United Online: Harvesting Cash Flow

With the latest fourth quarter and year-end reports now out from United Online, AOL and EarthLink, the expected trends continue. Dial-up Internet access, like stand-alone long distance before it, throws off cash flow, but less every year. All three leading independent Internet access providers are in the midst of transformation projects, with United Online succeeding most clearly, though it failed to pull off an initial public offering of its Classmates.com unit.

All three ISPs essentially are managing their dial-up bases to harvest cash flow and control costs, the standard prescription for managing a declining business, while seeking a new path to growth. That's the same path the independent long distance industry took as well.

Perhaps the best historical analogy is not long distance but paging. Basically, mobile phones replaced pagers, as broadband is supplanting narrowband access. But paging remains a business. It simply isn't as large a business as it once was, and is the province of specialists. That's the ultimate future for dial-up services in the medium term as well.

As this data from the Canadian Radio-television and Telecommunications Commission indicates, paging use and revenues have been declining steadily since 1998. Dial-up will be around for a while, but as a small niche within the broader range of access services.

Media, Voice, Mobile, Broadband Tipping Points

In a historic first, online media companies collectively will sell more ads in local markets this year than such individual hometown media as newspapers, broadcasters and yellow pages, says Borrell Associates. That's a tipping point, a stage of development when critical mass for some new phenomenon is reached.

Five years ago business phone systems hit a tipping point: most new systems were IP-capable. A couple years ago another tipping point was reached and new phone systems mostly are IP-only. These days most new phone sales are for IP systems.

Likewise, Internet usage and access hit similar tipping points earlier this decade. Most people now use the Internet, and that wasn't true 10 years ago. Also, there was a tipping poin when broadband caught and then surpassed dial-up access as the dominant access medium.

Then there was some tipping point reached where access speeds accelerated beyond the "affordable mass access in the hundreds of kilobits per second range" to "affordable mass access in the megabits per second range."

You can see tipping points for text messaging and mobile phone use as well, even though it is only within the last decade that most people started carrying mobile phones and only within the last five years that most younger users began texting heavily, dragging older users along with them.

One watches for tipping points for all sorts of practical reasons, including evidence that it now is time to restructure the way marketing, sales, production, business models, distribution, industrial design, menus and all sorts of very practical things get done.

And the point is that all media are approaching tipping points of their own, and for reasons largely analogous to how communications is changing because of Moore's Law, IP, peer-to-peer, cheap storage, optical fiber, wireless and Web services.

In the newspaper local advertising area, a new tipping point appears to have been reached.

Online-only media companies will have claimed 43.7 percent of the $8.5 billion spent in 2007 on local advertising, usurping the long-time lead of newspapers. While newspapers three years ago controlled 44.1 percent of the local market, they will capture only 33.4 percent of sales this year.

The growth of the online media companies “came mainly at the expense of newspapers and yellow pages publishers,” who have lost a combined 19.6 points of local advertising share in the last three years, says Borrell.

Having spent some time working at newspapers, as well as at publishing companies with multiple products, a concrete way to view tipping points is the impact on structuring of sales forces.

Typically, newspapers and other local media try to build their online businesses by selling new media to their legacy customers. Sometimes they try to use a single sales force to sell online and legacy products. That doesn't work, long term.

In fact, it doesn't quite work even short term, as sales forces direct their behavior to where they can make the most money, and that never is in the emerging businesses.

So one winds up with a strategy akin to launching a Boeing 777 into the air by rolling forward slowly on a long runway. No matter what you do, you crash at the end, because there never is enough runway if you don't get your airspeed up pretty quickly.

Companies that rely on their legacy sales forces to sell the new products--even though it seems logical--will crash their planes at the end of the runway. The only way to succeed is to cut the cord. Build separate sales teams with separate incentive structures; not "converged" sales teams.

One does not "incrementally" jump a very wide ditch. One leaps. One makes it or not. But it can't be done incrementally and slowly.

Is U.K. Business Broadband Near Saturation?

By October about 1.76 million (85 percent) of the 2.12 million U.K. workplaces already had Internet access. This is much the same proportion as six months earlier, in March according to Point Topic. Which could lead to several different conclusions. One might argue that the base of potential buyers is nearly saturated. Or one could argue that the remaining 360,000 sites require some new sort of plan. One might also argue that some businesses might not require broadband, for some reason.

