Friday, February 28, 2014

Telco Capital Investment: Running Harder to Stay in Place

Competition has negatively affected the potential return from any major capital investment in carrier networks. One recent illustration is a warning by Fitch Ratings that telcos will have to invest more network capital than they used to, just to maintain earnings where they are.

“While investment in data networks is still economically justified, weakening cash flows from traditional services means that telcos have to spend more capital simply to maintain EBITDA at the same level,” said Fitch Ratings.

That actually is not a new problem. Fixed network telcos have had to face the problem for a decade, and is easy to understand. In a monopoly environment, either a cable company or telco could safely assume that “cost per home” and “cost per customer” were about the same, when evaluating a network upgrade.

In a highly-competitive environment, “cost per home” and “cost per customer” diverge sharply, depending on customer penetration. If a service provider makes an investment, passing three homes, only one of which is a customer, then the cost per customer is 300 percent higher than cost per home.

The same sort of dilemma was faced by fixed network telcos pondering fiber to home upgrades. Voice revenues would not increase, and a decade ago, one might have argued that upgraded copper facilities would handle demand for high-speed access.

So the one new service with incremental revenue was video entertainment. So, essentially, the fiber to home upgrade business case had to be driven by incremental video revenues, in a market where cable had half the market, and the two satellite providers had the other half. That would make the telco the fourth provider in the saturated market.

That is a tough business case, indeed.

Now mobile service providers are encountering the same problem, as over the top apps erode demand for carrier voice and messaging.

To be sure, observers will note, use of over the top apps (especially video) increases demand for mobile data. That is true.

But Fitch notes that the boost in data usage does not translate into proportionally higher telco EBITDA, because data services have lower margin than the voice and messaging services the mobile data services replace.

That is another way of saying that revenue per bit is challenged. The problems might not yet be so pronounced everywhere, but Fitch does note that even some markets in growing Asia could be exposed.

Philippines mobile service providers earn about 30 percent of total revenue from text. for example. In other markets, including India, Indonesia and Sri Lanka, smartphone penetration is relatively low, and carrier voice and text prices also are low, reducing the potential for OTT substitution.

Changing demand for carrier voice and data also is affecting retail pricing plans. Whether particular products are best sold on a metered or unmetered basis is an important issue.

Generally speaking, it will make sense to meter usage of a high-demand product, and supply declining demand products on a flat rate basis.

Sometimes the approach changes with the product lifecycle. At one time, international voice and national long-distance were drove profit for the whole business, and it made sense to meter and rate usage.

These days, with cheap OTT alternatives, voice does not drive revenue growth, and the issue is how to protect what remains of a declining business. Under those circumstances, bundling voice and texting inside a bundle, and charging on a flat rate basis, makes sense.

Telcos have learned that triple-play bundled services not only increase revenue per account, and also reduce churn.

They now also have learned that converting metered services to non-metered services inside bundles has additional value, namely reducing revenue loss for legacy services that have declining levels of demand.
In the Netherlands, for example, KPN saw a 13 percent fall in consumer mobile service revenue in the fourth quarter of 201111, and warned of a poor 2012 outlook, in large part because its declining voice and messaging services were not protected by being moved to a bundle, Fitch Ratings argues.

In contrast, Vodafone's Netherlands business saw a much smaller impact in the same quarter because of its earlier introduction of integrated tariffs that protected some level of voice and messaging revenue, Fitch Ratings argues.

So we are likely to see a bigger shift to bundles putting voice and texting inside usage plans sold at a flat rate, at least in markets where demand for voice and texting is flat or declining.

Wednesday, February 26, 2014

Unlicensed Spectrum Now is Essential for Licensed Mobile Networks

Unlicensed spectrum has become a central, and arguably essential part of mobile service provider network economics, even if mobile service providers generally favor licensed spectrum.

That vital role for unlicensed spectrum is likely to become even more important as video content dominates network demand in the future.

In 2013, 45 percent of total mobile data traffic was offloaded onto the fixed network using Wi-Fi or a femtocell in 2013.

By 2018, more data will be offloaded to Wi-Fi from mobile networks than will remain on mobile networks, according to Cisco.

Without offload mechanisms, mobile data traffic would have grown 98 percent rather than 81 percent in 2013, Cisco notes. Mobile video is the driver. 

