Mobile Web: Falling Walls

The Internet has proven problematic for communications providers in any number of ways. Aside from mobility, the Internet and private IP services provide the foundation for most growth initiatives. Without it, there would be no demand for broadband access services, music downloads, video downloads and streaming, videoconferencing or Web services.

On the other hand, IP-based services also allow creation of services outside the traditional service provider walled gardens, creating competition for captive provider services. As a rule, IP also lowers the cost, and therefore the retail price, of just about any communications, content or information service.

So it is no surprise that wireless providers have mixed feelings about wider use of mobile instant messaging services that compete, at least in part, with lucrative text messaging services.

By the end of 2013, as many as 24 percent of mobile consumers will be using mobile IM services, say researchers at Forrester Research. That likely will cannibalize some amount of text messaging and shift brand awareness towards the IM providers (Microsoft, Google, Yahoo, AOL) rather than mobile carriers.

Sweden to Separate Networks

It looks like Sweden will join the ranks of countries believing that creating a separate wholesale broadband access entity will spur innovation in domestic telecom markets. A law giving Sweden’s telecoms regulator, the PTA, powers to impose a separation of network operations and retail services on TeliaSonera or any other infrastructure-based telco deemed to have significant market power now is under review.

But TeliaSonera has seen the writing on the wall and preempatively launched a wholesale unit on its own. TeliaSonera Skanova Access now offers equal wholesale terms to rivals and its own retail operations.

If approved, the new law will emulate BT’s "functional" separation. Swedish regulators say they will wait to adopt the new rules when the EU has formalized its own rules on functional separation.

There's a key challenge for North American regulators here. The grave potential danger of such structural or functional separation moves is that it will scare off investors who must provide the investment capital to build robust new optical access networks. As the trend continues to grow, not simply in Europe but in the Asia-Pacific region as well, we will accumulate a track record demonstrating whether, in fact, a capital strike is a realistic fear.

If functional separation can be made to work, if it continues to provide an attractive basis for investing capital in networks, pressure might mount on North American regulators to make similar moves. That will be especially true if market abuse were perceived to be occurring under the current "inter-modal" competitive regime that now prevails, under which competition between cable companies and telcos is expected to provide competitive benefits.

Sprint Loses Customers

It's not wonder Sprint is axing 4,000 employees, closing stores and halting distribution agreements with some partners. In the fourth quarter Sprint Nextel reported yet another quarter in which it lost more customers than it gained.

True, Sprint reported a "net gain" of 500,000 subscribers through wholesale channels, growth of 256,000 Boost Unlimited users and net additions of 20,000 subscribers within affiliate channels.

Bu those gains were offset by "net losses" of 683,000 post-paid subscribers and 202,000 traditional pre-paid users. In other words, Sprint lost 885,000 customers in the quarter and gained 776,000.

In other words, Sprint had a net loss of 109,000 customers.

In the churn area, where Sprint has arguably its single greatest challenge, post-paid churn (customers billed monthly) was 2.3 percent, slightly better performance than the previous quarter, and within striking distance of the slightly less than two percent range Verizon and at&t now have.

Unfortunately, Sprint Nextel's rate of involuntary churn, where it has to cut off service to a customer, rose over the prior quarter.

At the end of 2007, Sprint Nextel served a total subscriber base of 53.8 million subscribers including 40.8 million post-paid, 4.1 million traditional pre-paid, 500,000 Boost Unlimited, 7.7 million wholesale and 850,000 subscribers through affiliates.

As this chart from Bear Stearns shows, churn creates a couple problems. First, it directly reduces the number of revenue-generating units a company has. Secondly, it almost always raises the cost of acquiring new customers as well. The former hits revenue, the latter costs.

Orange iPhone Sales Stronger than Expected

Apple's iPhone is selling better than mobile carrier Orange (France Telecom) expected, Didier Lombard, Orange CEO, says. Orange expected sales to slow after the start of the new year, but that hasn't happened, Associated Press reports.

Orange had sold 30,000 iPhones in the five days after it went on sale in France, and planned to sell a total of 100,000 of the handsets by the end of 2007.

It doesn't appear too many customers are anxious to buy the unlocked iPhone, sold without a service contract and therefore for a significantly higher price.

Orange has sold "very, very few" iPhones without a contract, Lombard says.

Carphone Warehouse Now Major DSL Channel

The Carphone Warehouse Group (U.K. market), which might formerly have been thought of as an electronics retailer, now points out how much communications service distribution channels can change.

Carphone Warehouse now has 2.6 million Digital Subscriber Line customers. It is by no means certain that mass market retailers in other markets will do as well, but both Best Buy, Office Depot and Circuit City, for example, are distribution channels in the U.S. market, with differing degrees of active involvement in the integration and broadband access businesses. In the U.S. market, Best Buy has taken the boldest steps by buying Speakeasy, a national provider of DSL connections.

