Tracking Service Provider Capex

People who track telecom service provider capex are going to have to account for some likely shifts in the composition of that capital investment. For telcos providing IPTV, a significant percentage of ongoing capex is related to providing customers with relatively-costly in-home decoders. Comcast, which has built its business on the use of such terminals, is about as efficient as any provider can be, and gets the absolute best volume pricing on its gear. Yet it still devotes at least 18 percent of overall capex to the purchase of such boxes.

Telcos, who likely are not yet getting volume discounts as large as Comcast's may find as much as a fifth of their overall capex now devoted to customer premises equipment. That is going to shift thinking in the direction of variable CPE investment rather than the network transmission categories that traditionally have dominated spending. 

The other change is that IP-based gear in most cases costs less than legacy equivalents, so any given dollar of capex spending buys more capabilities than used to be the case. The clear implication is that less gross capex might be needed for any given unit of derived revenue. 

The other long-term change is that more of the value of capital comes from software investments rather than hardware. So telcos will be spending more capex on software, and less, proportionally, on hardware, or transmission hardware. More of the hardware spend is going to be premises based. 

One probably can see that in the case of Ethernet, DSL, video, telepresence or virtual private network services, for example. 

Where's the Competence?

Financial markets hate uncertainty. Right now, all we've got is massive uncertainty. Where's the governmental competence?

U.S. Tops Global List of Broadband Countries

If one measures the value of broadband not by simply "organizations that can buy broadband" (availability) or "homes buying broadband," (demand), but rather as a the ability a nation has to harness broadband to drive economic growth, the United States ranks first in the world, says Leonard Waverman, Fellow of the London Business School and Dean and Professor at the Haskayne School of Business at the University of Calgary. 

The United States has seen more clear-cut productivity gains than has Europe, and a major source of this U.S. productivity advantage is broadband usage by businesses that are not themselves producers and providers of broadband services, Waverman says. 

The concept of “useful connectivity” is based on the notion that the economic value generated by connectivity depends not just on conventional measures such as broadband lines or computers

connected, but also on who is using those lines—businesses or consumers—and how

well they are able to use the lines, says Waverman. 

"The notion of connectivity should be expanded to include also the complementary assets (software) and skills — embodied in people, governments and businesses — that determine just how productively the hardware and infrastructure are used.

"We use the term 'connectivity' to refer to the totality of interaction between a nation’s telecommunications infrastructure, hardware, software, networks, and users

of these networks, hardware and software," he notes.

Thus broadband lines, PCs, advanced corporate data networks and advanced use of wireless data services are certainly measures of connectivity, but so are human skills relevant to the usage of these

infrastructures, technologies and networks.

Consider the case of Korea, which has a very advanced fiber to the home capability. However, Korea is also a very heavily business-driven economy in that the levels of business investment and intermediate consumption  are very high compared to the level of consumption by the consumer sector.

On measures such as business spending on enterprise telephony and data services, Korea’s performance might be termed “lackluster,” Waverman says. By way of contrast, U.S. businesses are leaders in use of IP telephony and other broadband-based technologies, as well as the more subjective ability to use technologies as sources of business advantage, and drive innovation.

As with all such cross-nation "rankings," there is some element of subjectivity. Still, the point is well taken: broadband economic benefits cannot be measured by simple reliance on penetration or availability data. Human, cultural and institutional capital play a big role. 

Apple, Acer, Asus, Schumpeter

"Schumpeterian" times of "creative destruction" seem to be upon us. Note a recent ChangeWave poll on PC purchasing. You wouldn't be surprised to learn that Apple ranks number one in customer satisfaction. 

You might be shocked to learn that Asus and Acer rank second and third, above Sony. As satisfaction rankings are about value and price, something is going on here. 

Apple doesn't win because of its price. Asus and Acer play there, but I think something more profound is going on. 

Both firms have created a new value position in the market with their hot-selling netbooks. Prior to that, both firms had staked out positions in the value-priced notebook segment as well. But it is probably the netbook that will have the greatest implications for Asus and Acer over the next couple of years as each attempts to establish a retail brand. 

