AOL to Cleave Access from Ads

So it looks as though AOL will be split, separating out the Internet access business from the emerging advertising business. The thinking is that it will be easier to do something with each of the assets that isn't so easy right now. Presumably a buyer such as Google might want to pick up AOL's portal for the ad business.

But what can be done with the access assets? Even though AOL lost 3.8 million subscribers in 2007, it still has something on the order of 9.3 million U.S. subscribers.

EarthLink has something of a similar problem. It has a declining customer base but still has 4.2 million access customers.

The issue is what sort of buyer might exist for the Internet access customers AOL and EarthLink now are serving. Most of them are dial-up customers and are likely prospects for broadband upgrades. But the customer base is scattered all over the U.S. market.

So any potential acquirer would want a ubiquitous broadband access footprint (cable modem, wireless or Digital Subscriber Line). Only the leading wireless providers have any real shot at national coverage. Verizon, at&t or Comcast would have immediate coverage issues. Smaller ISPs might want to buy, but can't raise the money.

Does anybody have a rational business plan for rolling up the EarthLink and AOL access bases? Not one we've heard so far, even assuming all the other assets are cleanly separated.

Verizon, at&t Take Different Approaches to Bandwidth Caps

For an industry that in decades past has tended to move in lockstep, it is refreshing to see an ever-increasing divergence in strategies and marketing positions. Consider the matter of bandwidth caps and content filtering.

at&t has decided to filter non-authorized content on its broadband access networks. The move is an attempt to reduce the peer-to-peer bandwidth load on its networks.

Verizon, on the other hand, doesn't want to do so and says it will not. Many policy advocates will cheer that stance.

One might credit Verizon's decision to move to a fiber-to-home network for that laudable move. Simply, Verizon has a lot more headroom than at&t will to support today's heavy users, and ultimately, heavier use by nearly all users as more video moves to Internet delivery.

Beyond the policy stance differences, and the customer goodwill Verizon will garner, the notable difference stems from fundamental decisions each carrier has made. Verizon made a risky bet in the face of nearly-universal investor opposition. at&t took a less-risky path that was rewarded by investors.

But each of those decisions now has repercussions in other areas where technology now conditions the marketing decisions each company can make. I've said it before and will say it again: Verizon did the right thing sticking to its FiOS program, in the face of intense financial community pressure.

In the years to come, that technology and financial decision is going to give Verizon many options other contestants may not have.

Time of Day Pricing

As exemplified by this chart showing how utilities price usage by time to day to discourage use during periods of peak load, one theoretically could price broadband access, voice or virtually any other communications good based on time of day or day of week. Long distance pricing used to do so, in fact.

Of course, what we now know is that users vastly prefer flat rates, often because it is a way to avoid steep "overage" charges, and even when the actual price for usage is much higher than one might think. Based on what one did in a single billing period, for example, average prices for wireless calling might range from two cents a minute to eight cents or more. When one is on vacation, per-minute pricing might be as high as 20 to 25 cents a minute for the actual minutes used.

Most U.S. consumers probably don't worry about "per minute" pricing for domestic calling. They pay a flat rate for a certain number of minutes in a bucket, and that's about as far as one normally thinks about the matter.

Not so long ago, though, wireless calling and wired network calling routinely used time of day pricing. In principle, broadband access could be priced the same way. It is doubtful the potential benefits are worth the effort. Customers clearly prefer buckets and flat rate pricing. Also, there are costs associated with tracking usage so closely, so in most cases it might not be worth the effort.

The other issue is that pricing by the value of an application makes more sense than tracking raw bandwidth usage. The value of a text message or voice bit is quite high on a price-per-bit basis. On the other hand, the value of high-quality video video or audio bits is not determined so much by price-per-bit as by quality of the streams.

One movie might be "worth" the $3 or $4 a user pays for the stream. But the value will be determined by the quality of the delivered images. Two hours of continuous talking might be valued just as highly, even if the perceived price is $2.40 (two cents a minute for 120 minutes).

Time of day pricing also arguably makes less sense for broadband because network load tends to balance out, if one includes business broadband and consumer broadband load. Business load is high from 8 a.m. until perhaps 4 p.m. while consumer usage peaks in the evening. Average load therefore tends to balance on any given network from 8 a.m. to 11 p.m. local time, though usage obviously is lighter from midnight to 6 a.m.

Usage-Based Pricing Not Unusual

At some point, as more Internet service providers begin to adopt "buckets" of use as the dominant subscription model, there will be outcries about whether this is fair, since most users in the U.S. market have come to expect flat fee pricing for "unlimited" use.