Brazil, Russia, India and China Driving Growth

In 2007, Hewlett Packard earned 67 percent of its total revenue outside the U.S. market. In the fourth quarter along, Asia-Pacific grew by 20 percent, Europe, Middle East and Africa by 19 percent and the Americas region was up by 10 percent. The Brazil, Russia, India and China group grew 37 percent year over year in the fourth quarter. Growth rates of that sort are one reason new submarine cables are being laid between North America and the Far East, and being planned or talked about between Europe and India. Add mobile phones to the growth of PC and associated electronics and it is clear Asia, the Middle East and Africa is where the growth is, at least in terms of mobile and other sorts of communications.

Of course, there are other reasons for laying additional cables across the Pacific. Earthquakes are capable of taking out multiple cables and routes in an instant, so carriers logically want more redundancy on trans-Pacific routes than has been the case up to this point.

Ads: $5 Million a Day Shifts to Online

One way to look at current trends in where advertising is being bought is to note that "ad dollars are leaving the cable, broadcast TV and the newspaper business at a rate of roughly $5 million per day, says Paul Woidke, Comcast Spotlight VP.

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.

Apple, Netflix ramp up Online Video Efforts

There are many reasons lots of people ought to be paying attention to streaming and downloaded video. Lots of people work for companies making a living delivering video products and everybody watches video in its various forms. Lots of companies are making expensive bets about what people want to watch, how and where they want to watch, what features are required and how much they will watch. The two mid-January developments in the area of particular note are the Netflix "unlimited online viewing" offer and Apple's launch of a video download service.

Up to this point Netflix has allowed its subscribers to watch online movies on a limited basis, corresponding to their monthly plans. Basically, hours of online viewing roughly correlated to the monthly subscription price. The big change is that Netflix now allows users on unlimited rental plans starting at $8.99 a month to stream as many movies and TV episodes as they want on their PCs, choosing from a library of over 6,000 familiar movies and TV episodes.


Now, subscribers on unlimited plans can stream as many movies and TV episodes as they want from the smaller instant watching library, unconstrained by any hourly limits. The move widely is viewed as a preemptive response to Apple's launching of its own video download service, using a rental model rather than "download to own" approach. Up to this point Apple has seen modest success with an approach based on Apple TV hardware and content from two studios, Disney and Paramount.

All major Hollywood studios have agreed to make their content available as part of the new Apple service. They include Paramount, Universal, Walt Disney, Warner Bros, Sony Pictures, Metro-Goldwyn-Mayer, Lionsgate, New Line and News Corp's Fox.

Using Apple's iTunes online store, US consumers will be able to hire new-release movies at $3.99 for 30 days. Older titles are priced at $2.99 for the same duration.

These movies can be viewed on iPhones, iPods and television. One can debate the impact of Apple's more-aggressive move into online downloads and streaming. In fact, one can argue that the streaming business is a different segment from the "download to own" market or the "rent by downloading" segment.

One also can debate who wins and loses in the video rental business: Netflix, Blockbuster, Amazon.com, Joost, iTunes or others. Even the impact on Netflix is debatable. If consumer use of the streaming feature increases, Netflix will pay more money in licensing fees to the studios who own the content. It also will incur more bandwidth charges. On the other hand, Netflix might spend less money on postal charges, shipping and handling of physical DVDs.

Probably more important is the strategic impact: Netflix's ability to retain existing market share as new competitors enter the market.

The other issue is which market is affected. To some extent the "view on PC" segment is where Apple, Netflix and others compete head to head. There are other segments, such as the "watch on my iPod" market, where Netflix and others delivering to the PC do not play.


Also, one might debate whether a subscription service is different from a pay-per-view model. Heavier users arguably will prefer a subscription model. Lighter users might well prefer the "pay as you go" model. Also, there is little question but that mobile, iPod, PC and TV viewing segments will emerge as full-fledged markets at some point, irrespective of the payment model.

Business motivations also are different. Apple sells content at prices as low as possible so it can create a market for its devices. Its market is rNetazors (devices) not razor blades (recurring revenue). Netflix has the opposite business model: it only cares about devices as platforms to sell content on a recurring basis.

To some extent, then, Netflix and iTunes ultimately compete with telco, wireless and cable on-demand programming offerings, in addition to competing with each other to some extent. Netflix and iTunes now are in the video on demand business, not the "DVD rental" business.

Telcos and cable companies investing heavily in broadband access networks play in the linear TV space as well as the on-demand video space. They compete directly with each other and satellite providers. But over time each of the three main linear programming providers also competes in the on-demand entertainment market, especially as such viewing can be supported on TV screens at some point.

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.

Lots of SMEs Now Buy Video

Entertainment video of the sort delivered by cable, satellite or telephone companies often is thought of as a consumer application. But there's new evidence that lots of small and mid-sized businesses and organizations buy video services. To be sure, bars have long been a key business customer for video services.

