Google Doesn't Want to be a Service Provider

From a return on invested capital perspective, the difference between Google’s current business model and that of a facilities-based wireline service provider like Verizon could not be starker,” say Sanford Bernstein analysts Craig Moffett and Carlos Kirjner.

“In 2011, we expect Google to post an ROIC of 56 percent, or 38 percent when including goodwill,” they say. “In 2010, Verizon’s wireline segment (which includes FiOS) sported an ROIC excluding goodwill and ‘one-time items’ of  just 1.6 percent.”

“Including goodwill and similar intangible, and smoothed one-timers, it was minus one percent,” the analysts say.

Those are good reasons why Google will not want to become a service provider, even as it considers the virtual necessity of offering entertainment video and voice services in addition to broadband access on its 1-Gbps test networks in Kansas City, Kan. and Kansas City, Mo.

Wireline networks have the weakest returns on invested capital with a 1.5 percent gain over the last decade, Moffat says Wireless networks had a meager return of 0.3 percent. Cable garnered a 2.5 percent return. Low returns from invested capital
Satellite networks had the best return on invested capital at 5.5 percent. It’s no wonder that DirecTV shares have trounced other companies in 8-year returns. Others stocks—AT&T, Comcast, Dish, Sprint and Verizon—have negative returns.



Google, reports the Wall Street Journal, is looking to add video entertainment services, and possibly voice, for customers of its 1-Gbps fiber to home network in Kansas City, Mo., and Kansas City, Kan. The moves would be logical.

Many observers have wondered how such a network, delivering only 1-Gbps Internet access service, at prices "comparable" to existing services provided by telcos and cable companies, could possibly generate enough revenue even to break even.

As it turns out, Google has no magic rabbit to pull out of its hat. The costs of its network are not dissimilar from the costs any other service provider would incur. And few service providers would contemplate building a fiber-to-home network with a single revenue stream, namely Internet access.

Of course, Google could have chosen to operate as a "wholesale only" provider of bandwidth to other service providers. It could still do so. But the few U.S. examples of access network providers who attempt to operate "wholesale only" have not proven highly viable, most would probably conclude.

The only way to approach break-even apparently is to operate the network the way all other such networks are operated, namely providing retail triple-play services to consumers.

Nobody expects Google to become a "service provider" with its own facilities, on a wider scale. But that isn't the point. To some small extent, Google might become a distributor of voice and video services, not just a broadband access provider. But once it secures distribution rights, there are other possibilities.

So far, it seems unlikely Google would get licensing rights that will immediately save consumers money. In fact, any video rights will likely include the normal clauses that require Google to pay as much as other video distributors. But if Google were to focus its services only on "over the top" delivery, it might still have a clear price advantage, compared to other service providers who must build and operate access facilities, of course.

Google might also find it only can get content rights if it agrees to bundle channels in the typical way cable, satellite and telco TV providers do, which would limit the amount of innovation Google could attempt. Also, until Google got serious volume, the prices it pays for content rights will not allow significant retail price discounts.

But any move by Google into the triple-play services market would be a bit of a shock, even if nobody thinks Google wants to become a traditional service provider. The broader issue is that if Google can get what essentially amounts to "streaming rights" to most of the standard TV channels, it would have a bit of room to challenge not only the telco, satellite and cable providers, but over time might gain some leverage to package those channels differently.

In the near term, we should anticipate little change, as the content providers will act in ways to protect the existing distribution model. Longer term, if Google should get traction, matters will change. Google Ponders Pay-TV Business

Global Internet Speed Study

The average worldwide download speed is 580 Kbps. Average U.S. speeds are about 616 Kbps. South Korea has an average speed of 2.2 Mbps. In the United States, Verizon Internet Services provides the fastest service, averaging 1 Mbps.

In Great Britain, Virgin Media is the fastest choice with average speeds of 612 Kbps while Dacom Corp. takes the top spot in speedy South Korea with an average of 5.2 Mbps.

