Some Telephone Companies Have Lost 70 Percent of Their Voice Lines

The state of voice revenues at Consolidated Communications, a firm offering triple play services largely in rural markets, illustrates the revenue and strategy challenges smaller fixed network service providers face.

Consolidated Communications organic local calling revenue decreased $4.8 million during 2013 compared to 2012 primarily due to a four percent decline in local access lines.

Overall, local calling services revenue increased $13 million during 2013 compared to 2012, “primarily due to the acquisition of SureWest Communications,” Consolidated Communications says.

Likewise, Consolidated Communications network access services revenue increased $13.8 million during 2013 compared to 2012 primarily as a result of the acquisition of SureWest, which accounted for a $21.2 million annual increase in network access services revenue.

Excluding the additional six months of revenue for SureWest, Consolidated Communications network access services decreased $7.4 million during 2013 compared to 2012.

Consolidated Communications video, data and Internet revenue increased $93.3 million during 2013 compared to 2012, primarily as a result of the acquisition of SureWest, which accounted for $85.2 million of the annual increase.

Consolidated Communications organic growth was about three percent for data services while video revenue grew about four percent, on an organic basis.

Broadband revenues overall--video, data and Internet access--represented 45 percent of revenues in 2013 compared to 37 percent in 2012.

Abandonment of voice is one challenge: consumers are abandoning use of fixed network voice, in favor of mobile calling. At the same time, cable companies have become the clear alternate suppliers of fixed network calling.

In 2012, for example, there were about 305 million mobile accounts in service, compared to 96 million switched access lines and 42 million VoIP lines in service, for at total of 138 million fixed network voice lines according to the Federal Communications Commission.

About 41 percent of the voice lines were supplied by competitors, meaning that, overall, incumbent telcos retain about 60 percent market share. Competitors have taken 23 percent of residential lines and 18 percent of business lines.

Overall, incumbents serve about 58 percent of business lines, nationwide.

About 99 percent of the incumbent VoIP lines are sold as part of a service bundle. That raises a key question: are consumers buying fixed VoIP lines only because the cost of doing so, as part of a triple-play package, provides other advantages, namely lower total communications and video costs?

In other words, how “soft” is demand for residential voice lines? If consumers could buy packages without voice lines, and save even more money, would they do so?

The current structure of retail offers is such that consumers often can save more money buying voice service as part of a triple-play bundle than they would pay for a dual-play package featuring Internet access and video services.

In such cases, voice service just comes with the package, even if those consumers might otherwise not have purchased a voice line.

Since 2006, total lines purchased have fallen from 172 million to 138 million in 2012. That means telcos face two separate issues. The addressable market is shrinking, and competitors are taking an increasing share of the market.

Diversification into other services--Internet access and video entertainment, plus out of region operations--is now a universal strategy.

But unable to grow connections in region, telcos also are growing by acquisition. That is true for Consolidated Communications, no less than for other firms.

Had it not purchased SureWest Communications in 2012, Consolidated Communications voice revenue would have contracted.

But there is another way of looking at the problem.

For the year ended December 31, 2011, SureWest Communications reported $248.1 million in total operating revenues. But SureWest itself has grown largely by acquisition, buying first WINfirst and then Everest Broadband.

The Everest Broadband deal added 200,000 revenue generating units (each RGU is an individual component in a triple play offer) and 117,000 new voice access customers for SureWest.

The deal also more than doubled SureWest’s triple-play installed base of customers.

But there are more revealing numbers. As of December 31, 2013, the  Consolidated Communications operation in the former SureWest territory in California had 42,403 local access lines.

In 2004, that same SureWest Communications operation had 132,000 voice customers.

And that, in a nutshell, illustrates the problem fixed network service providers--especially telcos--now face. The legacy SureWest operation has lost nearly 70 percent of its fixed voice lines.

To be sure, Internet access, business services and video have compensated for those losses.

Change, in other words, if a fundamental requirement, not an “option.”

Telecom Market Concentration is Not Related to "Lack of Competition" in a Linear Way

Capital intensive businesses with high sunk costs tend to be relatively concentrated. That is why most markets have one or two dominant fixed network providers.

That also is why most mobile markets have about three leading providers.

Whether policymakers can expect much more than that, on a sustainable basis, is the issue.

Most mobile markets are fairly concentrated, by typical measures. After looking at 36 markets, the typical pattern is three leading firms, according to analyst Chetan Sharma. At least 30 of those 36 markets would draw regulatory scrutiny, using the Herfindahl-Hirschman Index of market concentration.

Some would argue that level of concentration does not inevitably lead to lessened competition.

After comparing  market concentration, as measured by the Herfindahl-Hirschman Index (HHI),  the GSMA argues there is no statistically significant relationship between market concentration and prices.  

Also, capital intensive markets with few providers still can exhibit significant levels of price compeetition.

And economics at the Phoenix Center for Advanced Legal and Economic Policy argue that reasonable competition in markets such as fixed network services can occur with as few as two main providers in a market.

The GSMA also argues that "concentration" and "prices" are not related in a simple linear fashion.

