Mobile Passed Fixed for Voice in 2000, But Fixed Voice Lines Continue to Grow

You might not be especially surprised that wireless accounts in service surpassed fixed phone lines in Japan, Korea and Finland back in 2000, meaning it has been a decade since a fixed line was the preferred way of using "voice" in the consumer, and part of the business market.

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You might not realize 2000 also was the year that wireless accounts surpassed fixed lines for voice in the U.S. market as well. At the beginning of 2010 there were 2.4 wireless lines in service for every fixed voice line, about 276 million wireless lines compared to about 114 million fixed voice lines.

That said, people often overlook the fact that fixed voice lines in service actually have grown since 2000, from about 100 million lines, up to 114 million lines. The confusion typically is driven by the decline of telco market share compared primarily to the growth of cable operator-supplied lines.

In Japan, cellular phone service was first introduced in 1979. The number of mobile ubscribers exceeded that of fixed phones late 2000.

In Korea, cellular phone service was first introduced in 1984. In 2000, the number of
subscribers exceeded that of fixed telephony.

Finland was the first country to introduce the digital GSM standard in 1992. Mobile revenue surpassed fixed line revenue in 1997.

Are Fixed and Wireless Broadband Equivalents?

Consumer desire to substitute a wireless broadband connection for a fixed connection remains a question whose answers are yet developing. There are few markets, except Austria, where fixed and wireless broadband really are viewed widely by consumers as equivalent products.

So answer the question "yes" in Austria, where wireless and fixed products are seen as a single market, not two. In most markets, though, especially those with robust fiber to home availability, regulators at least do not see the existence of a single functional market.

In most developing markets, wireless might continue to be the preferred access method, so again there is no functional equivalence between fixed and wireless modes.

But at least in some European markets, consumers are, in fact, starting to choose their broadband connections based on price, rather than on whether the service is delivered using a fixed or mobile networks, says Pyramid Research. For fixed network operators, there likely is no good news in those findings.

First, fixed has to compete with mobility, head to head, and it that fight, mobility offers some value fixed services cannot provide, namely the ability to use the broadband connection outside the home. The other bad news: consumers see so little differentiation they are buying based on price.

Such equivalence is highly unusual. The European Commission, which recently deregulated the broadband access market in Austria precisely because it is so competitive, admits that the Austrian situation is unusual. It is the only European Community market where wireless broadband is widely deemed to be a functional substitute for wired services that price regulation is not needed.

Pyramid likewise argues there is a "strong link" between fixed and mobile broadband adoption. So strong a connection, in fact, that these markets can no longer be looked at in isolation, though today's broadband access market still primarily is a matter of competiton between fixed line providers.

But mobile broadband increasingly will affect the fixed sector, Pyramid believes, especially in markets where overall broadband penetration is low. That includes markets such as Russia, Slovakia and Ukraine. In such markets there is only limited opportunity for fixed-mobile broadband bundles, because the services are competitive more than they are complementary.

What remains to be seen, though, is what happens to a highly-competitive market for fixed and wireless broadband when fiber-to-customer services become available. Even the EC says it will continue to monitor the situation and might reimpose regulation if optical fiber is widely deployed. The reason is a belief that, in such a scenario, where wireless competes with fiber-to-home, the products will naturally diverge again.

Mobile Broadband Complementary to Fixed Broadband

Over the next three to five years, mobile broadband will be complementary to fixed broadband, rather than a substitute, says William Lehr, economist and research associate in the Computer Science and Artificial Intelligence Laboratory at Massachusetts Institute of Technology.

"I expect fixed and mobile broadband services to offer distinctly different sets of basic capabilities, and as a consequence, to remain distinct services that will not be perceived as close substitutes in most user and usage contexts for the foreseeable future," Lehr says.

There will be situations where it is reasonable to expect that mobile services will be perceived as substitutes, if imperfect substitutes, for fixed connections, and will therefore result in some cannibalization, he says.

Users who are more budget conscious (the young or others with limited incomes, for example) are more likely to choose one instead of both services, Lehr suggests.

Heavy users may prefer fixed broadband access, while light users (or those who live alone) may find the mobile alternative more appealing.

Also, users who place a high value on mobility are more likely to opt for mobile over fixed services. Conversely, those whose principal mode of usage is at a fixed location and who would have a high need for a large sized display, may strictly prefer fixed broadband services.

