Enventis Sale Illustrates Rural Telco Dilemma

Another acquisition by regional telco Consolidated Communications, which now is acquiring Enventis Corporation, formerly HickoryTech, illustrates the pattern of “growth by acquisition” for Consolidated Communications and other regional telcos that formerly primarily earned their revenues from telecom services, mostly voice, sold to rural consumers.

In recent years, leading regional telcos that formerly could have rightly been called “rural telcos” have grown not just by acquiring assets, but by changing the nature of their businesses, becoming largely suppliers of services sold to business customers.

In most cases, such transformations have been accomplished through acquisitions, especially of service provider operations that historically have focused on business customers.

Almost by definition, that strategy cannot work for all rural telcos. An acquisition strategy requires access to capital, plus geographical proximity, management expertise and reasonable existing scale.

Windstream and Frontier Communications, for example,  are among larger regional service providers whose strategies are based on growth from business customers.

After the acquisition, the larger company (Consolidated  plus Enventis) will have $785 million in revenue and $332 million in adjusted EBITDA for the 12 months ending March 31, 2014.

Enventis currently serves approximately 39,000 access lines, has 21,000 high-speed internet customers, 12,000 digital TV customers and 90 fiber-to-the tower sites.

As has been the case for Windstream Communications and Frontier Communications, business revenues have proven to be crucial for Enventis, and increasingly also are the story for Consolidated Communications.

Enventis created a regional fiber network spanning 4,200 route miles that enables facilities-based business customer operations in Minnesota, Iowa, North Dakota, South Dakota and Wisconsin.

Enventis says it earns 80 percent of revenues from its business and broadband services segments.  That is the good news.

The bad news is that Enventis is losing voice lines and revenue, as well as associated equipment revenue, about as fast as it is gaining business revenues, Internet access and video services revenue.

That, as much as anything, illustrates the fundamental problem many fixed network service providers are facing.

Enventis arguably had been doing a good job creating new revenues to replace lost legacy revenues.

Even so, Enventis is running to stay in place.  

In 2013, access line revenue dropped 12 percent, access revenue declined seven percent, broadband revenue was up five percent and other revenue dipped seven percent. Total telecom segment revenue declined four percent.

Offsetting those losses, the fiber segment grew revenue 11 percent in 2013, while equipment revenues declined one percent (revenue was down 22 percent in the first quarter of 2014).

Enventis reported first quarter of 2014 net income of $2.1 million, an increase of 27 percent year over year.

Earnings before interest, taxes, depreciation and amortization totaled $12.1 million in the first quarter, an increase of 11 percent.

Revenue totaled $44.2 million and was down nine percent from first quarter 2013, primarily due to lower equipment sales, which were down 35 percent year over year.

Services revenue, which accounts for 77 percent of the company’s revenue, increased two percent year over year.

Revenues from “Fiber and Data” was $17.7 million, up six percent year over year. Operating income was $2.9 million, up 80 percent year over year, with net income amounting to $1.7 million, an increase of 81 percent year over year.

In the “Equipment Segment,”  Enventis revenue totaled $12.2 million, a 29 percent decrease year over year. Support services related to equipment sales was $2.2 million, a 19 percent increase from first quarter 2013.

Operating income totaled $486,000, a 41 percent decrease year over year. Net income totaled $287,000, a 41 percent decrease compared to the first quarter 2013.

In the “Telecom Segment,”  Enventis earned $14.4 million, down two percent year over year. Broadband service revenue grew five percent, offsetting part of the voice revenue decline.

Net revenue was $1.9 million.

The longer term issue might have been whether growth could be sustained.

Enventis predicted total 2014 revenue (gross, net, cash flow) would be about the same as 2013 results.

In 2013, Enventis revenue was $189.2 million, up three percent. Operating income in 2013 was $17.6 million, down nine percent.

Net income in 2013 was $7.7 million, down $566,000 from 2012.

Prior to the acquisition, Enventis had forecasted 2014 revenue between $189 million and $199 million, with the main trend being growth of business and broadband revenue and declines in voice revenue. In other words, revenue growth was most likely going to amount to $5 million, on an annual basis.

