OTT and Mobile Allow Geography-Bound Firms to Mimic App Providers

The old adage about the value of a house--“location, location, location”--also applies to many telecom businesses and most Internet access providers. Increasingly, geography also applies to app providers, though not for technology reasons.

To be sure, location is far less an issue for most app providers, which Internet Protocol allows to operate over any Internet connection, so long as government entities will allow it. That is a big change, but is only one way the Internet has changed in ways that limit freedom.

Access providers often can operate only in specific geographies, based either on franchise or licensing requirements, spectrum licenses, or capital limitations.

There are direct business implications. Geographical restrictions create limitations on scale, and scale often is a necessary precondition for success.

By definition, a franchise-limited or license-limited business can spread fixed costs only over the potential number of customers it can serve in a specific geography.  An app provider can spread fixed costs over a functionally-infinite number of potential customers.

Consider linear video entertainment services, which are highly dependent on scale. For that reason, few if any small access service providers actually can hope to break even as providers of linear video entertainment.

Most--if not all--small telco video operations lose money, while mobile operations likewise face declining average revenue per user, the report said.  Average revenue per user was $35.51 a month, down from $37.12 in 2009 and $40.93 in 2008.

And those scale issues, dictated largely by geography, extend beyond video.

The latest study by the Telergee Alliance illustrates business model issues faced by U.S. rural and small telcos.

Profit margins are dropping, part of a three-year trend that saw an overall five percent drop over the last year, Telergee Alliance said. Profit margin on new or non-regulated services were up by about that amount, but margins on voice services dropped more than 15 percent.

The key point is that geography-bound firms can sell products and services only to potential customers within a specific geography. An app provider can sell out of region, to the extent allowed by national regulators, generally.

That, to a large extent, explains why AT&T wants to buy DirecTV. Doing so would allow it to create voice-video-data bundles that can be sold anywhere in the United States, instead of primarily where it owns fixed network assets.

That is part of the reason why Verizon Communications remains focused on prospects for over the top streaming services. Like AT&T, Verizon can only sell so many units of video within its fixed network footprint.

Over the top services could be sold nationwide, and bundled with its mobile Internet access and voice services.

In that sense, mobility and over the top video represent profound changes. In a sense, they allow AT&T and Verizon to escape the bounds of geography.