Anna Karenina and Successful Startups

If you have ever worked at a startup that failed, the “Anna Karenina principle” will make sense to you. If success requires solving a number of key problems, then failure to solve just a single one of those problems produces failure. My personal experience is that failure happens as much as 70 percent of the time and perhaps closer to 100 percent over a decade’s time, if one considers acquisition to be an outcome or failure to scale outcomes that represent failure. 

To put it another way, failure goes through a wide gate; success through a very-narrow gate. 

source: slideshare 

The way I have come to understand that principle is an analogy to high walls, locked doors or hurdles. Success requires scaling a series of high walls; opening a series of locked doors or jumping over a series of hurdles. And each obstacle must be successfully navigated. Failure at any single obstacle kills the venture. 

source: Inc. 

Those obstacles can include failure to get the next round of funding; making a bad key hire; betting on the wrong product; launching too early or too late. Trying to solve the wrong problem; burning out the founding team; failure to manage remote teams; making the wrong pivot; lack of domain knowledge; team discord or lack of focus also are gates, hurdles or locked doors. 

Not “listening to customers” is a gate. But sometimes one has to ignore feedback as well. Poor marketing; lack of a viable revenue model; user interface problems; the wrong pricing model; a “too high” cost model; more-nimble competitors; having the wrong team; running out of cash before you are ready to go to market or misjudging the existence of a market also can be key hurdles, walls or gates. 

The point is that success requires success at every single obstacle. Failure requires only one obstacle not surmounted.

How Big is the "Value" Segment of U.S. Home Broadband Market?

Home broadband for $25 a month is the value proposition Verizon fixed wireless now offers for top-end customers of its mobility service. For T-Mobile fixed wireless customers on premium multi-user plans,  the recurring cost is $30 a month. 

Say what you will about the expected speeds of such services, or the cost of higher-speed services from either cable or fiber-to-home service providers. 

For a possibly-substantial portion of the market, such price points are going to be attractive, even if the trade off is lower top-end speeds. 

It might be the case that “good enough” service is worth a “reasonable price” for that service. 

That is important for home broadband market competitors. Even if such offers do not appeal to the entire market, the “good enough service for a reasonable price” segment of the market could be substantial, especially for Verizon and T-Mobile mobility service customers. 

That is similar to the “same service, lower price” positioning often used by attackers in established markets. If the top possible speed for fixed wireless sold by Verizon is about 300 Mbps (millimeter wave assets help), then Verizon theoretically could reach between a third and 45 percent of U.S.home broadband buyers, based on data from Openvault. 

T-Mobile speeds for home broadband are said to range up to about 182 Mbps, suggesting a third or so of U.S. home broadband accounts could be addressable. 

  

It is too early to say whether fixed wireless platforms will be long-lasting drivers of market share in internet access markets, or only relatively temporary. Some believe speed limitations will ultimately reduce fixed wireless attractiveness. Others think fixed wireless capacity can keep growing. 

But at least for the moment, it is hard to ignore U.S. cable operator lost market share and the availability of fixed wireless from Verizon and T-Mobile. In the near term, fixed wireless market share gains seem a certainty. 

Comcast continues to claim that fixed wireless is not damaging its home broadband business, and that might well be correct. For any ISP, a customer move is an opportunity to gain or add an account, so lower rates of dwelling change should logically reduce the chances of adding new accounts. 

In the second quarter of 2022, Comcast reported a net loss of customer relationships and “flat” home broadband accounts. 

That might suggest to some observers that stepped-up telco fiber-to-home and fixed wireless account gains might be starting to change market share dynamics. Those trends possibly were not obvious in the first quarter of 2022. 

All that said, there are possible signs of change. Fixed wireless already is driving net home broadband additions for T-Mobile. On its second quarter earnings report, T-Mobile added more than half a million net new home broadband accounts, which might put it on track to be the biggest net gainer for the third quarter in a row. 

In the fourth quarter of 2021, fixed wireless represented 74 percent of Verizon net home broadband additions.  

Comcast did not gain net accounts for the first time, ever, according to market watchers. Verizon added significant numbers of new home broadband accounts in the same quarter.  

The longer term  issue is demand as typical data consumption keeps growing, and “typical speeds” likewise keep climbing. 

Perhaps use of millimeter wave assets and better radio technologies will solve much of that problem for fixed wireless operators. Perhaps new wholesale arrangements will develop. 