That has not been the dominant model in Europe, for example, and though there might be some incremental impact in usage patterns, I don't think anybody would argue that metered usage is terribly and inherently unfriendly.

It also is highly unlikely to the point of implausibility that ISPs in the U.S. market will move to a strict metered usage regime. The reason is simply that the objective--matching consumption to the cost of providing access--can be addressed more simply and palatably by using the "bucket" model, much as mobile calling or texting plans can be purchased based on expected usage.

In that regard, it might be helpful to recall that consumer pricing has used any number of models. Pay-as-you-go had been the dominant packaging and pricing model for all long distance plans, mobile and fixed, until at&t introduced "Digital One Rate." Local calling, on the other hand, has used a "fixed fee, all you can eat" model.

Cable TV has used a mixed model: essentially "flat fee, all you can eat" for ad-supported video and movie channels, but usage-based pricing for on-demand pricing.

The model used for Internet access started at the other end of the continuum: unlimited use (subject to some acceptable use policies) for a flat fee. Only recently have some voice providers moved to that model.

Of late, though, there has been a bigger move to "buckets" that match usage to price. There's no particular reason to believe a move in that direction will affect the vast majority of users. Most customers have usage patterns that fall within a reasonable zone, and won't, in practice, notice anything different even if usage-based pricing becomes more prevalent.

Providers obviously will want to minimize disruption, and there's no question but that lower prices have driven high demand. Nobody will want to jeopardize their market share by raising prices for most customers other than the small percentage who consume a disproportionate share of bandwidth.

Over time, more attention will have to be paid to the relationship between retail pricing and usage as video starts to change usage patterns, though.

Test of Tiered Pricing for Broadband Access

Time Warner Cable is testing usage-based broadband access pricing, according to Broadbandreports.com. The move is hardly surprising. Most Internet service providers report that a fraction of all users, about five percent or so, use over half of all access bandwidth.

The Time Warner test presumably aims to discover how such usage can be monitored by end users themselves, how scalable the process might be, and possibly whether such heavy users will upgrade to higher-usage plans or flee to another provider.

Over time, it seems inevitable that heavier users will find themselves facing universal caps on their usage and the ability to buy plans that support their higher usage levels.

Broadandreports.com says the test will involve new customers in the Beaumont market, not existing customers. Those users will be placed on metered billing plans where overage charges will apply, and provided a web site where they can track their usage and upgrade, if required.

In principle, the approach is akin to how mobile pricing plans now are structured, where users can choose higher usage or lower usage plans for voice and text usage.

One way or the other, as video becomes a bigger part of overall broadband usage, it is inevitable that usage-based plans supplant current "all you can eat" plans. Video is the reason.

Video consumes vastly more bandwidth than Web surfing, email or voice, requiring across the board capacity increases in the network backbone and access networks. That obviously costs money, and those costs will have to be recovered.

Usage-based pricing is coming because it has to.

XO Launches IP Flex

XO Communications has launched XO IP Flex, a new converged IP services bundle that upgrades and replaces XOptions Flex, XO’s VoIP services bundle. The new service positions XO as a better provider of voice and data for larger businesses, and also packages voice services as a broadband access feature.

There are a couple noteworthy elements here. The offering is Ethernet-based, and so moves beyond the bandwidth formats dictated by the T1 and SONET frameworks. An organization can buy bandwidth between 1.5 and 45 Mbps, eliminating the abrupt cost and bandwidth jump between a couple of T1s and a DS-3.

Also, the offering positions the new product as "Ethernet access" and voice as an included application. Some will argue this is merely a marketing position, but it is an important shift in positions.

XO IP Flex extends XO’s VoIP services to larger business customers by offering new higher-speed bandwidth options including 4.5 Mbps and 10 Mbps. XO IP Flex works with existing phone systems.

The service eliminates pricing based on the number of voice lines. Unlike other approaches to IP pricing that still are based on traditional TDM services pricing models, XO’s bandwidth-based pricing acknowledges that voice is simply another application on the IP port and offers rates based on the size of the port, not on the number of voice lines.

Standard IP Flex features include:

* Voicemail, caller ID, call waiting, call forward, three-way calling, and one toll free number
* Dedicated Internet Access with Dynamic Bandwidth Allocation
* Unlimited local calling
* Unlimited site-to-site calling for multi-location customers with IP Flex, IP Flex with VPN and XO SIP locations
* Long distance calling with choice of calling plans
* Online Feature Management through the XO Business Center
* Optional features, including Auto Attendant, Call Center, Account Codes and Voice Virtual Private Network.