Net income was expected to be in a range of $6.4 million to $8.4 million, possibly less than earned in 2013.

EBITDA in 2014 was expected to be in a range of $47 million to $49.5 million. In 2013, EBITDA was $47 million.

The big story, however, is that new revenues would not offset all the legacy services losses.

Enventis expected flat to slightly-higher 2014 gross revenue, flat net income and EBITDA. So despite the robust new revenue growth, Enventis was on track to see revenues, profits and cash flow stall.

And that, as much as anything, illustrates the problems even successful rural telcos face. Despite healthy “new services” revenue growth, service providers might be losing traditional revenues as fast, or faster, than they can grow new revenues.

"No Business Case" for Voice over LTE, At Least, Not Yet

“VoLTE rollouts are taking off, but “There is no business case,” at least yet, for voice over Long Term Evolution, says Stéphane Téral,Infonetics Research principal analyst.

To be sure, that could change over time, and some might argue that high-definition voice services already operating on over 100 global GSM networks do have a business case, mainly related to boosting the value of carrier voice services, and thereby stemming churn.

Some might argue the effort to add value as a means of protecting voice revenue streams is an issue in the over-the-top voice app market as well.

“Japan-based Line has topped Skype as the market leader, capturing roughly a quarter of worldwide active users in 2013,” says Diane Myers, Infonetics Research principal analyst for VoIP, UC, and IMS.

In a manner similar to high-definition voice, Line has added new unique features, including stickers and games that change the product.  

Myers also notes that “most providers in this space are making very little money per user, an unsustainable business model for many independent companies”

That said, revenue for over-the-top mobile voice apps will experience 12 percent compound annual growth rates between 2013 and 2018.

The inability to create a sustainable revenue model therefore is an issue both for over-the-top and carrier voice services, one might argue.

To be sure, scale is an issue. There were eight networks and about 12 million VoLTE subscribers worldwide in 2013, mostly in South Korea. But voice is a scale business. A feature has value when it can be used on both ends of a connection, not just one end. VoLTE therefore has to become ubiquitous before its advantages will be consistently experienced.

By the end of 2014, Infonetics expects an additional 30 commercial VoLTE networks to launch and VoLTE subscribers to increase to 51 million.

In 2013, there were 1.5 billion mobile VoIP (mVoIP) subscribers worldwide, the bulk consisting of OTT applications.

The majority of OTT mVoIP application usage continues to occur in the Asia Pacific region, particularly in China, South Korea, Japan, India, and Indonesia.

Observers will disagree about what voice strategy makes most sense for carriers or app providers. “Add more value” is one logical approach. “Harvest” is another rational approach.

So far, it isn’t clear which strategy makes most sense, for specific service providers in specific markets.

T-Mobile US Zero Rates Speed Tests

T-Mobile US does not count bits consumed as part of speed tests against a user data usage allowance. Of course, some network neutrality supporters will--as they have with other pro-consumer issues, stretch the concept to the point of intellectual incoherence and silliness.

Worst of all, the intellectual incoherence leads to outcomes that are not consumer friendly, not conducive to innovation, and not enabling differentiation and creativity.

“Network neutrality” has been stretched unnaturally to argue against zero-rating applications usage, something Facebook and other app providers think has merit as a way of providing value to users of mobile Internet access in undeveloped regions. The charge is that doing so does not “treat all bits the same.”

Those on the other side of the net neutrality debate have argued against the concept precisely because it does prevent innovation, creativity and new ways of providing end user value.

In large part, such anti-consumer outcomes result because the language and concepts used to support network neutrality are, as a judge might rule in the case of a statute that is fuzzy in its language or conception, “overly broad.”

In trying to sweep many different types of problems into a bumper sticker slogan (“treat all bits the same”), we wind up in the classic “when all you have is a hammer, every problem looks like a nail” situation.