What might also be happening is that consumer appetite for “more affordable” internet access is substantial. Many households might be willing to trade “speed” for “lower price.” In other words, as with any product, value is a combination of features and price. Fixed wireless might show the existence of a market segment that cares about “reasonable speed for a reasonable price” more than “fast” levels of service. 

That is not the whole market, but it is potentially a big enough segment to shift billions of dollars of home broadband revenue and significant market share. 

Users Will Not Care about Web3 or Web 3.0

Is semantic web, or web 3.0, not the same thing as web3? Apparently not, some argue. But others will argue the terms will ultimately be interchangeable, even if purists will continue to argue the two concepts are quite different.  

Web 3.0 might be defined as a standards effort related to making the reading of machine data universal. That is akin to saying that the “internet” is different from TCP/IP or Ethernet. 

Web3, on the other hand, refers to a decentralized internet based on blockchain. 

Others will argue the semantic web (web 3.0) focuses on efficiency and intelligence by reusing and linking data across websites, while web3 focuses on decentralization, security and end user ownership of data.

As a practical matter, users will not care very much, any more than they care about how data is transported, where it is stored, how their phones or cars work. 

The nomenclature will eventually settle down. “Semantic” is not likely to gain widespread universal usage. For that matter, “web 2.0” never really became popular currency, either. And so it is possible that neither web3 nor web 3.0  ever really become mainstream user terms. 

source: mdpi.com, cointelegraph 

Far more likely is the common understanding that people use “phones” or “computers” or “cars.” So people will simply say they “use the internet.” But as has been the case in the past, applications, features and capabilities will continue to develop, for devices, apps and platforms. 

Most people will still not care how far towards a “next generation internet” we have gotten. They will simply be able to do and experience new things, in new ways, as we have found in the past. 

We have moved from a character-based internet to a visual internet; from “read only” to “read-write;” from content to commerce. Metaverse use cases will eventually develop. But it is possible that much of the shift to blockchain-based security will happen in the background. 

Regular people will not care much about decentralization or machine-readable data, if they care at all. People do not know how electricity works, how cars are made or what software powers their devices, to use them every day. 

Telco Choice of TCP/IP for Next Generation Networks was Fateful

Technology decisions, it goes without saying, can dramatically change access provider, data center and application business models. Cloud computing creates the business opportunity for data centers and “software as a service.”

Fatefully, connectivity provider adoption of TCP/IP upended the “closed” business model and substituted an “open” model that also relegates access providers to “connectivity” roles. If telcos did not want to become “dumb pipes,” they should not have adopted TCP/IP as their “next generation network” platform. 

TCP/IP was the computing network model, where value was created on top of layered and disaggregated transport and access. Modern computing necessarily operates on an “over the top” basis, with hardware and operating systems disaggregated from apps that use that hardware and operating systems. 

To be sure, there were strong arguments in favor of TCP/IP and Ethernet: connectors were low cost, compared to proprietary telco connectors. Data networks using TCP/IP and Ethernet were relatively simple. The ecosystem was well developed and disaggregated, presumably leading to faster and easier innovation. 

As all communications networks began to operate as “data” networks, that made sense. 

None of that necessarily requires retail pricing of data connections on a flat fee, unlimited usage model. 

As access service providers complain about capacity costs and seek new revenues from hyperscale app providers, other common solutions exist, even if hard to implement under highly-competitive conditions. 

Obviously, selling more customers unlimited usage plans, even at higher recurring prices, does not encourage customers to be careful about their consumption. 

By choosing TCP/IP as its next-generation network, the global “telecom” industry chose to operate data networks based on the use of loosely-coupled layers. But it is not a given that flat fees and virtually unlimited usage is a mandatory pricing model. 

Arguably much of the ISP concern about business models grows directly from decisions made to operate retail access networks with a flat fee/virtually unlimited usage model. 

Flat Rate Pricing is the Foundation of ISP Access Capex

“All you can eat” retail pricing policies (flat rates for unlimited usage) are a major reason connectivity provider business models are so challenged. On the other hand, wholesale transit prices--which are metered--also keep dropping, on a cost per bit basis. 

That is a major pricing model change from the economics of the voice era, when most usage was on a metered basis: use more, pay more. 

Internet service providers might complain that they “cannot” charge by usage, for any number of reasons. Still, that is a business choice that brings with it the perpetual need to upgrade facilities while retail revenue remains relatively flat. 

So, in a real sense, internet access providers are faced with capital investment choices partly of their own making; partly imposed by competitive market conditions and partly driven by a major shift of entertainment video preferences by consumers. 

