Will PayPal be Bigger than eBay?

That PayPal now is thought to be a business eventually larger than eBay, its parent, could explain why eBay is spinning out PayPal as a separate company. Pressure from activist investor Carl Icahn is an important trigger for why it is being done now, however.

The spinout also shows how synergies between firms sometimes are not as great, nor as strategically important, as initially claimed.

Auctioneer eBay bought PayPal in 2002, at a time when the immediate issue seemed to be that PayPal increasingly was the preferred payment mechanism for eBay shoppers.

More than a decade later, the synergies arguably are less obvious than originally thought. Over time, PayPal’s revenue has outgrown its eBay activity.

PayPal has more than 152 million active registered accounts, with growth of about 15 percent year-over-year.

Revenue over the last 12 months grew by 19 percent over the prior year period to approximately $7.2 billion, eBay says.

PayPal facilitates one in every six dollars spent online today.

Total payments volume over the last 12 months increased by 26 percent to $203 billion. PayPal is fully localized in 26 currencies, is available in 203 markets worldwide and has relationships with 15,000 financial institutions.

Separation from eBay arguably will provide PayPal with more autonomy to compete in the payments space, particularly with respect to Apple Pay and other emerging mobile wallet providers.

In the United States, for example,  mobile proximity payments--payments made using a phone to make a physical transaction at the point of sale--will reach $3.5 billion in 2014, according to eMarketer estimates. By 2018, that figure is expected to reach $118 billion.

As a separate entity, PayPal has a chance to focus its efforts and compete more effectively, the logic suggests.

The other example of failed synergy, some would say, was Microsoft’s purchase of Skype. In 2011, when Microsoft bought Skype, the deal was viewed as a way for Microsoft to gain immediate stature in peer-to-peer communications, messaging and IP communications in general.

Whether the benefits are so clear is the question. In a narrow financial sense it does not seem there are significant benefits. Microsoft does not break out Skype earnings or revenue.

To be sure, there were other advantages. Skype was acquired to replace an ailing Windows Live Messenger. So the enterprise messaging platform Lync arguably was a beneficiary. Integration of Skype with Windows and Outlook likewise was seen as a benefit.

Adding Skype to Xbox also will be touted as an advantage. Still, many would argue the strategic value is tough to discern.

Will Facebook be an Internet Service Provider in 21 Countries by 2018 or 2020?

Facebook believes it will be able to provide Internet access to 21 countries in Latin America, Africa and Asia sometime as soon as 2018 to 2020. Whether Facebook would do so on its own, or perhaps in partnership of some sort with other entities is not yet clear.

But Facebook “becoming an Internet service provider” might be as disruptive for Internet service providers in those 21 countries as Google Fiber has been in the United States.

Facebook hopes to begin testing the first examples of solar-powered aircraft (drones) for Internet access in 2015, over U.S. territory.

Facebook also believes the commercial deployment of such unmanned aircraft to provide Internet access would not occur until three to five years after the completion of successful tests, according to Facebook Connectivity Lab Engineering Director Yael Maguire.

As currently envisioned, such aircraft would fly at altitudes up to 90,000 feet. Maguire claims there are currently no regulatory issues for planes flying above 60,000 feet that would prevent using such a platform to provide Internet access in Asia, Africa and Latin America.

Such planes would have huge wingspans comparable to that of a Boeing 747 jet.

Facebook almost certainly will face competition from Google.

Separately, Google acquired Titan Aerospace, a manufacturer of jet-sized drones that are intended to fly nonstop for years. Google said the technology could be used to collect images and offer online access to remote areas.

Once in the air, the drones would fly unmanned for several months at a time. Some immediately will ask how will Facebook's network will work. After all, a moving aircraft flying near 90,000 feet will effectively be a platform operating much as a satellite or ground-based cell tower would, in many respects.

So Facebook might look at drones as a backhaul mechanism, with ground stations that retransmit Wi-Fi signals to standard smartphones able to use Wi-Fi. The other alternative, more complicated, would require use of special phones able to receive signals directly from an airborne transmitter.

Some might suggest that is rather too expensive for mass adoption in the markets Facebook is targeting.

None of that is as potentially shocking as is the sheer idea that Facebook could be joining the ranks of Internet service providers.

Is Low Customer Satisfaction a Result of Deliberate Strategy?