Mobile video traffic was 53 percent of total data consumption by the end of 2013, and by 2018, mobile video will represent 69 percent of global mobile traffic, according to the Cisco’s Visual Networking Index (VNI) Global Mobile Forecast, 2013-2018.

The other observation is that such offloading of bandwidth-intensive video content matches the propagation characteristics of low-power unlicensed spectrum.

Where a primary concern of older voice-oriented mobile networks was coverage, most video is consumed when users are not moving. That means "capacity," not "coverage," is the new requirement.

And most of the "capacity" can be supplied using low-power unlicensed spectrum. All of which underpins the argument that more unlicensed spectrum is required, and should be released.

In Wholesale Business, Customer Satisfaction Follows Revenue and Profit

Analysys Mason Global Revenue Growth Forecast
One would expect service providers to focus their sales and customer efforts in market segments where telecom industry revenue growth is highest, or where profit margins are highest, in both retail and wholesale portions of the business.

In the wholesale telecom business, that should mean attention to buyers of IP data capacity rather than voice, mobile buyers instead of fixed network buyers, large buyers rather than smaller buyers and content providers and “new customer verticals” more than some traditional customers, for example.

Findings of a survey conducted by Atlantic-ACM of global wholesale buyers suggests that principle is at work in the wholesale telecom business.

Though overall buyer satisfaction has remained stable since 2010, it appears smaller wholesale customers are less satisfied than they once were, while large customers are more satisfied than they used to be.

Early in 2014, satisfaction among large customers virtually leaped five percent among large customers. On the other hand, satisfaction among smaller customers declined 0.5 percent early in 2014.

Customers in fixed network verticals reported satisfaction levels 1.1 percent lower, while satisfaction among customers with operations in mobile service grew 5.3 percent.

Customers in “emerging markets” (cable/content/ISP verticals, resellers/systems integrators and data center/hosting/cloud providers) reported satisfaction levels 2.1 percent higher.

It would be reasonable to assume further changes in satisfaction will occur over the next decade, since the volume of sales, and the attendant profit margins from some products, are expected to decline.

For example, U.S. local wholesale voice revenues will decline from $6.1 billion in 2013 to $5.4 billion in 2014, according to Atlantic-ACM, while U.S. long distance wholesale voice revenues will decline from $2 billion in 2013 to $1.6 billion in 2014.

In a market with total U.S. telecom revenue in the $400 billion range  (including video entertainment revenues), that level of wholesale voice revenue is almost nothing.

Elsewhere, wholesale revenue likewise is dropping, propelled in some cases by mandatory price reductions imposed by regulatory authorities. In addition to lower retail prices, lower demand also is an issue. Not only are retail voice prices dropping, people are consuming less fixed network and in many cases also mobile voice.

In the United Kingdom, there is some evidence that aggregate wholesale revenues began to decline, as a percentage of total service provider revenues, in 2011.
Total European wholesale revenue declined by 6.2 percent in 2012 to $45.1 billion, Ovum estimates, while service provider retail revenues fell by 10 percent in the same period. As you might guess, voice revenue declines were key drivers of the change.

In 2012 the European wholesale fixed voice sector accounted for less than a third of total wholesale revenues in the region, while revenues were 13 percent lower than in 2011, part of a downward trend in place for more than a decade.
Under those conditions, one would expect suppliers to focus on growth segments (new customers, apps or geographies) while deemphasizing declining and small segments.

One of the shifts is regional. Already, retail revenue is declining in three regions--Central and Eastern Europe, Western Europe and developed Asia--while growing in the “emerging” parts of Asia, Latin America, Africa and North America.

And where retail revenue grows, wholesale revenue is likely to follow.

Analysys Mason predicts that retail revenue worldwide will grow at a 1.7 percent compound annual growth rate between 2012 and 2017, with growth in mobile (3.2 percent) more than offsetting a decline in fixed (–0.6 percent).

Tuesday, February 25, 2014

Globally, LTE is Faster than Wi-Fi, Study Finds

With the caveat that Long Term Evolution speeds are directly related to the amount of bandwidth to support the network (it makes a big difference whether 10 MHz or 20 MHz or bigger channels are available), Long Term Evolution now offers faster speeds, on an average global basis, than fixed connections using Wi-Fi for local distribution, according to an analysis by OpenSignal.  

