Exhaustion of Business Models is the Key Strategic Problem Faced by Telecom

“Exhaustion of business models” has been a key--perhaps the key--issue for the global telecom industry for at least three decades.

It might seem odd today, but several decades ago, global telecom profits were driven by long distance calling. For a variety of reasons predating VoIP, prices per minute of use plummeted globally between the 1970s and 2010.

That the business did not collapse was due to product substitution. Essentially, mobile services displaced the lost long distance revenues. Then text messaging became the first important “data” service, before mobile Internet access took the lead.

In the fixed networks part of the business, a similar displacement, or product life cycle, can be seen. Where voice once dominated revenue, revenue growth now is lead by high speed access or video entertainment services.

Now mobile voice and texting are losing their salience. In some markets, overall usage is declining, as is average revenue per user or average revenue per account.

That is the reason you hear so much about Internet of Things, connected cars, mobile payments or machine-to-machine services, mobile advertising or e-commerce.

Service providers know they must find big new revenue sources to replace lost legacy revenues.

In fact, there is relatively wide agreement that the historic business model--end users paying mobile operators for connectivity services--is itself exhausted.

That is why the search is one for services provided to devices, sensors, monitors beyond “people.”

That could include any number of new niche markets (vertical markets and apps). The 5G network will need to support a wide range of industry verticals but also a wide range of operator business models, including mobile virtual network operators (horizontal business models).

For fifth generation networks, there also will be a move to compete directly with fixed networks for high speed access.

DirecTV Would Create Triple Play for 47% of U-verse Homes

Though there are several reasons AT&T wants to acquire DirecTV, ability to rapidly supply linear video is among the key drivers.

AT&T has about 57 million high speed access locations, but only 30 million (53 percent) can get linear video service. The fastest way to create a triple play bundle for nearly half its consumer locations is to bundle DirecTV with U-verse.

Beyond that, DirecTV will throw off massive amounts of free cash flow, which is helpful for a firm that pays out most of its earnings in the form of dividends.

Eventually, DirecTV also would give AT&T the ability to create a triple play bundle out of region, where it does not have U-verse facilities. In those situations, AT&T would bundle DirecTV with mobile-supplied voice, messaging and Internet access.

Vodafone India Drops Roaming Fees As Much as 75%

In advance of mandates to lower roaming fees, Vodafone India has cut voice roaming fees as much as 20 percent, and text messaging rates as much as 75 percent. That is good for consumers but will hit mobile service provider revenues.

The rules on roaming fees are but one example of the profound impact regulators can have on communications markets, both enabling and shaping private actor decisions that directly affect end user welfare.

Investors and service providers also are speculating about what bottom line and top line impact might result from the recent Indian spectrum auctions that generated record $17.4 billion in spectrum costs for mobile service providers.

Observers say India’s carriers may have to raise prices (either for voice, or data, or both).

“While the costs of the industry are massive,” the average revenue per user (per month), or ARPU, of Indian telecom service providers is $2.96, compared with the international average of $35 to $40, according to the Cellular Operators Association of India.

The cost of acquiring spectrum in the recent Indian mobile spectrum auction were high enough that Bharti Airtel, Idea Cellular and Reliance Communications may take a sharp hit to earnings in 2016 and 2017, driven by interest charges on borrowed money spent to acquire spectrum, analysts estimate.

And most observers say retail end user costs are certain to rise, as the capital investment has to be recovered.

Bharti Airtel’s net profit could drop eight percent, starting in April 2016, US brokerage Morgan Stanley estimated. that would be mild, compared to what could happen at Idea Cellular and Reliance Communications.

Idea Cellular could see earnings before interest and depreciation drop 27 percent, while Reliance sees a plunge of 26 percent.

India’s Airtel provides more evidence that a mainstay product in the telecom industry--mobile voice--is following its cousin fixed network voice along the classic product life cycle.

Airtel's voice revenue per minute of use dipped 2.4 percent, compared to the prior quarter, while average revenue per user also fell in the quarter ending in March 2015.

