Wednesday, December 31, 2014

Why Internet of Things Matters

With the Internet of Things at the peak of its hype cycle, we will all be hearing predictions of non-linear growth. Many forecasts, for example, call for deployment of 20 billion or 30 billion IoT units by 2020.

The stakes for telecommunications service providers are huge. If one assumes that most tier one service providers will have to replace about half their current revenue over about a decade’s time, and if one assumes the broad IoT category represents the best candidate for driving as much as half of that new revenue, it matters greatly whether service providers actually can do so.

In other words, practitioners hope that the broad IoT category can drive new revenue growth, within a decade, representing about 25 percent of all current revenues. That is a big deal, especially if the industry proves unable to grow all other new revenue sources at a level representing about 25 percent of current proceeds.

The uncertainty is palpable, at the moment.

A recent survey of executives watching the market admit they lack a clear perspective on the concrete IoT business opportunities. That isn’t as flaky or fuzzy as it might seem.

Few would have been able to predict the many revenue models and businesses created by the Internet, either. Of course, the key qualifier is that revenues earned by service providers within the Internet ecosystem are a fraction of total revenues.

A few years ago, some analysts had predicted that, by 2020, the market for connected devices would be between 50 billion and 100 billion units. The point is that projections already have proven too optimistic.

None of that is at all unusual. But service providers are pinning rather large hopes on their ability to create a big new business in IoT.

Semiconductor executives surveyed in June 2014 by McKinsey said the Internet of Things will be the most important source of growth for them over the next several years—more important, for example, than trends in wireless computing or big data.

Those hopes might be misplaced, though. “For players in the traditional semiconductor market, the Internet of Things may spark some growth, but it certainly will not change two percent industry growth today to the 10 to 15 percent growth we had in the 1980s,” one industry executive says.  

If so, that might imply that hopes for massive new service provider revenues might also be excessively optimistic, at the moment.

Important innovations in the communications business often seem to have far less market impact than expected, early on.

Even really important and fundamental technology innovations (steam engine, electricity, automobile, personal computer, World Wide Web) can take much longer than expected to produce measurable changes.

Quite often, there is a long period of small, incremental changes, then an inflection point, and then the whole market is transformed relatively quickly, but only after a long period of incremental growth.

Mobile phones and broadband are among the two best examples. Until the early 1990s, few people actually used mobile phones, as odd as that seems now.

Not until about 2006 did 10 percent of people actually use 3G. But mobiles relatively suddenly became the primary way people globally make phone calls and arguably also have become the primary way most people use the Internet, in term of instances of use, if not volume of use.

Prior to the mobile phone revolution, policy makers really could not figure out how to provide affordable phone service to billions of people who had “never made a phone call.”

IoT might prove to mimic that pattern. And that is the optimistic scenario. Not all innovations prove to have such impact.

Still, the reason the industry needs to create viable and big business models around IoT is that it now is the single best hope for replacing about a quarter of all current revenues.

We might reasonably expect video entertainment, mobile data and out or market expansion to produce additional revenue representing about a quarter of the size of existing firm activity.

The issue there is that some of those gains are “zero sum.” Gains by one contestant come only at the expense of another contestant, and do not represent net market growth. IoT is among the few big new revenue sources that actually grow the market.

And that is why IoT matters.

Telecom Ecosystem Tension Grows as Business Model is Stressed

A lawsuit filed by five banks for losses related to credit card hacking illustrates in a new way the business tensions within an ecosystem can erupt. In a lawsuit filed by five banks, the plaintiffs are seeking to recover their costs of coping with a massive data breach at Target, alleging that Target was negligent.

The cost of replacing credit and debit cards from a 2013 data breach has been estimated at $400 million.

In the telecommunications business, similar tensions exist between content owners and networks and video subscription distributors over the price, terms and conditions of content rights.

Networks want higher per-subscriber fees and carriage of many new channels. Distributors want lower costs and fewer requirements to carry many new channels with low viewership.

Device suppliers depend on service providers for distribution, but mobile service providers chafe at the notion the perceived value of mobile subscriptions is driven by the devices brands.

Operating system suppliers have a complex relationship with their device partners and service providers. In some cases, service providers have hoped at least one additional major operating system could arise to create more competition for Apple iOS and Android.

