Minutes of use (MoU) per user across the acquired African operations was 103; again well below the 480 MoU per user of its Indian subscribers. The effective price per minute across its African businesses was US$0.072 compared to just INR 45 (US$0.01) in India, reflecting the ongoing effects of the price war in India. Bharti Airtel is also expected to replicate its low-cost Indian operational model in the outsourcing of IT systems and tower management.

Zain’s remaining wholly-owned African market of Sudan continued to perform strongly with the market-leading operator reporting net additions of 413,000 in Q2. Zain’s total connections reached 9.2 million following a year-on-year increase of 2.5 million connections (37%). ARPU declined US$2 (17%) year-on-year to US$10 but over the same period total revenue increased by 19% to US$291 million. Zain attributed its recent success to its continuing focus on network roll-out – 41 new sites were added in Q2 – as well as the launch of offers tailored to different market segments to stimulate usage. In contrast, second-placed operator MTN reported a substantial decline of 728,000 connections in Q2, wiping out all of the gains of the previous two quarters as total connections fell back to 3.3 million – though still ahead of the 3.1 million in Q2 2009. MTN did not provide any explanation for the decline but the operator’s ARPU also declined by 33% year-on-year to US$4. Third-placed Sudani (Sudatel) also outperformed MTN in Q2 with net additions of 200,000 as total connections reached 4.7 million, up from 4 million this time last year – a 17.5% increase.

Zain also retained its 15.5% stake in inwi (formerly Wana) in Morocco, a market that has attracted the attention of France Telecom which recently agreed to acquire a 40% stake in Meditel for EUR 640 million (Orange looks to re-enter Morocco via Meditel). This deal follows the sale last year of the 32.18% stakes held by both Portugal Telecom and Teléfonica for EUR 400 million each to a local consortium. Morocco witnessed a 19% year-on-year increase as it reached 27.9 million connections following net additions of 837,000 in Q2. Meditel reported net additions of 218,000 in Q2 to reach 10.4 million connections, an annual increase of 1.8 million (21%). inwi remains the market’s smallest player, but has seen its connections increase substantially since it rolled out a GSM/WCDMA network to complement its existing EV-DO network in February. The operator reached 1.6 million connections following net additions of 293,000 in Q2, a year-on-year increase of 159%. The recent success was attributed to per-second billing, identical tariffs for calls to any network 24/7, and the ability for customers to use their SIM card for prepaid BlackBerry services, unlimited mobile internet and MSN messaging. Maroc Telecom remains the market-leader following Q2 net additions of 326,000, taking total connections to 15.9 million – an annual increase of 1.6 million (11%). Despite the increased competition from inwi, ARPU was unchanged at MAD 94 while churn fell to 2.20% from 2.93% in the prior corresponding period. Total revenue increased 7% year-on-year to MAD 5 billion while EBITDA improved 13% to MAD 3.1 billion. This was attributed to the success of the customer loyalty program and offers that encouraged retention, as well as success in the higher-value contract market, which increased connections 9% year-on-year to 731,000.

The largest African cellular market, Nigeria, reached 78.7 million connections in Q2 following the net addition of 2.3 million connections. This is down from the 3.3 million net additions last quarter but still enough to give Nigeria the region’s highest net additions for the third consecutive quarter. The quarter saw the introduction of SIM card registration requiring the provision of personal details and biometric data (fingerprints and photos) for all new subscribers from May 1st. A date for the registration deadline of all existing subscribers is still yet to be announced. Collectively, Nigeria’s five GSM operators continued to increase their connections with net additions of 3.1 million in Q2. In contrast, the market’s four CDMA mobile operators lost 830,000 connections in the last quarter (an 11% sequential decline) to end Q2 with just 6.8 million connections. The CDMA operators are reported to be suffering from a lack of capital to support their infrastructure requirements. The rapid decline has led to calls from the Association of Licensed Telecommunications Operators of Nigeria (ALTON) for a government bail-out of the CDMA operators. Once again market-leader MTN continued to dominate market growth with 1.8 million net additions alone (78% of the quarterly total) to reach 35.1 million connections. MTN has added 7.7 million net additions in the last year – an increase of 28%. The operator’s market share stands at 44% – up from 41% in the prior corresponding period. ARPU declined by 8% in Q2 to US$11, attributed to penetration into lower usage segments while revenue also declined 8% to ZAR 8.2 billion despite a 15% increase in local currency terms due to weakness of the Naira against the Rand. Local currency revenue growth was attributed to an increase in airtime and subscription revenue, partly offset by a reduction in interconnection revenue following a mandated decrease in interconnection tariffs. Etisalat also reported a strong quarter as it reached 4 million connections, having added 3 million connections in the last 12 months. This month it was reported that the operator hit the 5 million connections milestone. The fate of the Nigerian government’s long-running proposed sale of a 75% stake in former incumbent NITEL (and its mobile arm Mtel) remains unclear, despite a winning US$2.5 billion bid by the New Generations Telecommunications consortium being announced back in February and completion of the subsequent investigation of the sale process.

In its home market of South Africa, MTN reported 678,000 net additions in Q2 taking it to 17.1 million connections as it continues to rebound from connection losses in the latter half of 2009 associated with the introduction of SIM card registration. MTN’s blended ARPU increased by 12% year-on-year to ZAR 152 primarily due to prepaid deactivations increasing prepaid ARPU by 18% to ZAR 109, while contract ARPU decreased by 7% to ZAR 336 attributed to lower out-of-bundle usage and migrations to lower-value packages. Total revenue increased by 7% to ZAR 8.6 billion driven by segmented data offerings for prepaid customers that boosted data revenues by 42%. MTN also highlighted that during the FIFA World Cup hosted in South Africa it carried one terabyte of data traffic, and that its customers sent approximately 590 million SMS’s and 10 million MMS’s during the tournament. Market-leader Vodacom reported its fourth consecutive quarter of connection losses with the Q2 loss of 3.1 million connections, mainly due to the change in the disconnection policy from 13 to seven months for call-forward SIMs resulting in the disconnection of 3.3 connections on April 1st. Contract connections growth remained positive with 175,000 net additions in Q2. Prepaid ARPU increased 20% to ZAR 79 largely as a result of the lower customer base. Contract ARPU declined 7% to ZAR 411 due to the strong growth of lower-end contract packages and reduced out-of-bundle spend. Data revenue increased 43% to ZAR 1.3 billion due to data traffic growth of 54%, which was driven by over 50% growth in smartphones, alongside lower device and usage prices and improved coverage.

