Voice a Broadband Killer App?

There is much truth to the notion that "email was the killer app for dial-up." There may also be some truth to the notion that "voice is the killer app for broadband." At least that seems to be a developing theme for SureWest Communications. 

SureWest benefits by selling more bundled triple-play services with the offering, thereby enhancing overall subscriber margins. "We have converted nearly 2,900 customers from the telecom voice product to the new broadband Voice over IP service since its launch earlier this year," he says. "And of those converted customers, over 20 percent added SureWest Internet with their phone service, and over 10 percent added TV."

In other words, VoIP has driven buying of other key services as well, especially broadband Internet access and IPTV. SureWest broadband residential voice RGUs increased seven percent year-over-year and five percent sequentially. In the original Sacramento region, voice RGU growth was 18 percent year-over-year and 13 percent sequentially.

U.S. Mobile Data Prospects in 2009

The U.S. wireless data market grew 7.3 percent sequentially in the third quarter 2008 and 37.5 percent year over year to reach $8.8 billion in data services revenues. For first nine months, mobile data revenues of $24.5 billion were equal to the revenues generated for all of 2007. 

The big question is what happens in the fourth quarter and after, as it appears handset upgrades and sales, for example, already are slowing. Some observers think wireless data service revenes will hold up. Analyst Chetan Sharma, for example, notes that text messaging represents 40 percent of all data revenues, and that the texting habit is unlikely to change. 

In the third quarter, U.S. messaging volumes grew 38 percent while messaging revenues grew six percent. Use of wireless dongles and cards for mobile PC access has been a big driver of revenue of late, and Sharma thinks that could an area of softness though, for the simple reason that many former users will fall victim to layoffs, while managements might be less generous in providing such technology to their remaining employees.

Still, it is conceivable that mobile data growth in the U.S. market will flatten out in 2009, says Sharma. "If the job loss rate increases substantially, more than it has been in the third quarter and into the fourth quarter, we might, just might, start to see flattening of data revenues in the first quarter of 2009 and gradual decline over the course of the year," says Sharma. 

Mobile providers probably can counteract economic issues by emphasizing sales of sub-$200 smart phones bundled with data plans, Charma says. To the extent there is an economic effect, it is likely to be on average revenue per user, Sharma suggests. 

That likely will be the case for wired network providers as well, as price and bundle promotions increase.

Operators in Europe have already started to feel the pinch, Sharma says. Vodafone and Telefonica recently have seen a decline in overall revenues. Though overall service revenues declined 1.7 percent, data revenues grew 30 percent. That suggests the importance of data plan, handset and bundling programs. 

100 Mbps Inevitable; Only Question is Price

NTT long has been the "gold standard" for residential bandwidth. But Verizon has closed the gap, suggesting that 100 Mbps is destined to become a common access speed.

The issue is how long it might take before such speeds are affordable.

To be sure, most of that bandwidth is needed for one simple reason: entertainment video. In its own analysis, Verizon has estimated that current and future needs for virtually all other applications top out at about 15 Mbps symmetrical bandwidth.

Beyond that, it is network-hosted applications and new forms of video that require higher bandwidth. Since it delivers linear video using a separate wavelength, Verizon thinks it really only needs about 15 Mbps downstream to support on-demand video.

But there's little question what happens if three-dimensional TV is commercialized. Then 75 Mbps might be required to deliver one stream.

88% of Internet Users Will Be Watching Online Video by 2013

By 2013, more than 69 percent of online video ad revenue will be associated with long-form video. By that point, about 88 percent of all Internet users will be watching online video as well, eMarketer now projects.

As good as that will be for content owners, it is unclear whether the trend will be good, bad or neutral for Internet access providers. Much depends on how involved ISPs are in the revenue value chain.

Have Landlines in Service Actually Decreased?