Some would-be suppliers have tried. But consumers and software developers have yet to be convinced.

Consumers generally have benefitted, with lower voice prices, lower mobile Internet access prices and lower fixed network Internet access prices, globally. In the developed world, where speeds have climbed, prices have declined on a “percent of household income  basis” since at least 2008.  

If you are a U.S. consumer who purchased 768 kbps or T1 Internet access in the mid to late 1990s, actual prices paid have dropped, even if speeds have grown by an order of magnitude or more.

Any industry relies on a complex web of relationships between value chain participants, from end user customers at one end to regulators and infrastructure suppliers at the other end. And those relationships often are unsettled, especially when competition and profit margins are under pressure.

Tuesday, December 30, 2014

ISPs, Social Media, Subscription TV Score Below Average for Consumer Satisfaction

It might be worth noting that consumer satisfaction is rarely directly related to customer spending, customer retention or churn, even if one assumes the relationship would be quite direct.

Sometimes people keep buying services, and show relatively low churn, even for products they claim to be somewhat unhappy with.

Of the five worst-performing industries routinely tracked by the American Customer Satisfaction Index are Internet social media, health insurance, airlines, subscription TV services and Internet access services.  

Few industries have offered less satisfaction to consumers over time than commercial airlines or several of the telecommunications services, but health insurers have fallen substantially since 2005.

While subscription TV and Internet service providers earn the very lowest ratings among 43 industries in the Index, health insurers share a berth close to both airlines and social media among ACSI’s bottom five industries for customer satisfaction.

Ranked on a 100 point scale, where 100 is the highest score, ISPs score 63, at the very bottom. Video entertainment services rank at 65. Airlines score a 69, health insurance at 70 and social media at 71.

It might be worthwhile to consider that if a highly-used and apparently highly popular and free service such as social media earns only a 71 score, it might not be so clear what is being measured, or why participants rank satisfaction for a well-used and free service lower than average.

Mobile service scores a 72, while fixed service gets a 73 satisfaction score. The average industry scores 76 to 77.  

Most people could think of plausible reasons why dissatisfaction would be high for airlines, communication services or health insurance.

Insurance claims processes are complex and arguably more frequently used than other types of insurance interactions. That means the odds something will prove irritating is higher than for some other products.

High premiums, deductibles and co-pays also provide easy sources of irritation. Constant price hikes for video subscriptions are a constant irritant. It might be harder to understand the unhappiness with Internet access services. 

Perhaps consumers do not like the additional recurring payments or quality perceptions. Airline service unhappiness might be easier to understand. Service quality has declined as providers have struggled to provide the low fares people want, and still earn a profit.

Some products not tracked by the ACSI, such as payments for housing, automobiles or groceries, might well show levels of unhappiness as well, as such expenditures provide constant reminders of how much consumers are having to pay.

Bank of America, which has a large mortgage portfolio, earns a 69 ranking, the same score as earned by airlines.

Consolidated Edison scores a 69 as well.

In other words, it is possible that many monthly subscription services are a cause of irritation.


Other products, even groceries, might escape that source of unpleasantness. Supermarkets as a category earn a 78 score, for example.

Also, keep in mind that the median satisfaction score ranges between 76 and 77. The absolute highest score earned by any industry is 82, the absolute lowest score is 63. ACSI does not provide the equivalent of a "margin of error" for the rankings, but a few points, higher or lower, might be the equivalent of "noise."

Monday, December 29, 2014

Airline Prices Really are Not "High," Neither are U.S. Telecom Prices

Some might argue telecommunications and airline service are analogous sorts of industries. Both are extremely capital intensive, both originally were operated as monopolies or oligopolies, the assets often owned directly by the government. Both have been privatized and become competitive industries.

Both industries have been profoundly affected by new technology and have become suppliers of products widely used by consumers, where once they were largely used by wealthy users.

Where both industries might once have competed based on quality, now both industries must compete on price. Both industries routinely rank at or near the bottom of consumer satisfaction surveys.

Both often are criticized by consumer advocates for offering low quality and high prices. Both arguably are tough industries, however. Consumers want (consistent with safety and consistency) low prices. But low prices are an issue for suppliers, in terms of sustainability.