The point is that policymakers have to work within the constraints of sustainable business models in capital-intensive industries with high fixed costs and significant competition.

Most such markets will not be able to sustain "more than a few" leading suppliers, over time.

Hard to Explain Higher Cost, Higher Usage Pattern in U.S. Mobile Internet Access

U.S. mobile data consumption in 2013 grew 120 percent over 2012 levels, according to CTIA-The Wireless Association’s annual survey.

U.S. mobile providers handled more than 3.2 trillion megabytes of data in 2013, CTIA reports.

Between 2010 and 2013, U.S. mobile data consumption increased 732 percent, CTIA also reports.

That probably does not come as much of a surprise. According to Cisco, Ericsson and other research firms, by 2018, data usage will increase eight times the 2013 figure, or be more than 383 times the traffic in 2008.

The interesting challenge is why U.S. mobile data is so high, compared to usage levels in Europe, for example, where “prices” or “costs” appear to be lower. Classical economic thinking would suggest usage for a product with demand should grow as prices get lower, contract for that same product if prices get higher.

The T-Mobile US marketing attack provides one example. By effectively dropping prices, T-Mobile US has stimulated both usage and attracted net new customers.

But some would note an anomaly: EU consumers pay less per month than U.S. consumers for mobile wireless services, but U.S. consumers use five times more voiceminutes and twice as much data, according to the GSMA.

One possible explanation is that, measured as percentage of household income, U.S. prices actually are lower than in Europe, even though the conventional wisdom and studies tend to suggest the opposite is true.

When converting for purchasing power parity, though, posted retail prices in the United States rank about 43rd globally, in terms of cost, behind Columbia and ahead of Greece.

The other issue is that prices make sense only in relation to other goods and services consumers purchase.

Looking at prices as a percentage of income is one additional way to measure, as that method compares communication costs to other goods and services purchased in the same market.  

Cost as a percentage of household income runs less than two percent in developed nations, as a rule.

To be sure, product and lifestyle preferences cannot be discounted, nor the relationship between speed and consumption: users on faster networks consume more data.

One might argue the U.S. simply has a more-developed application infrastructure.

Whatever the reasons for usage, European consumers pay less per month than consumers in the United States, but U.S consumers use their devices more intensely than consumers in the EU.

The other issue is unit prices--”price per bit”--which arguably is lower in the United States than in the EU, at least for some plans.

All that noted, if one argues mobile Internet access costs are higher in the United States than in Europe, while consumption is vastly higher in the United States, one is challenged to explain precisely why that should be the case.

In the end, differences in appetite might be the explanation. Higher prices might not deter consumption in the U.S. market because the product itself is in greater demand than in some other markets.

With the caveat that comparing prices between countries is not easy, GSMA in 2013 argued that U.S. mobile spending by consumers was about $69 a month, compared to a European Union average of $38 a month.

U.S. consumers use 901 voice minutes per month, more than five times the European

average of 170 minutes.

Thus, while U.S. consumers pay more per month than those in the EU, they pay less per unit of

usage. 

Merrill Lynch estimates that average revenue per minute of voice usage in the U.S. is far lower than in any European country, and less than a third of the European average, for example.

So there are any number of ways to look at the cost of usage. Cost in the U.S. market might be higher, but in a market where the product is deemed to have more value. 

As a percentage of household income, costs might not be higher. Or pricing policies might be shaped around usage patterns that, on a cost-pe-bit basis, are not higher in the U.S. market. 

T-Mobile US Not Acting Like a Firm that Believes it is About to be Acquired

U.S. regulators would prefer a stable long-term mobile market lead by at least four viable contestants. Whether that will remain the case is the issue.

And T-Mobile US, the firm thought most likely to be acquired, eventually, by somebody, seems to be taking no chances. It is acting like a firm that wants to be viable, even if it remains an independent company.

When AT&T proposed its acquisition of T-Mobile USA, T-Mobile essentially put its marketing efforts on autopilot, doing nothing exceptional to protect its markets and customers from losses, while awaiting approval of the transaction, which never came.

This time around, T-Mobile US is protecting itself by continuing to promote and market as though the potential deal is not going to occur, or be approved.

In June 2014 T-Mobile US is likely to launch additional features of its “Uncarrier” campaign, perhaps including measures such as advertising “all in” retail prices that include all taxes and fees, something mobile service providers generally avoid, for good reasons.

Including all taxes and fees in retail offers means the posted prices are higher than consumers are told. But such “everything included” pricing arguably is more fair, as the “total” charges and the “as advertised” charges are the same.

That older practice is analogous to the way airlines often display prices--without add-on taxes and surcharges.

T-Mobile US might also stop charging prorated fees that represent the fraction of a full billing cycle users often encounter, before the start of the next full monthly billing cycle. That will save consumers money as it also cuts T-Mobile US revenue for partial months of service.

T-Mobile US might also change the way it bills for devices purchased on installment plans, billing in equal installments from the time of the first bill, rather than starting to collect on device installment charges sometime after the first full month of service.