Sean Bergin, a founder of AP Telecom, just related a story that might explain why consumers rate their Internet service providers and video service providers so harshly. He explained that he used to spend $4,500 a month on his own phone, each month. That went on for years.

Finally, he found an alternative provider with a monthly recurring cost about half that much. That isn’t the point of the story, though. The point is that “not once” did his former service provider ever reach out to him to suggest ways to reduce his bills, offer a small token of recognition, or anything else, for a consumer account that big.

To be sure, anybody with knowledge of the economics of the consumer business would understand how difficult it is to create touchpoints of any sort with the “best” consumer accounts, to say nothing of the typical account.

Still, that anecdote probably explains why Vodafone is losing 100,000 customers a month in Australia, Bergin says. In 2011, Vodafone lost 500,000 customers. In 2012, Vodafone lost 500,000 customers in six months. In the first half of 2013, Vodafone shed a similar number of customers.

For whatever reason, suppliers of video services, phone services and even mobile phone services have tended to rank towards the bottom of consumer rankings in “customer satisfaction.” That was true of the May 2013 edition of the American Customer Satisfaction Index (ACSI) index, for example.

A separate analysis confirms the basics of the issue. Some firms do better than others, but as a class, video entertainment providers and telcos, and now telco-owned ISPs as well, rank in the bottom 10th percentile, according to an analysis by Temkin Group Research.

In fact, the bottom three industries were the mobile, Internet access and video entertainment categories.

Not much had changed in early 2014. Internet access service was the lowest ranked industry--last out of 43 industries--in the American Customer Satisfaction Index. Just above it--at position 42--is consumer satisfaction with video subscription services.

The old joke about outrunning a bear--you don't have to be faster than the bear, only faster than the other guy being chased--likely applies here, as the rankings show significant differences between contestants in the ISP and video markets.

But the latest J.D. Power round of surveys might suggest ISPs and video service providers are doing better.  

For video service providers, Satisfaction with performance and reliability has improved to 743 in 2014, an increase of 17 points from 726 in 2013, according to J.D. Power.

DIRECTV and Verizon FiOS (738) rank highest (in a tie) in TV customer satisfaction in the East region; AT&T U-verse (750) ranks highest in the North Central region; Verizon FiOS (751) ranks highest in the South region; and DISH Network (739) ranks highest in the West region, J.D. Power reports.

Satisfaction with ISP performance and reliability has improved to 700 in 2014, an increase of 37 points from 663 in 2011.

Verizon ranks highest in ISP customer satisfaction in the East (712) and South (725) regions; WOW! (Wide Open West) scores 728 ranking highest in the North Central region; and AT&T (704) ranks highest in the West region.

To be sure, to the extent that customer satisfaction is directly associated with customer loyalty, the rankings show relatively high unhappiness with most of the providers, and with the industry products compared to 41 others, according to the ACSI studies.

It might be unreasonable to suggest that customer satisfaction in the video and Internet access or mobile businesses is lowish because of rational decision making on the part of service providers.

Service providers, rightly or wrongly, might have concluded that the investment in additional customer service, recognition or other soft processes is not justified by the consumer customer lifecycle, lifetime value of an account and profit margins for such accounts.

That isn’t to say the situation is any way optimal, only to suggest service providers have made rational decisions.

"Follow the Money"

Rule number one when analyzing the telecom business is to “follow the money.” What service supplier executives, regulators, supplier executives or policy advocates might say provides clues about where value is perceived or business models are anchored.

Consider the issue of mobile roaming charges within the European Union. EU. A survey commissioned by the European Commission shows that 28 percent of those who travel in the EU switch off their mobile phone when going to another country.

Only about eight percent of travelers within the EC zone, who also reside in the zone, use their phones abroad in the same way as at home. About 33 percent of traveling EC area residents never use their phones at all when traveling outside their home countries, but within the EC.

Some 94 percent of Europeans who travel outside their home country limit their use of services like Facebook, because of mobile roaming charges, the survey also suggests.

About 47 percent report they would never use email or social media in another EU country.

About 10 percent say their behavior does not change, at home or roaming. Only about five percent say their use of social media when roaming is the same as when they are in their home countries.

Basically, mobile service providers have opposed an end to roaming charges, while EC regulators have favored it. To be sure, there are valid public policy issues here: EC regulators want lower prices for consumers.