The strategically important market of Tanzania (with Etisalat, Tigo, Vodacom and Zain all present) rebounded from a weak Q1 (311,000 net additions) to be the second fastest growing African market in Q2, with 1.7 million net additions taking total connections to 19.3 million – an annual increase of 4.8 million connections (12%). Market-leader Vodacom led the way with 739,000 net additions to surpass 8 million connections during the quarter, which the operator attributed to the market responding well to newly introduced tariff plans. Vodacom’s ARPU for Q2 declined 25% year-on-year to TZS 4127 while churn fell to 3.58% from 3.99% over the same period. Second-placed Zain reported 224,000 net additions in Q2, a marked turnaround from last quarter when it lost 211,000 connections, but was outstripped by third-placed Tigo (Millicom) which reported net additions of 318,000. Tigo’s ARPU declined marginally (4%) to TZS 6836, but remained comfortably ahead of Vodacom’s, while total revenue increased year-on-year by an impressive 42% to TZS 87.3 million. On an annual basis Tigo has also narrowed the gap on Zain by gaining 1.3 million (43%) connections compared to Zain’s 489,000 (11%). Both operators were outperformed in Q2 by Zantel (Etisalat) which added 456,000 connections to take its total connections to 1.8 million, an increase of 887,000 (90%) in the last 12 months. The connection figures are expected to take a hit in the second half of the year with the introduction of SIM card registration from July 15th. Recent reports suggested around 5 million SIM cards remained unregistered by the registration deadline and these have now been blocked. If they are not registered within 90 days they will be permanently deactivated.

Another strategically important market, Ghana (with MTN, Tigo, Vodafone and Zain all present), has also recently introduced SIM card registration for all new subscribers beginning on July 1st. Existing subscribers have until June 2011 to register their details or have their SIM card deactivated. Ghana reached 16.5 million connections by the end of the quarter as the market gained 548,000 net additions. Market-leader MTN saw its net additions in Ghana fall to 292,000 in Q2 (from 430,000 in Q1) as total connections reached 8.7 million. ARPU decreased by 8% in line with deeper penetration into lower usage segments. Revenue in local currency increased by 19% for the period but this translated into a 5% decrease in Rand terms. Revenue growth in local currency was mainly due to an increase in airtime and subscription revenue. SMS revenue, following the 2010 FIFA World Cup based SMS promotions, also contributed to revenue growth. Rival Vodafone saw a decline of 84,000 connections during the most recent quarter as it fell back to 2.7 million connections. Zain fared slightly better with 59,000 Q2 net additions to reach 1.4 million connections. The market’s smallest player, CDMA operator Kasapa, reported its sixth consecutive quarterly decline in connections with the loss of a further 24,000 connections in Q2 and has now lost 140,000 or 41% of its connections in the last year to leave it with just 204,000 connections. In contrast, Tigo witnessed a jump in net additions to 306,000 in Q2, the highest recorded by the operator since Q1 2008, as it reached 3.4 million connections. Tigo attributed this to customers seeking to sign-up before compulsory registration began. Tigo’s ARPU declined 13% year-on-year to GHS 7 while total revenue increased 4% to GHS 71 million over the same period. In June, Tigo completed the first phase of its tower deal with the transfer of 272 towers to Helios Towers. Elsewhere, Tigo reported that net additions slowed to 75,000 in Senegal, down from 285,000 last quarter. Total connections increased by 338,000 (16%) year-on-year to reach 2.5 million. Tigo’s newest market, Rwanda, where operations launched in December, gained momentum during the quarter with 259,000 net additions to reach 374,000 connections.

Egypt dropped to the position of the region’s third fastest growing market in Q2 (having topped the region’s growth table from Q1 to Q3 in 2009) with 1.4 million net additions as total market connections reached 59 million. Quarterly net additions were the lowest since Q2 2006 and are less than half the number recorded in the previous corresponding period. However, Vodafone maintained its recent strong performance by gaining 1.2 million net additions in Q2. Vodafone has now added in excess of 1 million connections for nine consecutive quarters to reach 25.8 million connections. The operator’s ARPU declined for the 12th consecutive quarter, falling to EGP 36.53 which Vodafone attributed to ‘severe competitive pricing pressure’. The highlight for Vodafone was data revenue growth of 55%. Market-leader Mobinil (ECMS) reported net additions of just 26,000 in Q2 and faces the imminent prospect of being overtaken by Vodafone, which now trails by just 357,000 connections. Mobinil blames its slowing growth on the regulator (NTRA) for limiting the availability of dials (unallocated numbers) and claims that it was limited to relying almost entirely on recycling old numbers in order to provide new services. The operator expects this situation to persist for the foreseeable future but vowed to continue with its efforts to solve the issue with the regulator. The market’s smallest player, Etisalat, saw its net additions decline for the third consecutive quarter to 146,000 as its total connections reached the 7 million mark.

In Algeria, Djezzy (Orascom) continued its recovery from the football riot related business disruption of Q4 2009 by posting net additions of 352,000 to take it to 15.1 million connections. The operator completed the re-opening all of its remaining owned shops. However, Djezzy continues to face operational challenges in what has been interpreted as government backed efforts to force Orascom’s hand in agreeing to sell Djezzy to the state. The latest challenges to confront the operator include the Algerian central bank preventing the transfer abroad of foreign currency to pay suppliers and the customs clearance of imported goods being blocked thus hindering any import of equipment and spare parts. So far Djezzy reports that it has managed to avoid any major network issues. This follows on from a protracted tax dispute that saw the operator hit with a US$600 million backdated tax bill for which an appeal to the Administrative Court is ongoing. Orascom also reported that during Q2 all of the Algerian operators also failed to have any of their new promotions and tariff offers approved, apparently due to internal issues at the regulator (ARPT). This month it has been widely reported Orascom has agreed to sell Djezzy to the Algerian government although the value of the deal has yet to be agreed. Rival Nedjma (Wataniya) saw its connections decline in Q2 by 260,000 to 8 million, but has still recorded a gain of 2.2 million connections (39%) over the last 12 months against a more sedate 603,000 (4%) by Djezzy.

 Americas

The Americas continued to reflect promising cellular growth in Q2 2010 and maintained its position on the global stage as the third fastest growing region in terms of cellular connections. Quarter-on-quarter, only seven mobile operators reported negative net additions compared to twice as many operators in Europe or Asia Pacific. Over the quarter, the Americas overtook Western Europe in terms of number of connections as the region reached 530 million connections – around 10 million more than in Western Europe. Regional cellular penetration topped 90% by June and is expected to pass the 100% milestone in 2012.

Chile and Brazil have registered quarterly cellular growth of 3.5% whilst Guatemala, Ecuador and Peru grew by around 2.5% on average. Meanwhile, almost half of the top 20 fastest growing markets in the Americas in Q2 2010 are located in the Caribbean which represents less than 5% of the region’s total connections.

Chile is one of the most mature markets in the Americas with a penetration rate of 110%, up 14 percentage points year-on-year. Teléfonica’s Movistar maintained its lead in the country with a 42% market share and continued to grow its contract customer base faster than its prepaid base – a trend that started in the opening quarter of the year. Movistar added 124,700 contract connections between Q1 and Q2 2010 which translates into a 40% market share of net additions. Prepaid connections at Movistar increased by 108,300 during the quarter, only half of prepaid connections registered by América Móvil’s Claro. Claro’s prepaid growth, however, did not offset the operator’s 4.3% churn which, in contrast with Entel (1.5%) and Movistar (1.4%), reflects the intense level of competition the operator is facing. In addition, Claro’s blended ARPU fell to EUR 7.3 which is approximately half the ARPU of competitor’s Entel (EUR 14.3) or Movistar (EUR 12). Claro’s effective price per minute fell from EUR 0.07 to EUR 0.05 year-on-year whereas Entel and Movistar have managed to keep a stable rate of around EUR 0.08 over the last 18 months. Claro is facing strong competition from Teléfonica which recently consolidated all its offers under the Movistar brand and is aggressively marketing its mobile broadband services, as well as Entel which introduced new plans and selective promotions to accelerate migration to 3G equipment.