Over the last 60 years of commercial aviation, airlines have not come close to recovering their cost of capital, much less actual profits In fact, airlines have had average profit margins of less than one percent on average over that 60-year period.

In fact, so bad have airlines performed that the traditional investment advice for investors was “don’t buy airline stocks, ever.”

In 2012 airlines made profits of only $4 for every passenger carried. In 2014, airlines might have unusually “high” margins of 2.6 percent.

Adjusting for inflation airfares are lower in 2014 than they were a decade ago. In 2011, airfares were about 40 percent lower than in 1980, adjusted for inflation, even when baggage fees and other ancillary charges are included.

Observers often complain about nominal U.S. prices for Internet access or mobile service as well. One might make the same observation about Internet access, mobile service or mobile Internet service as well. In developed nations, including the United States, cost as a percentage of household income ranges from half a percent to 1.7 percent of household income.

Costs are far higher than that in the developing world, for example.

People likely will continue to complain. But neither industry will have an easy time providing low prices, high quality and also geneate sufficient profits to continue to invest in the business. Airlines historically have had a harder time doing all three. But telecom providers increasingly are finding themselves in the same fundamental situation.

airfares1
source: AEI, Carpe Diem blog

Saturday, December 27, 2014

Bhari Airtel Tries Higher Prices for OTT VoIP Bandwidth

Bharti Airtel prepaid customers, under a new pricing regime, will not be be able to use discounted mobile Internet access rates when using an over-the-top voice over Internet protocol app such as Skype, Viber and similar services.

The move is reminiscent of pricing policies some mobile service providers adopted when VoIP services first emerged as a threat to voice revenues.

To be sure, there is a nuance. The new policies mean usage of mobile Internet access for VoIP apps does not qualify for prepaid data discounted rates, effectively raising the cost of using an OTT VoIP app.

Bharti Airtel can continue to claim that formal prices for use of VoIP bandwidth have not been raised; VoIP usage simply uses a “standard” rate, not a discounted rate that applies to other Internet apps and usage.

Effectively, it is a price increase. Starting in January 2015, Airtel customers using a prepaid data pack will be charged a higher rate for VoIP calls.

Bharti Airtel says use of VoIP apps will be charged at “standard” data rates of 4 paise per 10 KB on 3G networks and 10 paise per 10 KB on 2G networks.

The discounted rate is 0.25 paise per 10KB of usage.

Based on standard rates, usage of one gigabyte of data for VoIP on 3G network will cost about Rs 4,000 and while the same on 2G network will cost about Rs 10,000.

Such practices have been controversial in the past, and Indian regulators already are looking into the practice. TeliaSonera, for example, planned something similar in 2012, but eventually raised mobile data rates across the board, instead.

TeliaSonera, like Bharti Airtel, primarily was concerned about lost voice revenues when it considered the differential pricing plans.

Taking a slightly-different tack, Bharti Airtel says the move is necessary so Bharti Airtel can continue to make investment in expanded data services. In a broad sense, that is correct.

OTT voice shrinks the carrier voice business that represent the bulk of Bharti Airtel revenues, making that larger investment task harder.

Some argue the pricing moves violate network neutrality principles that allow people use of any lawful app, without blocking. That isn’t directly the issue here.

Nor does Bharti Airtel seem to be engaging in any effort to “speed up” or “slow down” VoIP packets or otherwise favor any class of apps. So the issue is less any potential violations of network neutrality principles and more an instance of supplier retail policies.

Whether the new move is the wisest course is the issue. In the past, similar practices have generated ill will. Still, in 2013 perhaps a quarter of all mobile service providers levied some sort of additional charge for use of mobile VoIP services.

Thursday, December 25, 2014

U.S. Network Neutrality Rules Will Set Back Service Provider Hopes for 2-Sided Business Models

Sometime early in 2015, the U.S. Federal Communications Commission is going to issue its long-awaited network neutrality rules. Just as certainly, no matter what the FCC does, there will be lawsuits challenging the rules.

All of that, plus a possibility the Congress will eventually step in and provide direction, mean we still will have no resolution of network neutrality rules in 2015.

In the end, some compromise solution is likely, with consumer access remaining a “best effort only” service, and business users free to buy or create services featuring prioritized access.

