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.

Users Would Pay for Twitter

According to this poll taken by Guy Kawasaki, technology marketing consultant, people would pay to use Twitter.

As it true for other communication services, people do not seem to mind paying a fair price for services and applications they value. 

That also suggests a possible business model for Twitter, as well. 

Broadband Now Demand Constrained

Most of the time, we seem to be more concerned with the supply side of broadband: what penetration rates are, what speeds are, what prices are.

But consumer broadband arguably is demand constrained, not supply constrained. In Kentucky, for example, 65 percent of adults have broadband access.

Household broadband penetration tops 44 percent and another 21 percent of Kentuckians have dial-up service (keep in mind that most U.S. households have more than one adult in them).

Logically, the 21 percent of dial-up users are the primary customer segment to be targeted for an upgrade to broadband. About 70 percent of Kentucky households have at least one PC.

But that leaves 30 percent or so of homes that do not report having a PC. That is a demand problem, not an access supply problem.

$69 billion in 2007 Unlicensed Music

The value of unlicensed or pirated music trafficked on P2P networks in 2007 was $69 billion, according to new MultiMedia Intelligence research.
 
"Content owners of TV episodes and full length movies are seeing a growing impact as well," says Rick Sizemore of MultiMedia Intelligence .
 
MultiMedia Intelligence's new research also found the number of unlicensed full length movies "shared" will grow almost four times from 2007 to 2012.

Not all P2P content is unlicensed, though. P2P Internet traffic, despite having grown at a torrid pace for years, will grow almost 400 petrcent over the next five years, growing from a level of 1.6 petabytes of Internet traffic per month in 2007 to almost 8 petabytes per month by 2012. 

Covad Launches Channel Offer

Covad Communications has launched a new integrated access service for its channel partners. The new service features a new online quote and order system that Covad says can cut days to weeks off provisioning time.
 
The service is aimed at firms with up to 35 employees per location. Covad delivers the service over a voice-optimized T1 line, and the service works with customers' existing phone systems.
 
Customers can start with as few as four phone lines, and new lines can be added one by one, rather than in the more typical "blocks".

Covad completely overhauled its ordering process for this service. The new online ordering system handles quotes, pre-qualification and contracts all in one place and all in real time. Partners can store and manage quotes and orders through the website, and can check potential deal-killers—such as number portability—at the beginning of the process, rather than at the end.
 
"This is the voice and data service we've been asking for. The new online ordering system is easy to use and lets us know right up front that we can make a deal work," said Dan Keane, Director of Partner Sales with Keane Telecom Consulting, LLC, in Atco, New Jersey.
 
Covad Integrated Access now also utilizes SIP trunking and supports a wide range of IP, digital and analog PBXs.
Pricing starts at $435 per month with no installation fees.

The service uses Covad's voice-optimized technology to dynamically allocate bandwidth between voice and data.

Consumer Electronics Dip Predates "Economy"s

As evidence mounts of business slowdowns, it will be tempting to point to "economic weakness" as the reason for consumer and business spending weakness.  There will, to be sure, be such effects.

But not all spending changes are the result of the near-term economy issues, as some trends predate the such pressures.

Consider consumer buying of digital cameras, camcorders, audio players and hand-held game platforms. Sales of all four categories of devices have been declining for three years.

That could suggest product saturation, with the corollary that upgrades need to move beyond incremental changes.  There will continue to be replacement buying, to be sure. But incremental upgrades to memory or megapixels of resolution, for example, might not provide as much sales lift as one might have seen in prior years.

Category saturation is a normal part of the consumer electronics business, which is why consumer electronics retailers always are on the look for the next big "gotta have it" product.

DT Results: Still Tough to Sort Out "Economy" Impact

As further evidence of just how complicated it now is to figure out what actually is happening operationally in the communications business, Deutsche Telekom's overall year-to-date revenue has fallen about 2.5 percent. 

But international revenue has grown 1.1 percent, despite an unfavorable currency impact from U.S.dollar and U.K. pounds sterling denominated revenues. 

Deutsche Telekom generated revenue of EUR 45.6 billion in the first nine months of 2008, a decrease of EUR 1.2 billion or 2.5 percent year-on-year. To put the currency effect in perspective, revenue was negatively affected by exchange rate effects totaling EUR 1.5 billion. 

DT's T-Mobile USA revenue grew by 13.7 percent, but partly because of the acquisition of SunCom.