What is striking is the degree to which lots of businesses now want to have video services available at the workplace. Whether for employee benefit or keeping up with the news (branch offices of financial services firms, for example), SMEs now appear to be far more willing than formerly to buy entertainment video services.

SME Hosted PBX: Smaller is Better

The smaller the business, the more likely it is to prefer a hosted IP PBX solution over a premises-based solution, says Yankee Group VP Steve Hilton. The pay-as-you-go
approach coupled with minimal on-site IT support makes hosted solutions desirable for
small businesses.

Based on Yankee Group survey data, businesses with fewer than 20 employees are three times more likely to want hosted IP solutions, compared to organizations with 99 employees.

Buying preferences are about evenly split in the 20-to-99 employee range.

Demand for hosted solutions also seems to be quite a bit higher in the retail segment, as you might expect, as these are deployment situations where most people will not need voice or text communications most of the time.

Small businesses in retail segments (a segment with more branch or franchise locations per firm) are almost three times more likely to want hosted IP solutions, whereas firms in professional services and manufacturing sectors are more evenly split between hosted and premises-based IP solutions, says Hilton.

There are some obvious conclusions. Service providers able to deliver hosted voice soltuions over a wide geographic area are positioned to sell hosted PBX services to retail enterprises with lots of franchises to support.

Service providers without wide geographic reach will largely have to content themselves with a focus on professional and manufacturing prospects that more often operate out of one or just a few sites.

The paradox is that there is no simple answer to the question of whether hosted PBX service makes more sense for small or enterprise-sized organizations. Large retail entities often operate thousands of essentially small sites, even though a sale will be made at an enterprise level. Geographic scale then matters, even when the actual use case is a gas station, convenience store or fast food outlet.

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.

Voice Peering: New Directions?

We might disagree about why the change is occurring, but it does seem that discussions of "voice peering" are moving in a different direction. Early on, there might have been more emphasis on how electronic numbering or native IP interconnection could save providers money, disintermediate legacy carriers or disrupt the voice business. If recent discussions are any indicator, there now is much more emphasis on solving basic interconnection tasks in a world of IP traffic, as well as creating a platform for introducing new services.

That isn't to say all peering supporters dismiss advantages of the disintermediating sort. There is no question but that cable companies as an industry segment are anxious to avoid interconnection payments to telephone companies whenever possible, as GSM-based mobile carriers likewise are interested in avoiding transit costs where possible.

The point is that there is a new practicality about the issues. Arbinet CTO Steve Heap, for example, points out that "peering is interconnection between two or more service providers to preserve quality, lower costs and create new services." In fact, Heap points to new problems created by number porting as a mundane but important problem peering can address. "In the Belgian market, for example, 18 percent of mobile numbers are ported," Heap notes.

And since every operator has different termination rates, peering can help service providers determine what the settlement rate ought to be when a mobile call is terminated, where to send a call and make those sorts of decisions in real time. Peering can also help with the time-consuming but relatively mundane issues of negotiating termination agreements with hundreds of discrete carriers. "Not every carrier has a relationship with every mobile operator, so maybe you want to route to provider who does have a relationship," says Heap.

One measure of how the discussion is changed is that a major service provider such as Tata views peering as a simple matter of ensuring call quality under conditions of increased routing complexity. "It isn't just about free calling," says Christian Michaud, Tata SVP.

In fact, routing complexity now appears to be a problem in its own right. "There are more choices of endpoints in the IP world," says Georges Smine, Nomin um senior director. There also are codec transcoding issues that will grow as more voice traffic shifts to IP origination.

In a business increasingly using IP transmission, "what we actually deliver changes as well," says Sarina Tu, Telcordia senior director. "These days, you really don't know where to send a call, what the class and quality of service are supposed to be or what the business relationship is between the originating and terminating networks."

Then there is a growing class of "presence" information that has to be exchanged, not simply the bearer traffic and signaling.

Then there's the matter of supporting all sorts of new services and applications over discrete physical networks, says Shrihari Pandit, Stealth Communications CEO. In many cases there will be advantages to terminating traffic without touching the public switched telephone network, especially when some features simply cannot be passed between networks based on PSTN switches.

The general notion of application-aware networks also applies to voice communications. "Types of calls are more diverse" and peering fabrics can provide the intelligence to support that diversity, Smine argues.

"Who can access and control your information and preferences," Tu asks, especially when that information might be scattered among any number of discrete databases?

"Who would be the central repository for the various databases?" asks Heap. "What do you do about conflicting returns if multiple databases provide different results when a query is made?"

"Service providers want all routing information processed internally, not by a third party," says Heap. "The issue is how all that information gets there."

Nor "do we want to create a new monopoly," Michaud adds.