Consumer Behavior in Recession was as Expected

Time Warner Cable's third quarter results provide a bit of concrete evidence that consumers did what they said they were going to as far as watching their spending on communications and entertainment services because of the recession.

Consumers said earlier in 2009 they were least likely to cut or reduce spending on Internet access and most likely to cut back on buying pay-per-view movies downloaded over the Internet, according to a new survey by Alcatel-Lucent. But mobile service, basic entertainment video service and telephone lines were among the items consumers said they were most likely to keep, though cutting back on things such as going to night clubs and concerts or going out to movies and restaurants.

All of those patterns would be in keeping with past consumer behavior in recessions.

(see http://ipcarrier.blogspot.com/2009/06/network-services-generally-safe-but.html, http://www.blogger.com/post-edit.g?blogID=7312392900566055630&postID=5497830666217750659)

Generally speaking, people said they would be keeping their broadband Internet, wireless and video entertainment services, though showing much more willingness to curtail adding new enhanced or premium services.

Some surveys suggested consumers would accelerate their abandonment of wired voice, while others suggested demand for fixed telephone services would hold up.

Time Warner Cable's results show that broadband Internet additions held up as expected, though sales of digital video, a premium upgrade, fell, as consumers suggested would be the case.

Time Warner's new voice customers also appear weak, though that bit of data does not necessarily confirm analyst expectations. Existing customers of other voice services might simply have stuck with their existing providers instead of switching to Time Warner Cable.

Overall net new additions tend to show the impact of consumer caution. The company added 117,000 revenue generating units in the third quarter, compared to 522,000 a year ago.

More to the point, Time Warner added 8,000 net new digital video customers, compared to 56,000 net new subscribers analysts were expecting. It added 62,000 net new voice customers where analysts had expected 107,000. The firm also added 117,000 broadband Internet access customers, where analysts had expected 115,000.

So broadband held up, while digital video activity fell, as did voice services.

Still, there are lots of variables to consider. Local market competitive conditions can sharply affect results, as do promotional activities.

Comcast, for example, saw its digital video customer base grow a net 7.4 percent, while adding 6.4 percent net new broadband customers and 20.3 percent voice customers.

Still, the point is that consumers had suggested, and history suggested, that wireless, broadband Internet and entertainment video growth rates would slow, but that the services themselves would hold up. It appears they did, at least for these two large cable operators. At&T and Verizon also added large numbers of wireless customers, as well as a decent number of video and broadband access customers.

Marketers Sell to Mobile Users, Not Subs

There are times when counting things one way, compared to a slightly different way, yield results that largely are the same. But for mobile marketers, counting mobile "subscribers" and "mobile users" will produce distinct results that do matter. 

The differences are that "subscriptions" are not equal to "users" because some users have multiple subscriptions. If you usse a mobile broadband card or dongle, plus two cell phones, you have three mobile subscriptions, for example. 

Mobile marketers want to reach people, not devices or subscriptions, so the method of counting makes a difference. In Europe, for example, many studies show mobile penetration to be at or in excess of 100 percent, but that is because many users have multiple subscriber information modules, each of which has a phone number, and counts as a subscription, even when only one SIM is in active use at any time. 

For marketers, the number of mobile users is a more useful figure because it more accurately describes the audience, and thus potential reach.

So how big is the actual U.S. mobile audience? Reserchers at eMarketer estimate that mobile penetration of users is 76.5 percent in 2009, or 235 million people,  rising gradually to 255.4 million in 2013, or 80 percent penetration.

By way of comparison, subscriber fgures from CTIA – The Wireless Association show there aer 276.61 million mobile subscriptions in service as of June 2009. That would work out to about 90 percent penetration of people. 

That 13-percent difference might not make a great deal of practical difference, except that the difference in estimates means the potential reach of any mobile marketing campaign might potentially reach 41.6 million fewer people. 

In the context of a mobile campaign that might not be so crucial, especially when marketers target one specific device or one specific carrier. But the difference in potential reach could be quite large for any campaign that tries to reach most users, and will certainly be reflected in the cost of any campaign. 

Droid Tethering in 2010

Though users apparently will not have the option immediately, Verizon Wireless says users of its Droid smartphones eventually will be able to use their Droids as a "dongle" to connect notebooks. The tethering capability apparently will cost an additional $15 to $50 a month above the normal data plan, depending on the usage plan any specific user already has, but will most often be an additional $30 a month.

The tethering feature will not be available until 2010, Verizon says.

Some end users are sure to complain about the additional fees, but Verizon Wireless has a sizable and growing business selling dongle access for notebooks and is understandably not anxious to cannibalize that business by allowing Droids and other smartphones to act as dongles.

Basically, the additional $30 fee makes the Droid a dongle as used with Verizon's "Mobile Broadband" service, costing $40 a month if all a user expects to use is 250 MBytes or less. The $60 monthly plan includes 5 Gbytes of usage.

Every user will have to figure out how much data they actually need to use in a month, but the tethering option will provide value for most users who need a Droid data plan and some amount of mobile broadband access for their netbooks or notebooks. If you need to use both your smartphone and your PC for Internet access parts of every month, and your combined usage from both devices does not exceed 5 Gbytes a month, that access, using tethering, costs $60 a month.

