Consumer, SME Spending Tightening?

Large incumbent telco and cable companies say they haven't yet seen any adverse sales or churn impact because of economic stringency. But there are some signs this is not true, and has not been true, in parts of the consumer and small business and medium business market segments since perhaps last summer.

Cbeyond, which sells to small business, reports it began to see higher than normal credit issues in the third quarter, forcing it to tighten its credit rules. The result was a churn rate 40 percent higher than is typical for Cbeyond.

Leap Wireless, which sells heavily into lower-income customer segments, likewise saw an unusual and high rate of customer churn in the third quarter last year, an anomaly the company says can be explained by expansion into less mature markets as well as deliberate policy changes in the prepay and handset areas.

Now Henry Blodget of Silicon Alley Advisor says he detects real softness in small and medium business spending on advertising since the Christmas or holiday season. He says a source workking for a digital advertising company has seen severe drops in digital ad spending at small- and medium-sized enterprises in the past few months.

Blodget says he was told one client that had $4 million to $5 million in sales in the 2006 Christmas season had only $1 million in sales this season.

The source believes that Google is seeing, or will soon see, similar drops in spending in the SME segment.

It will be hard to separate out the many threads here. Both Cbeyond and Leap Wireless are in the middle of major market expansions, and each has taken internal actions which could account for nearly all, if not all of the unusual churn activity.

Beyond that, Leap Wireless executives have been watching for signs of economy-specific impact for quite some time, as the background rise in gas prices, sub-prime lending and housing slowdowns also could create higher churn, lower net addition effects.

Even slowing broadband or wireless subscriber growth alone will not be evidence of economic weakness, as both of those markets are nearing saturation. Growth necessarily will slow, and the economy has little to do with the slowing.

Lower housing starts plausibly are an issue, but only at the margin. The simple fact is that both broadband and wireless penetration rates now are nearing a natural limit.

Both Cbeyond, Leap Wireless and any other service providers expanding rapidly into new markets are going to have higher churn for new customers than is typical for customers they have had for several years. The reasons are simple enough. Customers who leave have found reasons not to continue. By definition, customers who stay for several years have found good reasons to do so.

They have learned how to use the services, are getting acceptable levels of service, correct bills, prompt resolution of issues and other "use" experiences that confirm they have made a wise choice.

So higher churn, in and of itself, will not mean economic softness is the culprit, at least for firms expanding rapidly into new markets and adding new services.

Over the next couple of quarters, all observers are going to remain watchful for any signs economic issues are coming into play. So far there are signs--not conclusive by any means--of increased pressure in some consumer and SME segments. But so far it is hard to isolate economic issues from other background factors.

Slowdown? "Not Yet" Says Siemens

Siemens AG, Europe's biggest engineering company, probably will meet its 2008 sales and profit goals, and sees no sign that a global economic slowdown is affecting business, Chief Executive Officer Peter Loescher says.

That despite the statement that "it's clear that we're entering a phase of slowdown in the world,'' Loescher says. ``The impact for us as a company, we don't see it yet.''

Mobile Revenue Surpasses Landline in 2009

"Mobile service revenues will pass landline in 2009," says Arthur Gruen of Wilkofsky Gruen Associates, reporting on the latest Telecommunications Industry Association expectations for U.S. communications revenues. "It now is primary line erosion, as second lines erosion was finished some time ago."

That means there will be 150 million landlines in service by 2011, where there once were 286,000 in service in 2004.

About 82 percent of consumer voice subscriptions are sold as part of a bundle, up from 14 percent in 2005 and 40 percent in 2007.

Wireless growth slowed to single digits in 2007 for the first time, however. Still wireless revenue of $200 billion in 2011 will exceed wireline revenue by 26 percent.

About 84 percent of wireless service revenue growth comes from data and data will be 35 percent of total revenue in 2011, up from 16 percent in 2007 and six percent in 2005.

Overall wireless penetration will hit 90 percent in 2011, up from 79 percent in 2007.

In 2011, Gruen also predicts VoIP will represent 37 percent of landlines, serving 33 million subscribers.