Overall revenue grew 31 percent, year over year, due to mobile data revenues, counteracting the revenue pressure in the voice business. That also is part of a global trend, namely that mobile access to the Internet now is the revenue growth driver in many markets.

Idea Cellular, the third-largest provider by subscribers,  also reported a three percent quarter-on-quarter decline in voice revenue per minute.

The trend is long standing. Prices have been falling since at least 2007. Likewise, data revenues have been growing since at least 2006, in the Indian mobile market, while voice prices have declined almost steadily since then.

Some have criticized the Indian government for making government revenue a bigger priority than creating conditions where service providers can aggressively extend service. Calling taxes and charges “excessive,” outgoing Vodafone India CEO Marten Pieters said Vodafone pays 30 percent of gross revenue to the government.

FCC Rural Subsidies Might Not Find Takers: There Might Not be a Business Case

The Federal Communications Commission has increased Connect America Fund funding for “price cap” carriers by about 70 percent, but also raised the minimum required speeds to 10 Mbps, although the Federal Communications Commision has redefined “broadband” as a minimum of 25 Mbps.

The conditions include a requirement to serve all high-cost areas within a state, if a carrier accepts the funding. Predictably, not all potential affected carriers might support all of the requirements for funding.

In some cases, a service provider might conclude that the total impact of upgrades required to receive the high cost service area funds exceeds the revenue that can be earned by doing all the upgrades.

The new funding benchmarks range from $72.40 for 10 Mbps downstream/1 Mbps upstream service with a 100 gigabyte usage allowance, to $96.89 for 25/5 Mbps unlimited service.

High-cost fund recipients that are subject to broadband performance obligations are required to offer service at or below the benchmark rates to qualify for the subsidies.

The fundamental economic problem is that, in many areas, there literally is no traditional business case for providing service, at the rates which can be charged, and which most consumers would pay. When that is the case, even the subsidies might not be sufficient to create a positive business case for upgrading.  

That has been a problem in the past, and is one likely reason the amount of support has been raised.

If service providers decline to take the funding, other service providers will be allowed to bid for the the support. But that also is part of the subtlety: consumers might well prefer to buy mobile service, in place of fixed network services. And the cost of providing that service might be lower, using mobile, than using any fixed network approach.

No Consolidation Among Top-4 Mobile Operators is Possible; One Has to Fail

Even if one argues a four-provider U.S. mobile market is not sustainable, U.S. regulators have ruled out any consolidation among the top four suppliers. That means the market cannot consolidate to three strong providers by means of mergers among the contestants.

That leaves only one solution: one of the firms, or perhaps even a couple, would have to be so weakened that the top ranks shrink naturally to two or three providers, with a distant number four unable to keep up. Failure, in other words, is the only way the U.S. mobile market is going to consolidate.

That appears not to be the case in the video market.

Even 20 years ago it would have been possible to predict that, ultimately, both DirecTV and Dish Network would cease to be operating entities, and would have been acquired or merged with another entity. The logical candidates always have been Verizon and AT&T.

Now that AT&T has made the move to acquire DirecTV, half the prediction seems likely to be fulfilled. The issue now is what happens with Dish Network. Verizon likely has little interest, as Verizon thinks linear video is going to decline rather quickly.

That makes Dish Network exit options tougher. It never has seemed likely any cable TV operator would see the logic of acquiring Dish Network or DirecTV. If Verizon isn’t interested, the pool of buyers gets very thin, one might argue.

Likewise, some have argued that, long term, the U.S. mobile market simply cannot support four major national suppliers. But it is hard to see, at the moment, how that consolidation would happen.

In fact, the only scenario that would reduce immediately and clearly reduce the number of suppliers is the one development regulators will not presently support: Sprint merging with T-Mobile US, or either AT&T or Verizon buying T-Mobile US or Sprint.

In other words, none of the four leading national providers will be allowed to merge. That doesn’t mean there will not be acquisitions; there simply won’t be any mergers of the top four firms.