By 2020, web and file sharing accounted for only about 14 percent of global IP traffic, for example. Some 82 percent of total traffic was entertainment video traffic. 

source: Cisco, Vox, Recode 

It might be largely uncontrollable that video entertainment has moved from “broadcast” (“multicast”) and “packaged media” delivery to unicast and network delivery. But that alone has huge capital investment and pricing implications.

Unicast and two-way networks cost more than multicast or broadcast networks. The reason is the ability to deliver one copy of something to millions of consumers all at the same time. Uncast now essentially means delivering millions of copies at different times. 

If one copy of an item requires X bandwidth, then a multicast delivery requires X bandwidth. Unicast delivery of that same object to one million viewers requires one million X bandwidth. 

So the shift of video consumption to unicast drives huge changes in network investment. Perhaps nobody envisioned that the largely character-based early internet would evolve into the multimedia platform it now has become, with former multicast traffic increasingly being delivered in unicast formats. 

That alone would require ever-increasing access bandwidth as unicast video consumption (streaming and downloading) increases. 

In other words, flat rate pricing for virtually unlimited usage does not match the requirements of delivering entertainment video. 

It might be quite difficult for any single ISP to use pricing that matches consumption with cost. But flat rate pricing for virtually unlimited usage  is the primary driver of ever-growing access provider capital investment.

Intel Gets Brookfield Investment for Chip Fabrication Expansion

Chip fabs are the latest form of digital infrastructure investment. Intel Corp and Canada's Brookfield Asset Management agreed to jointly fund up to $30 billion for Intel’s chip factories in Arizona.

As frequently is the driver for other co-funding ventures in the digital infrastructure space, Intel will limit its own capital investment in return for giving up part of the future revenue from the investment.

Brookfield  will invest up to $15 billion for a 49-percent stake in the project.  Intel will retain majority ownership and operating control of the two chip factories.

More FTTH Co-Investment

Investment firm Meridiam is co-investing in fiber-to-home infrastructure with T-Mobile in Austria, each firm investing about a billion euros to construct facilities reaching 650,000 homes in rural areas and small towns. 

The firm began investing in digital infrastructure in 2000, and has made prior FTTH  investments in Germany and Canada. 

The deal essentially solves a problem for Magenta Telekom, namely the high cost of wiring rural and lower-density homes. 

Liberty Global, Telefonica and InfraVia Capital Partners have created a joint venture on a larger scale, aiming to build FTTH past seven million U.K. homes. 

Such moves represent a change in thinking on the part of fixed network internet service providers, who historically have favored fully-owned access infrastructure. But high capital requirements and heightened risk seem to be encouraging fresh thinking. 

Better to share financial returns and risk, the new thinking suggests. But such thinking also should raise the issue of the value of fixed network access assets. Access networks traditionally have been viewed as assets with high moats, in large part because of the high capital investment required to create them. 

But competitive local access markets also raise the issue of stranded assets as well. In markets with two facilities-based contestants, equally skilled, stranded assets (facilities generating no revenue) might represent up to 60 percent of deployed assets. 

Co-investment and wholesale business models represent a way to both lower capital investment, reduce risk and the danger of stranded assets. 

At the same time, institutional investors now view digital infrastructure as an alternative investment quite similar to the real estate and other infrastructure investments they have traditionally made: long-lived assets producing steady income and offering business moats (protection from additional competition). 

But there also are other strategic drivers. Profit margins on internet access services are harder to sustain and capital intensity seems to be increasing as well. 

All of that increases incentives to trade some revenue upside for reduced risk.

Should Universal Service Funding Burden Be Broadened?

The shift in telecom service provider business models has obvious implications for all other parts of the ecosystem, including mechanisms for funding universal service. That will be obvious in coming debates about how universal service should be funded.

There are big potential winners and losers. So behind all the rhetoric are perceived financial interests that will be helped or harmed. Among the coming key questions is which parts of the value chain should bear direct burdens.

Up to this point, direct customers of communication services have been the funding source, even when service providers have had the option of paying themselves (out of profits or shareholder returns) or passing such charges along to their customers.

The coming debate might challenge that notion, adding other stakeholders to the formal contribution base. But make no mistake: such changes are favored because they help sonme parts of the value chain and harm others.

But make no mistake: ISPs argue their costs are climbing, and somebody has to pay.