As mobile data rates increase, some users may find that for their usage profile, mobile is fast enough to meet their needs even for shared household use. That should especially be true now that MiFi devices can allow sharing of one mobile connection by as many as five devices.

On the other hand, even though mobile bandwidth is increasing, so is fixed bandwidth. So the relative value of mobile over fixed services is greater when the fixed service is less capable. In other words, a fast 4G wireless connection might be perceived as superior to a lower-speed digital subscriber line connection, compared to a fiber-to-home connection or DOCSIS 3.0 cable modem service.

What the situation might be in 10 years is likely unknowable, but it is reasonable enough to assume that if today's smartphones are simply tomorrow's phones, and if new devices continue to be developed, that mobile broadband always will be a distinctly complementary service. If you assume today's 276 million mobile phone users in the future will simply be smartphone users with broadband connections, you get the point.

In fact, it probably makes more sense to say that fixed services are not going to be substitutes for mobile broadband, than to argue that mobile will be a substitute for fixed access. Nearly every mobile device will require broadband, irrespective of what in-home or in-office devices require.

Whatever you think about mobile broadband, it is worth remembering that mobile broadband services were not available in the U.S. market until 2005. So we are at this point just five years into the product's lifecycle.

By the first quarter of 2008, 40 million or almost 16 percent of mobile subscribers were regularly accessing the Internet using mobile broadband services, according to Nielsen.

Analysts at Forrester Research use a lower figure of 34 million subscribers in 2008. That will have grown at a 52 percent rate in 2009 to 52 million, and mobile broadband will continue to exhibit double-digit growth through 2014, when 106 million users, or a full 39 percent of all wireless subscribers, will become regular mobile Internet users, Forrester now projects.

PC data cards represent about 34 percent of mobile broadband subscriptions, while smartphones rapidly have emerged as the key driver of new mobile broadband accounts.

Are Recession Driven Product Substitutions Permanent?

Whatever else one might say about it, a recession is a prime opportunity for product substitution whose immediate benefit might only be seen to be “saving money,” but which then might create a satisfying habit that leads to a permanent shift in demand, not just a temporary change of provider or service level.

In the U.S. market, the issue is whether the millions of customers who have opted for prepaid mobility will keep those plans even after the recession has past. Virtually nobody thinks consumers who have cut the landline voice cord in favor of mobility are likely to reverse course.

The poster child for substitution of mobile broadband for fixed broadband, for example,  is Austria, where  almost all broadband net adds have over the last year or two been mobile connections, rather than fixed connections.

And though the market in Austria and in the United States appear to have different structural characteristics, the danger of product substitution is amply highlighted in the Austrian market, where aggressive mobile providers, high fixed broadband prices and relatively low value of entertainment video create a sort of perfect storm for mobile broadband substitution.

And though it is not certain, past recessions were linked with, though perhaps not directly contributors to, the rise of disruptive new players in media or communications ecosystems.

Google was born in 1998, in the midst of the Asian financial crisis, while Skype was born in 2003, after the dot-com implosion, for example.

Changes in industry structure and the emergence of disruptive new industry leaders will not be ascertainable for some time. But churn is going to be easier to track, as we normally get reasonable trend data from any number of public companies every three months. We largely will have to guess at how product substitution might be occurring.

Some forms of substitution are now so commonplace as to be expected: cable companies and mobile providers gaining voice customers while telcos shed them; telcos gaining video customers while cable companies shed them while online viewing grows.

Other likely product substitutions are less visible. It is not clear there is any appreciable substitution of mobile wireless broadband for fixed broadband. But logic suggests that will become a greater opportunity and danger in several years, when fourth-generation services are more widely available.

Parks Associates research, for example, finds 80 percent of broadband users in key European markets prefer traditional video viewing to online viewing. Depending on how you want to spin it, that is a glass half empty or half full.

“Broadband has transformed video viewing habits in Western Europe, where over 20 percent of broadband households have watched a film or TV program online in the past six months,” say researchers at Parks Associates.

Mobile broadband and mobile broadband modems and dongles (including embedded devices) are growing dramatically. In several major European markets, including Austria, Ireland and Sweden, as many as 15 percent to 30 percent of broadband subscriptions are now over cellular networks, up from nearly zero a year ago, the International Telecommunications Union says.

Think about that for just a moment. From zero, mobile broadband jumps to 15 to 30 percent of total broadband accounts, in a single year.