There are a couple key errors made by supporters of net neutrality that lead to anti-consumer, anti-competitive outcomes, even when net neutrality is supported precisely because it is supposed to be pro-competitive.

Supporters conflate two different principles--that no lawful app can be blocked by an Internet service provider, and that no lawful app can have quality of service measures applied to it.

Lawful apps should not be blocked by a government or an ISP, of course. But even there, the rule is not always clear cut. Should a non-profit group or business be able to block lawful apps? Should a parent? Should a school be able to block even some lawful apps? How about phishing emails, text or social emails?

You get the point: there are some areas where exceptions even to the “no blocking” rule might be helpful, desirable and wanted by consumers and Internet end users.

But “content blocking” can be dealt with--entirely--without invoking a different principle at the heart of network neutrality.

Net neutrality supporters argue against the lawfulness of content delivery networks. CDNs routinely are used by major app providers--paying for services or spending money to create their own CDN features--to speed up the performance and quality of their apps.

Does that give an advantage to firms that can afford to buy CDN service or build their own CDN networks? Of course. Should that be lawful? Net neutrality supporters say such quality of service mechanisms should, in fact, be unlawful.

Unfortunately, the bumper sticker slogan used to argue in favor of net neutrality contains the mental straightjacket that makes the concept increasingly--and obviously--unworkable, anti-competitive anti-consumer.

By simplistically arguing that “all bits should be treated the same,” net neutrality step over from a prescriptive remedy (enforcing a remedy to an existing problem) to a proscriptive (to make illegal something that might or could happen)

And therein lies the problem.

By prohibiting quality of service mechanisms, net neutrality supporters also prevent further development of innovative, consumer-friendly and user-desired features.

Zero-rating of some apps clearly increases use of popular apps in markets where the cost of Internet access is high. But “treating all bits the same” prevents zero rating, and increases the cost of using such apps for consumers who cannot afford to pay very much for access.

Exempting “speed test” data consumption, or even zero-rating delivery of content by Kindle users, provides clear end user value in the same way. People can use apps without incurring extra charges.

Amazon isn’t the only content company to bundle content with delivery. TV and radio broadcasters do the same. So do cable TV, satellite TV and telco TV providers. End users have “no incremental charge” access to content, or pay for a content service, that does not impose additional bandwidth charges.

The old adage that “nothing is free” applies here as well, in ways that promote use of the Internet, use of apps and access to content. Some entity decides it has a vested interest in subsidizing use of network bandwidth to encourage use of its product.

Consumers derive value as a result, and suppliers can innovate.

But “no blocking of lawful apps” is a principle that does not require a prohibition on innovation.

Users can enjoy “best effort access” to the Internet--the way consumers now use the Internet--without proscribing all other innovations that add value for consumers, app providers or access providers.

Quality of service can provide clear end user value when networks get congested. Some apps, especially video and voice, are highly susceptible to packet delay. When networks get congested, customers and end users might well prefer to apply QoS mechanisms to those apps.

Worse, the “treat every bit the same” actually prevents other forms of innovation, including zero rating of some apps, that provide clear end user and customer value.

That’s the problem with bumper sticker solutions to too many other problems that could be remedied by other means.

Protecting the Internet requires much more than simplistic slogans.

Mobile Now 66% of Total U.S. Internet Connections

Though it still makes sense, conceptually, to separate fixed network Internet access services from mobile Internet access services, mobile connections now vastly outnumber fixed connections.

Overall, mobile Internet connections represent about 66 percent of all Internet access connections. The distinction is important because blended averages of access speeds, including both fixed and mobile connections, can obscure the differences between platforms.

In June 2013, 15 percent of fixed connections (13.8 million connections) were slower than

3 Mbps in the downstream direction.

At the same time, 46 percent of mobile connections (83.7 million connections) were slower

than 3 Mbps in the downstream direction.

Some 70 percent of fixed accounts (66.3 million connections), more importantly, operated at 6 Mbps or faster in the downstream direction.

About 36 percent of mobile accounts (or 64.7 million connections) operated at 6 Mbps or faster in the downstream direction.