The only issue, they argue, is "who" should be directly funding universal service. Up to this point, it has been service providers held responsible in a formal sense, even if service provider customers have been the actual payers, ISPs and telcos acting only as collectors of a "fee" that is more akin to a tax.

(Yes, regulators, lawmakers and ISPs will insist universal service payments are fees, not taxes. Such payments are taxes in practice, no matter what the form suggests.)

What helps ISPs will necessarily harm others: customers, citizens, consumers, other participants in the internet value chain. It cannot be avoided.

Perhaps ironically, taxes on long distance voice usage remains the foundation for funding high cost or rural networks. And the problem with that mechanism is that “fees” (taxes, essentially) have to keep rising as the   contribution base  keeps shrinking. 

Logically, the shift to broadband access as the key product also means broadband has to be the funding source and the destination of funds, over the longer term. 

And that means changing the rules, which always means potential winners and losers if the rules are changed. And there is at least a possibility--however slight--of a revolution of sorts in funding mechanisms. 

In the European Union, regulators and policymakers are considering levying fees directly on app and content providers, not just direct customers of access networks. The U.S. Federal Communications Commission says it will look at such approaches as part of its review of the funding mechanism for universal service. 

In the United States, additional funding for rural area networks comes from the Rural Utilities Service and the National Telecommunications and Information Administration as well. But so far, the FCC has not moved to make “mobile service” a universal service objective, though support is available for mobile voice and internet as an alternative to fixed network service.

As always, support mechanisms are a highly-political matter, as any proposed changes will produce winners and losers. 

And that is where perceived financial interests emerge. Though some might argue that shifting support mechanisms (taxes, essentially) from declining voice to broadband access is logical, there are reasons internet service providers oppose such moves. 

The obvious stated reason is that doing so raises the effective cost of home broadband. Since higher prices reduce demand, basing universal service support mechanisms on broadband access has the effect of damping down broadband take rates, which is the point of universal service. 

But ISPs also argue that taxing broadband instead of voice is only a temporary measure, as the reasonable amounts any such tax can raise are insufficient for long-term support. And that is why there is more vocal support for taxing some hyperscale app or content providers, for the first time shifting support mechanisms beyond service providers or access customers. 

“A diverse and wide-ranging group of commenters supported a second idea related to USF contributions: further broadening the USF contribution base to include entities including “edge providers” such as streaming video providers, digital advertising firms, and cloud services companies rather than relying solely on the end users—or consumers and enterprises—that have historically paid the line item fees passed through by providers,” the FCC notes. 

Whether such an approach would be adopted might hinge on whether it can be adopted. “The Commission has never analyzed its authority to regulate edge providers, which broadly defined, encompass a wide variety of different entities that provide Internet content, applications, and services,” the FCC says. “Before the Commission could require contributions under its permissive authority for any type of edge provider, it would need to conduct a rulemaking proceeding and establish a record that analyzed and applied the definition of “telecommunications” to edge providers and demonstrated that the public interest supports requiring contributions.”

There also is some belief that a specific charge from the U.S. Congress would be needed. “A wide variety of commenters called for legislation to expand the Commission’s authority so it could assess contributions on the broadest range of service revenues, including from digital 

advertising and other online edge services that benefit from broadband networks,” the FCC says. 

The FCC believes “there is significant ambiguity in the record regarding the scope of the 

Commission’s existing authority to broaden the base of contributors.” 

So the FCC recommends “Congress provide the Commission with the legislative tools needed to make changes to the contributions methodology and base in order to reduce the financial burden on consumers, to provide additional certainty for entities that will be required to make contributions, and to sustain the Fund and its programs over the long term.”

In the end, no matter how the funding issue is resolved, consumers and customers will wind up paying. In the final analysis, customers always wind up paying for all entity costs of doing business. 

The coming battle will simply pit value chain participants against each other to shift the burden someplace else, in a direct sense. 

In the end, though, no matter where the formal burden is placed within the value chain, customers and end users scattered along the value chain will wind up paying, as the higher costs of doing business will simply be passed along to direct customers at every stage of the value chain. 

One might argue the logical approach is simply to base universal service obligations on buyers of broadband access services. It is simple, transparent and logical. But ISPs will fight that suggestion, by and large. The last thing they want is for their customer demand to be exposed to new challenges. 

From an ISP point of view, the better solution is to shift the blame elsewhere, by making some other entity collect the fees (taxes) in their own retail prices. That still passes the payment burden onto consumers or customers, but hides the pain by disbursing it. 