It isn't simply that their netbooks sell at retail for a bit less than $300. It also is that the value of a netbook might be higher than the notebooks it is intended to "complement or replace."

That's disruptive, at least for PC retailers. What isn't clear yet is whether netbooks will be disruptive in other ways. It is clear that lower-end PCs and higher-end mobile phones are heading for each other.  In fact, Acer already has unveiled a line of smart phones. 

Content, Distribution, Attention: What is King?

Many years ago, as a graduate student in managment, Herbert Simon was taught to us as a theorist with a lot to say about the way human beings in organizations behave. These days, he returns anew as a theorist whose work informs us about the logic of digital media. 

"What information consumes is rather obvious: it consumes the attention of its recipients," Simon once said. "Hence a wealth of information creates a poverty of attention, and a need to allocate that attention efficiently among the overabundance of information sources that might consume it."

In a world where so much content exists, the key problem now is "getting noticed." That tends to mean "distribution" is less important than in the past. Think of a past world with limited outlets for radio, TV or print content, so unlike our present world where there is almost no physical distribution barrier, while the true barriers essentially amount to affirmation by audiences. To use the overworked phrase, "users rule."

One doesn't sell, one invites. One doesn't push, one pulls.  "Attention" scarcity also puts a new perspective on the old debate about whether "content" or "distribution" is king of the value chain. "Both" or "neither" are equally good answers in a world of content abundance where the objective simply is "attention."

Across consumer markets, attention is becoming the scarcest, and so most strategically vital, resource in the value chain. Hence marketing now becomes both tougher, and more necessary, and more attention now is shifting to "inbound" rather than "outbound" marketing, pull rather than push. 

Since the business foundation for much of media is marketing, media are bound to change. So are lots of other things. If you think about it, Google's page ranking mechanisms continue to emphasize "linking," which is seen as a proxy for "attention." 

It's interesting how a theorist you once "met" in one context now seems so relevant in an entirely-different context. 

Use Enterprise Sales to Drive Consumer Web Apps?

It might sound counter-intuitive, but at some observers think Web-based software products not only can span enterprise and consumer user segments, but can leverage enterprise deployments to spur consumer penetration.  Some even think Web apps specifically seen as consumer tools can be sold directly to enterprises with little or no modification. 

That is roughly the reverse of what has tended to happen in recent years as the normal technology transmission belt has been inverted.  But the process would be something of a return to past adoption patterns, in roughly the same way that "software as a service" and cloud computing now "returns" us to an earlier era with some resemblance to a mainframe or centralized model of computing.

In the past, software and hardware innovations tended to be "discovered" in the universities then commercialized first in the enterprise buyer segment. Over time the price and feature set would be "de-tuned" for the mid-market, with adoption then spilling over into the small business market and then sometimes even in the consumer market. 

Now some observers say targeting the enterprise "edge" can stimulate buying in the broader consumer market. 

What is different, and might enable this to work, is that Web apps are much easier to adopt in an enterprise environment. Less customization is needed. Also, the user interface, designed for consumer use, tends to require less training, again reducing the hassle factor for adopting in an enterprise environment.

Volume Discounts Wrong for Social Software?

Volume-discount pricing structures are the norm in the computer and most other businesses. 

But Julien le Nestour, an adviser, investor, and manager at Schlumberger, argues that for some "products" such as social networking, value grows as users grow ("network effects"), making the value of an application with 70-percent use much more valuable than an application with 10-percent usage.

But under typical volume-pricing practices, buyers pay more for the less-efficient than for the highly-efficient "product." So pricing should invert. Discounts should be offered for low-penetration use, and rising prices for high-penetration use. 

If customers extract more value (higher returns) per user as the number of users increases, yet pay an ever-decreasing price per user (which is VD pricing), value and price have diverged. 

41% of U.S. Internet Users are "Social"

Researchers at eMarketer estimate that in 2008 nearly 80 million people, 41 percent of the U.S. Internet user population, visited social network sites at least once a month, an 11 percent increase from 2007.