Brazil grew by 16% year-on-year to reach 188 million connections. By year end, the fifth largest cellular market in the world is expected to have passed 100% penetration and reached close to 200 million connections. Vivo remains the market-leader with 30% market share, closely followed by Claro (25%), TIM (24%) and Oi (20%). In terms of total revenue, Vivo topped EUR 1.9 billion in Q2 2010, compared to EUR 1.5 billion for TIM and EUR 1.25 billion on average for both Claro and Oi. Over the quarter, TIM consolidated the offers launched last year and maintained its key services ’Infinity’ and ’Liberty’ which together added nearly 30 million users since Q2 2009. In addition, the operator launched new offers to target the enterprise segment promoting ‘Intelig’ services and also launched a new ’unlimited’ voice and data plan ’TIM Turbo’. Nonetheless, its ’Chip Avulso’ offer had the most immediate impact on TIM’s financial results as the SIM-only strategy – along with a reduction in handset subsidies – triggered a 24% yearly decline in both Subscriber Acquisition Cost (SAC) and cost of goods sold. Consequently, TIM’s EBITDA grew by 16% year-on-year to BRL 887 million, reaching an EBITDA margin of 25% in Q2 2010 compared to 22% in Q2 2009.

In Guatemala, Millicom’s Tigo registered yearly growth of 19% in Q2 2010, topping 5.8 million connections and taking its market share to 45%. However, in Honduras and El Salvador, the operator’s connection base declined by 1.6% and 1.1%, respectively, quarter-on-quarter. In terms of revenue, the situation is similar as Guatemala maintained a positive performance, but revenues in Honduras and El Salvador continued to be impacted by taxes on incoming international calls and, in the case of El Salvador, a reduction in interconnect rates from 18 cents to 8 cents introduced in December 2009. In Q2 2009, net additions in Central America represented 35% of Millicom’s total net additions compared to 9% in Q2 2010, which reflects the competitive pressure the group is under in the sub-region. Nevertheless, Millicom is focusing on users’ growing appetite for data services and the operator noted that, at the end of June, nearly 4% of customers in Central America were using 3G services.

América Móvil’s Claro added approximately 300,000 connections in both Peru and Ecuador in Q2 2010. In both markets the operator’s contract base has been expanding slightly more rapidly than its prepaid base, and it benefited from mobile number portability schemes, especially in Peru where seven out of 10 ported numbers ended up as Claro subscribers. In Ecuador, Teléfonica’s Movistar noted that data revenues accounted for 24.5% of service revenues in the first half of 2010 (up 4.4 percentage points year-on-year) supported by a 90% growth in non-P2P SMS data revenue in the half-year period, which represented 51% of data revenues at the end of June 2010 (15 percentage points). Similarly, Peru’s Movistar registered a 6.6% year-on-year growth in data revenues (17.1% sequentially in the second quarter), to account for 10.9% of mobile service revenues over the first six months of the year.

In Venezuela, the devaluation of the Venezuelan bolivar fuerte at the beginning of this year continued to impact operators’ financial performances. In 2010, the conversion of Movistar’s Venezuelan financial results is delivered at an exchange rate of 4.3 bolivar fuerte to the US dollar, which implies a year-on-year devaluation of 50%. Nevertheless, despite the phenomenon of hyperinflation in the country and higher handset costs, Teléfonica’s margins stood at 44% in Q2 2010 and non-P2P SMS data revenue registered a 90% year-on-year organic growth. Meanwhile, the Caribbean continued to enjoy solid growth, adding 600,000 connections over the quarter to reach a total of 25.5 million at the mid-year point. The Dominican Republic remained the largest market in the sub-region, with around 300,000 net additions over the quarter growing its installed base to 9.2 million connections. Meanwhile, Puerto Rico continued to have the second largest subscriber base with 3.7 million connections, adding 100,000 over the period. Haiti added around 50,000 subscribers during the quarter to retain third position, although its connections total of 3.5 million is down 1% year on year due to the effect of the January earthquake. Jamaica remained the fourth largest Caribbean market with 3.4 million subscribers, an increase of 100,000 between Q1 and Q2 2010.

Cuba witnessed the highest level of quarterly percentage growth, with around 40,000 net additions increasing its total subscriber base to just over 650,000 connections. However, despite a year-on-year growth in connections of 31%, Cuba has a market penetration level of just 6%; only five nations in the world had a lower mobile penetration rate in Q2 2010. In contrast, 16 of the other 24 Caribbean nations had a penetration level greater than 100% for the quarter, two of which (Cayman Islands and Turks and Caicos Islands) were greater than 150%.

At the operator level, Digicel continued its recent growth trend across its operations in the Caribbean, Central America and Asia, albeit at a slower rate as many of its markets are approaching or have exceeded 100% penetration. Connections grew by 2% to reach 11 million across 32 countries; with the group increasing its share of total subscribers quarter-on-quarter in all of its major markets (El Salvador, Haiti, Jamaica, Papua New Guinea and Trinidad & Tobago). Year-on-year the group’s total increase in connections amounted to 10%.

Trading under the Claro brand in Dominican Republic, Puerto Rico and Jamaica, América Móvil’s Caribbean operation added 170,000 subscribers in the second quarter to finish June with 6.4 million connections, an increase of 14% year-on-year. Meanwhile, Cable & Wireless’ subsidiaries in the sub-region recorded a 5.4% increase in connections between Q1 and Q2 2010, reaching 1.3 million at the mid-year point. This represented a year on year increase of 4.3%, or 55,000 net additions.

There were no new operator launches in the Caribbean in Q2 2010, nor any new network launches in the sub-region during the quarter.

Asia Pacific

In the region, 17 operators in total reported a decline in subscriber connections; 12 quarterly losses and 10 year-on-year declines. This is a regression from Q1 2010 where just eight operators reported an annual decline. Quarterly, the loss across all operators represents 1.9 million connections and annually 2.2 million. Worst affected on a sequential basis was Beeline (GTEL-Mobile), Vietnam which dropped 800,000 connections after only its first year of operation (see Vietnam, below). Warid, Pakistan posted the largest year-on-year loss of 955,000 connections but has since returned to quarterly growth in Q2, after its 2.7 million loss due to inactive subscriber deactivation in Q1 2010.