If speed is a key driver of usage, then users are going to rely more on LTE than Wi-Fi, much as they traditionally have used Wi-Fi instead of the mobile network because Wi-Fi offered a better experience.

There is some evidence of that. A study by Mobidia in 2012 suggested that South Korean users actually were reducing their Wi-Fi usage in favor of the LTE network.

But a Devicescape analysis suggests that Wi-Fi Wi-Fi usage doubles for consumers on 4G networks at a similar rate to how their mobile data usage increases. In other words, consumers increase mobile and offload consumption in proportion to their current behaviors.

In contrast, a recent survey by EE of its UK subscribers that found a significant proportion of its LTE customers are using fewer or no public Wi-Fi hotspots, defaulting instead to the LTE connection most of the time.

The EE survey found 43 percent of LTE network customers were using fewer or no public Wi-Fi hotspots since moving to 4G. In addition, almost 50 percent indicated their mobile browsing time had increased since getting the faster connection.

So it is not yet clear how a faster LTE network affects use of Wi-Fi.

AT&T Adds "No Incremental Cost" International Text Messaging

Starting February 28, 2014, AT&T's Mobile Share and Mobile Share Value plans will include unlimited text messaging from the United States to more than 190 countries worldwide and unlimited picture and video messaging to more than 120 countries around the globe. Both new features come at no extra cost.

In doing so, AT&T joins T-Mobile US and Verizon Wireless, both of which had added “no incremental cost” international text messaging on some popular plans. Verizon More Everything plans and T-Mobile US Simple Choice plans feature no incremental cost global text messaging.

T-Mobile US also features no incremental cost Internet access when roaming, on it Simple Choice plans.

The new capabilities illustrate the trend of declining revenue opportunities for mobile and fixed network service providers in the voice and messaging application areas, as well as the growing use of substitute products such as WhatsApp.

As recently as 2005, voice revenues represented 73 percent of total revenues. By 2013, voice had dropped to just 43 percent of total revenues.

The average length of a local call has fallen more than 50 percent over the last decade to 1.8 minutes, according CTIA-The Wireless Association.

And consumer email traffic fell nearly 10 percent between 2010 and 2012, according to Radicati Group.

Over the top messaging, meanwhile, is growing at triple-digit rates. WhatsApp recorded an all-time high of 10 billion outgoing messages in a single day in June 2013, which equated to an average of more than 30 messages per user per day, according to Stephen Sale, Analysys Mason principal analyst.

“We estimate that the total volume of messages sent from mobile devices via IP services exceeded the volume of SMS messages for the first time in 2013, at more than 10.3 trillion compared with 6.5 trillion worldwide,” said Sale. “Messaging volumes associated with OTT services are expected to almost double in 2014 and will reach 37.8 trillion messages sent in 2018.”

That is having an impact on voice revenues and usage as well, at least in many markets.

To be sure, Insight Research projects that U.S. telecommunications service revenues will continue to grow from 2013 to 2018. But that growth will not come from voice services.

Instead, voice revenue will continue to decline at -4.81 percent compound annual growth rate from $163 billion in 2013 to $127 billion in 2018, Insight Research predicts.

Mobile voice—which peaked at $118 billion in 2008—will decline at -3.82 percent CAGR to $84 billion in 2018. Fixed network voice will drop even faster, at a negative 6.56 percent CAGR from $61 billion in 2013 to $44 billion in 2018.

Voice lines in service obviously will mirror those declines. The U.S. fixed network voice installed base peaked at 192 million access lines in 2000. In the following decade, despite nominal population growth, close to 80 million  access lines or more than 40 percent of wireline network lines were disconnected, replaced largely by mobile phones, Internet-based phone services or a shift to other communication apps, Insight Research says.

Globally, by 2002, the global telecommunications industry reached a crossover point at which the number of mobile service subscribers surpassed those of fixed telephone networks. At the close of 2002, there were 1.2 billion mobile customers around the world, compared with
1.1 billion fixed telephone lines.

Those are daunting challenges for observers who argue that service providers actually can do very much to protect and then grow voice revenues. Some might argue that, no matter what service providers do, voice revenues will drop.

Millennials Watch Lots of "TV," Just Not So Much on TVs

Though some studies indicate that Millennials watch less linear TV than older consumers, some research suggests they consume more video, just not on linear TV services, a study sponsored by YuMe suggests.