That represents some mix of additional access accounts supplemental to fixed broadband, and some substitution. But it is significant that the ITU report believes the growth shows “mobile broadband can substitute for light-usage DSL.”

So the logical question is whether mobile broadband is to fixed broadband as mobile voice was to fixed voice.

Analysys Mason notes that one of the key success factors for the rapid take-up of HSPA (3G) has been the introduction of flat-rate pricing with either unlimited usage or very large inclusive data bundles.

So at least in some markets, the recession could be leading some significant number of consumers to trade off their fixed broadband connections in favor of mobile broadband.

The longer-term issue is more important. Once they have learned to live that way, will they continue when the recession ends?

That is the big danger on a number of fronts. And it is a bigger change than simple churn, as important as that is.

If a business customer picks another provider for one or more services, the danger for the original provider is that this particular customer never returns.

If a customer switches from cable to telco or satellite for video, does the cable company ever get that customer back? And if a customer abandons all landline service, does a telco have much of a shot at getting that customer back later?

Those issues are real enough. More challenging though is a fundamental new behavior pattern that changes the size and value of an entire market segment, application or service, not simply the market share various contenders can claim.

Sure, there will be important but temporary effects during the recession. What bears closer scrutiny are permanent changes in end user demand. The recession will provide incentive to try new things. Once that happens, we might see the behavior persist even after the recession-induced driver has passed.

We won’t know precisely how important all that is for some time. What does seem clear is that lots of people are going to try new things, maybe just to save money at first. There is no way all that behavior is going to stop once the recession is a memory.

Despite Shocking Unemployment, Consumer Demand for Communications Holds Up

There's a sobering statistic in the latest research from Centris about consumer spending on communications and video service consumption: 27 percent of households reporting at least one member who lost their job in the last six months.

Most of the other findings seem consistent with other surveys taken over the last two years, though. The issue now is whether recession-induced behaviors will change as we exit the recession.

About eight percent of U.S. households said they were likely to cancel their Pay TV service in the third quarter of 2009, unchanged from the second quarter of 2009. Keep in mind that a typical churn rate for video services is about two percent a month, so those findings are relatively consistent with typical disconnect plans, and most churners simply sign up with alternate providers.

Some 18 percent of households said they were likely to cancel their home phone service and replace it with a currently-used cell phone. That is an underlying trend that might have accelerated during the recession, but was in place already.

Fully 75 percent of respondents said they would not likely downgrade their Internet access service. Virtually all other studies show high resistance to cutting back, or cutting off, Internet access services.

Nearly half of all households have contacted their current TV service providers shopping for discounts and lower-priced packages, though.

If past patterns show themselves, consumers should start spending more on enhanced services of all sorts, including premium video entertainment and mobile services, as the economic recovery takes hold. The wild card are services such as wired voice, which have been under pressure for other reasons unrelated directly to the recession.

Cord Cutting Growing, But Landlines Relatively Stable: Why?

Switched access lines provided by telcos in the United States have decreased by 17 million lines from 2005 to 2008 and telcos will lose another 10 million by 2011, says Patrick Monaghan, Yankee Group senior analyst.

You might think that is caused by users dumping their landlines in favor of mobile-only service.
But Monaghan doesn't think wireless substitution explains much of the incumbent line loss. In fact, he says, residential home phone service has only experienced a two-percent year-over-year loss from 2005 to 2008.

That's something on the order of five million subscribers. His conclusion: Most consumers are not cutting the cord. They simply are choosing cable or other providers.

There's one other important data point. Business lines in service have grown slightly over that same time period. Paradoxically, cord cutting has increased at the same time that fixed voice lines have held about level.

All of that is hard to square with estimates that 13 to 16 percent of U.S. homes already are wireless-only.  The logical inference is that higher numbers of households headed by younger people are wireless only, at the same time that business use of fixed voice is up a bit and consumer use is down a bit.

An impressionistic example: as my four children headed off to college, my own household dropped one landline and added one mobile account, but now there are four more wireless-only "households" out there.

PC Data Cards Cannibalize Landline Usage

Researchers at comScore say PC-based mobile broadband usage largely displaces tethered PC Internet usage. That is not to say wireless broadband is displacing fixed broadband, but only to note that most users do not spend more time online overall, when both mobile and fixed modes are available.