Just about everybody assumes that landlines in service have declined over the last seven or eight years. To be sure, if one looks at Federal Communications Commission data, there is a net loss of about 34 million access lines between the end of 2000 and the end of 2007, though there has been significant shift of market share from incumbents to cable TV and competitive local exchange carriers.

But there are some facts one wouldn't immediately see. Wired broadband connections increased by more than 65 million over the same time frame. And business lines in service likewise increased, despite technological substitution of broadband for narrowband lines.

So one has to differentiate between lines that shifted to new providers, lines that shifted from narrowband to broadband and lines that shifted to over-the-top providers (A customer buying an over-the-top VoIP service is still a wired voice customer, even if a "line" appears to be gone.

If one assumes that the roughly three million U.S. VoIP lines are active, revenue-generating wired voice lines, the market as a whole lost about 31 million lines, for all reasons, between 2000 and the beginning of 2008.

Broadband lines in service grew from perhaps five million in 2000 to about 65.4 million in 2007. Even if every broadband line represented the loss of a narrowband line, overall lines in service clearly have grown.

Is TV Getting Cannibalized or Not?

A new IBM study reveals that online video is cannibalizing television consumption. Another study by Nielsen says U.S. TV watching actually has climbed. Maybe there are key differences between U.S. and global TV viewing that could account for the differences. But the Nielsen report also notes that “TV use is at an all-time high, yet people are also using the Internet more often; 31 percent of which is happening simultaneously,” Susan Whiting, Nielsen vice chairwoman says.

That's a potential way of harmonizing some of the difference. People could be watching online video while the TV is on in the background.

The IBM poll of 2,800 people in six countries found that 76 percent have viewed video online and that 45 percent do so regularly. About 15 percent of those who watch online videos say they watch "slightly less" TV than they used to, while 36 percent say they watch "significantly less" TV as a result of their online video viewing. Indeed, "place-shifting alternatives may be changing consumer couch-potato behavior," the study claims. IBM polled 2,800 people in six countries for the study.

In the third quarter of 2008, the average American watched approximately 142 hours of TV per month, five hours more than they watched in a typical month during the same period a year ago, Nielsen says. During the 2007 to 2008 television season, the average U.S. household consumed eight hours and 18 minutes of TV per day, a record high since Nielsen started measuring television in the 1950s.

Americans who used the Internet were online 27 hours a month, and people who used a mobile phone spent three hours a month watching mobile video. Men were more likely than women to watch via mobile phone, while women were more likely then men to watch video online.

HDTV Drives 2.3 Million Churn Events

HDTV purchases seem to be driving some amount of service provider churn: nine percent of HDTV owners say that they switched multi-channel video providers when they purchased their HDTV, according to Leichtman Research Group. About 22 percent of all households purchased a new TV set in the past 12 months, with 43 percent of this group spending over $1,000 on a new TV.

There are about 114.5 million U.S. TV households. That suggests 25.2 million TV homes bought HDTVs. If nine percent of those buyers switched providers, that suggests 2.3 million homes switched providers, or about two percent of TV households, over the last 12 months, because of an HDTV purchase.

50 Mbps? Try 8 Mbps

U.K. workplaces with downstream broadband speeds topping 10 Mbps have risen from 18 to 25 percent, Point Topic says.

About 13 percent of businesses had speeds of 50 Mbps or above. About 21 percent of businesses have a connection capable of less than 2 Mbps, 33 percent run at up to 8 Mbps, 12 percent have 10 Mbps connections, six percent have 100 Mbps service, five percent use 50 Mbps and two percent have connections running at 100 Mbps.

The most common downstream speed among businesses is 8 Mbps, with 33 percent of businesses buying connections at that rate.

One wonders whether a quarter of cable modem subscribers will be willing to spend about $150 a month to get service at about 50 Mbps downstream, given demand so far for business broadband at speeds above 10 Mbps.