The company also has launched XO SIP, which delivers converged voice and data services to businesses with IP-PBX systems over a single, high-speed IP connection. XO SIP is a fully integrated solution designed to support the needs of businesses with the most demanding voice and data applications at single locations or multiple locations nationwide.

Session Initiation Protocol uses a native IP-based facility to manage all traffic between a customer’s IP-PBX system, the XO IP network, and the Public Switched Telephone Network. The service provides greater efficiencies by eliminating the need for businesses to maintain multiple access facilities for voice and data services and eliminates the need for bandwidth-consuming protocol conversions, thereby, simplifying the overall deployment and management of customers’ enterprise IP telephony services.

XO SIP includes a broad range of bandwidth options to maintain optimal network performance. XO SIP features include:

* Dedicated Internet Access with Dynamic Bandwidth Allocation
* Unlimited local calling
* Unlimited site-to-site calling for multi-location customers with IP Flex, IP Flex with VPN and XO SIP locations
* Long distance calling with choice of calling plans
* Optional Voice Compression
* Online Feature Management through the XO Business Center

XO SIP is currently interoperable with Avaya IP Office, Cisco Call Manager, Cisco Call Manager Express and Digium Asterisk Appliance. XO SIP also utilizes the BroadSoft BroadWorks VoIP platform to provide customers additional advanced IP-PBX features, including auto attendant, call center and voice VPN.

Customers simply select an IP port speed from 1.5 to 45 Mbps, a calling plan and any additional features. Because voice is just another application on the IP port, customers pay nothing for incremental lines or voice channels provisioned within the port speed they have with their service. The bandwidth-based pricing is now being offered with XO IP Flex, XO IP Flex with VPN and XO SIP plans.

Verizon Launches 7 Mbps Service

Verizon has launched a new 7 Mbps broadband access service availabe in about 400 Verizon-served communities. Prices begin at $39.99 for contract plans. Verizon will expand the program into more communities throughout the year.

Carphone Warehouse in Play?

Shares of Carphone Warehouse Group, Europe's largest mobile handset retailer, rose the most in more than five years in London trading on speculation the company may receive a takeover offer, says the Bloomberg news service.

"Rumors about bid interest from Vodafone and Best Buy have been doing the rounds for some time," says Jimmy Yates, a London-based trader at CMC Markets.

What is interesting is the strategy context driving some of the rumored suitors. Best Buy has a small stake in Carphone Warehouse, which operates 2,400 stores across Europe. Best Buy also is collaborating with the U.K. chain to boost sales of mobile products in the U.S. Best Buy stores.

So you might argue that Carphone is simply a way for Best Buy to expand its footprint in its current business.

But keep in mind that Carphone also has 2.5 million Digital Subscriber Line customers. It also has a backbone network. Consider that Best Buy's Geek Squad is in the technology services business.

And recall that Best Buy owns Speakeasy, a provider of business-class broadband access and voice services in the U.S. market. Sure, Best Buy can grow its retail footprint. But by acquiring Carphone Warehouse, Best Buy makes an even bigger bet to become a more-significant provider of broadband access, business voice and mobile services.

For Best Buy, its core business is more than acting as a retail distribution channel. It is a service provider. Owning Carphone Warehouse would only deepen that commitment.

Now consider the possibility that Vodafone might acquire Carphone Warehouse. The idea there is not so much that Vodafone wants to become a mass market electronics retailer. Vodafone, long a dominant wireless service provider, now must also become a multiple-services provider, and broadband-based services provided over wireline networks are part of the vision.

Carphone Warehouse would give Vodafone much more heft, in that area. It might not strike you as significant that wireless and wireline services are converging. It might be a bit more surprising that retailers are moving from simple channel partners into the service provider business.

"Nothing But Net"

Online ad spending is growing at a faster rate than broadband access, according to PMorgan Internet analyst Imran Khan. In a nutshell, the story is that Internet stocks will do well in 2008.

JPMorgan expects 34 percent earnings growth in 2008 for the Internet stocks it covers versus 8 percent earnings growth for the S&P 500.

From my perspective, the story is that online advertising is going to grow because attention is shifting that way. And advertising follows attention.

Broadband Access Revenue: Bad News

Broadband access penetration might be climbing just about everywhere. Unfortunately, it looks like revenue is going to fall significantly, if Yankee Group analyst Vince Vittore is right. He projects Digital Subscriber Line revenue, which represents the overwhelming share of global revenue, is set to fall precipitously.

You might think fiber-to-home (OLT)revenue or cable modem revenue (CMTS) is poised to take up the slack. Vittore doesn't think so.

It looks like broadband access is turning out to be a product just like the Internet: useful, ubiquitous, necessary and something service providers can't make much money on.