“I have always said on consolidation, it’s not a matter of if it’s when and how and now I’m going to add and who, because I think as we think ahead you need to think I still reiterate that in five years we will think it comical that we thought about the  industry structure as the four major wireless carriers,” said T-Mobile US CEO John Legere. “So I think you need to think about the cable industry and players like us as not competitors but potential partners and alternatives for each other in the future.”

That would not necessarily reduce the number of providers from four to three, as a firm such as Comcast would still remain in the market. But a Comcast acquisition of either T-Mobile US or Sprint would give the acquired company the heft to secure its number three spot in the market on a long-term basis.

On the other hand, it always is possible that Dish Network might also try to acquire T-Mobile US, to transform itself. That likewise would not immediately reduce the number of leading mobile providers.

So, like it or not, no consolidation of the U.S. mobile market is possible by means of any mergers among the top four providers.

Instead, one of the firms would have to be weakened so much that it essentially drops from contention. Weakened sufficiently, the number-four provider might well be acquired by a firm that has a different business model, and essentially does not compete directly with the leading three providers.

How Much Must Small Cell Costs and Backhaul Drop?

Ask yourself how much you would be willing to pay for an Internet connection to a $100 appliance (router, for example). At the low end of that range, one is looking at consumer-grade Internet access connections.

But put yourself in the shoes of an executive of an Internet service provider looking at big networks of small cell access points, perhaps with per-site costs in excess of $3,000, just for equipment, and not including site rent costs.

Consider a single macrocell, where backhaul could cost $24,000 a month, supporting perhaps 160 Mbps to 500 Mbps of capacity per site. How much capacity might a small cell require?

On the assumption a small cell only makes sense in a high-traffic area, the answer might be that the small cell requires as much capacity as a macrocell, in some instances. In other cases, perhaps a small cell only has to support a fraction of total macrocell bandwidth.

The issue is that traditional access using T-1 equivalents does not work. Small cells are going to require Ethernet bandwidth, between perhaps 100 Mbps and a gigabit.

As a rough rule of thumb, assume a small cell requires cost parameters about an order of magnitude less than a macrocell, with backhaul costs likewise scaled about an order of magnitude. That implies a maximum small cell backhaul cost of about $2,400 a month.

Greg Weiner, Vertix co-founder, argues that small cell sites would have to drop to about $100 to $250 per location to drive mass adoption. Again, that suggests something on the order of magnitude drop in costs is needed.

On the other hand, the cost of business grade gigabit connection is dropping dramatically, in some markets. Connections supplied by cable TV companies with dense fiber deployment (think Comcast) are one reason for thinking backhaul costs will drop to levels enabling mass small cell networks.

The One Disruptive Implication of Google Fi

Fi, the new mobile service by Google, has been criticized in some quarters for not being disruptive enough. With the caveat that many changes could come as the service develops, observers have argued that the retail pricing isn’t really all that unusual, not especially affordable, and that the selection of handsets is nil.

All of that might be true, for the moment. But there is one huge shift in retail packaging and pricing that Fi does represent, and it is odd that it comes from a firm such as Google, which might be presumed to favor unmetered or unlimited usage.

Generally speaking, telecom service providers have preferred metered usage based on consumption. Generally speaking, Internet app providers prefer unlimited and unmetered usage plans.

The reason is simple: access provider make more money when users pay for what they consume, while app providers arguably make more money when usage fees place no constraints on the amount of app usage.

The reason “buckets of usage” exist is that Internet service providers, mobile service providers and fixed network service providers are trying to slowly wean customers off of the notion that Internet access literally is “unlimited.”

Conversely, for those services whose demand is plummeting (voice and messaging), service providers now offer “unlimited” plans in place of the buckets or usage-based billing that once were the industry norm.

Again, the reasons are simple. With demand dropping, the network has plenty of spare capacity to support “unlimited usage,” especially when end user demand is highly predictable. Also, because of the high predictability of usage, and low bandwidth impact, unlimited plans can safely be offered because few customers will actually use very much of the resource.