EU Approves UK Broadband Deregulation

The European Union Telecoms Commission has approved an Ofcom proposal to deregulate the U.K. broadband market UK broadband market where there are four or more actual or potential providers serving areas with more than 10,000 homes and businesses.

In practice, that means deregulation for areas covering around 65 percent of all homes and businesses.

T-Mobile USA Continues Fixed-Mobile Trial

T-Mobile USA continues to test a Wi-Fi-based, dual-mode phone approach to fixed-mobile integration, allowing users to send and receive calls and messages using their in-home broadband network and a Wi-Fi router instead of sending and receiving messages and calls over the mobile network. The user advantage is that the airtime plan isn't decreased when using the Wi-Fi connection.

The tests began last June in Seattle and now is providing service in Seattle and Dallas.

The additional monthly cost is $10 for the "Hotspot at Home" feature, which isn't much of an issue. The issue is that the service only works with two phone models, the BlackBerry Curve and the Samsung T409.

Someday handset limitations won't be so big a deal, as more devices come natively equipped with Wi-Fi, and when operators stop disabling the function. But right now, the limitation to just two devices is an issue that will limit adoption.

TA 96, Digital One Rate: Which was More Important?

Though the subscriber stats don't paint the picture quite so clearly, wireless minutes of use exploded after 1998, when AT&T Wireless Services introduced "Digital One Rate," a new plan that eliminated the difference between local and long distance services, and used a "bucket" of minutes packaging approach.

U.S. competitive local exchange carrier lines in service, on the other other hand, ramped up through about 2004, and then began to decline, even as more telephone and cable companies themselves became "CLECs" for purposes of providing services outside their historic service territories.

In 1998, when Digital One Rate was introduced, mobile subscribers numbered about 69 million. By the middle of 2007, mobile subscribers numbered more than 243 million. At this point, the time is long past when wired lines exceeded wireless lines. These days, wireless accounts far outnumber wired accounts.

In many respects, and without belittling the Telecommunications Act of 1996, Digital One Rate has had far more impact than anything that has happened on the wired side of the business.

VoIP Markets: Is Europe the Future?

Though those of us in the U.S. community tend to overlook the fact at times, the consumer VoIP market in Europe is quite different. In Western Europe there were 21.7 million VoIP customers at mid-year 2007, up from 15.6 million only six months earlier.

TeleGeography estimates that the ranks of European VoIP subscribers had grown to 28.9 million by year-end 2007.

While VoIP is often associated with competitive carriers and cable companies, many European incumbents have counterattacked by launching their own VoIP services. France Telecom has emerged as by far the largest consumer VoIP provider in Europe, while BT, Telecom Italia, and KPN all rank among the top ten European VoIP operators.

The European consumer VoIP market remains fragmented and highly diverse, featuring a wide range of provider types and business models, says Stephan Beckert, Telegeography analyst.

In some countries, incumbents dominate. In others, competitive carriers have gained the advantage. VoIP adoption also differs widely across nations. For example, 34 percent of all French households subscribe to VoIP, compared to only 11 percent in Germany.

At some point, the U.S. markets are going to start resembling the European market. At some point incumbent carriers are going to start pushing VoIP services actively. Recall the pattern set by Digital Subscriber Line services. The technology was available for quite some time. But telcos didn't have a business driver to deploy it aggressively (they feared cannibalization of T1 lines) until the cable operators forced their hand by launching rival cable modem services.

To be sure, an argument can be made that revenue is better managed by allowing traditional phone line sales to shrink gradually, rather than massively converting to VoIP, with the attendant cost and reduced revenue across the board. At some logical point, the benefits will be close to the costs, and the switch will happen.

Verizon Has 0.5 Percent Exposure to Unlimited Calling Plan Downgrades

Verizon Communications has 305,000 single-line Nationwide Unlimited Anytime customers with monthly voice price plans in excess of $99.99 per month. That's important as the investment community now is nervous the introduction of new plans costs about $100 a month will cause those sorts of customers, paying $125 to $135 a month, will downgrade to the $100 a month plan.