By 2013, an estimated 52 percent of Internet users will be regular social network visitors, according to eMarketer.

80% of Broadband Users Prefer Traditional Video Viewing

Parks Associates research finds 80 percent of broadband users in key European markets prefer traditional video viewing to online viewing. Depending on how you want to spin it, that is a glass half empty or half full. 

“Broadband has transformed video viewing habits in Western Europe, where over 20 percent of broadband households have watched a film or TV program online in the past six months,” say researchers at Parks Associates. 

European consumers are adopting online viewing habits with some reluctance, however, Parks Associates says. For all the countries surveyed, the U.K., Germany, Spain, Italy, and France, over 80 percent of broadband households prefer a more traditional option for viewing video, including going to the cinema or watching a DVD. 

Many consumers are watching video online only because of the availability of free content, both legitimate and illegitimate, the researchers note. 

Broadband to the Farm?

About 57 percent of U.S. farms had Internet access in 2007, up about seven percentage points since 2002, and 58 percent of U.S. farms using the Internet in 2007 bought high-speed Internet access, according to the U.S. Department of Agriculture. 

In 2002, the Census found that half the farms in the country were connected to the Internet in some way, using either broadband or dial-up services. 

So 33 percent of farms in 2007 purchased broadband connections.  Penetration likely is higher now, though most observers think rural broadband, to say nothing of use by rural farmers, remains lower than usage by urban or suburban customers. 

Researchers at the Pew Internet & American Life Project say 55 percent of homes now buy broadband access, up eight percentage points since 2007. If rural use grew at a comparable pace, farm use of broadband could now stand at 41 percent. 

The other angle is that farmers in the West have the better access than the rest of the nation to high-speed Internet, the Department of Agriculture indicates. Nationally, 31.3 percent of farms in rural counties had broadband connections. In urban counties, by way of contrast, the survey showed almost 40 percent of farm operators had high speed Internet connections.

The rural West led the nation with 38 percent of farms reporting access to high-speed Internet. Of the states in the Rockies, Colorado had the highest percentage of farms with broadband access with 47.9 percent, about 45.4 percent higher than the national average. 

New Mexico was the only state in the West (including Hawaii, California and Alaska) that had rural farm broadband penetrationlower than the national average.  

Statewide, 43.2 percent of farmers had access to broadband, 10.4 percent below the national average. 

Nationally, 31.3 percent of farms in rural counties purchased broadband connections. In urban counties, nearly 40 percent of farm operators had high speed Internet connections.

Smart Pipes, Smart Move

BBC, mBlox and Vodafone Group, working with the Mobile Entertainment Forum, have launched "Smart Pipe Enabler Services," a way mobile operators can offer third-party content and app providers a variety of services including age verification, location, identity authentication, reliable phone applications, specific tariffs to consumers and delivery with specific quality of service.

Enabled by these services, content providers can offer the consumer a better user experience, a key objective for much of MEF’s work.

The move is a major step towards creating an entirely new revenue source: business partner revenue streams, while improving end user experience and moving beyond any notion of access networks as "dumb pipe."

At the moment, of the $32 billion worth of revenues in the mobile entertainment industry, about half is based off-portal. The new "smart pipe" approach is aimed at offering those providers the option of features now available primarily to operator-provided services.

Among those features are bulk SMS capabilities, premium billing, short code rental and location look-ups.

Enabling services operators can offer include handset features, user presence information, age verification, "sender-pays" data, user demographic profile, handset application control, electronic wallet, credit status and location.

ITU Issues Views on Recession Impact on Telecom

At a high level, nobody is completely sure consumer behavior in this recession will match behavior in past recessions, for any number of painfully obvious reasons. There also is some thinking that as broadband had not attained mass adoption status during the last recession, this will be the first test of demand elasticity for fixed broadband.

