Is Content Really King?

There continues to be talk in the communications business about network infrastructure providers as "dumb pipes." That's a bit of an analogy to the "content is king" discussions that the video business periodically revisits. Put simply, there is a tension, in either communications or media businesses, between the value added by network services and applications, and the debate never seems definitively solved.

Consider the case of Time Warner, which is in both the "content creation" and "network delivery" businesses. Some financial analysts say the content assets are overvalued, compared to the cable assets.  Time Warner Cable trades at a discount to Comcast on price-to-earnings multiple, some note. 

To be sure, some analysts worry about increasingly effective competition from Verizon and AT&T. But Time Warner Cable still is adding net subscribers in a recessionary environment. Of course, these debates tend to run in cycles. 

Distribution was the focus of the entertainment industry for much of the past 15 years. The large entertainment conglomerates took advantage of looser ownership regulations and technological advances to acquire more television and radio stations, cable and satellite subscribers, and internet portals. Basically, that's an argument for the importance of distribution. 

Some think there will be a swing in the other direction, as content owners increasingly focus on distribution across all platforms. News Corp. and Time Warner now are now sellers of distribution assets, for example. 

That doesn't necessarily speak directly to the relative importance of distribution compared to content ownership, though. It might be closer to the truth to say that in a climate where capital is scarce, and viewership is changing rapidly, content companies need to stick to their knitting. 

Conversely, some of us make the argument that distribution remains vital, and in any case is a far-bigger business than content. In 2003, for example, Hollywood box office revenues were $11 billion in the United States and $25 billion to $30 billion globally. The global music industry earned $35 billion. Videogaming, consoles and all software represented $40 billion worth of revenue.

In contrast, U.S.telecom revenues pulled in $348 billion.

Content is sticky, content is a fairly large business, content is part of the business the telecom industry now is part of. But that's not the same thing as arguing "pipes" are commodity items with no ability to differentiate. In fact, those pipes remain highly-valuable, very-scarce assets supporting a huge applications business. Voice is declining in value, to be sure. But broadband and mobility apps have arisen to replace those lost revenues. And the new frontier is all sorts of other business models, ecosystem relationships and values. That isn't to say the transformation will be easy, or steady in its progress. 

So make no mistake: transparent optical transport and access are, in some ways, undifferentiated at the moment. But that does not mean the values, features and applications delivered over those pipes are undifferentiated or commodities. 

It may never be possible to determine, once and for all, whether "content" or "distribution" are "the" king of the ecosystem. One thing is clear, though. Distribution is a far bigger business, because it includes the large person-to-person, machine-to-machine and one-to-many and many-to-one communications functions. 

Will Recession Lead to Permanent Behavior Changes?

Nobody yet knows when the current recession will end, or what will happen to various industry segments during the recession. What is even less known is how consumer and business behavior during the recession might carry on in the form of new trends once the recession is but a memory.

Recessions can cause people to think more about the effective use of their assets. In bad times, users are forced to see if there are substitute ways of doing things that save money right now. But if the substitutes are good enough, people might not go back to their former preferred ways of doing things.

At a practical level, business buyers in many cases are taking longer to make decisions, so the time lag from proposal to acceptance is stretching out.

But there still is little, if any, concrete evidence that business or consumer users are abandoning key services ranging from broadband access to wireless to multi-channel video. In fact, the evidence so far indicates they are behaving as they have in the past: keeping services but delaying upgrades and adoption of new enhanced services.

What bears watching are signs some customers are behaving in new ways, such as canceling multi-channel video subscriptions in favor of Internet alternatives. A recent poll by researchers at the Yankee Group suggest that one percent of respondents actually have done so.

Then there is the impact of users dropping landline services in favor of mobility, or using Skype instead of their landlines or mobiles, switching to prepaid from postpaid mobile plans, buying hosted business voice in place of new phone switches or buying some forms of broadband access instead of others.

The point is that tougher economic conditions will lead some consumers to experiment with new behaviors that might become permanent changes.

Broadband Stimulus: Small Details, Big Difference

The revised Senate version of the "stimulus" bill has not yet been passed. Nor has it been reconciled with the House version. But there could be big differences. The revised Senate version funnels money through the National Telecommunications & Information Administration. The House version splits disbursements between NTIA and the Agriculture Department.

The difference? For a company such as Qwest Communications, the Agriculture Department funds would not be available, because of Agriculture Dept. rural loan program rules. The NTIA program does not operate under those rules, making Qwest eligible to apply.