Separately, the 5 Gbyte plan and Droid data plan would cost $90 a month. On the other hand, separate data plans also means separate buckets of usage, so the value of one's choices depends on how much total usage one expects to require in a typical month.

Under most circumstances, a consumer user will find a single 5-Gbyte mobile bucket is reasonable for tethered and smartphone use. Traveling business users, expecting to use the Droid as a dongle for work purposes every month, might not find the tethering option quite so workable.

Consumers who really watch a lot of video on their PCs and mobiles will need to be quite careful about the tethering option. In that case an unlimited smartphone data plan likely is best.

Wi-Fi's Business Model: Not What Was Expected

New technologies sometimes wind up being used in ways not originally envisioned. It might sound odd today, but there was a time when public Wi-Fi was seen by some as a replacement for fixed broadband used by residential customers, or as a competitor to wireless 3G networks.

These days, with a couple of notable exceptions, public Wi-Fi lives by indirect revenue models. It is an amenity for retail or hospitality operations that make money some other way. Coffee, food, lodging or memberships are some of the revenue models.

The notable exception is "for fee" Wi-Fi in global markets where the cost of 3G access is very high, making a for-fee Wi-Fi connection a better deal.

In recent years, the typical revenue model for public Wi-Fi has been that it is a valuable amenity for sales of fixed broadband connections and retention of customers. More recently, public Wi-Fi has become an important component of the value of some smartphones, which can use hotspots for VoIP even when it is not allowed on the 3G networks.

AT&T, for example, says that its customers made 25.4 million Wi-Fi connections in the third quarter of 2009, exceeding the 20 million connections made in all of 2008 and nearly equaling the 25.6 million connections made in the first half of 2009.

Wi-Fi usage has been increasing significantly each quarter, up from 5.2 million connections in the third quarter of 2008. Smartphones and other Wi-Fi enabled devices are the reason, AT&T says.

For the first time, the number of Wi-Fi connections made by smartphones and other mobile devices in the third quarter surpassed connections from laptops, AT&T notes.

About 60 percent of all AT&T Wi-Fi connections were made from mobile devices, up from 49 percent in the second quarter of 2009, AT&T says.

Public Wi-Fi seems destined to play a bigger role in the smartphone market going forward, as it is a great way to offload video and other bandwidth-intensive applications from the mobile network to the fixed network.

So aside from its value as a feature that supports an indirect revenue model for retailers, it is a value-enhancing way for service providers to differentiate and add value to their mobile and fixed broadband services.

In the future, it likely will assume a greater role in allowing mobile networks to better manage bandwidth. None of those initially were thought of as the "value" of public Wi-Fi.

Amazon Integrates Twitter

It increasingly looks as though Twitter's business model will rely, in large part, on marketing services of various types.

A recent study by professors at Penn State University found that 20 percent of tweets contain requests for product information or responses to the requests, says Jim Jansen, associate professor of information science and technology in the College of Information Sciences and Technology at Penn State.

Separately, Amazon.com has introduced a new feature that allows Amazon Associate members to broadcast links to Amazon products via their Twitter accounts.

Amazon Associates is the partner program the company uses as part of its affiliate advertising programs, allowing customers to make money advertising Amazon products.

Associates can now simply click a link in the toolbar to send a link and text to Twitter as part of their shopping and selling experience. Amazon gets a sale, Twitter gets traffic, and the associate gets revenue share.

Smartphones are Changing the Wi-Fi Hotspot Business

Smartphones are changing the nature of the hotspot business, it now appears. Originally envisioned as a way to provide "outside the home" and "outside the office" connections for laptop and notebook PC users, hotspots now are becoming important sources of broadband connections for smartphones.

One example: iPass, which used to focus on managing PC authentication processes for traveling enterprise workers, now finds it is focusing more attention on managing authentication processes for enterprise smartphones, says Rick Bilodeau iPass VP.

"Smartphones are the new thing," he says. "Now it is smartphones and Blackberries." The software is available for BlackBerry, Symbian and iPhone at the moment, and iPass is watching the Android, though it hasn't seen enterprise demand for that device yet.

As a firm that manages broadband access for hundreds of Fortune 2000 companies, iPass has to manage connections created on hundreds of global networks, but now scores of smartphone devices as well.

To make that process easier, it created an "Open Device Framework," a standardized interface to iPass client software that allows enterprises to write their own XML scripts for the specific dongles, phones and other devices they want to support.

The company also now preconfigures Mi-Fi routers, loading SSID information directly into the boxes before they are delivered to their users, for example. The iPass log-on software also can be preloaded. "We're first to do this, we think," says Bilodeau.

ODF is available now and the Mi-Fi featuers will be available in December 2009, he says.

BlackBerry and iPhone Users are Different, Just Not Wildly So

BlackBerry users are different from iPhone users, a new study by Retrevo Gadgetology suggests. Some of the differences are amusing, perhaps intentionally so, as the questions asked of younger BlackBerry and iPhone users included some that observers might find frivolous, or intended to evoke humorous responses.