Looking at total hours of use in the fourth quarter of 2008, comScore found that the U.S. Internet user spent 90 hours online, or roughly one hour a day. Users who had both fixed and mobile broadband access spent 89 hours online during the quarter, using mobile or fixed access.

Of PC data card users with both a PC data card and a wired connection, 25 percent of their total online time (22 hours) was spent using a PC data card.

The rather clear implication is that PC mobile broadband is a substitute for fixed access, and does not increase the amount of time the typical user spends online.

There are some obvious implications. Over time, the typical user will start to see broadband access as something they have, irrespective of network. They will start to see this as a value that is measured against the cost of satisfying that need.

They probably are going to approach this as "broadband access is worth X dollars to me every month." They are not going to indefinitely pay for multiple accounts, supporting a single device, much less multiple accounts supporting multiple devices, forever.

The logic likely will parallel the way some wireless-only users behave. They simply decide that the ability to talk and text is worth some finite amount of money, and conclude that paying for that capability twice does not make sense. So they drop landline voice service and use some of that money to pay for heavier mobile usage.

Overall spend probably doesn't change much. As with so much else these days, consumers are willing to switch behavior when functionally equivalent products are available, and when use of those products costs no more than what they already spend, or costs less.

http://www.comscore.com/press/release.asp?press=2771

Wells Fargo to Replace 50% of Desk Phones

Karen Bailey, Wells Fargo director of voice services, says her firm plans to replace 50 percent of employee desk phones with soft clients and mobile phones.

Mobile Broadband Supplemental, But High Risk of Substitution

A huge explosion in mobile broadband use in Europe over the next five years largely will be driven by consumers, and largely will complement, not supplant, wired broadband connections, predict researchers at Analysys Mason.

That said, a separate forecast by Informa Telecoms & Media suggests the potential for broadband substitution will remain high.

Analysys Mason projects148 million mobile broadband connections in Europe by 2014, when they will account for almost half of all broadband connections in the region.

The potential for fixed-line voice substitution also will remain high. About 40 percent of total mobile traffic was generated in the home environment in 2007, says Informa Telecoms & Media.

By 2013 it is expected to reach 58 percent, with about eight percent of total mobile traffic offloaded to fixed broadband. In 2008, the home environment likewise represented more than 43 percent of total mobile data traffic and will climb to 60 percent by 2013.

That's the danger for fixed services providers, particularly in single-person households, households of non-related persons and households where every person in the household above a certain age has a mobile.

Mobile use at home will represent about 40 percent of total mobile usage, while use at work will represent 30 percent of usage, with nine percent of calls initiated while users are moving. About 21 percent of calls will be generated from other public environments.

"In the same way that voice traffic has moved from old fixed line telephony service PSTN to mobile, there is reason to believe that a significant percentage of Internet traffic generation will move away from fixed personal computers to mobile devices including mobile handsets, mobile Internet devices (MIDs) and connected notebooks," says Malik Saadi, Informa principal analyst.

As more casual users adopt mobile broadband, they typically will do so as a complement to tethered broadband, usually opting for prepaid subscriptions rather than monthly contracts, Analysys Mason forecasts. Prepaid subscriptions will account for 59 percent of mobile broadband connections in 2014, up from eight percent in 2008.

New customers will tend to behave differently from early adopters and users who have substituted wireless for wired connections, many observers believe. Most significantly, use will be casual. So, at some point, continued growth of mobile broadband in the U.S. market likewise will require charging mechanisms better suited to casual users, who will not be inclined to add substantial fixed-fee subscriptions when their anticipated usage is relatively light.

Mobile IS Voice

Enterprises and consumers still spend lots of money on voice services delivered over some sort of wired connection, including "plain old telephone service" as well as newer replacement services such as cable-provided "digital voice" (voice over IP) or hosted business phone services.

But wireless is where the action is moving. And while lots of different approaches to integrating wireless and wireline access are being tested and deployed, it's hard to escape the conclusion that wireless increasingly is the dominant way people "do voice," even when some amount of talking shifts to PC-to-PC format.

There will be lots more integration of features and call delivery between wireless and wired modes, to be sure. But there will be an equally large amount of wireless substitution as well, even in the enterprise customer segments.

Is Mobile Substitution at the Tipping Point?

Something interesting might be happening in the mobile-only household segment. Wireless-only households, especially households including only a single resident or multiple young adults, have been increasing for some years.