If, as likely, consumer services remain based on  “best effort” access, at least one logical way for service providers to create a “two-sided” business model in the consumer Internet access business will fail.

Service providers continue to hope that other methods of selling services for third party business partners might yet emerge.

In fact, some hope 5G mobile networks will embed precisely such features into the fabric of the eventual standard.

But content delivery networks, acting all the way to a consumer account premises, will not be among those features.

Wednesday, December 24, 2014

5G is Likely to Fulfill Promises if the Business Architecture Succeeds

Many fifth generation network proponents are fond of saying 5G is not about faster speeds or network performance, but “heterogenous” network access or lead applications. In other words, the expectation is that 5G will represent not just a “faster network” but a network characterized by its application focus.

That said, proponents now say a minimum of 50 Mbps in the mobile environment, and up to 1 Gbps in fixed indoor environments, is a baseline. So “faster networks” might not define 5G, but speeds will grow.

Though 5G networks will feature “much greater throughput, much lower latency, ultra-high reliability, much higher connectivity density, and higher mobility range,” 5G networks also will feature the ability “to control a highly heterogeneous environment, and capability to, among others, ensure security and trust, identity, and privacy,” the Next Generation Mobile Network Alliances argues.

Many suggest that Internet of Things or machine-to-machine applications, for example, will be key characteristics of 5G, as will on-demand provisioning. To be sure, the desire for a flexible network able to shift “on the fly” has been a service provider goal for decades.

One might say all of those are reasonable extrapolations of current trends in thinking about next generation networks in general. The “highly heterogeneous environment” includes a mix of fixed, mobile and untethered access, all sorts of devices and types of user interactions.

The whole network virtualized functions and software defined network philosophy emphasizes flexibility and on-demand control of network resources.

In other words, the network itself should enable “flexibility to optimize the network usage, while accommodating a wide range of use cases, business and partnership models,” NGMN argues. That implies a network able to support on demand bandwidth and features, in an agile and cost-efficient manner.

The NGMN association argues that new revenues can be generated by providing third party application providers higher quality and lower latency access, as well as proximity, location, quality of service or authentication services.

In the current vision, services are available anywhere, anytime ; with consistent experience across time, space and networks; on multiple devices and access technologies; supporting multiple interaction types;  contextually and personalized; securely; reliably and responsively.

Proponents believe that sort of network will enable new revenue streams earned from providing third party app providers with wanted features.

The problem. as the network neutrality debate has proven, is that app providers are well aware of the “two-sided” (revenue earned directly from end users and from business partners) revenue strategy, which makes service provider revenue a cost to the app provider. So the issue is whether app providers can replicate those functions themselves, or actually believe the access provider value proposition really is so valuable.

You might say hopes for 5G are congruent with an industry hope to add more value and avoid becoming a commodity supplier of bit transport and access. In other words, the hope is that 5G will create a platform for higher application content.

The debate over network neutrality already shows one side of the expected resistance from app providers to the whole notion of “network-provided services that cost money.”

The issue is whether the 5G vision ultimately develops as planned. Next generation network architectures proposed by the telecommunications industry have a way of failing, or developing in unexpected ways.

In the case of 5G, so much of the vision relies on “business architecture,” not “network architecture.”

Tuesday, December 23, 2014

IoT Might Be Very Big, But Few Can Say What the Business Models Will Be

With the “Internet of Things” at the peak of its hype cycle, we will all be hearing predictions of non-linear growth. Many forecasts, for example, call for deployment of 20 billion or 30 billion IoT units by 2020.

Of course, a recent survey of executives watching the market admit they lack a clear perspective on the concrete business opportunities. That isn’t as flaky or fuzzy as it might seem. Few would have been able to predict the many revenue models and businesses created by the Internet, either.

On the other hand, any predictions of IoT installed base are close to pure conjecture, if the actual business models cannot yet be fully defined.

A few years ago, some analysts had predicted that, by 2020, the market for connected devices would be between 50 billion and 100 billion units.

None of that is at all unusual. If IoT does wind up becoming a major technology with wide application, the impact will be as profound as observers predict. But big new markets typically grow far more slowly than expected, at first, before eventually becoming ubiquitous.