Over time, such measurements will have to reflect widespread use of wireless broadband, with generally slower speeds, though.

The study was based on 27 million downloads by 20 million computers in 224 countries from January through June 2011.

Global Internet Speed Study

Mobile Needs to Focus on Pipe; Won't Be Much of a Factor in Apps

You would be very hard pressed to find a single mobile executive who actually will say in public that providing "dumb pipe" services is the key to their future prospects. Up to a point, this is correct. Most service providers already are preparing, testing or deploying new services that add new "services" to "access" products.

But there might be clear limits to how much service providers can escape, or should want to escape, their fundamental position in the ecosystem. "Access" is the unique contribution service providers make in the Internet ecosystem and value chain. That does not mean service providers cannot, or should not, attempt to occupy other roles within the ecosystem as well.

But one can question how much success can be found in some of the adjacencies. Most end users won’t need much help from service providers to to discovering and use their preferred Web content on mobile phones and portable computers, says Declan Lonergan, Yankee Group analyst. In other words, there might be limited opportunity in the web apps area.

At the same time, though, dependency on mobile Web access increases as hosted, in-the-cloud services replace on-the-device apps. Perhaps there is more opportunity in focusing on "connectivity" than many believe, including both packaging innovations, quality of service features and integration with wired networks.

Customers’ mobile content and Web experiences will be delivered almost exclusively by others in the ecosystem, regardless of whether consumers are using apps or browsers as their primary means of access.

The issue with some ideas and concepts is that unstated assumptions are associated with the ideas. Service provider executives hear the phrase "peering" and they understand it as "settlement-free" interconnection. That has financial implications entirely distinct from the issue of manner of connection. Service provider executives hear the phrase "dumb pipe" and think "commodity-like, low-margin service."

But "dumb pipe" does not necessarily mean "low margin, lower price, undifferentiated" pipe. "Dumb pipe" might just mean "access."

The point is that service providers now are suppliers of a number of values, including simple access to the Internet and web, as well as other services that are managed. Entertainment video, voice, mobile voice and texting are the primary examples.

Telcos, cable companies and satellite companies cannot escape their place in the ecosystem, which is network access. In addition to access, they provider other services, applications and value as well, but all are built, fundamentally, on access.

As always is the case, participants in any value chain will fight for a bigger share of total profits from the ecosystem. It is no surprise others want "access" to be as affordable as possible, as that is better for the other participants. But "access" is the one, unique, irreplaceable value that service providers supply. Everything else they might do hinges on access.

Yankee Group Research Report

Is "Access" Where Most of the Revenue Is?

Fretting over whether people will pay for content is based on a mistaken assumption: that people have ever paid for content in the past, says Forrester Research VP. "They actually haven't," he says.

 Instead, people have paid for access to content.  You have to think about this some. People buy newspapers, so isn't that a content purchase? Well, he argues, not really. The cost of the newspaper purchase never covers the full cost of the content, which is mostly paid for by advertising.

One had to think about a "newspaper" as a distribution channel and a content aggregator, not an actual "content product" in that sense.

So what about cable TV? McQuivey argues even monthly video subscriptions are about "access" to content, not direct content purchasing. "Pay per view," where a show or movie is bought a la carte, on the other hand, is a content purchase.  Subscriptions to linear channels are a form of access, he argues.

If one looks at matters that way, "access" constitutes 77 percent of what the average household spends for "content" each month is spent on content access, not content itself.

Some will argue with the notion that a cable, telco video or satellite video connection is "access" rather than content. On the other hand, having linear video streaming in the background, even when one is not watching, is somewhat akin to voice "dial tone" or broadband Internet access. It's there, one can use it when one wants, but it is not a discrete "content"purchase.

I'm not sure I'd go so far as to classify cable TV as "access" rather than content. People pay for their voice services using a flat-fee subscription, as they pay for linear video. Some of us might not think a different payment method, or retail pricing plan, changes the nature of the product.