But there is now some indication that mobile-only usage is higher in the general population than it is among more technologically-savvy users. If that trend holds up, it indicates that cutting the landline now has reached a possible tipping point.

In the first six months of 2007, 13.6 percent of households did not have a traditional landline telephone, but did have at least one wireless telephone, according to the National Center for Health Statistics.

Now here's the other bit of interesting data: The Harris Poll, which surveyed Internet users only, found that 11 percent of those respondents were mobile-only. Going only slightly out on a limb, let's assume Internet users are more open to new technology-use behaviors.

Indeed, the Harris Poll shows that two percent of Internet users only have VoIP services, and do not use mobile or landline phones. Another five percent say they use mobiles and VoIP.

Adding the "mobile only" users with the "mobile and VoIP" users gives you 16 percent of users who do not use a landline. Add the two percent who use only VoIP and one has 18 percent of Internet users who do not have a landline. So it still appears that Internet users are "different" from the general population.

That is as many of us would expect. Still, it is startling that "wireless only" usage seems to higher in the general population than among the arguably more-advanced Internet users.

Overall, the percentage of adults living in wireless-only households has been steadily increasing since 2005. In the first six months of 2007, one out of every eight adults lived in wireless-only households. One year before that just one in 10 adults did.

What might be new is some new spread of such behaviors beyond what we have tended to see, up to this point.

Are Landlines Becoming a Giffen Good?

Widespread use of VoIP tends to cause voice prices to fall. And classical economic theory would suggest that consumption of wireline calling should increase, as a result. In some cases that seems to be what happens. People call globally more often when the prices are lower.

But it just is possible,under some specific circumstances,for price declines to cause reduced consumption.

A Giffen good, for example, is an “inferior” good for which a rise in its price makes people buy even more of the product as its price rises. Conversely, there is less demand as price falls. To be sure, such Giffen goods are exceedingly rare. But one is tempted, when looking a mobile versus fixed line calling, to ask whether there are not some similarities.

Mobile calling now leads wired connections by a three-to-one margin globally and more people are shifting to "wireless only" calling. And though it is a loose analogy, perhaps we might think of mobile calling as a "superior" product and wireline calling as an "inferior" good, not in terms of intrinsic worth but in terms of the way people consume each product.

Giffen goods are named after Sir Robert Giffen, who was attributed as the author of this idea by Alfred Marshall in his book Principles of Economics. The classic example of potato consumption during a famine now is viewed as unsupported.

But in July, Robert T. Jensen, an economist at Brown University, and Nolan H. Miller, a professor of public policy at Harvard University, published an article for the National Bureau of Economic Research on Giffen goods.

The two economists say they have located a real-world Giffen good, namely rice and wheat flour in the central Hunan and Gansu provinces of China.

As Giffen suggested more than 100 years ago, goods whose price and demand move in the same direction are most likely to be essential products such as food on which households spend a large part of their incomes (and that's why neither VoIP nor landline voice service can be called Giffen goods in a formal sense).

Wheat flour and rice fit the bill in central China. When the price of the good falls, households appear to shift buying to meat. So lower prices cause less consumption.

Jensen and Miller look at poor Chinese consumers and demonstrate that they consume more rice or noodles, their staples, as prices go up.

Still, neither VoIP nor landlines strictly meet the criteria for consideration as Giffen goods. But it is an interesting notion. Might lower landline calling prices caused by VoIP actually lead to lower usage, in the presence of mobile alternatives that might be likened to “superior” goods, as compared to landline which might be thought of as an “inferior” good?

If so, lower landline calling prices will simply hasten the transition to more preferred mobile calling. I wouldn't push the loose analogy too far. But there some parallels.

As the chart suggests, consumers can buy either commodity Y or commodity X (line MN,where M = total available income divided by the price of commodity Y, and N = total available income divided by the price of commodity X).

The line MN is the consumer's budget constraint.

If there is a drop in the price of commodity X, the reduced price will alter relative prices in favour of commodity X, known as the substitution effect. This is illustrated by a movement down the indifference curve from point A to point B.

At the same time, the price reduction causes the consumers' purchasing power to increase, the income effect (line MP where P = income divided by the new price of commodity X).

The substitution effect (point A to point B) raises the quantity demanded of commodity X from Xa to Xb while the income effect lowers the quantity demanded from Xb to Xc.

The net effect is a reduction in quantity demanded from Xa to Xc making commodity X a Giffen good by definition.