Of course, IoT hopes are so large because it would propel growth in a range of industries from semiconductors to sensor applications to fixed and mobile communication networks.

Semiconductor executives surveyed in June 2014 by McKinsey said the Internet of Things will be the most important source of growth for them over the next several years—more important, for example, than trends in wireless computing or big data.
Those hopes might be misplaced, though. “For players in the traditional semiconductor market, the Internet of Things may spark some growth, but it certainly will not change two percent industry growth today to the 10 to 15 percent growth we had in the 1980s,” one industry executive says.  

Monday, December 22, 2014

Global Mobile Revenue Growth Slows to 0.5%, Search for Industry Revenue Growth Intensifies

Though mobile services have been the clear growth driver for the global telecommunications industry over the past decade or two, and though mobile data has taken the growth leadership from voice and text messaging, mobile revenue growth rates are slowing, globally.

Global mobile service revenue in the first half of 2014 grew  just 0.5 percent, compared to the same quarter of 2013, to $385.5 billion, according to Infonetics Research.

At the same time, voice usage slightly slowed, caused by an increase in use of over-the-top communications alternatives.

Also, mobile Internet access overtook SMS as the largest revenue generator of mobile data, Infonetics Research reports.
Mobile Internet access revenue rose 26 percent in the first half of 2014, compared to the first half of 2013, and mobile Internet access now drives mobile data services revenue growth.

Despite the growth of mobile data revenues, average revenue per user continues to fall, but at a much slower pace in every region, including developing Asia Pacific, says Infonetics Research.

That is one reason why we now are hearing so much about the Internet of Things, machine to machine communications and connected cars. The next wave of revenue growth, beyond mobile, mobile voice, text messaging and mobile Internet access, must now be discovered and realized.

Saturday, December 20, 2014

Does Apple Pay Have to Catch PayPal or Starbucks?

Apple Pay in November 2014  was responsible for one percent of digital payment transaction volume (measured by dollar amount), according to ITG Investment Research.

Google Wallet, which launched in 2011, accounted for four percent of digital payment transaction volume in November 2014.

Apple Pay could pose a major threat to market leader PayPal's current dominance of the mobile payment space, according to Steve Weinstein, ITG senior Internet analyst. PayPal was used by close to half of online consumers in 2012, so the trick is to leverage that position in the proximity payments business (retail store checkout).

In September 2014, excluding Starbucks, PayPal had about 60 percent share of mobile wallet share, followed by Google Wallet at 43 percent.  

In the near term, it is Starbucks that Apple Pay might have to displace, even though Starbucks presently is a “captive” system, while Apple Pay aims to be a general purpose payment system.

“In 2013, payment for purchases by use of all mobile devices in the US totalled $1.3 billion, that was the entire market,” said Starbucks CEO Howard Schultz. “With over 90 percent of those purchases taking place in a Starbucks store, that means we had 90 percent share of mobile payments in 2013 while brick-and-mortar commerce in 2013 totalled more than $4.2 trillion.”
That language suggests Starbucks might eventually leverage its mobile payment system on a larger scale. “Starbucks Coffee Company has cracked the code at tying mobile payments to loyalty and we are now receiving great interest in partnerships from mobile payment companies who see the value of our rewards program and the mobile payment behaviour we established,” said Schultz.
“I can assure you that Starbucks will have a major role to play, both inside and outside of our stores, as the nascent mobile payment industry evolves,” Schulz said.
About 60 percent of new Apple Pay customers used Apple Pay on multiple days through November.
New PayPal customers used the service on multiple days during the same time period just 20 percent of the time, ITG notes.

Apple Pay customers used the service roughly 1.4 times per week and used Apple Pay at the same merchant for future transactions roughly 66 percent of the time.

Apple Pay users employ the service for 5.3 percent of all card transactions and 2.3 percent of all future card transaction volume, the study found.

Apple Pay Retailer Share of Apple Pay Activity
Rank
Merchant
Transaction %
Dollar %
1
WHOLE FOODS
20%
28%
2
WALGREENS
19%
12%
3
MCDONALD'S
11%
3%
4
PANERA BREAD
6%
2%
5
SUBWAY
3%
1%

Top 5
58%
45%

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