But that is where the notion of “follow the money” applies. EC regulators, whatever the merits of policies first to reduce, then put an end to roaming charges, do not suffer financial downside as a result of those policies, of course.

Mobile service providers, by way of contrast, earn perhaps three percent of total revenue from roaming charges.

The European Commission argues that mobile service providers “are missing out on a market of around 300 million phone users because of current pricing strategies.”

“This makes no sense,”  regulators have argued.

Well, not exactly. Mobile service providers will lose three percent of their revenue. Consumers will gain lower prices for texting, voice and mobile Internet usage. App providers, on the other hand, will gain directly as use of their apps grows.

But “follow the money.” Mobile service providers lose a specific amount of money. Consumers will save money and app providers will make more money, as usage, and therefore advertising and commerce, increases.

When ecosystem participants support policies, it is because they gain. When participants oppose policies, it is because they lose.

It is hard to argue against lower consumer prices. It also is hard to ask providers to invest more, while earning less.

EC officials might argue that three percent gross revenue reductions are not relevant for investment decisions. Earnings from roaming charges only support dividend payments.

Whatever the truth of that charge, it remains true that dividend payments are a major cost of doing business for public telecom companies. They must be paid, and then capital investment made out of the rest of cash flow or earnings.

Three percent less income might not be a big deal for regulators: they don’t lose the money. It is material for a mobile service provider asked to give up three percent of gross revenue.

"Hybrid" Access Networks Continue to Make Sense

Historically, times of technology transition result in “hybrid” approaches. Once upon a time, sailing ships were outfitted with steam boilers as well.

Decades ago, building on pair gain technologies originally developed to support what we know as “T1 or E1” service, engineers began experimenting with Asymmetrical Digital Subscriber Line, essentially a modification of the method used for T1 service.

Initial results were not so promising. Some thought it never would be possible to make ADSL workable in real-world operating environments, even if some techniques worked in the laboratory.

Of course, once upon a time, engineers at Bell Laboratories also believed it was impossible to deliver 20 channels of analog video using a single pair of lasers. But systems delivering at least 80 channels of analog video eventually were developed.

Once upon a time, engineers doubted a high definition TV signal could be delivered in just 6 MHz of bandwidth. At the time, 45 Mbps or so was thought to be necessary. Today, standard broadcast TV uses a 6-MHz signal.

The point is not simply that hybrid approaches are a common bridge between technology eras, but also that “what is possible” can change, dramatically.

So it is that BT reports G.fast trial results suggesting that “1 G.fast” technology could deliver 700 Mbps speed downstream and 200 Mbps upstream, if G.fast was deployed, to about 80 percent of locations now served by fiber to the curb networks (FTTC).

That would have been unthinkable two decades ago, and improbable a decade ago. But as with earlier transformations related to multichannel analog video using a single laser or HDTV bandwidth, additional effort has wrung unexpected output from older technology platforms.

The BT trial is part of development efforts seeking to reach gigabit speeds over hybrid networks using copper drops and optical fiber distribution.

In its recent G.fast tests, BT has been able to deliver download and upload speeds of 786 Mbps downstream and 231 Mbps upstream over an FTTC line using a 19-meter (about 62 feet) copper drop cable.

That is significant since many fixed networks in suburban or urban areas feature copper drop cables of perhaps 100 feet to 150 feet long. To achieve 700 Mbps, a service provider would have to use a “fiber to the telephone pole” or “fiber to a cabinet” network that places cabinets about as densely as a telephone pole network does.

BT also tested G.fast with a 66-meter (216 feet) copper line and found that the download speed fell to 696 Mbps while top uploads weighed in at 200 Mbps.

In other words, “close to gigabit speeds” might be possible over relatively standard drop cable networks.

The International Telecommunication Union is working on standards for G.Fast, so commercial deployment will have to wait a bit. Some think the standard could be finished by 2015.

But the development shows how much value a hybrid approach can yield during a time of technology transition. Decades ago, few believed such performance was possible, using such pair gain technologies.

But industries have very high incentives to do something dramatically better in the context of a legacy technology platform.

Broadcasters “needed” the ability to deliver HDTV in the same bandwidth as analog TV. Cable operators “needed” to preserve transparency of video format (no transcoding) as they added optical fiber backbones.