Fi might be the first significant change in thinking about what sorts of plans are most “consumer friendly.”

Up to this point, the “consumer friendly” approach has been considered the uncapped or unlimited consumption approach. Now, Fi is arguing that it is the metered approach that is most consumer friendly. That is a huge shift.

In fact, most ISPs would prefer a metered approach for Internet access, as much as they would argue they benefit by offering “unlimited” use of voice and text messaging.

So, oddly enough, the real innovation Fi represents is a possible sea change in thinking about what form of retail packaging and pricing is most consumer friendly.

Is Facebook Next Regulatory Target in Europe?

Is Facebook the next target for European Union antitrust authorities? Possibly. 

Ostensibly, Facebook only wants a single, unified framework. Facebook VP Richard Allan warns that multiple, overlapping investigations of Facebook, instead of a single EU policy, would lead to higher costs and a decrease in the rate at which new features are developed.

Facebook’s concern partly is a “balkanization” of rules. National regulators in a number of countries, including Belgium and the Netherlands, appear to be initiating multiple, overlapping investigations of Facebook.

“In effect, this would mark a return to national regulation,” said Allan. “If it is allowed to stand, complying with EU law will no longer be enough; businesses will instead have to comply with 28 independently shifting national variants.”

The unstated concern is simply that antitrust investigations seem to be proliferating. The other, unstated issue, is growing regulatory scrutiny, as Google now faces.

Cablevision, Hulu Sign "First Ever" Deal

Cablevision Systems Corporation will offer the Hulu subscription streaming service to Optimum customers, becoming the first linear video provider to do so. The announcement contained no details about pricing or packaging, but it might be reasonable to assume the cost will be about $8 a month, the current price for a paid Hulu subscription, and that the tweak is that the content will be viewable directly from within Cablevision’s linear TV channel lineup.

In other words, Hulu likely will be offered in the same way a linear channel such as HBO is sold and packaged.

Some might say the deal adds value to both parties somewhat incrementally. Consumers already can buy Hulu directly, and can watch on TVs, PCs, tablets or smartphones. That likely will not change as Cablevision becomes a distributor.

But that’s where the incremental value might be created. Hulu gets a big distributor with a customer base and the ability to promote the service. Cablevision gets a new network nobody else offers as part of the linear package.

The move arguably adds a bit more momentum to the “over the top” trend.

The bigger impact plausibly could come if Netflix strikes a similar deal with another major cable TV company (in terms of subscriber share), for the simple reason that Hulu has relatively small market share among OTT providers, while Cablevision likewise has a limited footprint.

So far, only a couple of smaller cable TV providers (Suddenlink. Grande Communications, RCN and Atlantic Broadband) have signed deals to integrate Netflix into their channel lineups.

T-Mobile US Addes 1.8 Million Accounts in 1Q 2015

T-Mobile US reported revenue growth of 13.1 percent in the first quarter of 2015, on the strength of robust net account additions.

T-Mobile US had 1.8 million total net account additions in the quarter, marking two straight years of adding at least a million net new customers every quarter. Still, that was a slowdown from the 2.4 million net adds in the same quarter of 2014.

Some 1.1 million net adds were branded postpaid accounts, one million of those accounts being phone accounts.

At the same time, branded postpaid phone churn was 1.30 percent.

For the full year, T-Mobile US now expects to add a total three million to 3.5 million branded postpaid net adds.

T-Mobile’s branded prepaid net customer additions were 73,000 in the first quarter of 2015. Branded prepaid churn was 4.62 percent in the first quarter of 2015.

For the full-year of 2015, T-Mobile US expects adjusted EBITDA to be in the range of $6.8 to $7.2 billion, unchanged from previous guidance.

T-Mobile revenue rose to $7.8 billion from $6.88 billion a year earlier. But heavy promotions resulted in a first-quarter loss of nine cents per share.

At some point, some of us have noted, T-Mobile US would have to switch from rapid subscriber growth to actual profits. If the rate of subscriber growth continues to fall, then that time is coming.

