Unstable Fixed Network Business Open to Assault from "Start-Up" Style Value Propositions

The U.S. fixed network business is unstable, and becoming more unstable. In part, that is because revenue is shifting to the mobile networks, stranding assets owned by the largest fixed network providers. That means fixed network operators have a revenue problem.

Add to that the increased burden placed on each remaining customer as high fixed costs have to be shared across a shrinking base of customers. That means operating costs must be slashed.

Rural service providers have other problems, namely shrinking support funds and a new emphasis on broadband access, not voice.

Still, the main problem is that mobile networks generate about two thirds of global industry revenue.

So no matter what is spent on the fixed networks, they only generate a third of total revenue. And that assumes the revenue ratios do not tilt in the direction of mobile even more than at present.

U.S wireless revenue in 2012 of about $335 billion represents about 66 percent of communications revenues.  Fixed network voice revenue was about $132 billion, with an additional $38 billion in broadband access revenue and $6 billion in television revenue, for a total of about $176 billion in fixed network revenue.

U.S. mobile revenues as a percentage of total revenues have been climbing for a decade. The only issue has been the precise year of crossover, when wireless surpasses fixed network revenue. That will happen in 2013, some believe.

To be sure, the executives running fixed networks are smart. They will redeploy capital into other lines of business, such as Comcast already has done. They will use bundling and packaging to protect legacy services. They will adjust pricing. They will try to create new services. They will buy assets to substitute for organic growth.

Still, all of that essentially amounts to running in place.

But market instability also creates opportunities for other providers. Those with lower operating costs or a radically-different value proposition will have advantages. Some incremental advantage will be claimed by service providers able to offer “same value, lower price.”

But major changes in market share will require more than that. In the start-up business, the notion has been that challengers need an order of magnitude better value-price advantage to take on legacy market leaders.

And that is precisely the danger Google Fiber represents. On either value or price-per-bit metrics, Google Fiber offers an order of magnitude improvement in end user experience.

But that probably also illustrates what might be needed if a serious challenge to current ISP market share is to happen. Competitors will have to move from "same value, lower price" to the metric used by start-ups: an order of magnitude better value, same or lower price."