China, the region’s largest market, maintained its prodigious growth adding 29.1 million new connections in Q2 2010, an average of 9.7 million per month over the period. China Mobile added 15.2 million connections (more than both its competitors combined) and posted healthy first-half revenue and EBITDA increases of 7.9% (RMB 229.8 billion) and 6.1% (RMB 116.6 billion), respectively. Indicative of all three operators’ reliance on rural subscribers to drive the next wave of growth, ARPU for the world’s largest operator fell to RMB 72 (a 4.5% drop annually), but was bolstered by an annual increase in data revenue of a third to RMB 30.5 billion. Subsequent to Q2, it was also revealed that Vodafone Group sold its 3.2% share of China Mobile for US$6.6 billion, the first disposal of the group’s many minority assets. The stake – which represents a sale of nearly double its purchase value – was sold to a consortium of banks, led by Goldman Sachs, which was in turn sold on to private investors. Second-placed China Unicom’s revenue results were similar, posting a 7.6% annual rise to RMB 82.11 billion for the first half of 2010, but behind the numbers the company’s healthy mobile unit growth offset a 2.4% decrease in fixed-line revenue yet couldn’t quite bolster a 5.1% fall in EBITDA which the operator attributed to 3G network deployment and asset depreciation. Despite just 9.5% market share, China Telecom remains China’s fastest-growing operator and, having acquired Unicom’s former CDMA business less than two years ago, produced Q2 2010 revenue of RMB 54.8 billion (6.1% growth year-on-year). Annually the operator has almost doubled its mobile connections base and while fixed-line voice connections dipped slightly, its fixed-line broadband business grew 19%.

In a joint change, the Chinese regulator (MIIT) announced plans for both mobile number portability (MNP) and SIM card registration. MNP trials were conducted in the north-eastern city of Tianjin during August although the remaining trials, staggered over the next two years, will focus on a somewhat fragmented implementation of MNP. Initially, customers will be able to retain their number when switching from more competitive operators to those less so and in the second and third phases, the operators will implement switching for customers on 2G and 3G networks, respectively, though it is understood China Mobile customers will be excluded from the 3G implementation given their adoption of the TD-SCDMA standard. The implementation of SIM card registration was however more imminent, and introduced in September. Proof of identification is now required from all mobile subscribers in order to purchase a new number and existing customers are also being asked to register with operators by 2013. The new regulations additionally apply to all foreigners and any purchase of a prepaid SIM. Of China’s 785 million connections, an estimated 320 million are not yet registered as of Q2 2010.

In India, operators added 51.2 million connections, bringing the market to a total of 635.5 million. However, as recently revealed in our analysis, Indian price war puts start-ups at risk, the new greenfield GSM licences awarded in 2008 collectively represent less than 2% of the total market. With the exception of the two licences awarded to the existing CDMA players, Reliance Communications and Tata Teleservices, these six new operators have struggled to build market share and even roll out infrastructure in the cut-throat economic environment. With a current effective price per minute of less than US$0.01, many operators are still to launch in some of the circles in which they have licenses and ByCell has already had its license revoked due to foreign ownership issues. Indicative of this conundrum, Videocon Mobile adopted a soft-launch strategy in its most recent circle deployments, despite its initial success. Aimed at curtailing any financial penalties of the licencing demands, the average number of reported connections in its ten new circles was just 84 and the largest of these deployments, Himachal Pradesh, just 596. One of the more successful launches has been the Telenor joint-venture, Uninor which has reached 6 million connections in the past six months. These figures place Uninor with just 1% of the Indian market but half of the total connections base among the start-ups. Reports suggest that the operator has ploughed US$500 million into the new network but maintains a stance of reaching profitability by 2011. Measures currently being considered by the Indian government to avoid bailouts (and refunds) on the licences include the lifting of regulation preventing MVNO activity on operators’ networks – a move that would allow the start-ups to rent wholesale capacity and generate more immediate revenue. In addition, to avoid market exits in their entirety, a relaxation of M&A regulations is being mulled over which would allow for much needed consolidation in the crowded arena.

Vietnam, the region’s fourth largest market, added 5 million connections in the quarter, surpassing 115 million connections. The market has, however, seen significant restructuring in recent quarters following the introduction of both SIM card registration and a regulator-imposed limit on the maximum number of prepaid SIM cards per individual. The regulation, imposed late last year will likely see Mobifone (VNPT) lose approximately 15 million connections, Viettel 23 million and Vinaphone (VNPT) 16 million. To date, it is believed the process has largely been completed in conjunction with the January 2010 deadline for prepaid SIM registration. Operators are required to move any credit on the deactivated accounts to their subscribers’ retained accounts but have been coy regarding how the physical decline in connections will be accounted for, stating only that they expect to re-allocate the vast majority in a market that has already reached 130% penetration. Next-generation services gained momentum in the first six months of the year after Viettel and EVN Telecom deployed HSDPA networks in March and June respectively. The duo follow Vinaphone and Mobifone, who launched their WCDMA/HSPA offerings in October and December 2009 (Vietnamese operators begin high-speed network rollout). EVN’s network – a joint-venture deployment between EVN and Hanoi Telecom – follows the regulator’s demand that the remaining licensees from the April 2009 auction met a June 2010 deadline for the initial rollout of their 3G network. The duo met the target date but at a cost of a restricted roll-out, albeit in the country’s largest cities. EVN aims to procure 1 million 3G connections with a year of launch.

Japan added 1.5 million net connections in Q2 2010, its highest total within the past year and now totals 114 million connections – the region’s fifth largest market. EMOBILE, the country’s fastest growing operator and the first to upgrade to HSPA+ additionally announced that Ericsson would be upgrading its network to the theoretical maximum of 42 Mb/s by year-end, coinciding with rival and market-leader NTT DOCOMO’s own plans for its initial LTE deployment (EMOBILE upgrades 3G network to keep ahead of rivals). All four Japanese operators have been awarded LTE licences, with DOCOMO and KDDI planning the most aggressive rollouts.

There were four new network deployments during Q2 2010 in Asia Pacific; two WCDMA networks and two EV-DO. Indosat (Qtel) in Indonesia upgraded its network to 42 Mb/s HSPA+ in May, while previously mentioned E-Mobile (EVNTelecom), Vietnam deployed its first 3G network using WCDMA infrastructure in mid-June. Among the CDMA operators in Asia, Nepal Telecom announced in May 2010 that it had upgraded its full mobility network to EV-DO (in addition to its fixed wireless network upgrade earlier in the year). Lastly, Ceria (Sampoerna Telekomunikasi), Indonesia deployed EV-DO Rev. A on top of their existing CDMA coverage in April 2010.

Eastern Europe

Eastern Europe recovered slightly from last quarter’s losses, improving on both the number of operators reporting negative net additions as well as the absolute overall loss. Quarterly, 24 operators reported a net connections decline (representing 1.6 million connections) while 18 reported an annual decline (3.2 million). This is a marked improvement over last quarter’s 32 quarterly losses (3.6 million) and 26 annual declines (5.7 million). Loss-posting groups included Deutsche Telekom (Croatia, Macedonia, Montenegro and Romania (via OTE)), Telenor (Hungary and Serbia), TeliaSonera (Estonia and Lithuania), VimpelCom (Russia and Tajikistan) and Vodafone (Albania and Hungary).

Romania was the worst-affected Eastern European market for negative net additions with Cosmote (OTE) reporting a decline of 68,000 connections and Orange 338,000. The companies cited macro-economic deterioration in the first half of 2010 as the impact of an IMF-driven austerity package hit home with sharp rises in unemployment and VAT, twinned with a 25% pay-cut for public sector workers. However, OTE posted a slight 2.6% increase in service revenue, despite significant price erosion hitting their bottom line. Excluding the acquisition of Zapp in Q4 2009 (and lucratively, its 3G network which Cosmote was unable to organically deploy), EBITDA dropped 9% for the quarter. The company has already noted significant synergy-related cost savings from the merger. In conjunction with Slovakia, Romania was France Telecom’s worst-performing market in Q2 2010, but the group noted an improvement over the first quarter (4% growth in both markets). Overall, EBITDA for the ‘rest of world’ segment (which excludes France, Spain and Poland) fell 2.4 percentage points primarily due to these operations. In absolute terms, Romania contributed an EUR 45 million downtown in EBITDA and Slovakia a EUR 12 million loss.