That has the effect of providing consumers a “true” sense of recurring charges, at least until the device is paid off.

T-Mobile US also could announce full, and simple, device unlocking.Those are initiatives taken by a firm that believes it might remain a stand-alone company.

Needing additional spectrum assets in lower frequencies, T-Mobile US also is seeking to buy 700-MHz spectrum from existing license holders. Again, that is a move a firm might take if it believed it might continue to compete as a stand-alone firm.

As with so many other elements of business strategy, T-Mobile US might also assume now is the time to lock up such spectrum in the 700-MHz band because the other likely buyer--AT&T--is preoccupied with its bid to acquire DirecTV.

In April, T-Mobile US bought $3.3 billion worth of such spectrum from Verizon, covering about half the T-Mobile US footprint. So now T-Mobile US needs to fill in the other half.

Most of that 700 MHz A-band spectrum is owned by 33 relatively small carriers.

To be sure, T-Mobile US might believe there are other potential buyers, including Dish Network, that might be able to structure a transaction that passes antitrust review and could get Federal Communications Commission clearance.

An acquisition of T-Mobile US by Dish Network  would not reduce the number of leading national service providers from four to three, for example, and therefore would not further concentrate the market.

But this time around, T-Mobile US is acting as though it is unwilling to put its future into the hands of regulators and would-be buyers. It is behaving as though it has to have a serious “plan B” or “plan C.”

Plan C is founded on the continued independence of T-Mobile US.

T-Mobile US Not Acting Like a Firm that Believes it is About to be Acquired

U.S. regulators would prefer a stable long-term mobile market lead by at least four viable contestants. Whether that will remain the case is the issue.

And T-Mobile US, the firm thought most likely to be acquired, eventually, by somebody, seems to be taking no chances.

When AT&T proposed its acquisition of T-Mobile USA, T-Mobile essentially put its marketing efforts on autopilot, doing nothing exceptional to protect its markets and customers from losses, while awaiting approval of the transaction, which never came.

This time around, T-Mobile US is protecting itself by continuing to promote and market as though the potential deal is not going to occur, or be approved.

In June 2014 T-Mobile US is likely to launch additional features of its “Uncarrier” campaign, perhaps including measures such as advertising “all in” retail prices that include all taxes and fees, something mobile service providers generally avoid, for good reasons.

Including all taxes and fees in retail offers means the posted prices are higher than consumers are told. But such “everything included” pricing arguably is more fair, as the “total” charges and the “as advertised” charges are the same.

That older practice is analogous to the way airlines often display prices--without add-on taxes and surcharges.

T-Mobile US might also stop charging prorated fees that represent the fraction of a full billing cycle users often encounter, before the start of the next full monthly billing cycle. That will save consumers money as it also cuts T-Mobile US revenue for partial months of service.

T-Mobile US might also change the way it bills for devices purchased on installment plans, billing in equal installments from the time of the first bill, rather than starting to collect on device installment charges sometime after the first full month of service.

That has the effect of providing consumers a “true” sense of recurring charges, at least until the device is paid off.

T-Mobile US also could announce full, and simple, device unlocking.Those are initiatives taken by a firm that believes it might remain a stand-alone company.

Needing additional spectrum assets in lower frequencies, T-Mobile US also is seeking to buy 700-MHz spectrum from existing license holders. Again, that is a move a firm might take if it believed it might continue to compete as a stand-alone firm.

As with so many other elements of business strategy, T-Mobile US might also assume now is the time to lock up such spectrum in the 700-MHz band because the other likely buyer--AT&T--is preoccupied with its bid to acquire DirecTV.

In April, T-Mobile US bought $3.3 billion worth of such spectrum from Verizon, covering about half the T-Mobile US footprint. So now T-Mobile US needs to fill in the other half.

Most of that 700 MHz A-band spectrum is owned by 33 relatively small carriers.

To be sure, T-Mobile US might believe there are other potential buyers, including Dish Network, that might be able to structure a transaction that passes antitrust review and could get Federal Communications Commission clearance.

An acquisition of T-Mobile US by Dish Network  would not reduce the number of leading national service providers from four to three, for example, and therefore would not further concentrate the market.

But this time around, T-Mobile US is acting as though it is unwilling to put its future into the hands of regulators and would-be buyers. It is behaving as though it has to have a serious “plan B” or “plan C.”

Plan C is founded on the continued independence of T-Mobile US.

Why Amazon Wants its Own Smartphone: $$$$

Nearly 30 percent of Amazon users access the site exclusively on their phones. In 2012, perhaps five to eight percent of Amazon's total sales were made from mobiles, representing perhaps $3 billion to $5 billion worth of sales volume. 


Fully 55 percent of all time spent with online retail in June 2013 occurred on a mobile device, comScore says.



In the United States, in March 2014, about 71 percent of time spent at Amazon.com originated from a mobile device, comScore also says. That is the same percentage of mobile time spent as seen at eBay, and trails only the 99 percent figure for Apple sites. 



Smartphones accounted for 44 percent of retail Internet minutes while tablets accounted for 11 percent.