How Much Further Can Fixed Network Broadband Grow?

It almost seems impossible that fixed network broadband Internet access could have become a “legacy product” so soon, at least in the U.S. and other developed markets, but that is what has happened.

In the U.S. market, most potential consumers already buy broadband. Leichtman Research Group points out that  the 17 largest cable and telephone providers, representing about 93 percent of the total market, acquired about 580,000 net additional high-speed Internet subscribers in the third quarter of 2012.

Collectively, these service providers now account for over 80.7 million subscribers. Cable companies have 46.2 million broadband subscribers, and telephone companies have 34.5 million subscribers.

The issue is how close the U.S. market is to full saturation. By some estimates, U.S. fixed network broadband penetration is near 80 percent of homes. You might argue that leaves room to grow, and there is, but not much.

The reason is that not every home requires broadband. Not every home owns computers. Not every home has users that want to use at-home Wi-Fi to support tablet and smart phone access, or game consoles or Internet-connected TVs.

Also, some households substitute mobile access for fixed connections. Perhaps six percent of U.S. homes using broadband already seem to rely exclusively on mobile connections.

When asked what device they normally use to access the internet, 25 percent of smart phone owners say that they mostly go online using their phone, rather than with a computer. 




While many of these individuals have other sources of online access at home, roughly one third of these “cell mostly” internet users lack a high-speed home broadband connection, according to Pew Internet & American Life Project. That implies about an eight percent of households that only use mobile broadband. 

Many studies show that income is directly correlated to PC ownership and broadband usage. Households with annual incomes of at least $75,000 buy broadband at at least an 87 percent rate. Homes with annual incomes of $30,000 to $49,999 buy broadband at a rate of about 64 percent.




The top cable companies added about 575,000 subscribers, while the top three telephone companies added about 5,000 subscribers, in large part because AT&T and Verizon actually lost customers.

AT&T and Verizon added 749,000 fiber subscribers (U-verse and FiOS) in the quarter, while having a net loss of 799,000 DSL subscribers.

The slow pace of net additions simply reflects a market that is nearly saturated. We will know when the market is completely saturated when net additions hit zero, or very close to it. .

Global Telecom Business: No "One Size Fits All" Strategy Exists

Once upon a time, all communications service providers pretty much "looked alike" in terms of strategy. That is less true now, and will probably be much less true in the future, as service providers adapt to the realities of many different segments of the communications business.

These days, strategies are diverging. That might especially be true in developed markets, where actual practices have lead to more strategic diversity over the past couple of decades.

Those differences are driven, in large part, by a bifurcation of opportunity in the global telecommunications business, which is predicted by virtually all analysts to be growing, but unevenly.

There are lots of places where phone penetration is 22 percent, for example, or where use of the Internet is about 23 percent, despite the fact that mobile penetration, in terms of “accounts,” now is as high as 79 percent, even in the “developing” countries.

Of course, usage even within a single country or region, and revenue prospects for service providers, are not distributed evenly. Generally speaking, growth opportunities are disproportionately found in the Asia-Pacific region, though Africa and Latin America are growth areas as well.

The obverse is true in much of of the developed world, where classic markets for voice and messaging are saturated, and even mobile broadband, the current growth driver, will face maturation not so long from now. That of course explains the serious and even furious pursuit of new growth drivers by executives in the mobile and fixed network service provider industries.

The European telecom service market decreased for the third year in a row, by 1.5 percent, the European Telecommunications Network Operators Association reports. You might blame a tough economy for the contraction, but ETNO points out that in the most-recent year, in a context of moderate economic recovery (+4.2 percent for current gross domestic product in the region), the lagging performance suggests structural changes, not just cyclical economic impact.

But some observers might argue that economic woes are having an impact.


The decline in fixed telephony revenues is accelerating (-8.3 percent in 2011 and –31 percent over the last five years), driven in part by a negative five percent growth of fixed lines in service. Since 2005, fixed line subscribership is down 22 percent.  The bad news is that mobile revenues, long the driver of industry growth, also are declining (-0.6 percent)

Mobile voice revenues were down 4.7 percent in 2011 (–13.2 percent over the past three years), a decline driven by significant drops in some large countries: Spain (-8.3 percent),
France (-8.2 percent) and Germany (-7.1 percent).

Fixed network broadband revenue is the bright spot, as revenues were up 6.5 percent in 2011.

Mobile services, though, remain the bulk of telcos revenues, accounting for 52 percent of the total market (142.7 billion EUR in 2011).

The report also shows the divergence between European and the United States market, where it comes to revenue growth. Since 2006, U.S. service providers have done better than their European counterparts.

Precisely why that should be the case is not always so clear. One might argue that European markets are more competitive. One might argue European markets are more fragmented. One might argue that calling and texting tariffs have been higher, since there is more international roaming across Europe, compared to the continent-sized U.S. market.

Certainly, regulators have been squeezing revenue by mandating lower charges for cross-border roaming. Those lower tariffs of course will put pressure on gross revenue.

Moreover, Europe's share of the global telecoms market has been declining regularly over the recent years, from 31 percent  in 2005 to just over 25 percent in 2011 as the gap between
global growth (+3.2 percent in 2011) and growth in Europe widens.
So different business strategies will make sense in different markets and parts of markets. Service providers in high-density markets with high per-capita income will be the first to find they must “outgrow” reliance on voice, messaging and even broadband access.

Service providers in low-density, high per-capita income areas will find they can rely on “basic” services for quite some time to come.

Service providers in high-density, low-income areas increasingly will be looking at ways to boost average revenue per user, while providers in low-density, low-income areas generally will be looking at ways to provide basic access services.