Newly restructured VimpelCom posted a marginal loss of 400,000 connections during Q2. However, its remaining customer base of 50.9 million connections generated total mobile revenue of RUB 51.8 billion and OIBDA of RUB 28.9 billion in the quarter. As a result, ARPU rose 7% to RUB 330 and average minutes of use to 219 per connection per month. Mobile broadband remained a strong area of growth and the company added another 132,000 USB modems to its network. Mobile broadband ARPU remains constant year-on-year at RUB 251. The largest development for the Russia-headquartered group in Q2 was the merger with Kyivstar in Ukraine, tying up almost five years of legal troubles between Telenor and Alfa (Altimo) Group which were resolved in April via the formation of the new VimpelCom Ltd across Russia, Ukraine, CIS and Southeast Asia. In Ukraine, VimpelCom’s loss-making operation absorbs the 22 million connections of Kyivstar and will additionally adopt the Beeline brand, as discussed in our recent analysis, Newly-enlarged VimpelCom hits 90 million subscriber milestone.

Tele2 announced 1.2 million net new connections across the group in Q2 2010, representing mobile revenue of SEK 6,829 million. Notably, two of its newly launched Russian operations (in the regions of Tula and Orel) reached EBITDA break-even during the quarter having only been in commercial service the past nine months. The positive news was shared by Tele2 Croatia which, having run a successful campaign on the back of the introduction of MNP in the country, also enjoyed EBITDA break-even during Q2. Its customer base now represents 656,000 connections. The group also notes it remains on track to re-launch mobile operations (under the Tele2 umbrella) in Kazakhstan during the first half of 2011.

Norway-headquartered Telenor group garnered solace in stable margins in Eastern Europe despite continuing difficult competitive environments and falling revenues. In its largest market, Hungary, the company recorded a 7% year-on-year drop in revenue to NOK 1,193 million and a loss of a further 37,000 connections. In Montenegro, revenues fell 9% to NOK 151 million annually but the group did manage to stem customer losses in the last two quarters, adding 15,000 connections in Q2. Finally, revenue in Serbia was stable, growing 1% to NOK 625 million, but connections narrowly fell by 7,000. The group stated that its cost measures will have full effect starting Q3, particularly in Serbia, and it hopes a rebranding in Hungary and Montenegro to the Telenor brand will improve customer recognition and retention. Cash flow from the region remained stable given the group’s restructured regional cost base and low capex.

There were four network launches during the quarter in Eastern Europe. MTS Belarus deployed its 3G network in May, jumping straight to 21 Mb/s HSPA+ with an 11 Mb/s HSUPA upstream network. The operator joins its rivals life:) (BeST) and Velcom (Telekom Austria) who launched their HSPA+ services last quarter. Elisa in Estonia and Mobitel Slovenia additionally both upgraded to HSPA+ in April, again both offering top speeds of 21 Mb/s. Lastly, Unite (Moldtelecom), Moldova also launched its 3G offerings, deploying a 14.4 Mb/s HSDPA network in May under the ‘Unite 3G’ brand. The operator has reportedly invested MDL 250 million in its new network since winning a licence in December 2008 for US$8 million. The Huawei-built infrastructure will sit alongside its existing CDMA2000 1X and EV-DO services and currently covers 68% of the population. Our recent analysis, Global HSPA+ deployments set to surpass 100 mark, covers these and all other worldwide rollouts of the technology.

After the close of the quarter, Uzbekistan and Poland became the third and fourth markets, respectively, to deploy data LTE networks. In Uzbekistan, MTS (Sistema) and Ucell (TeliaSonera) both launched the technology in the 2500-2700 MHz bands while Aero2 and CenterNet Mobile Poland are running a joint network in the 1800 MHz band, offered through Aero2’s wholly-owned subsidiary Mobyland. Aero2, CenterNet and MTS are all using infrastructure from Huawei, while TeliaSonera’s network in Uzbekistan was deployed using equipment from ZTE.

Western Europe

In Q2 2010, Western Europe stood at 514.7 million cellular connections after recording a net decline of 5.2 million connections quarter-on-quarter. Western Europe is the most saturated cellular region globally, with penetration up to 130% and yearly connections growth of just 1%. In Q2 2010, 14 mobile operators reported negative quarterly net additions, a decline of 3.2 million connections. Aside from organic operator declines, the merger of Orange and T-Mobile to form Everything Everywhere in the United Kingdom also resulted in a net write-down of 6.5 million connections compared to their combined Q1 figures. This ‘loss’ was primarily due to the consolidation of definitions between the two companies to recognise active customers as those with usage in the past 90 days, compared to T-Mobile’s previous retention period of 180 days. Both these trends clearly reflect the high level of maturity in Western Europe as well as the intense level of competition within the mobile operator community.

Despite their high level of maturity, Nordic countries are amongst the fastest growing markets in Western Europe, with Finland in pole position. Year-on-year, total connections in Finland grew by 13% which is equivalent to the growth recorded in Q2 2009. In Q2 2010, the growth was fuelled by prepaid connections which grew by 42% at TeliaSonera year-on-year, boosting its market share of prepaid net additions to 89% in the quarter. But across the Nordics, mobile operators are strongly focusing on data growth, with TeliaSonera Sweden reporting a 40% yearly growth in its data and messaging net sales. The operator also reported that in May 2010, 28% of its customers used a smartphone compared to 13% a year ago. In addition, its mobile broadband connection base crossed the 500,000 connections milestone over the first half of the year, adding close to 100,000 net additions year-on-year. TeliaSonera launched LTE in Stockholm in December 2009, and promoted the benefits of the high-speed network in June this year by providing LTE services for some 3,000 journalists who travelled to Stockholm to report on the wedding of Crown Princess Victoria and H.R.H. Prince Daniel. In Sweden, we estimate that 40% of total connections are based on WCDMA (including HSPA) with TeliaSonera controlling a 44% 3G market share, closely followed by DNA with 31% and Elisa at 24%.

Due to a successful prepaid campaign, Telenor has managed to sustain its connections growth in Denmark in Q2 2010, whereas TDC and TeliaSonera both reported a quarterly decline. Telenor also reported fast growth in the contract segment with 703,000 contract net additions year-on-year, which translates into a 125% yearly growth. The operator also noted that revenues from mobile operations in local currency increased by 5% mainly driven by a higher subscription base within voice and mobile broadband. Quarter-on-quarter, its mobile broadband customer base increased by 10,000 to 161,000 connections. In May, Telenor Denmark acquired 2x20 MHz in the 2.6 GHz frequency band for approximately NOK 333 million. The spectrum license – valid until 2030 – has no requirements for geographical coverage or deadline for roll-out.