Essentially, Agriculture Dept. rules ascertain eligibility on a statewide basis, while NTIA would fund on a community basis. As Qwest serves both urban and rural communities in each of its states, it has been ineligible for rural broadband loans that it might otherwise qualify for.

So the reconciliation process will be crucial.

About $6.5 Billion in Broadband Spending Still in S.1

The 778-page Senate version of the "stimulus" bill apparently calls for about $6.5 billion in tax credits for supplying broadband to rural or "under-served" areas. It is not yet clear what will happen when the Senate version of the bill is reconciled with the House version.

The House version includes more specific references to broadband speeds, while the Senate version deletes those references.

Earlier versions of the Senate bill had talked about providing tax credits for building new capacity in rural and underserved areas would be as much as 40 percent, but only for service operating at 100 Mbps or faster.

A 30-percent credit would be offered for service operating at 5 Mbps or better. The bill also seems to allow 40-percent credits for wireless service operating at 6 Mbps or better downstream and 30 percent tax credits for wireless service of 3 megabits per second or better.

It does not appear that those clauses remain relevant in the new revised Senate "stimulus" bill, and reconciliation with the House bill might reinsert them in some way.

The revised language could be quite important, though, as many investors might balk at the notion of building 100 Mbps service as a prerequisite for getting loans under the broadband program, which in the revised Senate version also would operate under National Telecommunications And Information Administration oversight, not shared with the Agriculture Department as in the House version.

What a chore it has been to read the revised bill, and the original bill before it!

Sprint Nextel Operations Outsourcing Imminent?

Sprint Nextel Corp. soon will announce it is outsourcing part of its network operations to Ericsson, removing about 2,000 to 7,000 employees from Sprint's payroll, reports the Kansas City Business Journal.

That move, which would indicate Sprint Nextel no longer considers some parts of its network operations to be so important they must be staffed in-house, could affect about a third of Sprint’s network employees.

Sprint spokeswoman Lisa Zimmerman-Mott denied the report, though.

Sprint has said it would cut 8,000 jobs by the end of March. Those cuts include the head of Sprint’s network, Kathy Walker. In addition, former Ericsson executive Sven-Christer Nilsson joined Sprint’s board in November, the Kansas City Business Journal reports.

Cusick estimated that outsourcing network operations would save about 25 percent of expenses in that area.

Congressional Budget Office Says "Stimulus" Plans Will Reduce Output in the Long Run

The Congressional Budget Office now estimates that by 2019 the Senate "stimulus" legislation would reduce U.S. gross domestic product  by 0.1 percent to 0.3 percent. H.R. 1, as passed by the House, would have similar long-run effects, the CBO says.

"Most of the budgetary effects of the Senate legislation occur over the next few years," CBO says.  Even if the fiscal stimulus persisted, however, the short-run effects on output that operate by increasing demand for goods and services would eventually fade away."

"In contrast to its positive near-term macroeconomic effects, the Senate legislation would reduce output slightly in the long run, CBO estimates, as would other similar proposals."

"In principle, the legislation’s long-run impact on output also would depend on whether it permanently changed incentives to work or save. However, according to CBO’s estimates, the legislation would not have any significant permanent effects on those incentives."

see http://www.cbo.gov/doc.cfm?index=9619.

$6 to $9 Billion for Rural Broadband Soon? Maybe Not.

Don't get your hopes up that the $6 billion to $9 billion in potential "economic stimulus" spending to support broadband in rural areas will have any near-term measurable impact, either as a way of getting the country out of its current recession, or getting more broadband to rural users. 

Analysis from the Congressional Budget Office now indicates it will take seven years to get that money spent, and, at best, about 60 percent of the money might be spent in the years leading to 2011. In other words, by the time most of the money actually gets spent, the recession is likely to be over. 

The CBO projected that much of the $6 billion in broadband grants geared to underserved and unserved areas will be spent between 2012 and 2016.

Praiseworthy though the effort to extend rural broadband is, the current proposal does not seem to support the goal of "stimulus," which is to put money to work right now. For starters, any grantees would have to put up 20 percent of any project's cost from their own, or other sources. One might question the ability to do so, under current tight credit conditions. 

Then there are "open access" rules that might affect 100 percent of any grantee's business. And there is no definition of what that means. Right now, any executive would have to factor in the impact of those rules on the whole business as the price of getting grant aid. Depending on how "open access" is defined, service providers might well conclude they cannot accept funding. 

"CBO anticipates that funds provided to the National Telecommunications and Information Administration to administer the broadband grant program would take longer to spend--seven years--because the new appropriations would far exceed the agency's 2009 funding of $17 million, and the legislation would require, in most circumstances, that grant recipients provide 20 percent of the project's cost from non-federal sources," the CBO says. 