In telecom, there is no “one size fits all” strategy.

Does Movie Piracy Actually Increase Movie Revenues?

Does illegal file sharing of movie content actually increase movie box office revenues? One study suggests that might actually be true, though the magnitude of the revenue lift might be tough to determine. 

Researchers say the illegal file-sharing spreads information about content that encourages some users to pay, when they might not otherwise have done so. Content owners won't be impressed, as the self evident fact is that piracy does drive significant revenue loss. 

In fact, piracy affects many industries. In this one example, the revenues in red represent estimated losses because of piracy. 

Why Technology Companies Should Not Pay Taxes

Though it is counter intuitive, consumers actually are better off when corporations do not pay any taxes at all.

They collect taxes on behalf of the taxing authority, but that's it. Taxes are a cost of doing business, like any other, so some other stakeholder winds up paying. The only issue is which stakeholders those are.

A tax requires that the wallet of some human being gets lighter; the study of exactly whose purse it will be is the study of tax incidence.

With respect to the incidence of corporation tax, we have known since 1899 (when Seligman first pointed it out) that the company itself does not ultimately carry that burden. In theory it's some mixture of the customers (who end up with higher prices), the workers (who get lower wages) or the shareholders (who see lower returns).

But there is an argument to be made that it is the workers and the shareholders who, in the end, take the hit.

So to the extent that a person actually cares about economic growth, this matters. To be sure, some people do not apparently actually care about growth, but economic growth is what allows people to earn a living, and supports all government spending. So economic growth really does matter. 

A some level, taxes are necessary. But some taxes are harmful because they depress the growth that supports all jobs. Corporate taxation is one of those harmful taxes. 

Usage-Based Pricing Actually is Better for End Users

The most economically consumer friendly retail payment model for end users might actually be "usage based" billing, even though people rather instinctively prefer "unlimited" or flat fee models. 

And many consumer advocates think usage based billing inherently is unfair to end users.

To be sure, there are advantages to flat rate pricing. Flat fee means users know what to expect, which helps with budgeting. 

And flat rates mean no danger of bill shock, as could happen, and does happen, when users are roaming, or using streaming video.

But flat rates are not the same as "unlimited usage" plans. These days, pricing is moving to "banded" ranges, or "buckets of usage" that have usage and pricing roughly correlated within some ranges. 

So some modified way of rating usage, using "buckets" rather than actual per-byte usage, arguably is better for buyers than unlimited flat rate pricing.

There are issues, even from a service provider perspective. There always is a tension between operational simplicity and sophistication in retail customer packaging and network management. Simple approaches often are cheaper, but at the cost of forfeiting creation of more-nuanced subscriber plans.

Likewise, policy management tools that can prioritize and shape bandwidth consumption can help service providers alleviate congestion and provide higher end user experience, where regulators allow such tools to be used. But there appear to be lots of trade offs.

Most executives would agree that flat-rate billing for unlimited use is a difficult and likely unsustainable retail packaging model for broadband access, especially in the mobile services realm. But what should be the replacement? That seems to be a tougher question.

As a corollary, executives must weigh “pricing by value,” or “pricing by application,” which means more complexity for consumers, or some simpler “pricing by consumption” approach.

Likewise, methods for managing mobile networks to avoid peak-hour congestion arguably can be viewed with circumspection. And the issue there similarly seems to be a mix of concerns about imposing more overhead on operations, irritating customers and adding complexity to the marketing and billing process.

Mobile service provider executives say they prefer to charge subscribers for data based on tiered usage plans, rather than by application, an on-line survey of some 300 mobile service provider respondents suggests, according to Connected Business Research.

For example, a large number of operators were considering changes to billing plans in 2012, but a substantial number of executives also are concerned that market perception and competitive considerations might prevent them from adopting their preferred billing schemes.

Retail billing preferences have to be balanced against market realities, in other words.

Mobile Payments Surge on "Black Friday"

A huge surge in mobile payments seems to have occurred on the U.S. "Black Friday," the day after the Thanksgiving holiday that historically marks the start of the Christmas and holiday shopping season. 

Somehow, it doesn't seem surprising. IBM analysts estimate that mobile shopping activity rose about 21 percent on Black Friday, year over year. But mobile purchases also surged on Thanksgiving day itself. 

At some point, reporters and analysts will stop noting such occurrences, and that's when we'll know mobile commerce (shopping and payments) simply has become another form of "e-commerce," like online shopping, which largely and justifiably is considered unremarkable these days. 

But some would say there is little correlation between the size of sales on Black Friday and overall sales during the crucial Christmas and holiday shopping season. So there's even more reason not to get worked up over the size of Black Friday sales. It is not actually a very consistent predictor of ultimate seasonal sales volume, as it turns out. 

Can Microsoft Become an Ad-Supported Technology Company?

Traditionally, Google has been the primary and leading example of a technology company supported by advertising. But others are at least thinking about what could be possible. Ad-supported tablets might be one example. 

Perhaps more common is ad-supported software ad-supported software, with most people thinking of mobile apps, perhaps, though there also are examples of business software supported by advertising. 


Microsoft has been looking at ad-supported software since at least 2005. And some say Windows 8 will mark an expansion of that effort, integrating advertising into the operating system itself. 

Some think that could lead at some point in the future to ad-supported versions of the operating system, possibly a freemium model, for example.

Up to this point, software has been the type of product most readily adapted to advertising support, one might argue. 

In addition to Google, Facebook, Pandora, Yahoo and AOL have had predominant ad revenue models.

For Microsoft, the "Office" suite has driven about 30 percent of revenue.