The divergence is even greater for access at speeds of 50 Mbps or 100 Mbps. No mobile connections operated at 25 Mbps or faster, while 22.2 million fixed connections operated at 25 Mbps or faster speeds.

In other words, about eight percent of fixed connections offered 25 Mbps or faster speeds, while  no mobile connections could do so.

Also, a negligible number of fixed wireless or satellite connections likewise were able to deliver speeds of 25 Mbps or higher. That basically is the long-term difference between fixed and mobile Internet access.

The fastest networks will always be fixed networks. Overall,  three-tenths of one percent of fixed connections operate at 100 Mbps or faster.

About 33 percent of fixed network connections are supplied by telco digital subscriber line, another eight percent by fiber to premises access, for a telco total of about 41 percent of fixed network connections, according to a report by the Federal Communications Commission.

Cable TV companies supply about 56 percent of fixed network connections.

Fixed wireless suppliers represent less than one percent of fixed network connections. Independent ISPs also supply less than one percent of fixed network accounts.

Satellite providers supply about two percent of “fixed” network connections.

The number of connections with downstream speeds of at least 10 Mbps increased by

118 percent over June 2012, to 103 million connections, including 58 million fixed connections

and 45 million mobile connections.

The number of mobile subscriptions with speeds over 200 kbps in at least one direction grew to 181 million, up 18 percent from June 2012.

Between June 2003 and June 2013, total business and residential fixed network connections grew from 23 million to 94 million, a compound annual growth rate of 15 percent per year.

Over the same ten-year period, residential fixed-location connections grew from 21 million

connections to 86 million connections, also at a compound annual growth rate of 15 percent per year.

There are some 94.2 million fixed Internet access connections in service, and 181.4 million mobile Internet connections.

In June 2013, there were 70 million fixed and 93 million mobile connections with download

speeds at or above 3 megabits per second (Mbps) and upload speeds at or above 768 kbps as

compared to 57 million fixed and 43 million mobile connections a year earlier.

source: FCC

Facebook Has 69 Million Indonesian Users

Facebook has some 69 million monthly active users in populous Indonesia, according to Anand Tilak, Facebook’s Indonesia head. That’s a six percent increase from the 65 million users Facebook reported six months ago.



Indonesian smartphone penetration is just 23 percent, underscoring the role key apps such as Facebook are deemed to play in creating demand for smartphone usage. 

Content Consumption Has Shifted to Mobile Devices

Mobile devices now are the dominant content-consumption devices, in terms of “time spent,” surpassing personal computers.

Mobile platforms, including both smartphones and tablets, represented 60 percent of total digital media time, up from 50 percent in 2013.

Several key content categories have shifted almost exclusively to mobile.

Digital Radio, led by category leader Pandora now generates more than 96 percent of its total engagement from mobile devices.

Engagement with photos--especially Instagram and Flickr--also occurs 96 percent of the time on mobile devices.

Other categories getting at least 90 percent of their engagement time from mobile include maps (Google Maps, Apple Maps) and instant messenger (Facebook Messenger, WhatsApp, Viber) apps.

Social networking now generates more than 70 percent of its activity on mobile devices.

Mobile apps accounted for more than half of all digital media time spent in May 2014, coming in at 51 percent, according to comScore.

source: comScore

Voice Still Drives Net New Subscriber Accounts, Globally

To the extent that service provider revenue is driven by net subscriber additions, mobile voice accounts remain the global growth driver in 2014, though mobile broadband is assuming a bigger role.

Fixed broadband net additions will be roughly flat through 2018, Infonetics Research predicts.

That pattern has been in place for several years, particularly since the Great Recession of 2008.

source: Infonetics Research

In the U.S. market, for example, the number of consumers using fixed network voice lines has dropped by about 50 percent. Other surveys have shown the same trend.

A 2012 survey of buyers of wholesale voice services showed a belief that the most disruptive trends in the voice business included declining use of the fixed network for voice, as well as VoIP over mobile networks.

source: inetwork

Chapel Hill to Get Gigabit Access from AT&T

Chapel Hill, N.C. will get a gigabit access service provided by AT&T. Durham, N.C., Cary, N.C., Raleigh, N.C. and Winston-Salem, N.C. also are getting GigaPower service.