So an agency geared to disburse $17 million annually would have to suddenly gear up to disburse nearly $3 billion, an increase of two orders of magnitude. If you've ever had any hand in running any agency that does this sort of thing, you know that increases of that scale simply cannot be handled effectively, that fast. 

Under the House-passed bill, about $6 billion for broadband grants and loans, the National Telecommunications and Information Administration would distribute $2.8 billion in broadband grants with $1 billion going to wireless broadband. 

The Rural Utilities Service is expected to administer the remainder through its broadband loan program. The Senate is working on a $9-billion version that would include tax credits. 

New Era of Discrete Apps?

Many changes are possible as we move into an era of Web-based applications, built and accessed as Web services. On the demand side, users will be accustomed to a new way of buying and using software. On the supply side, we will see different business models. 

Especially for communications-enabled business processes, we likely will see more reliance on something we might call "discrete applications," rather than the more-monolithic approach we have seen historically, where lots of features were purchased upfront with the buying of a switch solution, for example. 

That doesn't mean every application is efficiently provided discretely. Generally speaking, large scale tends to dramatically tip the scale towards platform-based solutions. Conversely, low volume tends to tip the scale towards hosted, Web-based approaches. 

That is a pattern we have seen for services such as business phone systems, carrier switches and server farms, for example. If a provider or enterprise has high volume and lots of users, buying and owning switches and facilities tends to make more business sense than leasing or renting services or capacity.

Conversely, small entities with relatively low volume demand almost always are better off renting capabilities rather than buying and owning their own infrastructure. 

Roughly the same sort of economic logic should come into play in a new era where more applications are built and intended for use by relatively smaller number of users than in the past. The example already is seen in the broad consumer market.

Consider even broadly-purchased applications and services such as multi-channel video services. In an older paradigm, a single provider might expect 70 percent penetration. In a competitive market, even a successful provider might expect to get just 30 percent penetration. 

That changes the economics of network investment. Where once a provider might build a whole network and expect to get customers at seven out of 10 homes, now a provider has to build a network where ultimate penetration is three homes out of 10. that means shared costs must be borne by a considerly smaller number of actual paying customers. 

In the Web sphere, roughly similar sorts of phenomena are at work: in the vast majority of cases, any single application will have a smallish number of users. The opportunity for any single application will be quite small, compared to an earlier era where most people used a small number of relatively-standard applications. 

The good news is that all of the tools and infrastructure we now have will support robust business models even at relatively lower levels of end user demand. So one of the other implications is that we may be entering an era of vastly-expanded use of "discrete applications," custom built in many cases using pre-built modules or "primitives."

That in turn presupposes new ways of packaging, pricing, marketing, delivery and support, new ways of discovering needs and building solutions to match those needs. This means more discrete apps and fewer of the monolithic sort, even though some apps will continue to be relatively monolithic because they have mass usage. 

Adoption, Not Availability, is the Broadband Problem

What broadband really needs--more than money to build more broadband-- is action on the demand side, says David McClure, U.S. Internet Industry Association president. The reason is that only about one percent of Americans actually cannot buy broadband access if they want to. 

"We can now reach 99 percent of all households in the United States with some form of broadband," he says. "We are in pretty darn good shape."

The issue some policy advocates seem to be concerned about actually is not "availability" but rather "appetite" or other issues. Some potential customers might want broadband, but do not own PCs. Others might want broadband, but can't afford to buy it. Many potential users do not use PCs. 

About 25 percent of the U.S. population does not use the Internet at all, McClure notes. "Worse than that, they don't care if they don't get it."

About 51 percent of the non-users say the Internet is not relevant to their lives, McClure adds. 

It is true that 66 percent of the U.S. population now has some form of broadband at home. But that is a different matter than "availability." Cable modem service alone reaches 19 out of 20 homes in America, for example.

About nine percent of users have a dial-up connection. Of these, the majority cite price as the reason they haven't switched to broadband. 

"Broadband in America is in wonderful shape and if you hear differently, it is a lie," McClure says. "Adoption is the problem, not deployment."

That doesn't mean we should neglect targeted investment in some areas where broadband really is not available or where coverage is spotty, he says. But there are several demand side issues that must be tackled to stimulate more usage. literacy is an issue. PC ownership and training are issues. 

Investments in “smart networks” to enhance the efficiency of the networks and provide for advanced products and services also would be useful. 

"Ask a 'public policy' advocate to name a place where broadband isn't available," McClure says. "They don't know any."