50-Mbps Demand Test

Comcast has begun introducing 22 Mbps and 50 Mbps broadband access, and the company says it will make the new services available to 10 million premises in at least 10 markets over the next few months. Comcast’s Extreme 50 service, offering up to 50 Mbps downstream and up to 10 Mbps upstream, costs $139.95 per month, plus taxes, when bought with cable TV service. The Ultra service, running at up to 22 Mbps downstream and 5 Mbps upstream, costs $62.95 a month, plus taxes, when bought in conjunction with cable TV service.

In the Pacific Northwest, Comcast will primarily compete with DSL services from Qwest Communications International (which advertises download speeds up to 12 Mbps) and Verizon Communications (up to 7.1 Mbps).

A business-class package offering 50 Mbps downstream and 10 Mbps upstream, sells for $189.95, plus taxes, and bundles in firewall services, static IP addresses, 24/7 customer support, and a suite of software from Microsoft.

We now will get a demand-side test of how many customers presently want to pay for service at such speeds.

Smart Phone Behavioral Differences

So far, it appears that Apple iPhone users download applications more often than other smart phone users. Some 72 percent of iPhone users say they have downloaded more than five applications on their phones, compared to only 23 percent of other smart phone owners.

Where 34 percent of smart phone owners have not added an application to their phone, just seven percent of iPhone users report they never have downloaded an app, according to a recent survey by Compete.

The issue is what this behavioral difference makes. It may be partly that iPhone lead adopters are tech savvy, compared to other smart phone users. It also may be that apps are easy to find and add to the iPhone.

It is conceivable download rates for Google and Blackberry devices might ultimately rise to match what iPhone now sees, Compete analysts suggest.

Wireless Won't Suffer, Ovum Predicts

One of the questions service provider executives are trying to answer is whether communications and multi-channel video services will hold up as well as they have in past recessions. Through the third quarter there still had been no evidence of damage. Some will note that the impact of October's credit crisis will not be seen until the fourth quarter, and that is a correct observation.

But there might be reasoned hope for stability. As noted before, only in one year since about 1945 has wireline revenue growth even flattened. With that single exception, wired network revenue always has grown, recessions or not.

Cable TV revenues have had the same sort of pattern since the 1980s, for example, and at least so far, there has been no detectable evidence of mobile revenue slowing.

In fact, Ovum predicts the North American mobile market will escape catastrophe as a result of macroeconomic conditions in 2009 and will continue to grow, albeit not at the rates we have seen in 2008, predicts Steven Hartley, Ovum senior analyst.

Ovum argues that U.S. mobile connections will rise 6.3 percent while revenue also rises 6.3 percent in 2009. In Canada connections are expected to grow 7.5 percent while revenue grows 11.3 percent.

The United States added 3.9 million connections in the third quarter and year-on-year total connections growth was 10 percent, Ovum says. Only Sprint saw a decline in connections in the third quarter (losing a net 1.3 million subscribers.

Canada's national wireless operators also saw continued connections growth, with Rogers connections base growing eight percent year-on-year, Bell Canada growing seven percent and Telus 10 percent.

One might argue that the fourth quarter will not be so robust, or that the real damage to come will be in the margin area, not the revenue area. Still, growth at the level Ovum predicts would be fairly convincing proof that wireless now has attained "necessity" status.

Something One Doesn't Typically See

Commenting about the recent Comcast peer-to-peer blocking adjudication at the annual Phoenix Center conference, Federal Communications Commission Chairman Kevin Martin noted one truly unusual aspect of the case. 

"Normally people fess up and promise never to do it again," Phoenix Center head Lawrence Spiwak  noted. Those of you who have had even casual acquaintance with the deference routinely shown to the FCC in Washington policy circles will agree.  

"In this case, Comcast first said they didn't do it, then said they did, but that the FCC had no authority over it," Martin said. That's unusual behavior. 

Network management is one thing; interfence with lawful applications another, Martin said. 