Sprint might still continue with a focus on subscriber growth rather than profits, but a shift by either, or both firms would signal that the fierce marketing war, driven by those two firms, is about to wane.

Impact of 25-Mbps "Broadband" Definition

Conspiracy thinkers might see a pattern in recent decisions by the Federal Communications Commission to manipulate statistics on U.S. Internet adoption, even if each single decision has a logic of its own.

Beyond some greater inability to track progress, and some obvious marketing and strategic issues for entire classes of providers, it might be difficult to determine the impact--beyond universal service funding implications.

That might be considered odd, since the presumed reason for changing the definition was to spur faster investment in higher-speed networks.

Consider the decision to define “broadband” as a minimum of 25 Mbps downstream, in January 2015. Since access speeds are increasing, seemingly at a faster pace, it makes sense to periodically review definitions, at least for the purpose of determining performance levels relevant for government universal service purposes.

Oddly, the announcement about the speed redefinition began with the statement that “broadband deployment in the United States--especially in rural areas--is failing to keep pace.” The irony is that the new definitions make the “problem” bigger.

“The 4 Mbps/1 Mbps standard set in 2010 is dated and inadequate for evaluating whether advanced broadband is being deployed to all Americans in a timely way,” the FCC said.

“Using this updated service benchmark, the 2015 report finds that 55 million Americans--17 percent of the population--lack access to advanced broadband,” the FCC said.

Cynics might point out that redefining an issue to increase the number of incidents will logically create a bigger defined problem. Those who argue a higher definition will cause faster investment might argue the new definitions almost immediately will mean recipients of universal service funds will have to build at a minimum 25 Mbps, not 4 Mbps, to receive funds.

The impact on the broader market is unclear, in terms of investment incentives. Many commercial providers, especially those in the fixed networks segment, having long passed the 4 Mbps standard, arguably will not be much affected, however, as the market level of competition comes from the Google Fiber gigabit challenge, not the “minimum” 25 Mbps definition.

So changing the definition likely has little impact on many major commercial providers, in terms of investment incentives. 

But there are some odd implications, with high sector impact. Some Internet service providers have been redefined out of existence. 

That includes most satellite and fixed wireless ISPs, plus many rural telcos. Selling a 15-Mbps access service no longer qualifies as “high speed” or “broadband.”

And some of those service providers cannot increase speeds to 25 Mbps, across the board, for reasons related to lack of spectrum. If speeds higher than 25 Mbps are the future, those contestants face long term issues related to ability to compete.

Some might see other important implications, as well. Even most Long Term Evolution networks do not consistently deliver 25 Mbps, though they easily meet the 4 Mbps definitions. So, by raising the definition of “broadband” to 25 Mbps, the entire U.S. mobile industry was eliminated from contention.

Again, the result is a suddenly “bigger” problem, even if few really believe the actual state of high speed access has gotten significantly worse over the last year.

Also, the new definition meant Comcast, had it acquired Time Warner Cable, would have had at least 57 percent market share of “broadband” connections in the United States. By historical standards, that was far beyond the 30-percent share maximum that has governed antitrust thinking in the communications and video entertainment businesses.

So some might see ulterior motives. Others might see an understandable logic, less sinister but still designed to create problems, not solve them.

Students of organizational “mission creep” or development will note that organizations never declare victory and disband, when the original problem they sought to fix has been vanquished. Instead, they search for new missions.

Cynics might argue something similar was at work: definitional changes that dramatically affected the status and scope of a defined problem, with a bigger implied need for action to solve the problem.

Others might note that the fuzziness about Internet access has grown for some time, though. Classically, “broadband” was defined as any speed at or above 1.5 Mbps. That definition now is archaic, but has been replaced by a subjective notion that “broadband is what we say it is,” in essence.

That is perhaps unavoidable in a market where speed improvements, since the earliest days of dial-up access, have been increasing nearly at the rate Moore’s Law would suggest.

