U.S. ISP Business Has Gotten Tougher

It has been clear for some time that the operating environment faced by U.S. communications service providers would be getting tougher.

“The U.S. telecommunications industry is currently faced with pressing concerns like intense pricing competition and severe spectrum crunch,” say analysts at Zacks.

The mobile segment faces saturation, both of customers overall and smartphone-driven revenue upgrades as well, Zacks says. “Massive promotional expenditures and cut-throat pricing competition are major concerns presently plaguing the industry.”

At the same time, competition in the fixed segment of the business has heated up as well.

That is going to cause pressure on gross revenue as well as profit margins, right at a point where access providers must invest heavily in their core networks to accommodate must-faster access speeds (gigabit fixed network speeds and fourth generation mobile network investments).

At the same time, network neutrality rules already are shaping access provider revenue models, most likely in a more-limiting way. In part, the impact comes from limiting consumer access to “best effort” service and extending those rules to the mobile business.

By definition, stipulating “best effort access” automatically rules out any revenue models or plans that involve quality of service mechanisms.

What is so far unclear are the longer-term implications of regulating Internet access as a common carrier service. Already, there are indications the extension of net neutrality thinking to carrier interconnection, which logically and historically is unrelated to consumer access policies, is affecting service provider practices.

Specifically, it is not so clear that traditional compensation principles based on the amount of traffic exchanged between networks will remain the case. The amount of settlement-free peering, even when traffic exchange is highly unequal, might result, with implications for business models of “eyeball” domains and “content delivery” domains.

At the same time, the lawfulness of some retail charging policies, especially zero rated apps (akin to toll free calling), is under challenge.

The consumer impact could be substantial, as well.

The net effect of net neutrality rules is that “brute force” bandwidth upgrades will remain the dominant way of providing quality of service, compared to potential alternative network management methods.

Still, the direct impact of the new rules in unclear. Capital investments to upgrade access speeds are dictated as much by competitive concerns as anything else. And with Google Fiber, independent Internet service providers, Comcast, other cable TV companies, AT&T and CenturyLink all upgrading to gigabit speeds, there is market pressure to match those upgrades.

So the issue is whether the U.S. access provider market is robust and profit rich, or becoming less robust and less able to afford investment in new facilities.

On that score, there is some disagreement about growth prospects for future telecom global revenue. Some predict slow but rather steady growth. Others think a slowdown could happen.

Common carrier regulation might have significant long-term effect on investment decisions, since many ISPs will have a harder time growing revenue, creating new products and innovating.

The net neutrality rules adopted by Federal Communications Commission  in February 2015 make high-speed broadband access a public utility service under Title II of the 1934 Communications Act instead of section 706 of the 1996 Telecom Act.

The reclassification is “a radical change” and means the “FCC can now strongly regulate the ISPs,” Zacks says.

Much remains unsettled, as the FCC rules are under court challenge. But the net impact of a number of FCC decisions, including the redefinition of “broadband” to reflect a minimum of 25 Mbps downstream, has effectively removed many providers and services from the “broadband” domain (think satellite TV, fixed wireless and some telco services).

Conversely, with the upgrades to gigabit services in much of the market, more capital spending will be required, on the part of fixed network providers. It isn’t so clear that there is a near-term fix for satellite and fixed wireless providers, as spectrum is the primary constraint for those suppliers.

High throughput satellites will help. And TV white spaces might be an essential tool for fixed wireless providers.

But the main point is that the operating environment has gotten more difficult for most ISPs.
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