"U.S. broadband infrastructure is ranked fourth in the world and rapidly improving," he says. "U.S. broadband adoption is ranked at 15th in the world and not improving."

The important point is that "we are 15th in terms of adoption, not availability."

36% of Social Networkers Want Access from TVs

A recent survey of over 1000 households conducted by ABI Research found that 36 percent of those who currently use social media on a regular basis say they’d like to access their networks on the TV screen.

Younger consumers were more interested in engaging with their friends through chat and messaging, while middle-aged respondents were more likely to be interested in more passive social networking behavior such as checking status updates. 

The most popular potential application for those over 50 who expressed interest in TV social networking was being able to see what their friends were watching on TV.

Not a Good Day for Arizona Cox Customers

Both broadband access and voice seem to be down across much of the state.

Time Warner Cable Grows Revenues 8% in Recessionary Year

How does Time Warner Cable perform in a full year of recession? By growing revenues eight percent, or $1.2 billion, over full-year 2007, to reach $17.2 billion. Subscription revenues were up eight percent($1.2 billion) to $16.3 billion. Video revenues grew four percent ($359 million) to $10.5 billion, benefiting from the continued growth in digital video subscriptions and video price increases.

High-speed data revenues rose 12 percent ($429 million) to $4.2 billion, driven by continued high-speed data subscriber growth. Voice revenues climbed 36 percent ($426 million) to $1.6 billion.

The rate of revenue units added slowed later in the year, though. That is in line with past recessions, when customers delayed adding more enhanced services. 

Still, Time Warner faces a problem in its legacy video business that telcos face in their legacy voice business. Time Warner Cable is losing "basic video" subs, as telcos are losing voice line customers. Time Warner Cable lost 119,000 customers in that category when some analysts anticipated 27,000 to 46,000 or so basic cable customer losses. 

Keep in mind, though, that these losses would likely have occurred even without a recession, as market share shifts away from cable and to telco video services are a secular trend that was underway before the recession. 

60% of Workers Use Social Networking Sites

About 60 percent of working Americans (18 years old or more) used one or more social networking sites at end of 2008, according to Compass Intelligence. About 35 percent of working Americans say they use Facebook, while 29 percent say they use LinkedIn.

About 60 percent of working Americans not using social networking say they don't use them because "it's not a good use" of their time. 

Conferencing Now the Lead UC Application, It Seems

I've been speaking on, and running, panel sessions on unified communications for some time, as have many of my other associates who follow UC. I've noticed a shift early this year: people now are talking a lot more about conferencing, and less about integrating voice, instant messaging,email,  mobile and fixed services. 

What that suggests is that "what is selling" is conferencing. It might, or might not, suggest a certain sluggishness of buyer response to the more-traditional pitches. 

Jill Taylor, product marketing executive for Verizon Business, says  "conferencing is becoming the lead product for UC." That's a switch. 

Verizon Business is one of the first global service providers to integrate audio and Web conferencing services across multiple leading IM services, including IBM Lotus Sametime Unified Communications and Collaboration, Microsoft Office Live Communications Server  2005 and the Cisco Jabber XCP, says Taylor. 

"I don't know that it is the economic climate solely, but it plays there," she says. The idea is to use a presence-based client to escalate into an audio or a net session, making the meeting experience more intuitive, instantaneous and flexible, Taylor says.

Sametime, Lotus, Jabber are supported. Also some additional integration: leader can launch other features such as Web moderator, a call management tool that allows you to visually see who is on a call, record a session as well. Better integration from the desktop. Lots more intuitive. 

The push for Jabber conferencing came from the finance and pharmaceutical communities, which are key Jabber user verticals.

The new tools are available immediately for U.S.-based organizations and are scheduled to be rolled out internationally later this year, along with Verizon audio and net conferencing integration with Microsoft Office Communicator 2007. 

Also, Verizon Business is calling the new features "spontaneous collaboration." The linguistic shift is important. "UC" is a reasonable provider-side description. But it doesn't necessarily resonate with end users. "Spontaneous collaboration" is better. From an end user perspective, it better describes "something I can do."

More 3G, But Majority of Users Don't Use Broadband Features?

Use of smart phones with full HTML browsers that offer a true Internet browsing experience increased steadily in 2008, according to comScore. 

So mobile browsing  grew 34 percent during

the year. But users on 3G networks grew 43 percent from November 2007 to November 2008.

So the percentage of 3G users using the mobile Web did not change over 2008. In fact, the percentage of 3G users who do not use the mobile Web might have slipped a bit.