There arguably is no "conspiracy." But real issues are created. Comparing performance or progress over time will be tougher, since the definitions have changed. 

Many ISPs no longer can say they sell high speed access or broadband. In many cases, there are physical limits to progress, such as lack of access to additional spectrum. What policy changes can, or should, flow from that situation are unclear.

Amazon Business to Tackle $1 Billion U.S. B2B Market

Amazon Business, a customization of Amazon for business customers will not come as a surprise, any more than marketplaces for consumer services are a surprise.

Amazon Business is an expansion of what was once Amazon Supply, the wholesale site it launched in 2012. At it's peak, Amazon Supply had about 2.2 million products serving millions of business customers. Amazon Business certainly will be much bigger, boasting hundreds of millions of products.

In part, the effort reflects the size of the business products market. In 2014, the business-to-business market was about $1 trillion, according to estimates by the U.S. Commerce Department.

That is almost four times the size of the business-to-consumer e-commerce market that recorded sales of $263.3 billion in last year, according to the U.S. Department of Commerce.

B2B e-commerce also is growing slightly faster than U.S. online retailing—at an annual estimated rate of about 19 percent, according to Deloitte, compared with 17 percent for B2C e-commerce, as reported ed by the U.S. Department of Commerce.

1,000 Times More Data Center Processing to Support IOT in 5 Years?

Only about four years from now, the Internet of Things will need 750 percent more data center capacity in service provider facilities than it consumes today, according to a recent report by the market-research firm IDC.

At the same time, it is possible latency requirements will require offloading processing to the edge of the network.

The reason is the assumption that dense networks supporting highly mobile and distributed sensors and appliances will produce so much raw data, with a need to process so fast, that computing has to be offloaded from centralized data centers to edge processors of some sort.

Whether it will be possible to process fast, with latency of not many milliseconds, backhauling all data to data centers, is the issue. Many do not think that will be optimal, even if it proves possible.

Apple Earns 69% of Revenue from iPhones

If you ever wondered why “Apple Computer” is now simply “Apple,” it is because Apple is a mobile phone company, not a “computer” company. The Apple iPhone, in Apple’s second quarter of 2015, represented 69 percent of total revenue.

Apple had quarterly revenue of $58 billion and quarterly net profit of $13.6 billion in its most-recent quarter, up from revenue of $45.6 billion and net profit of $10.2 billion year over year.

Gross margin was 40.8 percent compared to 39.3 percent in the year-ago quarter and international sales accounted for 69 percent of the quarter’s revenue.

For the next quarter, Apple predicts its fiscal 2015 third quarter will feature

revenue between $46 billion and $48 billion.

Verizon Puts Muscle Behind A LA Carte and Streaming Strategy

Verizon wants to make omelets.  It has to break eggs.

Did Verizon Just Screw The Content Giants? http://m.seekingalpha.com/article/3106216?source=ansh $VZ, $DIS, $FOX, $FOXA

Level 3 And Verizon Agree To Share Cost Of Network Upgrades

That is the way large networks and Internet domains always have interconnected. And it makes sense.

When networks exchange roughly equal amounts of traffic there is no structural problem. When traffic is unequal,  the sending network imposes costs on the receiving network. "Sending network pays" is how it works.

And how it should work, in fairness.

Level 3 And Verizon Sign Interconnect Agreement: Agree To Share Cost Of Network Upgrades http://m.seekingalpha.com/article/3106406?source=ansh $LVLT, $VZ

ESPN Sues Verizon Over Skinny Bundles that Do Not Include ESPN

ESPN obviously sees the Verizon skinny bundle as a bigger threat than DirecTV’s skinny bundle. Verizon excludes ESPN from the base tier, relegating ESPN to an optional sports tier.

DirecTV does something similar, albeit on a smaller scale, by allowing consumers to purchase a basic tier without ESPN, though most of the packages do seem to include ESPN.

So Verizon’s approach likely is going to affect more consumers. Verizon has been sued, and DirecTV has not been sued.