T-Mobile reported a 1.2 percent drop in its U.K mobile customer count, year over year. Mobile subscriber counts grew 8.3 percent, year over year. 

But mobile revenue was up 1.1 percent, year over year, overall, though there was weakness in the German, U.K., Austrian and "other" markets. 

So far, it might be reasonable to conclude that competitive conditions explain much of the weaker performance, though economic conditions could be contributing. 

We don't have the data yet, but what will be instructive is whether the overall mobile revenue in each of the countries is available, as that will provide a better sense of whether there actually is some slowing of consumer spending. 

Right now, all we can tell is that DT operates in competitive markets, has a secular wired voice lines problem as do other telephone companies, and that broadband access remains fiercely competitive.  

Economy Not Responsible for All Revenue Shortfalls

The temptation these days is to blame the "economy" for every slowing or decline in sales of communication products. We have to resist that temptation. At least so far, more companies reported robust third quarter growth in broadband, mobile and video sales than slowing. And there always are market share shifts to account for, a trend that should be in play for at least a year.

The content delivery business, for example, has to be judged a disappointment for Internap Network Services Corp., which saw sales in its contend delivery network segment decline for the third straight quarter.

Internap reported third-quarter revenues up eight percent to $65.4 million. But CDN sales in the quarter dropped to $5 million, down from $5.4 million in the second quarter and $5.6 million in the third quarter 2007.

We may well see economic effects in the fourth quarter or in 2009. But not all the negative impact will be a direct result of economic factors. In many cases, simple shifts of market share will be the driver.

Cbeyond: No Evidence of Slowing

If one wanted to point to a highly-successful provider of small business VoIP service, it would be hard to pick any single company doing better than Cbeyond. Third quarter revenue growth of $90.2 million represents 24.6 percent over the third quarter of 2007. 

Total adjusted earnings before interest, taxes and amortization of $16.9 million during the third quarter of 2008 was an increase of 25.5 percent from the third quarter of 2007. 

Cbeyond  had net customer additions of 1,993 in the quarter, to reach 40,569 in total.

The company also had average monthly revenue per customer location of $760 during the third quarter of 2008, compared to $754 in the second quarter of 2008 and $749 in the third quarter of 2007. 

Monthly customer churn of 1.3 percent in the third quarter of 2008 was stable compared to 1.3 percent in the second quarter of 2008. That is significant as Cbeyond experienced a temporary increase in churn several quarters back when it tightened credit polices. 

Windstream Results Point to Possible Shift

Windstream Communications third quarter results, like those at Charter Communications, do not yet support the theory that economic stress is changing basic consumer habits in the video entertainment and communications areas. 

Also, Windstream might finally be approaching a time when its voice lines stop shrinking. So there might be something to the argument that if executives think "lines will keep shrinking," they will.  Conversely, a belief that line losses are not inevitable might lead to efforts that in fact produce that result. 

Keep in mind that both Charter and Windstream operate in more-rural areas, so it may be that "big city" and "rural" patterns are diverging. 

Beyond that, neither company seems to be seeing any real slowdown in growth for broadband or video products, as some might expect in the face of the economic slowdown. 

Windstream added 28,000 new high-speed internet customers in the quarter, bringing its total broadband customer base to roughly 963,000, an increase of almost 16 percent year-over-year, and Windstream executives believe there still is room for additional growth. 

Windstream also added nearly 21,000 digital TV customers in the quarter. Long distance service revenue also increased five percent year-over-year.

To be sure, traditional voice lines declined by approximately 38,000, but that was an improvement in absolute lines lost of more than 8,000 units  year-over-year. In total, Windstream access lines declined by 4.8 percent year-over-year. But note: Windstream thinks it might finally have turned the corner on landline losses. 

Though competition has increased, Brent Whittington, EVP, thinks the company might have "turned the corner" in the third quarter, in terms of landline losses. That would be a significant development indeed.

Though some probably reflexively think telcos will keep losing voice lines forever, logic suggests the losses will stabilize at some point. Keep in mind the example of broadband access. Aggressive cable operator marketing of high-speed access went virtually unchallenged by telcos for some time. Then telcos decided they simply could not ignore getting into the business, despite some qualms about cannibalization of existing special access services.