In Austria, most operators reported stable yearly connections growth despite the level of saturation in the country. T-Mobile’s connection base increased by 207,000 connections between Q4 2009 and Q2 2010 as a result of a new prepay deregistration rule for the secondary brand, tele.ring which was introduced on January 1, 2010. The operator reported 7% yearly connections growth which helped to keep its market share stable at 31%. However, Austria and Slovakia are the only two markets that did not share in T-Mobile’s fast contract growth. T-Mobile’s contract base in Austria now represents 64% of its total connections in Q2 2010, compared to 68% a year ago. In the country, T-Mobile upgraded its entire 3G network in collaboration with network equipment supplier Nokia Siemens Networks, a move aimed at introducing more aggressive data offers to offset falling voice revenues.

In Portugal, third-placed player Optimus reported an increase of 2.3 percentage points over 1H09 in data revenues, which now represent around 29.9% of total service revenues. This trend was mainly driven by the success of the operator’s ’Kanguru’ mobile broadband offer based on WCDMA HSPA, the introduction of competitive contract offers aimed at pushing smartphone penetration and the launch of its first Android smartphone brand ’Optimus Boston’. As a result, Sonaecom’s Optimus reported that EBITDA margin reached 32.8%, a 3.1 percentage point improvement compared to the first half of 2009. Meanwhile, market-leader TMN noted increased competitive pressure in certain consumer segments such as the youth segment and registered flat EBITDA at EUR 161 million, with EBITDA margin growing by 2.8 percentage points year-on-year to 46.9%. In Q2 2010, TMN focused on campaigns targeting on-net flat-fee prepaid tariff plans, as well as data services for which it introduced new smartphones such as the Samsung Galaxy S and the Samsung Wave. In addition, TMN launched a new version of its mobile portal – first introduced in 2007 – with a more user-friendly design and richer user experience. The operator has consolidated its Internet offering in the new mobile portal to enable access to its most popular applications such as Meo Mobile, email and Internet browser.

Despite a turbulent first half of the year, operator market shares in Greece remained relatively stable. The three main operators were forced to ramp-up deactivation of unregistered prepaid customers which led to a 12% decline in total connections to 18.2 million in Q2 2010, down from the beginning of the year when the figure stood at 20.8 million (Greek mobile market contracts by 12.5% in first half of 2010).

Everything Everywhere – the UK’s joint venture between Orange and T-Mobile – held its first investors conference in London on September 28th. In Q2 2010, their combined operations reported mobile service revenues at GBP 1.56 billion, EBITDA of GBP 309 million and free cash flow of GBP 205 million. Interestingly, Everything Everywhere reported a consolidated customer base of 27.1 million in Q2 2010 which is 6.5 million connections lower than the sum of Orange and T-Mobile’s connections base in Q1 2010. Prior to the conference, the company had described itself as the “UK’s biggest communications company, with a combined customer base of over 30 million people”. The ‘decline’ was caused by the operator cleaning up its subscriber base of inactive users, given differing definitions between the two companies. As part of its new strategy, Everything Everywhere plans to expand its footprint by increasing the number of combined network sites from 16,000 to 18,000, and will launch a national roaming offer. As a first phase of its multi-network strategy, Orange and T-Mobile will launch on the October 5th a unique offer that will enable their customers to access their combined network flavours (2G, 3G, fixed broadband and Wi-Fi) at no extra cost.

Vodafone highlighted a return to organic service revenue growth in two of its key European markets, the UK and Germany. The operator grew its annual service revenue by 0.2% in Germany and by 0.7% in the UK (Vodafone sees first signs of recovery in Europe). The operator group also sold its 3.2% stake in China Mobile which raised questions about the importance of its various minority equity interests in its financial results in the long term. We discussed in a recent blog post the contribution to Vodafone’s free cash flow in its 09/10 fiscal year made by the dividends received from associates and investments, and favourable foreign exchange gains. For Vodafone and other large operator groups, this situation is not sustainable and could be a sign of difficult times ahead.

Middle East

Turkey reported its third consecutive decline (and the fifth decline in the last six quarters) with the loss of 261,000 connections in Q2. Total connections fell to 61.5 million following an annual decline of 2.1 million (3%) connections. The Turkish mobile market witnessed the introduction of significant regulatory changes during the quarter, which took effect from April 1st. The regulator (TA) reduced Mobile Termination Rates (MTRs) by 52% and the maximum price cap by 38%. It also replaced the unit‐based pricing system for prepaid subscribers with a TRY-based per minute pricing system. In response operators increased their focus on contract subscribers. At the same time, there have been price adjustments to existing tariffs and limitations on usage incentives in the prepaid segment which saw all operators report declines in prepaid connections. Market-leader Turkcell led the decline for the third consecutive quarter with the loss of a further 400,000 connections in Q2, albeit an improvement from the 1.1 million lost in Q1. On the plus side for Turkcell was the return to growth of contract subscribers as it gained 500,000 contract connections in Q2. These gains were offset by the ongoing loss of prepaid subscribers, with a further 700,000 prepaid connections lost during the quarter. Turkcell has now reported the loss of 2.5 million prepaid connections since Q1 2009.

Vodafone’s turnaround continued in Q2 with net additions of 319,000 as total connections recovered to 16.1 million but still remain below the 17.4 million seen back in Q2 2008. Vodafone reported a record 535,000 contract net additions during the quarter, more than offsetting a third consecutive decline in prepaid connections of 216,000 in Q2. The highlight for the operator was the 24% year-on-year growth in service revenue to a record GBP 296 million, despite the impact of the MTR cuts. Vodafone noted that excluding the impact of the MTR cuts the operator would have seen a 43% year-on-year improvement. Blended ARPU increased by 17% year-on-year to TRY 16.10 with both contract ARPU up 17% to TRY 35.38 and prepaid ARPU by 8% to TRY 11.97 over the same period. The operator attributed its recent turnaround to an improved customer mix, the launch of strategic initiatives in targeted segments, and continued distribution and network enhancement. The market’s smallest player, Avea (Turk Telecom), reported its fifth consecutive quarter of negative net additions with the loss of a further 180,000 connections in Q2, as total connections declined to 11.5 million. Like its larger rivals it also managed to report gains in contract connections with the net addition of 120,000 contract connections in Q2, partially offsetting the decline of 290,000 prepaid connections. Avea reported that blended ARPU was up 8% year-on-year to TRY 17.76. The operator’s contract ARPU declined fractionally year-on-year to TRY 29.97 while prepaid ARPU increased by 16% to TRY 9.74 over the same period. Total revenue increased by 3% year-on-year to TRY 643 million while EBITDA rose by a substantial 331% to TRY 71 million, attributed to a combination of cost controls and commercial actions. Avea’s EBITDA margin returned to double figures in Q2 (11%) for the first time since Q4 2008.

In the region’s second largest market, Iran, market-leader MCI (TCI) finished Q2 with 38.3 million connections following net additions of 1.4 million, taking its annual increase to 6.8 million (22%). Second-placed MTN Irancell also performed strongly with net additions of 1.6 million in Q2, giving the operator 27 million connections. MTN attributed its ongoing success to appealing seasonal and segmented acquisition and usage promotions including GPRS bolt-ons, and a wider electronic distribution channel. Revenue in local currency increased by 42%, although this translated into a 15% increase to ZAR 9.1 billion in Rand terms with revenue growth mainly due to higher airtime and subscription revenue. Local currency ARPU increased marginally as a result of greater usage due to improved capacity and coverage in key areas, while reported ARPU remained stable at US$8. A highlight for MTN was the 32% year-year growth in data revenue growth due to an increased uptake of GPRS services.