As many as 100 other cities in 21 metropolitan areas are potentially candidates for "GigaPower" service, AT&T says.

They include Atlanta, Augusta, Charlotte, Chicago, Cleveland, Fort Worth, Fort Lauderdale, Greensboro, Houston, Jacksonville, Kansas City, Los Angeles, Miami, Nashville, Oakland, Orlando, San Antonio, San Diego, St. Louis, San Francisco, and San Jose.

With previously announced markets, AT&T now has committed to or is exploring about 25 metro areas for fiber deployment.

FreedomPop to Introduce Sponsored Data Access

AT&T has been criticized in some quarters for supporting a “sponsored data ” retail model where content or other sponsors pay for mobile data charges to support end user consumption of some particular apps.

The concern is that such practices contribute to creation of a multi-tiered or two-tier Internet where some apps and services are more favored than others, even when--or perhaps precisely because--the feature is available to all content and app providers.

But such sponsored data consumption has been tried in a number of developing markets, typically to encourage use of social apps. And though there has been some criticism of sponsored data, even major app providers are working to do so.

Pryte, for example, now owned by Facebook, specializes in creating platforms that allow service or app providers to collaborate in offering such sponsored app programs.

Now there is more movement in the direction of sponsored data consumption, this time by FreedomPop, the Internet access provider attempting to disrupt the pricing of mobile and untethered Internet access in the U.S. market.

FreedomPop is planning a Pryte-style “pay as you app” feature allowing users to buy data allowances for specific apps, including both a “buy what you need” offer and a “no incremental cost” offer using a sponsored data approach.

Here’s the point: such forms of innovation do not strictly “treat all apps alike.” The plans provide direct and clear end user value, but not on a “universal” basis. As so often is the case, there is a choice: treat all apps alike, and not provide value in an innovative and consumer-friendly way, or insist rigidly on treating all apps alike, and not providing that value.

China Argues for "Internet Sovereignty"

Each country should have ultimate power to determine what Internet traffic flows in and out of its territory, China's Communist Party believes. Such Internet sovereignty does of course raise issues about the original "anyone can communicate with anyone else" origins of the Internet, but that is a time long passed.



In practice, the Internet is substantially fragmented, and it is no longer true that anyone can speak to anyone else, as it no longer is true that anyone can use any Internet app or service. 



That is one reason why controversies about "Internet freedom" these days are relative. An equally big problem is the casual way many unrelated controversies are said to involve disputes about what freedom remains. 



It isn't helpful to equate application blocking with network management or managed services or quality of service. There is room for disagreement within the ecosystem about such matters. 



What isn't particularly helpful is the overly-broad depiction of all other issues as instances where actual "freedom to use applications"  is curtailed or restricted in important ways. 



Blocking apps is one category of "freedom" issues. But not all other issues are similarly weighty.

Creating End User Value Often Requires Treating "Internet Apps" Unequally

Twitter has crafted a new partnership with Indonesia’s Indosat, to streamline the signup process for new users who want to receive World Cup-related tweets.

The arrangement is the first of its kind in Asia-Pacific and one of several that are being rolled out during the World Cup in emerging markets like Bangladesh, Nigeria, Ghana and Latin America.

Under the arrangement with Indosat, which has some 59.7 million mobile subscribers, users can type in a code or visit a URL using their Android or iOS phones.

Users are then allowed to create a new account, pick their favorite World Cup team and select a corresponding profile image. They can then chose various specialized accounts to follow, such as World Cup players.

Business terms are unknown, but the deal does raise the issue of how innovative features that provide value to end users can be created without some exclusivity, uniqueness or ease of use features that are not available to all apps.

That sort of uniqueness, some might argue, does not “treat all apps” equally. More and more of these sorts of features are bound to be created. Each might indicate some of the real-world objections to the concept that “treating all apps equally” is a logically sound way to frame the network neutrality debate.