55% of U.S. Internet Homes Buy OTT Video

Some 55 percent of U.S. households with Internet access now subscribe to an over the top streaming (OTT) video service, up from 44 percent in 2013, Parks Associates estimates.

Subscriptions are highest among households with a younger head-of-household, with 72 percent of households headed by those 18 to 24 and 71 percent of households headed by those 25 to 34 having an OTT service subscription.

That alone might not suggest a tipping point, or inflection point, is nearing. More significant are moves by content suppliers to create stand-alone streaming services not dependent on a prior purchase of a standard linear service.

AT&T Acquisition of DirecTV Seems Likely, for Good Reasons

As a rule of thumb, I tend to assume U.S. regulators will nix any acquisition by a market leader that produces an outcome where a single entity controls more than 30 percent national market share.

That math suggested Comcast would not be allowed to buy Time Warner Cable, since Comcast’s share of high speed Internet access would exceed 57 percent.

The only issue, after the Federal Communications Commission raised the definition of broadband to a minimum of 25 Mbps, was how much higher Comcast’s share would grow.

By way of contrast, an AT&T that has acquired DirecTV would still only have a maximum of 17 percent share of the U.S. Internet access market. The actual share, under the new 25-Mbps definition, is not clear, but would be less than 17 percent. And linear video share would not exceed 27 percent, in a line of business universally recognized to be declining, in any case.

That is why rumors of merger approval seem logical. Even if the acquisition consolidates one of the major linear video providers, the new entity has 27 percent market share, and faces almost-certain declines over the next five to 10 years.

What if Nobody Wants to be the "Carrier of Last Resort?"

AT&T has about 17 percent share of the U.S. Internet access market, assuming none of its lines now fail the new definition of 25 Mbps. Most consumers buying satellite Internet, and probably most customers buying fixed wireless services likewise now are purchasing Internet access, but not, strictly speaking, what the Federal Communications Commission calls “broadband” or “high speed access.”

Beyond the issue of FCC regulatory fiat redefining a few industries out of business (most satellite and fixed wireless access services), causing a statistical, overnight decline in “broadband” adoption in the United States, and rendering multi-year tracking of Internet access more difficult, there are other perhaps perplexing issues in the U.S. Internet access business.

In a competitive market, some of us would argue, the low cost provider wins. In the fixed network Internet access market, that is cable TV.

So it is noteworthy that Verizon has been shifting capital investment into mobile, and generally away from its fixed networks.

And even allowing for its use in a lobbying capacity, AT&T now says its own fixed network is more costly than that of the cable operators that now are the market leaders in high speed access, in the U.S. market. AT&T's fiber to the neighborhood network cannot keep pace with the bandwidth offered by cable and other competitors, AT&T has told the FCC.

So AT&T increasingly will have to shift to fiber to the home to keep pace, as Verizon already has done with FiOS.

The problem is that the new investment will occur in the context of declining profit margins in the fixed networks business overall. Voice revenue is declining, linear video is expected to decline, and cable has the more efficient, and faster, Internet access services.

Put bluntly, the ability of a telco--even a tier one telco--to compete against a well-capitalized cable TV company is doubtful, long term, in the fixed network business.

That might be a shocking conclusion. But evidence points in that direction. It is fashionable, perhaps even directionally correct, to say that the fundamental strategic importance of a fixed network is mobile backhaul.

But that statement also suggests the revenue potential of a fixed network is shrinking. Special access might have been a high-margin service that drove profits for networks that recovered their costs substantially from consumer services.

But such business-focused services (backhaul) were not huge gross revenue drivers.

It is too easy to argue that telcos will discover huge new revenue sources to revive the fixed networks business, so there is no strategic issue. It is possible such revenues will never be found, leaving cost reduction or exiting the business the options.

That does raise issues for regulators. What if no single service provider wishes to, or can afford to be, the “carrier of last resort?”

And if the intent is to create and sustain incentives for any service provider to take on that role, what has to change? We don’t have clear answers, yet.