In neighbouring Syria, MTN reported net additions of 122,000 to reach 4.4 million connections at the end of Q2. The operator attributed this increase to the launch of numerous segmented value propositions and loyalty programmes aimed at the youth segment, as well as a strong focus on churn management. ARPU declined 11% year-on-year to US$11 while total revenue declined 5% to ZAR 1.6 billion. Revenue in local currency increased by 12% partly due to an increase in data uptake that saw data revenue increase 105% to ZAR 62.5 million. MTN has been seeking to convert its current Build-Operate-Transfer (BOT) agreement into a full licence, and in this regard it appears to have met with success as it has recently been reported that both MTN and Syriatel will be asked to pay SYP25 billion to convert their BOT agreements into 20-year full licences. It has also recently been confirmed that Syria intends to issue a third licence which is expected to attract the attention of a number of bidders. Elsewhere in the Middle East, MTN reported Q2 net additions of 191,000 in Afghanistan and 166,000 in Yemen to reach 3.6 and 2.7 million connections, respectively.

In Saudi Arabia the market’s new entrant, Zain, reported that it reached 6.9 million connections in Q2 following net additions of 1.3 million. Total connections increased by 3.1 million (83%) over the last 12 months. Zain reported Q2 ARPU of US$18, down from US$17 in Q2 last year, while total revenue increased year-on-year by 107% to SAR 1.5 billion. The operator, which launched in August 2008, reported that it had turned EBITDA positive after just 22 months of operations, with Q2 EBITDA of SAR 57.1 million. This was achieved on the back of rapid network deployment and a focus on data services. During this most recent period, Zain reported that it had decreased its operational costs and increased its revenue streams significantly by expanding its infrastructure and increasing efficiency, as well by offering ‘unique and attractive service packages’. Market-leader STC reported that its total revenue declined by 1% to SAR 8.8 billion. In contrast Mobily, the second ranked operator, increased total revenue over the same period by 24% to SAR 4 billion. Finally, the markets smallest player, Wataniya controlled iDEN operator Bravo (PTC), reported net additions of 4,000 to take total connections to 200,000. Bravo’s ARPU declined 1% year-on-year to KWD 8.40 while revenue increased by 10% to KWD 6 million. Wataniya’s operations in Palestine which commenced in November 2009, reached 244,000 connections in Q2 – up from 164,000 at the end of last quarter. ARPU was reported to be KWD 3.50. Incumbent operator Jawwal (PalTel) reported 125,000 net additions in the quarter to reach 2.1 million connections with an ARPU of US$14.95.

Qatar reported net additions of 74,000 in Q2, the lowest since Vodafone commercially launched in July 2009 and ended Qtel’s former monopoly. Vodafone led the way in net additions for the third consecutive quarter with a gain of 70,000 connections, albeit the lowest figure since its launch. Vodafone’s total connections hit 535,000 giving them a market share of 20%. Qtel reported net additions of just 5,000 in Q2 as total connections reached 2.2 million. In more positive news for Qtel, the operator reported its blended ARPU increased for the first time in eight quarters to QAR 123.90, with both prepaid and contract ARPU rising, though it remains down 21% year-on-year. Vodafone also saw its blended ARPU increase 3% sequentially to QAR 104 in Q2, while total revenue increased 21% sequentially to QAR 176 million. Vodafone indicated it expected to report positive quarterly EBITDA by year end and that it remains on track to be cumulatively EBITDA positive by December 2011. The operator stated that going forward it intends to focus on high value customers, which it identified as Qatari nationals, expat families, short-term expats and business customers, to build on its current segmented offerings for labour and service workers. It also promised among its new strategies to ‘really deliver an awesome customer experience’ and to ‘bravely take a few risks on cool new stuff’. Rival Qtel also increased its segmented offerings when it initiated its partnership with the Virgin Group through the launch of its Virgin Mobile brand in May.

In Oman, total connections reached 4.4 million following net additions of 172,000 in Q2. Market-leader Oman Mobile (Omantel) added 145,000 net additions in the quarter to hit 2.4 million connections. These figures include 43,000 net additions during the quarter by its MVNO partners, FRiENDi (including Halafoni) and Renna, which had a combined total of 331,000 connections at the end of Q2. Qtel controlled Nawras reported net additions of 27,000 in Q2 to reach 2 million connections. ARPU declined 6% year-on-year to QAR 69.10. In Iraq, Qtel associate Asiacell reported net additions of 175,000 as total connections reached 7.9 million. Market-leader Zain reported a bumper quarter with 1.1 million net additions to reach 11.7 million connections on the back of a re-vamp of its existing products, an increase in points of sales from 2,500 to 7,500, as well as the launch of new VAS and data services. Since the sale of the majority of its African operations Iraq is now Zain’s largest market by both connections (34%) and revenue (31%).

Israel has also recently seen substantial interest amongst potential MVNOs with around a dozen groups expressing an interest. Several groups including Telecom 365 (Hamashbir), Ituran and Free Telecom have received formal concessions from the regulator that allows them to begin negotiations with the network operators. Other groups to express an interest include 018 Xfone, Bynet Communications, Home Center, Israel Post and Rami Levy. So far though it has been reported that the network operators have been reluctant to enter into negotiations with the potential MVNOs and it appears that the regulator may need to step in to set the agreements if no deals can be signed within six months. The outlook for the market is further complicated by the regulator’s recent announcement that it plans to issue two additional 3G licences early next year, as some of the potential MVNOs have also expressed an interest in bidding. The existing network operators continue to report relatively low levels of connections growth, with both Cellcom and Orange (Partner Communications) reporting 28,000 net additions in Q2 and Pelephone (Bezeq) reporting 18,000, leaving the annual market growth under 5%. Cellcom remains the market-leader with 3.3 million connections at the end of Q2, ahead of Orange (3.1 million) and Pelephone (2.8 million).

USA/Canada

US market-leader Verizon Wireless reported the highest organic connections growth in Q2 with net additions of 1.6 million, ending the quarter with 99.7 million total connections. However, this was down from 100.1 million total connections reported the previous quarter following completion of the divesture of 2.1 million connections to comply with regulatory conditions imposed as part of its acquisition of Alltel. Second-placed AT&T Mobility hit 90.1 million connections in Q2, following organic net additions of 1.6 million. AT&T’s total connections were further boosted by the acquisition of 1.6 million of the connections divested by Verizon. AT&T intends to move these connections across to its 3G WCDMA network over the next 12 months by replacing subscribers’ existing CDMA devices with equivalent devices running on its network. After three years of quarterly connection losses, Sprint finally managed to post positive headline net additions of 111,000 in the latest quarter, taking its total connection count to 48.2 million. The operator benefited from the launch in June of the HTC Evo that runs over both Sprint’s CDMA network and the WiMAX network of its subsidiary Clearwire. Meanwhile the nation’s fourth largest player – T-Mobile – reported a decline of 93,000 connections for the quarter as its total connections fell to 33.6 million.