As always, for every valid public purpose there are private interests. And we are about to see those private interests go to battle over a very public purpose.

Low Take Rates for Subsidized Home Broadband?

Apparently just over one percent of U.K. households take advantage of a home broadband for low-income residents program. Such programs seem to be widely available, but take rates are quite low. 

 In the United States, up to 45 percent of California households appear to qualify for subsidized home broadband programs and 27 percent of those households do so. In Colorado some 20 percent of eligible households appear to take advantage. 

But some observers believe the current program will expire before reaching take rates of 68 percent nationally. 

It is not clear whether participants were “unconnected” before or were already buying internet access. Supporters sometimes count all the participants as having not had internet access prior to joining the program, and that is not likely. The program provides a $30 discount off any published plan. 

Existing ISP programs had routinely offered low-cost access at speeds lower than 100 Mbps. The Affordable Connectivity Plan offers subsidies for 100-Mbps at no cost to qualifying households.  

But there are many reasons why some households choose not to purchase  internet access because they do not want to use the internet or do not need home broadband because they use the internet in other ways, such as by mobile phone, or get access at other locations. 

Mobile Data Traffic is Correlated with GDP

Analysys Mason estimates that a 100 percent increase in mobile data traffic translates into a 0.98 percent impact on gross domestic product. That is a correlation, not necessarily causation, as always is the case for economic impact studies. 

But that is the problem with all efforts to quantify the economic impact of any particular innovation, product or industry. We might estimate impact, but we cannot prove the causal relationship of any single input when results (economic growth, for example) is caused by multiple inputs.

Consider that, in addition to the volume of mobile data traffic, the capacity of undersea cables, home broadband adoption, use of information technology,  transportation systems, energy supplies, broadband speed, educational attainment, household wealth, housing density, business activity levels, ethnicity and age can be correlated with gross domestic product as well. 

It is impossible to clearly separate the impact of each input when determining countrywide economic output. During the Covid pandemic, we discovered correlations between risk factors and deaths. But correlation is not causation. 

One might argue for a correlation between electricity consumption and GDP, for example. 

Among OECD member countries, for example, gross domestic product increases by 1.7 percent per year. Electricity use increased by 0.9 percent per year between 2015 and 2040. In non-OECD countries, GDP increases by 3.8 percent per year, and electricity use increases by two percent  per year over the same period, according to the U.S. Energy Information Administration. 

The point is that there is a correlation between electricity usage and GDP. 

source: Our World in Data 

Higher GDP is associated with higher energy consumption. 

source: EIA 

The other problem is that if one were to try and add up all the claimed economic benefits caused by each input or industry, the results would not comport with reality. The claimed output would vastly exceed reality. 

“We find that a 10 percent increase in the fraction of the population ages 60+ decreases the growth rate of GDP per capita by 5.5 percent,” the RAND Corp. has found. “Two-thirds of the reduction is due to slower growth in the labor productivity of workers across the age distribution, while one-third arises from slower labor force growth.”

Transportation might be correlated with about five percent of GDP as well.  

The point is that better communications and connectivity always are assumed to correlate with better GDP outcomes. We can disagree about the magnitude of such correlations while assuming there is a correlation. 

But neither can we accurately measure the specific causation of any single input.

More Streaming Bundles?

Streaming service bundling was probably inevitable, as bundling of products has been a staple of the consumer content and communications business for some decades. Lower marketing costs, higher perceived value, lower churn and perceived distinctiveness are some of the advantages. 

Bundling also makes price comparisons more difficult, as the retail price for the bundle obscures the actual “price” for any single bundle component. That becomes more obvious as disparate services or products are added to any bundle. 

Some decades ago bundling sometimes was described as having value because it simplified the customer billing interaction. Most of us would have a hard time identifying that as a value which is relevant to most--if not all--buyers. 

In almost all cases, price discounts are the attraction of a bundle. 

For some content owners, discounted offers for purchases of multiple owned steaming services is something of a no-brainer. 

Bundling of streaming services with other products such as a mobile subscription also has become common. The point has been to create differentiation in a crowded marketplace by adding value beyond content access. 

source: Axios 

The other new trend in the U.S. streaming business is multi-sided revenue models, particularly using advertising in addition to subscription fees paid by end users. By effectively lowering price points, demand is stimulated. 

As linear content services always have been about bundles, now streaming will do the same, perhaps eventually creating bundles of bundles. The trade off, as always, will be higher volume at the cost of lower profit margins per unit.