"It did not seem to be reasonable that Comcast denied that was what they were doing," Martin said. "It is a problem when you have a company that won't admit it is doing something" independent evidence shows it is. 

Not many who routinely deal with the FCC could say they have seen this sort of thing very often. 

U.S. Business Landline Purchases Up

Here's something you might not have suspected: U.S. businesses have added 700,000 wired network connections over the past five years, despite shedding large number of narrowband voice lines. 

Ethernet, business grade DSL and business grade cable modem connections have driven the growth. 

So despite narrowband line losses, service providers have seen overall growth of business lines of 15 percent over the past five years. 

Mobile Market Shifting

Market economies work because consumers vote with their wallets to buy the better products from the better suppliers. That is less true where markets are more managed, but the principle remains. But the logical end result of market economies is that, sooner or later, companies selling products with less demand will go out of business, while companies selling products with higher demand will grow. 

Sooner or later that tends to lead to market concentration, with the inevitable result, at least historically in the United States, for anti-trust actions to reset the playing field. But no amount of anti-trust regulation will stop the process from reoccurring. People are going to buy more of the products they think are best; allowing those companies to grow larger; while other companies disappear, leading to yet another cycle of anti-trust action.

Very few observers would probably think the U.S. communications market is so concentrated--again--that something drastic has to be done. Nor is it clear precisely how many effective competitors must exist in a single market to provide the benefits of competition. Some say three contestants is enough. Some argue for more; in some cases as few as two might provide meaningful competition, some economists argue.

We might be seeing some sort of a tipping point in the U.S. wireless market, though nearly all observers would argue that the U.S. wireless market remains highly competitive. An example: third quarter financial results.

Verizon Wireless and AT&T Mobility continue to perform well and pull further ahead of their competitors in the U.S. mobile business, says  Susan Welsh de Grimaldo, Strategy Analytics analyst.

Sprint Nextel continues to bleed subscribers, losing more than a million in the quarter. The company lost 1.3 million subscribers in the third quarter while AT&T Wireless gained two million and and Verizon Wireless gained 1.5 million.

Sprint's customer numbers have declined by a further 6.3 percent over the past 12 months while U.S. mobile subscriber numbers increased by seven percent over the same period.

One can argue the AT&T iPhone is responsible, that continuing customer service at Sprint or Nextel is responsible, that Verizon bundling capabilities are contributing, Sprint's failure to come up with a winning alternative to the iPhone, continued trouble at Nextel or some other combination of circumstances are responsible for Sprint's continuing slide. 

Nor is it clear whether Sprint can stabilize and then counterattack. On a value for money basis, it is hard to argue with Sprint's "Simply Everything" packaging, for example. But even that seems not to have halted the erosion. 

To be sure, the top of the U.S. mobile market has been relatively stable, in terms of market share, for some time. What appears to be happening now, though, is a destabilization of the market, with AT&T and Verizon gaining, while T-Mobile and Sprint are in flux. T-Mobile now is a relatively-distant fourth, but that could change over the next few years if Sprint cannot halt its slide. 

Voice Is Not a Commodity

One of the enduring pieces of conventional wisdom in the communications business is that "voice is a commodity." That perception typically is the result of even a casual analysis of "per minute" fees for long distance or even mobile usage over the last decade or two. 

Service providers in the wholesale space often sell their product based on per-minute fees as well, so it is easy to see why the working hypothesis is that voice actually is a commodity.

Despite all that, the way people use voice communications is anything but "commoditized," in the sense that one application is a fully functional substitute for another. 

People who use landlines also use mobile and IP-based communications as well. People who use IP communications also use mobile and fixed calling. Likewise, mobile users avail themselves of IP communications and fixed services as well. 

Beyond that, people tend to use each of the applications at different times, at different places, with different applications and different devices, to talk to different people, for different reasons. 

Not enough attention typically is paid to the ways all those use cases can be differentiated in marketing. Usage already is differentiated in fact.