Point Topic’s latest results contrast with the 6.3 percent increase found for the period May 2006 to March 2007 when the pace of broadband development was still high.

Part of the problem is that most of the remaining businesses without internet access are small and poor, Point Topic notes. There is a strong positive association between workforce size and business internet penetration. Organizations with more than 250 employees all have Internet access. Businesses with only one or two employees reported 75 percent penetration.

Internet penetration is 100 percent in the businesses with the highest sales volume, particularly those in the finance sector. All businesses with over £20 million in sales have Internet access, but only 77 percent of those in the “£50k to £100k” category do.

The wholesale and business services sectors are both close to saturation with take-up at 95 percent. The least connected is the retail sector, where only 67 percent of companies have Internet access.

About half of businesses say they are making do with an ordinary, low cost, consumer type internet service. But as the number of employees in a business rises, the proportion using consumer-type internet services falls and that using more expensive business-quality services rises.

In terms of internet connection types, cable modem connections are found much more frequently at smaller workplaces, with 20 percent of all Internet-connected one or two employee businesses choosing them.

Take-up is only around five percent at medium-sized sites and they disappear altogether at the biggest ones. More common amongst businesses with greater employee numbers are satellite, fiber, ATM, leased line or frame relay connections. Some dial-up or IDSN connections are found at all workforce sizes – with ISDN much more important at the larger end.

Sometimes the Truth Doesn't Seem to Matter...

A commentator recently noted that "Some 62 million Americans are still using their telephone lines to dial into the Internet, according to recent figures from the Pew Internet and American Life Project. The direct implication is that U.S. consumers suffer from woeful broadband availability. Other figures from research firms like Forrester show that only about 40% of Americans have high-speed connections at home, 30% rely on dial-up and 25% don’t have any Internet connections at all.

"So how come the US is lagging behind most of the developed world in broadband access?," the commentator asks.

The problem with such thinking is that it likely is completely wrong. Sure, broadband bandwidths started out pretty low. But they are going up fast. And per-capita broadband consumption in the U.S. market does lag many other countries.

And sure, we'd have much higher penetration of just about anything if we are willing to subsidize it.

Where one starts doesn't matter. Where one ends is the issue. And there's ample historical evidence to suggest broadband adoption isn't an actual issue, from the perspective of where we will wind up. And one might point out that it is far easier to do something in a small country than across a whole continent, as a completely practical matter.

First of all, history actually suggests that innovations useful to consumers get adopted. Period. When people want something, they buy it. There's a demand element here, not simply a supply dimension.

What isn't useful doesn't get used. And many important communications innovations--including the Internet, cable TV, TV, radio, compact disk audio and DVD players, for example--have in fact propagated exceedingly rapdily with no much regulation besides spectrum allocation, RF emissions control and some amount of franchising, in some cases.

Things people don't find as useful, such as C-band satellite dishes, eight-track tape players, "videotext" and so forth, just don't make it because people don't find them useful enough, over time.

Then there are the examples of innovations such as mobile phone use, where U.S. consumers lagged far behind customers in other countries before penetration grew spectacularly. Something along the same lines appears to be happening with short message service: slow, under-par adoption followed by acceleration that ultimately closes the usage gap.

The point is that the same sort of alarmist fears were raised about mobile phone usage itself. And that doesn't seem to be any sort of problem at the moment. So maybe some perspective is in order. If "25 percent" of U.S. homes have no Internet access at all, that might be because 25 to 30 percent of U.S. homes have no personal computers in them.

And if telcos and cable companies keep adding customers at the furious pace they now are racing at, there won't be any homes with PCs left to convert to broadband in just several years.

It might be easy, convenient and satisfying to complain about broadband adoption. But it is wrong to ignore the evidence. And the evidence, both historical and current, suggests that broadband penetration is accelerating exceedingly sharply.

And, oh by the way, some people don't want to buy broadband yet. We'll fix that, in a bit. But just because people don't buy as much of any product as the producer would like does not mean there is market failure. It means people don't want a product, priced and packaged the way it currently is. There could be lots of good reasons for those decisions. And they are persuadable. But the problem isn't necessarily or primarily market structure and regulation.

Just like all those other communications-related services we now cannot live without, we will have virtually ubiquitous, high-quality broadband at affordable prices. It would be ahistorical to suggest anything else, and requires abandonment of any actual direct observation of current broadband adoption rates.