Keep in mind that customers paying more than $100 a month for a single line represent just 0.5 percent of Verizon's customer base.

Verizon believes that the reduced revenue from the $100+ customers will be more than offset by other customers on lower-priced plans moving up to the $100 a month plans. The exposure to the downside isn't that high--possibly $109 million or so.

On the other hand, assume just 300,000 customers upgrade their plans to the unlimited plan, out of the base of total 65.7 million users, and that the incremental revenue is $30 a month.

Despite some momentary imbalance, it seems more logical that the upgraders outnumber the downgraders by as much as two orders of magnitude.

Dan Hesse, Digital One Rate

Dan Hesse, Sprint Nextel CEO, was CEO of AT&T Wireless Services back in 1998, not many will recall. That was the month Hesse was able to act on a vision he had strenuously to sell to his superiors: that wireline minutes of use could be shifted to wireless, saving at&t money on access fees by doing so.

The Digital One Rate Plan was not primarily aimed against other wireless carriers at all, but rather at reducing a significant cost of doing business on the AT&T long distance side of the house.

At the time, Hesse pointed out that "we're taking a chunk out of revenue usually going to our competitors," meaning by that the Regional Bell Operating Companies that at&t had to pay access fees to.

The point is that major packaging initiatives can have unanticipated consequences. Digital One Rate was just a way to save AT&T long distance operations money on terminating traffic charges paid out to local carriers.

So make no mistake: Hesse is used to launching unusual packaging programs for non-intuitive reasons. But not even Hesse was able to fathom that Digital One Rate would change the way the entire industry packaged its basic product.

If Sprint does launch some sort of "nuclear" strategy to try and shake things up, you can bet Hesse isn't going to choose some sort of simple copycat unlimited calling plan.

Dan Hesse is the guy who got the whole "buckets of minutes" train rolling, and wiped out the difference between local and long distance calling in the U.S. domestic market.

He's the guy who triggered an explosion of mobile adoption and a sharp increase in usage of mobile minutes.

Financial analysts seem to be riveted on what a $60 unlimited calling plan might mean for the fortunes of all leading wireless providers. I don't think that is what they ought to be focusing on. Digital One Rate was about moving "long distance" minutes from the landline network to the wireless network.

That's what "unlimited" mobile calling plans do. That's why Sprint is testing femtocell technology in Denver: figuring out the operational and marketing issues around small in-home transmitters that improve wireless signal quality and also create a marketing opportunity for "home zone" services where a wireless handset can replace a landline handset and service.

Nobody should be surprised if Sprint Nextel comes out with a program of its own in the "unlimited" calling area. But nobody should expect Hesse to confine his initiatives there. At this point, rolling out its own unlimited-calling plan is nothing more than a tactical response to prevailing market conditions on the packaging front.

It isn't the sort of industry-transforming plan Digital One Rate was. But we also need to keep in mind that industry transformation was not what AT&T had in mind in launching Digital One Rate.

Watch out for the unintended consequences.

What if Sprint "Goes Nuclear"?

There now is speculation Sprint Nextel is considering an unlimited calling plan costing as little as $60 a month. Aside from disrupting nearly all pricing plans in the U.S. mobile business, one has to wonder what that does for wireless substitution and consumer VoIP as well.

If one can get unlimited calling for that sort of price point, most people who use mobiles and also live in single person, or households of unrelated people, are going to have huge incentives just to go "wireless only."

To the extent that consumer VoIP is mostly about cheap calling, mobile is going to be hugely competitive in a new way, in the event of "nuclear" conflict.

CLEC Precedent for VoIP Companies

Birch, a competitive local exchange carrier that declared bankruptcy twice, has been sold to Access Integrated Networks. The combined company is based in Atlanta, has about 400 employees and will have revenue of $200 million to $210 million a year. The combination is but the latest in a continuing wave of consolidation in the independent CLEC segment, which like most other parts of the telecom business requires scale.

In many ways the VoIP business already has taken a path similar to that pioneered earlier by the "CLEC" business. The CLEC business was lead, in terms of market share, by just two companies: AT&T and MCI. There were lots of independent CLECs, but most had fairly small market share and sales.