But it is an interesting way of looking at the relative value of various revenue streams. Back in the early days of the tramnsition from dial-up to broadband, I gave a speech to a group of ISPs very concerned about the difficulty of the business model.

At that time, most of the actual revenue was earned by providing access. There was some amount of value-added service and products.  For better or worse, I said then, "access" was where most of the money was, despite the difficulty of the business case.

The business ecosystem was simpler then. Google had not grown to its current state, for example.  Looked at broadly, it may no  longer be true that most of the money is in access.

European Commission, FCC Disagree on Competition

As U.S. competitive local exchange carriers and cable companies await key decisions from the Federal Communications Commission, the quantitative tests of "effective competition" are key. And on that score the FCC and the European Commission do not see eye-to-eye. In the video arena, the FCC targets the 30-percent market capture level as denoting "effective competition." In the voice services area the test seems to be 20-percent share loss by incumbents. The EC doesn't even think 50-percent loss of market share by incumbents is sufficient.

The disparities in thinking about what marks "effective" levels of competition leaves at least some room for new thinking on what measures might be required to stimulate even more robust levels of competition. In mass markets, 30 percent quite often is the share held by the market leader.

Wal-Mart to Sell HughesNet Services

Need a little satellite broadband with your order? Wal-Mart customers will be able to buy HughesNet satellite broadband services soon. Sure, it is a niche. But there are lots of big niches in the communications business. About 10 percent of all U.S. end users live places where the local telephone company is not one of the big brand names. Also, for some of us, wireless is a good way to back up a primary wired broadband connection. In my case, Covad as a primary for primary in-home business and personal use, plus 3G wireless primarily for mobility, but also as the backup in case the primary service fails for any reason.

iPhone Wins with Software Defined Radio

Software defined radios--software that emulates all the functions of one or more radio transceivers--have been talked about for at least a decade, and at least one company--Vanu--has had its SDR approved for U.S. use by the Federal Communications Commission. The attractions are many: mobile communications becomes an application any device can be given; dedicated firmware and hardware are unnecessary; multiple radios can be made available to any single device; smaller radios are possible.

An SDR could mean a global mobile device, able to work in Japan, on GSM or CDMA networks, with Wi-Fi or other wireless networks. Some users would love it. Mobile carriers have to be ambivalent. Sure, you'd like to sell a true "global phone." But then you also lose control of the end user and the device. Any truly global phone necessarily works with any mobile provider's network, as well as with Wi-Fi and potentially other wireless platforms--such as WiMAX--as well.

On the other hand, looking at this from a consumer device manufacturer's point of view, SDR is a wonderful thing. If you sell mass market communicating devices all over the world, and have to deal with disparate radio infrastructures and protocols, you want SDR because it streamlines the entire manufacturing and logistics process.

You build one device, supporting multiple radio types; not multiple devices designed to work on one sort of radio platform. If you are Apple, in other words, SDR is a really nice thing. It's a nice thing if you are Nokia as well. Nokia just has more entangling relationships with customers that undoubtedly will press Nokia not to make SDR available.

Also, no particular business model inevitably is bound up with the use of SDR, though obviously the technology lends itself to more open and flexible end user models. One can envision open, unlocked business rules on one hand and walled garden rules on the other where "roaming" is possible anywhere in the world so long as the user has agreed to pay for that privilege.

The point is that by fits and starts, we see more openness at both the device and application layers of any communications-enabled business, corresponding to the openness IP itself has brought to transmission.

Midband Ethernet, Everything Else is Growing...

It has been a good year for suppliers of midband Ethernet connectivity equipment and access services. Heck, it's arguably been a good year for access services, period. Where providers used to get asked for T1s, they now get asked for DS3s. Where they used to get asked for DS3s, now customers are asking for optical connectivity. It's the same story on the consumer access front: more bandwidth, more often. That's what video will do to a network.