Over a recent three-year period, Millennial women watched about 10 percent less linear TV since 2010, while Millennial males who dropped TV usage seven percent since 2010. The YuMe survey used an 18-24-year-old group (born in 1989-2000) as the “Millennial” definition, a narrower definition of Millennials than others would use.

Millennials also use their smartphone and tablets more than any other demographic, for the purpose of watching video. Also, Millennials did not use digital video recorder features at all, YuMe suggests.

Millennials do report watching a lot of TV shows and user-generated content. What they don't watch, is news, with only 13 percent saying they watch it.

About 49 percent of Millennials reported watching web videos on smartphones, 44 percent said they watched web videos on PCs and 44 percent said they watched web videos on 

4.3 Billion People Do Not Have Internet Access

Of the world’s seven billion people, 2.7 billion have access to the Internet, while 4.3 billion do not. 

Most of them live in developing countries.

Though it still is possible to argue about whether the high adoption of Internet access and higher degree of economic development are causal or correlated, even those who might tend to think high Internet access and higher economic development are correlated, not causal, might support fastest possible adoption of Internet access everywhere, for the same reasons it was deemed important to provide voice communications to everyone.

If developing countries were to catch up with levels of internet access in developed economies today, they would reach a penetration level of around 75 percent, more than tripling the number of present “global south” Internet users from 800 million to three billion.

Of the new global south Internet users, some 700 million would be in Africa, 200 million in Latin America and 1.3 billion in Asia.

Public policy makers can help through initiatives that focus on reducing costs and administrative barriers for operators, strengthening competitive incentives for operators to expand coverage and the services they offer, and ensuring that consumers face affordable prices, the study suggests.

Expanded Internet access in developing countries to levels seen today in developed economies could increase productivity by as much as 25 percent in developed economies,  generating $2.2 trillion in gross domestic product,  and more than 140 million new jobs, lifting 160 million people out of poverty, according to a new study by Deloitte, and sponsored by Facebook.

Deloitte estimates that if developing regions achieved internet access levels seen today in
developed regions, their long run productivity could increase by about 25%. This effect is most pronounced in regions currently characterised by lower current levels of productivity or lower penetration rates.

In India, long run productivity could increase by 31 percent, while Africa productivity could grow 29 percent.

In South and East Asia, productivity increases of about 26 percent is possible. Productivity in Latin America could increase by 13 percent.

Mobile and internet connectivity in the agricultural sector would improve productivity by providing farmers with information on weather conditions, disease control and new methods of maximizing crop yield, as well as provide livestock tracking.

Access to market and pricing information through the internet and mobile phones enables small-scale farmers to access markets directly instead of through costly intermediaries. That could increase profits for farmers by up to 33 percent, the report suggests.

In the Kerala region of India, the use of mobile phones to track weather conditions and compare
wholesale prices led to an eight percent increase in profits for fishermen, along with a four percent drop in prices for consumers, Deloitte says.

These gains in productivity might benefit up to 360 million individuals, many of them small-scale subsistence farmers.

By reducing transaction costs, the internet reduces barriers to market entry and allows small and medium-sized businesses to reach a broader market, as well.

Smaller businesses with Internet access in countries such as Vietnam, Mexico, Malaysia, Argentina, Turkey, Taiwan, Hungary and Morocco all experienced on average an
11 percent productivity gain due to Internet-accessed applications, the study suggests.

A World Bank study suggests developing economies with a 10 percent increase in
broadband penetration can increase growth in per capita gross domestic product by 1.3 percent.

Deloitte estimates that an expansion in internet access is worth between $450 and $630 per year to individuals in the developing world, an average increase in per capita incomes of
about 15 percent.

In Africa, Internet access could grow per capita income by 21 percent. In India, Internet access could increase per capita income by 29 percent.

Deloitte estimates that increasing internet access to levels experienced in developed countries can increase GDP by up to $2.2 trillion (an increase of 15 percent), with South and East Asia and India each gaining about $0.6 trillion in additional economic activity.

Output in Africa could increase by over $0.5 trillion. Across the developing world, the GDP growth rate would be boosted over 72 percent. In India GDP growth rates have the potential to double, in Africa to grow by 92 percent and in South and East Asia to rise by 75 percent.

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