Telcos “needed” to preserve the value of expensive copper drop cable networks as they have progressively boosted speeds. But hybrid approaches abound elsewhere as well.

Hybrid computing environments, partly using cloud and also premises-based data centers, now are relatively common. Mobile service providers use both their own networks and Wi-Fi to support communications.

So work on gigabit access networks using hybrid approaches is not unusual.

Bell Labs, the research arm of Alcatel-Lucent has achieved 10 Gbps speeds over very-short distances as well.

Bell Labs XG-FAST, an extension of G.fast technology, has been shown to reach gigabit speeds at distances of about 70 meters (229 feet).

By way of comparison, G.fast has been shown to deliver 500 Mbps over a distance of 100 meters (328 feet).

Bell Labs also achieved 1 Gbps symmetrical service over 70 meters on a single copper pair. 10 Gbps was achieved over a distance of 30 meters by using two pairs of lines (by “bonding” two pairs of wires.

“Fiber to where you can make money” is an aphorism illustrating the economics of optical fiber access network deployment, and the aphorism remains apt.

Internet service providers have high incentives to maximize the use of existing copper access facilities in many scenarios, even if fiber to the home makes more sense in new installations.

Technology comparison
Technology	Frequency	Maximum aggregate speed	Maximum Distance
VDSL2*	17 MHz	150 Mbps	400 meters
G.fast phase 1*	106 MHz	700 Mbps	100 meters
G.fast phase 2*	212 MHz	1.25 Gbps	70 meters
Bell Labs XG-FAST**	350 MHz	2 Gbps (1 Gbps symmetrical)	70 meters
Bell Labs XG-FAST with bonding***	500 MHz	10 Gbps (two pairs)	30 meters

* Industry standard specifications. G.fast allows for upload and download speeds to be configured by the operator.

**   In a laboratory, reproducing real-world conditions of distance and copper quality.

*** Laboratory conditions

Is There a Grand AT&T Video Strategy?

Otter Media, a venture between The Chernin Group and AT&T, has purchased a majority stake in Fullscreen, a global online media company. That investment is a concrete step in the direction of creating the ability to deliver entertainment video over the top and on demand.

Otter Media was established by AT&T and The Chernin Group to invest in, acquire and launch over-the-top (OTT) video services.

Fullscreen, founded in January 2011, works with more than 50,000 content creators who engage 450 million subscribers and generate four billion monthly views.

But that move is only part of what AT&T is doing in entertainment video. AT&T obviously would like higher take rates for U-verse video. But AT&T also wants to buy DirecTV as well.

All that should raise questions about the possible grand strategy. Could DirecTV eventually become AT&T's "standard" linear video platform, while the fixed and mobile networks become the platforms for on-demand, streamed video?

Of course, perhaps there is no unified grand theory, at least, not yet. Perhaps U-verse video remains an essential part of the fixed network triple-play value proposition. Perhaps DirecTV really is an out-of-region platform.

The DirecTV acquisition creates a national video footprint outside AT&T’s fixed network footprint, and in any case throws off significant cash flow, valuable in its own right, some would argue.

And, since virtually all observers see a more-important role for OTT entertainment video over time, investing in alternative enabling platforms makes sense as a hedge, if for no other reason than to free up bandwidth on the fixed network.

Some might argue that, eventually, AT&T might be tempted to rely primarily on DirecTV for linear video, thus freeing up more bandwidth on fixed networks that do not already have U-verse video.

Some might even speculate that AT&T might, at some future point, and especially if the shift to OTT accelerates, decide that U-verse video does not make sense, if it can bundle DirecTV in region.

That wouldn’t necessarily be an easy transition. But majority technology and business model changes rarely, if ever, are easy.

Times of technology and business model transition are difficult for incumbents: they have to protect and harvest a declining product or products, using an older technology base, while simultaneously nurturing growth of a new set of products, built on the new technology base, that might actually cannibalize the existing business.

That largely explains the behavior of linear TV distributors including cable TV, telco and satellite TV providers. Even if all see an eventual disruption of the linear model, all will strive mightily to protect revenues from the current model as best they can, creating hybrid products that add value to the legacy product set and provide a hoped-for bridge to the future.

That is why “TV Everywhere” requires that customers first buy the traditional linear product before they are able to use the streaming features.