Both AT&T and MCI were absorbed into SBC Corp. and Verizon, respectively, leaving the CLEC industry essentially "headless" in terms of national regulatory clout.

The experience of VoIP providers is analogous in many ways. Though the business was pioneered by independents, as was the CLEC business, it now is "lead" by U.S. cable operators, who might be seen as the AT&T and Verizon to the rest of the small independents.

Cable companies have distinct regulatory interests distinct from those of independent VoIP providers, for the most part, and compete directly with VoIP providers in a commercial sense.

One might argue that the independent VoIP providers now also will start consolidating, for VoIP also is a scale business. And some of the more interesting pairing will be of business-focused VoIP providers with business-focused CLECs.

Mobile Price War Impact?

Though the impact might be quite overblown, at least some investment analysts think the recent adoption of unlimited calling plans by three of the four largest U.S. mobile providers is going to hammer their revenues.

Credit Suisse telecom analyst Christopher Larsen, for example, has reduced his rating on at&t, Verizon, Qwest and Sprint Nextel.

He worries that unlimited calling plans will trigger “a wireless price war.”

UBS telecom analyst John Hodulik thinks the potential impact will affect Verizon and at&t, at least at this point.

Hodulik says Sprint is likely to launch an unlimited voice plan in the next few weeks is considering pricing at $60-$80 a month. If Sprint gets traction, that logically would compel Verizon and at&t to reduce their prices to match.

I am not so sure about that. Each of the carriers might see some lost "overage" revenue from heavy users. But each should gain some customers who upgrade from lower-priced plans, as well as some customers upgrading because they are substituting wireless for wireline service.

It is possible higher subscription revenue will compensate for the loss of "overage" revenue.

Euro Managed Services Sales Slowing?

Managed IP PBX contracts won by European telecom service providers declined by an order of magnitude during the first half of 2007, says Phil Sayer, Forrester Research analyst.

The number of IP PBX managed services deals fell to three percent of deals, where in the first half of 2006 managed IP PBX deals were part of 39 percent of new contracts.

Forrester says there was an equally massive drop in the number of deals involving managed security services as well. The only IT service that recorded any increase was the provision of help desks.

Overall telco IT services sales with an IT services component was down from 31 percent to 22 percent.

It isn't yet clear whether that trend was seen in other regions, whether it continued through the balance of 2007, or what it means, if indeed the trend did continue.

Most likely, the data suggest a shift of buying to other channels, rather than a decline in aggregate purchasing. The survey suggests that most of the service provider sales were of the small sort. It is most likely the case that value added resellers and other providers now are increasingly active in that market with services that compete directly with service provider offerings.

The total number of managed services contracts signed in the first half of 2007 by European telecom service providers also showed a decline in the number of deals, compared to the first half of 2006, with slight less contract value.

Where 188 deals were reported by the participating carriers in the first half of 2006, with a contract value of €1.6 billion, contract value in the first half of 2007 was roughly flat at €1.5 billion.

The majority of deals continued to be small, but the increase in the average deal size was the result of a small number of very large contracts.

T-Mobile Adds $100 Unlimited Plan

T-Mobile USA will offer consumers an unlimited calling plan including unlimited ationwide text messaging for $99.99 per month. This offer will be available beginning Feb. 21.

Note that the T-Mobile offer includes unlimited text messaging (SMS), picture messages (MMS) and instant messages (IM). Full details of the at&t Wireless offer are not yet available, but it wasn't immediately clear whether at&t Wireless would include unlimited text messaging as part of the $100 a month unlimited voice plan.

$100 Unlimited Plans Spread

Wasting no time responding to a major new Verizon Wireless offer, at&t Wireless has unveiled its own $100 ($99.99)a month plan for unlimited mobile calling. The plans will be available to new and existing wireless subscribers Feb. 22. Existing customers can buy the plan without extending their current contracts.

New customers can buy on a month-to-month, 12 month or 24 month contract.

Sprint has been offering unlimited calling plans in four markets at about $119.