And nobody seems to believe that wireline voice will in any way be helped. There is probably less consensus on what will happen in the wireless business, but wireless service providers likely are among the best-placed industry segments during the recession, in part because of greater "flexibility in their cost structure and capex and fixed-mobile substitution," a new report by the International Telecommunications Union says.

And though broadband access demand is believed to be relatively inelastic, that almost certainly will not be the case for fixed voice.

"Telecom services are likely to come under further price pressure, as operators will fight for a more cost-focused customer, resulting in further erosion of margins," the ITU suggests. And that is going to favor mobile operators as well.

"The more flexible cost structure of mobile networks means that mobile operators are winning more of the lower usage end of the fixed services customer base," the ITU says. "This has happened in voice, and 2008 has demonstrated that mobile broadband can substitute for light-usage DSL."

For countries where data services are popular, data revenues could be adversely impacted by a reduction in consumers’ real incomes, ITU says. Also, more consumers are likely to opt for prepaid and flat-rate packages for telecom services to try and control their expenditure.

Unemployment may accelerate fixed-mobile substitution, with consumers preferring to switch
fully to mobile services. Young people may delay decisions to adopt a fixed broadband or voice line in addition to mobile service.

Unemployment will accelerate households’ decisions to give up fixed services, either because they are unaffordable, or because a mobile alternative is cheaper.

"In terms of practical pricing strategy, the economic slowdown will increase pressure on operators to reduce prices," the ITU says. Operators will find it harder to promote value-added services and the adoption of new services such as mobile TV will be affected, ITU believes.

$200 Million More in Videoconferencing Service Revenue This Year?

An Association of Corporate Travel Executives survey shows that 71 percent of its member companies plan to spend less on travel this year than in 2008.

According to the trade group, that’s a huge and unprecedented shift in corporate travel mangers’ plans from just five months ago.

ACTE’s new survey shows most companies are seeking to spend 10 percent to 20 percent less on travel than they reported in September of 2008.

Using the most conservative figures for estimating the dollar impact of such cuts, ACTE suggests that the 176 member companies responding to the survey will spend about $880 million less on travel this year than they had planned. If the same estimate is applied to the ACTE’s full membership of 2,400 companies, the impact would be more than $2 billion.

That should lead to opportunities for Web and other conferencing services and applications to get more traction, undoubtedly including many users and companies that have not historically relied on conferencing services, especially those with a video component.

Assume just 10 percent of the avoided $2 billion is spent on video-enabled conferencing services. That's a gain of $200 million in service provider revenues.

Enterprise IP Telephony Slows, In-Stat Says

The struggling economy will slow the growth of enterprise IP telephony adoption, In-Stat researchers suggest. Some 32 percent of enterprise-size businesses say the economic situation has slowed their VoIP deployment plans.

Broadband IP telephony remains the most common carrier-based business VoIP solution with revenues exceeding $1.1 billion in 2008, compared to $857 million for hosted IP Centrex service within the United States, In-Stat says. 

Adoption varies significantly by size of business, with enterprise-sized businesses preferring a partial deployment, while small office and home office users are more likely to go IP-only.

About 13 percent of U.S. businesses use both carrier-based and premises-based IP solutions. 

Slightly more than one in three US businesses that have deployed VoIP use it exclusively, In-Stat says.  Many more businesses use VoIP as a partial voice solution. U.S. businesses are also beginning to embrace voice-enabled IM capabilities, particularly among younger workers. 

Mobile Backhaul = 30% of Opex

Mobile backhaul now represents more than 30 percent of mobile service provider operating costs, says Juniper Networks. If one looks at opex and adds depreciation, backhaul can represent 70 percent of on-going costs.

Up to this point, most of the mobile backhaul has been provided by T-1 lines or DS-3 connections, in some cases.

But deployment of 2.5G and 3G technology has lead to an increased backhaul requirement, to say nothing of coming 4G requirements. So where base stations that previously required one or two T1/E1’s for backhaul now need four to six T1/E1’s. The result has been a 200 percent to 400 percent increase in required backhaul capacity and its associated increase in operating expense costs.