Sprint Counters T-Mobile US "Test Drive" and Zero-Rated Music Consumption

The new T-Mobile US "test drive" program, which allows the first million takers to test an Apple iPhone 5C for seven days, without obligation to buy the device or keep the service, has been countered by Sprint, which now offers a 30-day money back guarantee for new potential customers.

The satisfaction guarantee allows new customers who are not satisfied with the Sprint experience to cancel within the first 30 days, with Sprint refunding the cost of the device and waiving all service and activation charges.

The satisfaction guarantee is available beginning June 27, 2014 to new consumers and select small corporate liable customers who activate a new line of service at a Sprint company owned store or preferred retailer, by calling 1-800-SPRINT1 or using www.sprint.com/network.

The guarantee also is available to current customers adding new lines of service in a Sprint store, online at sprint.com or by calling 1-800-SPRINT1.

Some might argue Sprint already was in position to essentially “zero rate” use of streaming music services, as T-Mobile US has announced, since it already had offered unlimited unlimited mobile data plans.

Oddly enough, though many mobile service providers are moving away from “unlimited” data plans, we might see the return of a modified form of such plans, on a wider scale, if and when for-fee mobile video streaming services become more popular.

As contentious as the issue might be, that zero rating of bandwidth is essentially what cable TV, satellite TV and telco TV firms already do, as a standard practice. The cost of a linear video subscription video plan is embedded in the cost of using the service, and does not impose a separate bandwidth charge.

That’s the difference between a managed service and an over the top Internet accessed service. So zero rating of bandwidth consumption could eventually re-emerge, if not in a full “unlimited” Internet bandwidth offer.

There will be fierce debates, but managed voice, video and other services are not “Internet” apps (from a regulatory perspective), it will be argued, and not without merit.

Maybe Amazon Fire is Not Supposed to Be About Smartphone Share

Consumer Intelligence Research Partners has estimated that roughly 40 percent of all Amazon shoppers own a Kindle device and that those shoppers on average spend $1,233 with the retailer annually, which is $443, or 56 percent, more than the $790 non-Kindle owners spend with the retailer each year.

CIRP surveyed 300 Amazon.com shoppers online from Nov. 15, 2013 to Nov. 18, 2013,  about their Amazon purchasing behavior in the previous 90 days. As more retail activity starts to happen on smartphones, something like that also could develop for Amazon-centric smartphones.

It’s a gamble, to be sure. It is a management distraction, to be sure. But the objective might not be so much “competition with other smartphone suppliers” as “competition with other major retailers,” including Apple and Google, to name a few.

The prediction that Amazon is too late to make a dent in smartphone market share is reasonable enough. Some might say Amazon has failed to take lots of share in the tablet market, as well.

Amazon arguably is playing a different game. It might not so much want to be a leading force in tablets or smartphones so much as it wants to secure greater share of the online retailing market.

It is true that Amazon retail operations can be conducted from non-Amazon devices as well as its own. But Amazon might rightly believe that its most-loyal, or biggest-spending customers, tend to use Kindles or might use an Amazon Fire smartphone.

It is a gamble. But we won’t know the outcome for some time. Amazon’s experience with tablets might be the template.

“One way to look at the Kindle Fire and Kindle e-reader is as a portal to Amazon.com,” says Mike Levin, partner and co-founder of CIRP. “Kindle Fire provides access to everything Amazon sells, while the Kindle e-reader has become the way that Amazon customers buy books, Amazon’s original product line.”

Amazon Fire might not be as important as Amazon Prime as a driver of  loyalty or repeat buying behavior. But it might not be insignificant, either.

U.S. retail spending on mobile devices is expected to reach $57.8 billion in 2014, representing 19 percent of total e-commerce sales, according to eMarketer. That is more than double the dollar figure spent in 2012. By 2018, eMarketer sees mobile commerce rising to $132.7 billion or 27 percent of e-commerce sales.

Amazon Fire is a gamble on snagging more of that growth.