The evolution of the consumer services market to a bundled product business (triple play, quadruple play) likewise is why both Dish Network and DirecTV have made moves to transition from satellite-only to hybrid or integrated models where a bundled product can be sold.

Verizon and AT&T arguably will do so as well, defending and harvesting linear video as long as possible, while investing in over the top, on demand delivery and revenue models.

That explains the investment in Otter. It is a hedge on a different future.

To some extent, the acquisition of DirecTV is an effort to gain significantly-greater share in a business producing significant cash flow, in the belief that the ability to bundle with mobile and other fixed network services.

Perhaps DirecTV is not even seen as an essential part of the future network transition to OTT delivery. But it might be helpful in other ways, such as creating content buying power.

Still, at least some might suggest an eventual AT&T move to end or limit support for U-verse video. Much would hinge on when that happens, and how strong consumer demand remains.

So long as linear video demand remains largely intact, there arguably is little need to do anything disruptive.

The big questions would come if linear video begins to decline fast, consumers opt to watch video entertainment OTT and content suppliers decide to support OTT in a big way. Then no linear video supplier would be able to avoid asking how much should be invested in delivering a product with rapidly-declining demand.

Under those circumstances, no linear video supplier would be able to avoid evaluating the value of linear video and network resources devoted to delivering linear video.

Eventually, all ISPs Will Have to Shift Bandwidth from "Linear Video" to Internet Access

Why is high speed access the strategic foundation of future fixed network business models? That is where the enduring value lies. No matter how important mobile becomes, there are some applications and features a fixed network can provide better than any other alternative, including mobile networks.

Consider only end user demand for video entertainment. If one assumes that a typical television viewer watches four hours a day, and that, someday, that will shift largely to over the top delivery, huge new bandwidth demands result.

And the demand grows with image quality. With standard definition as the baseline, high-definition, 4K and eventually possibly-higher resolutions will put huge stress on access networks.

Before compression is applied, 4K video requires four times the bandwidth as HDTV. In some cases, the bandwidth required to support HDTV was about eight to 10 times that of a standard definition signal.

In other words, 4K video, delivered over the top, might require 20 Mbps to 45 Mbps per stream. So bandwidth is one issue. Usage caps are the other issue. Without compression, a standard two-hour movies represents a 100-GB file.

You see the problem. Even a fixed connection might well have a 300-GB usage cap. Many mobile usage plans have effective per-device usage caps of perhaps 5 GB to 10 GB.

Looking at mobile services, Wi-Fi offload has become an important mechanism for allowing devices to consume data at rates that far exceed the actual mobile network usage cap.

That makes mobile data offload a primary value of the fixed network. Voice and messaging require such minimal bandwidth they do not affect the bandwidth demand requirement.

For telcos, cable TV companies or Internet service providers, high speed access is the foundation of the business, going forward. Video already dominates overall demand for gigabytes, and will over time grow even more important, as image resolution increases and most apps acquire the ability to incorporate video into their experiences.

What are the practical implications? The value of bandwidth will shift in the direction of Internet capabilities, over time, and away from bandwidth devoted to linear video.

Cable operators and satellite TV providers already have managed to reclaim significant amounts of bandwidth by shifting from analog to all-digital video delivery.

Might AT&T have something similar in mind in its bid to acquire DirecTV. Out of region, AT&T gains the ability to sell a triple-play offer. The big question is what happens in region. It might be reasonable to expect U-verse video to remain the delivery mechanism, where AT&T already has it deployed.

Long term, it is questionable whether any supplier will want to “waste” bandwidth on linear video, if demand shifts dramatically to over the top delivery over the Internet.

Interestingly enough, that also should shed some light on current arguments about “not making the Internet cable TV.” The concern is legitimate, but misplaced.

There is nearly universal belief that, eventually, today’s linear video service will migrate to some form of OTT delivery.

So it is not that the Internet, overall, “becomes cable TV,” but that cable TV content and business models will shift to use of the Internet for content delivery.

Managed services, in fact, are likely to become more important over time, even when public Internet networks are the delivery mechanism. Carrier voice provides another example.

Carrier voice will use Internet Protocol, on both managed and unmanaged networks. But that illustrates the complexity of arguments about quality of service. Consumers are going to have different expectations of services they have paid for.

In any event, you get the point: high speed access has to be the foundation for fixed network service providers.