Despite the ongoing success of Apple’s iPhone, Verizon outpaced AT&T in organic contract net additions in Q2, largely thanks to its DROID branded line of Android smartphones including the HTC Incredible, launched in April. Verizon gained 665,000 contract connections for the quarter ahead of AT&T’s iPhone-inspired 496,000. Verizon noted that 35 percent of its contract subscriber base now has 3G devices. However, only a reported 20 percent of its retail subscribers are using smartphones. Rival AT&T reported that the number of contract subscribers with 3G integrated devices (handsets with QWERTY or virtual keyboards) increased by 2.9 million year-on-year to 29.7 million (representing 44 percent of its contract base), an increase of 98 percent year-on-year. Much of this increase has been driven by the iPhone. AT&T activated another 3.2 million iPhones during the quarter – the operator’s highest ever number of quarterly activations. These figures included just under a week of iPhone 4 activations at the end of June. AT&T noted that approximately 27 percent of iPhone activations were for new subscribers, underlining the importance of the device in driving AT&T’s connections growth. Notwithstanding Sprint’s success in turning around its headline connections figure, the operator continued to bleed contract subscribers during the quarter with a loss of 228,000 connections. Despite a gain of 136,000 contract CDMA connections, Sprint’s iDEN contract subscribers continue to be a major drag on the operator with a decline of 364,000 in Q2. Meanwhile, despite the lack of a hero handset matching the status of it larger competitors, contract subscribers were the bright point for T-Mobile during the quarter as the operator picked up 106,000 contract net additions to post its first net increase in contract connections since Q209. T-Mobile reported that 6.5 million subscribers were using 3G-capable smartphones, which now accounted for 19 percent of total subscribers, up from 6 percent in Q2 2009.

The most successful of the big four operators in the prepaid market during Q2 was AT&T, which added 300,000 organic net additions. However, this gain came almost entirely on the back of 3G iPad activations. With a reported 400,000 – 500,000 iPads connected during the quarter, AT&T’s traditional voice-centric prepaid connections base appears to have declined, as it has done for three of the last four quarters. Verizon reported the organic loss of 211,000 prepaid connections as it kept clear of vigorously competing in the price-sensitive prepaid segment, leaving the space open for its wholesale partners. Sprint, which has focused heavily on prepaid as part of it efforts to stem headline subscriber losses, reported 173,000 prepaid net additions for Q2. However, in a similar pattern to its contract offerings, a gain of 638,000 prepaid CDMA connections was offset by the loss of 465,000 prepaid iDEN connections. The period saw the operator roll-out its four prepaid brand strategy with offerings from its Boost Mobile, Virgin Mobile, Common Cents Mobile and Assurance Wireless brands. Boost continues to focus on unlimited plans, while Sprint also re-launched Virgin as a data-centric offering. The operator also expanded the government subsidised Assurance and launched Common Cents as a traditional pay-per-minute offering. T-Mobile reported a decline of 199,000 prepaid connections during the quarter as its prepaid offerings struggled in a competitive marketplace. Prepaid specialist Leap Wireless also struggled, with a loss of 112,000 connections (comprised of 79,000 voice connections and 39,000 mobile broadband connections). However, fellow prepaid specialist MetroPCS reported a strong quarter with net additions of 303,000 on the back of its ‘Wireless for All’ unlimited text/talk/web tax-inclusive plans.

Verizon clearly dominated the wholesale market during Q2 with organic net additions of 896,000, taking its wholesale connections base to 5.9 million. This is still some way adrift of AT&T’s 10.6 million wholesale connections (after AT&T reported an organic decline of 130,000 connections in the quarter) but can be considered a sizeable achievement considering that Verizon only had 2.5 million wholesale connections in the year-ago period. Much of the success has come on the back of its wholesale agreement with TracFone’s Straight Talk unlimited prepaid offer, which is distributed nationwide via Wal-Mart. Sprint also gained wholesale connections in the period, with an increase of 166,000, taking its total wholesale connections to 3.8 million (including affiliates). However, this is significantly down from the 9.3 million reported in Q2 2009 (largely due to its acquisition of Virgin Mobile USA late last year, which shifted Virgin’s subscribers directly into its retail subscriber base). Finally, T-Mobile disclosed that 2.1 million of its prepaid connections base came from its wholesale partners, unchanged from last quarter.

For the first time all four major nationwide operators gave an indication of their embedded (connected) device connections, indicating the growing importance of these devices in carrier growth strategies. AT&T reported that it added 896,000 ‘connected devices’ (e-readers, vehicle-tracking, alarm-monitoring and other emerging products) during the quarter, taking its embedded total to 6.7 million connections. The operator’s connected devices base increased by 3.6 million (115 percent) year-on-year, illustrating the growing importance of this market segment and its significant role in boosting connections growth. Verizon has also been busy growing embedded device connections (or ‘Other’ connections as it prefers to call them) and reported Q2 net additions of 264,000, boosting its total to 7.7 million. No prior year comparisons were provided. Sprint includes embedded device connections in its wholesale figures and revealed that connected devices represent approximately half of its wholesale connections base. On the basis of Sprint’s current wholesale figures this implies that its connected devices portfolio currently represents around 1.9 million connections. Sprint also noted that, while ARPU for these connected devices is significantly lower than traditional subscribers, the cost is also significantly lower, resulting in higher margins. Not to be left out, T-Mobile reported that it has 1.5 million connected devices that are included in its contract connection figures, although it noted that some of these may not have monthly recurring charges.

In Canada, market-leader Rogers Wireless gained 119,000 net additions during the quarter to hit 8.6 million connections. The operator reported that it activated and upgraded 385,000 smartphones in Q2, of which 35% were new subscribers. This resulted in subscribers with smartphones representing 35% of its contract subscribers compared to 25% only 12 months earlier. Telus Mobility reported the highest connections growth in Q2 with net additions of 124,000 to end the quarter with 6.7 million connections. The operator reported that smartphones represented 30% of contract gross additions in Q2 compared to 15% in the previous corresponding period, while smartphone subscribers now represent 25% of its contract subscriber base as compared to 16% a year earlier.

Bell Mobility reported the lowest quarterly growth of the big three operators with 98,000 net additions to finish the quarter with 7 million connections. In addition, the Canadian market has recently been shaken-up by several new entrants, discussed in our analysis WIND Mobile leads the charge of new entrants in Canada. WIND Mobile (Globalive), which launched in December 2009 backed by Orascom, reported that it finished Q2 with 94,000 connections and subsequently passed the 100,000 milestone in early July. During the quarter two further new entrants began operations with both Mobilicity (DAVE Wireless) and Public Mobile kicking off their services in May while Videotron (Quebecor Media) launched earlier this month. In most cases the new entrants have focussed on undercutting the incumbent operators with unlimited voice and text plans. The new entrants prompted market-leader Rogers to respond by launching a new sub-brand called ‘chatr wireless’ offering unlimited talk and texts. Bell Mobility also responded to these developments by revamping its ‘Solo’ sub-brand with an almost identical unlimited offering. These moves have attracted criticism from some quarters as they are reported to be only currently offered in the urban markets that have seen launches by the new entrants.