CLECs Touch Few Buildings in 6 Verizon Markets

By now, you'd think there would be significant optical fiber pulled to commercial buildings in major and secondary markets, even though you'd suspect it is tough getting fiber in outlying suburban strip malls, for example. But it appears optical fiber connections to commercial sites remains a significant work in progress. In six Verizon markets, for example, all competitors to Verizon put together can reach but a small fraction of sites.

Global Broadband Access Prices

Average prices in October 2007, according to the Organization for Economic Cooperation and Development. In the U.S. market, speeds keep going up and prices down.

Charter Communications, for example, will be upgrading speeds in most of its markets over the next three-to-four months. Charter's 3 Mbps tier will be bumped to 5 Mbps, the 5 Mbps service will be upgraded to 10 Mbps service and the company's 10 Mbps tier will be boosted to 16 Mbps downstream and 2 Mbps upstream. Prices apparently will vary by market.

Verizon in October launched a new tier of symmetric internet access service over its FiOS network that increases upstream and downstream speed up to 20 Mbps.

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.

EarthLink San Francisco Network Now Toast

EarthLink will not be providing free wireless Internet access throughout San Francisco. As promised, EarthLink is not proceeding with any new muncipal Wi-Fi networks when it has to pay the full cost of construction, as would have been the case in San Francisco.

Under the original deal, EarthLink would have invested $14 million to $17 million to build the network. EarthLink also expected to be able to charge $22 a month for a premium tier of service.

San Francisco officials probably will issue another proposal request. And EarthLink conceivably could get additional sponsors. But it's getting tough to make the numbers work when tethered broadband rates now are so affordable. In cities where muni Wi-Fi networks are in operation, or have been proposed, it isn't unusual to find tiers of service comparable to Wi-Fi available for $10 to $15 a month.

Also, as video becomes a more important part of the Internet experience, muni Wi-Fi networks just aren't going to be able to keep up.

EarthLink Pays Houston Fine; Might Be Off the Hook

EarthLink is paying the city of Houston a $5 million penalty fee for missing its first deadline in building the city's municipal Wi-Fi network. The payment might ultimately let EarthLink off the hook for the entire network build, though technically the payment buys about nine months to begin construction. The contract calls for complete construction time of two years.

Of course, EarthLink already has said it is no longer interested in continuing under the original contract terms, so unless the contract is renegotiated in some way, the network won't be built, at least not by EarthLink. It might not be the last fine EarthLink pays.

The city of Houston is also free to take proposals from other vendors during the nine-month period, and could award the contract to another company, observers say.

Considering that at&t offers Houston residents a $15 Digital Subscriber Line service running at 768 kilobits a second, it's hard to see how much share EarthLink might get for a service that will wholesale to retailers at $12 a month for a 1 Mbps service. The retail price then likely will have to be set at $15 or more.

Verizon FiOS Blows Away Competition

A recent survey of ComputerWorld readers has Verizon's FiOS service topping the satisfaction rankings in virtually every measured category. Overall, 96 percent of FiOS customers rated the service "excellent" or "good." And though cable modem services scored better than Digital Subscriber Line overall, Comcast fared poorly as a provider. All that noted, and for all the grumbling one tends to see on blogs and discussion boards, about three quarters of the respondents think their services are "excellent" or "good." Upload speed remains the single biggest gripe.

Consumer, Mobile Satellite Drive Growth for HNS

Though its legacy enterprise networking business still generates the most revenue, consumer broadband access and mobile satellite provided the growth for Hughes Network Systems in the most recent quarter, says. Pradman Kaul,HNS CEO.

“The consumer, small and medium business and mobile satellite businesses continued to be the key contributors to our revenue growth,” says Kaul. Over 30,000 new broadband access subscribers were added in the second quarter of 2007, growing the HughesNet customer base to 353,000 at the end of June. That's year-over-year growth of 18 percent.

Revenue from our mobile satellite business showed strong growth of 88 percent
to $35 million in the second quarter of 2007 over the second quarter of 2006.

HNS does not report average revenue per unit for either its enterprise or consumer users. So you might not think 353,000 broadband access customers is a particularly big deal. But look at it this way. Assume that ARPU for a single enterprise customer site is $100 a month or so.

Then assume that each of the consumer, small office or small business sites each represents the same ARPU, as some analysts have suggested. That's a very healthy recurring revenue stream, by anybody's standards, for a consumer Internet access product.

And extremely rare in the communications business. How many other companies do you know that can claim the ARPU for a consumer access line is the same as the ARPU for an enterprise line? I know of no others.