As it turns out, the cannibalization fear was overblown. T1 lines in service increased even as cable modem and digital subscriber lines proliferated. Something along those same lines will happen once telcos decide it is time to market VoIP and IP telephony aggressively. As a byproduct, the shrinkage of voice lines will slow, then halt. 

Maybe Windstream is getting close to that point, even in advance of a major technology shift to IP-based voice.

Broadband Prices Drop 20%

Global broadband access prices have dropped about 20 percent, on average, in the first three quarters of 2008, say researchers at Point Topic. Digital subscriber line prices have dropped from $66.75 in the first quarter to $53.32 in the third quarter. Average subscription prices for cable are down just over 12 percent and fiber-to-customer prices declined by 6.5 percent.

Keep in mind that the Point Topic analysis is based on stand-alone tariffs. Customers might be paying less if they are buying their broadband access as part of a bundle.

DSL prices have declined the most in 2008, though Point Topic researchers say it still is the most-expensive broadband option, on a price-per-megabit basis.

In the Middle East and Africa, for example, consumers are paying over $46 per megabits per second basis, compared to $6.23 per Mbps in Western Europe.

Prices in the MEA region have dropped by seven percent on average in the year and speeds are up 13 percent. In part, the price declines for DSL reflect the greater degree of competition in that segment, compared to cable or fiber-to-customer alternatives.

In North America, cable modem price-per-megabit metrics are close to Western European levels. Western Europe prices of $4.80 per Mbps are close to North American prices of $4.89 per Mbps.

In Eastern Europe, cable modem prices declined about 25 percent.

Will Consumer Electronics Hold Up?

With the current economic slump, this holiday season is expected to be a tough one for most retail sectors, but will consumer electronics be one of them? 

Maybe not. A recent study by the Consumer Electronics Association found that although consumers may be spending less overall this season, they are planning to spend more on electronics. 

Some even argue that that the weak economy will make home entertainment products, like video games, even more popular this year, as some will see it as an affordable alternative to spending on concerts, movies and other events. 

So far, Compete.com data shows a normal pattern for the year. But people are right to be worried. 

According to the ICSC-Goldman Sachs index, retailers had their weakest October performance since the index's inception in 1969. 

Charter: Countervailing Evidence About Consumer Behavior

The problem with isolating economic from other drivers of consumer behavior and provider success is obvious enough when looking at Charter Communications third quarter 2008 results. You can't complain about the results.

For the third quarter of 2008, total revenue was $1 billion $636 million, an increase of eight percent over the third quarter of 2007. Phone and high speed internet, Charter's highest margin services, accounted for about 65 percent of Charter's revenue growth in the quarter. Telephone revenues totaled $144 million for the third quarter continuing as Charter's largest revenue growth driver with 55 percent year-over-year growth.

For the third quarter our commercial business revenues climbed 16 percent to $100 million driven by the expansion of commercial telephone product in the business bundle.

One of the broader assumptions about times of economic stringency is that consumers will be cautious about upgrading service to higher tiers. But that doesn't seem to be the case at Charter.

Demand for high definition continued in the third quarter with HD customers increasing nearly 50 percent year-over-year. Orders for on-demand content increased 57 percent and the number of users climbed nearly 30 percent over the year ago period. Orders for the DVR feature was up 33 percent.

Charter added 71,000 high speed customers during the quarter, more than 30 percent greater than net ads for the same quarter of 2007. And though you might expect customers to signing up for lower speed, less-expensive services, Charter says that wasn't the case. The majority of net gains came from higher speed products, company executives say.

Charter also added about 100,000 telephone customers in the quarter, consistent with year ago net ads, while voice customers increased nearly 60 percent year-over-year.

Early indications so far for the fourth quarter suggest that the economy may be having a "modest impact."  New connects were down year-over-year.

In the first two quarters of 2008 Charter did see losses in the broadcast basic tier, but the trend did not continue in the third quarter.

Charter made rate adjustments that might have lead customers to disconnect or possibly upgrade service in the first two quarters.

Third quarter customer retention and bad debt were generally in line to favorable with year ago levels, the company says.

Charter also increased its marketing spend in the third quarter, spending something like 4.8 percent of revenue on marketing, where Charter typically spends about four percent.

So there's some countervailing evidence about the impact of a recession on consumer spending for video, voice and data. Whatever else executives at other companies might think will happen, so far, Charter Communications has not seen anything yet that supports the theory that consumers are downgrading or postponing buying of higher-priced Internet access or video services.