Apple iPhone say they find cool gadgets, “most attractive,” about a person, in fact, three times more than they find a college degree attractive.

BlackBerry owners think a college degree is more attractive than the mobile device they use.

About 34 percent of iPhone owners and 29 percent of BlackBerry owners think old gadgets on a potential partner are a turn off. Some 33 percent of iPhone owners say they have broken up with someone  using text messaging, compared to 22 percent of BlackBerry users.

A quarter of iPhone users say they have broken off a relationship because their partner spent too much time on their mobile, compared to 17 percent of BlackBerry users.

The Retrevo Gadgetology report surveyed 445 iPhone and BlackBerry owners distributed across gender, age, income and location in the United States.

"Surprising" AT&T Stance on Net Neutrality?

Some people might be shocked to learn that AT&T complies with existing Federal Communications Commission rules. Some people might be shocked to learn that AT&T actually already agrees that "best effort" Internet services ought to treat every packet the same as every other.

“We use the principle of ‘us on us,’” says AT&T  CTO John Donovan. “If we take an external developer and ourselves, we should not be advantaged in how long it takes or how much expertise is required."

"I don’t think it needs to be that complicated," he says. Does any application run by any third party work as well on the network as an AT&T-provided application?

"Outside applications need to be on an equal footing with our own applications," Donovan says.

But that's part of the problem with net neutrality. It is very hard to define and covers a range of business discrimination issues, network management and performance practices as well as potential future services that consumers might very well want to buy, that provide value precisely because they allow users to specify which of their applications take priority when the network is congested.

As a working definition, net neutrality is the idea that ISPs cannot "discriminate" between packets based on the owner or sender of packets, or on the type of lawful application, or block lawful packets.

The latter principle already applies to fixed broadband access connections, and the new change might be the extension of such rules to wireless providers. What is "new" in the current net neutrality debate is that concept that no packet can be afforded expedited handling, compared to another.

At some level, this is common sense. One wouldn't want video packets or voice packets sold by a third party to be disadvantaged, compared to video packets sold by the Internet access provider, for example.

But that isn't the issue in the current round of discussions and the possible FCC rulemaking. The issue is more an issue of  whether "affirmative" packet handling, as opposed to "negative" packet handling, will be lawful in the future.

"Negative" packet handling is sort of a "thou shalt not" approach: application providers should have a reasonable expectation that their best-effort Internet traffic will be handled the same way as any other application provider's traffic is treated. So ISPs "shalt not" provide any quality-of-experience advantage for their own application bits, as compared to any other bits delivered over the network.

All that sounds fair and reasonable, and in fact ISPs (after a few notable cases of interference), have concluded it is not worth the public outrage to block or delay any packets to heavy users, even when networks are congested, for the purpose of maintaining overall user experience for all the other users.

But there are several issues here. Good public policy would forbid business discrimination, a situation where any ISP could attempt to favor its own applications over those provided by its competitors. Back in the "old days," an example might have been a refusal by one telephone company to deliver calls from a rival.

But the network neutrality debate is far more complicated than that. There is a broad area where network management policies designed to maintain performance might be construed as business discrimination, even when the purpose is simply to protect 95 percent of users from heavy demand created by five percent of users.

Under heavy load, real-time applications such as video and voice suffer the most. So either end users might want, or ISPs might prefer, to give priority to those sorts of applications, at peak load, and slow down packets less sensitive to delay.

The problem with crudely-crafted net neutrality rules is that they might make illegal such efforts to maintain overall network performance for most applications and most users. One can hope that will not be the result, but it remains a danger.

The other issue is creation of new services or applications that can take advantage of expedited handling. Users might want their video or voice packets to have highest priority when there is network congestion. Crude net neutrality rules might make that impossible. But one can hope policymakers will take that sort of thing into consideration.

Net neutrality is a very-complicated issue with multiple facets. Ironically, end users might, in some cases, actually want packet discrimination.

More U.K. Mobile than Fixed Broadband Users in 2011?

More people will use mobile broadband rather than fixed line broadband by 2011, mobileSquared predicts. It's the sort of shocking prediction that makes for a great headline, but also is misleading. The forecast, for the U.K. market, might lead one to conclude that users are disconnecting fixed broadband lines and using mobile instead.

But that is not what the forecast assumes. Rather, it primarily assumes continued growth of smartphone connections.

By 2011 the number of active 3G "smartphone" type devices in the UK will be 36.3 million. There also will be 6.4 million dongles and embedded devices in use, taking the total number of mobile broadband connections to 42.7 million compared to a base of fixed broadband connections of 42.5 million, mobile Squared projects.

To be sure, over time there will be more Internet access occuring from broadband-capable smartphones.
The firm estimates that between one percent and 10 percent of enterprise Internet traffic is already being generated from a mobile device, for example.

But most observers, and most users, likely would say that mobile broadband and fixed broadband are complementary, more than substitutes.

That noted, the application profile for mobile broadband likely will be distinctive. “Mobile will become the primary access point for brands and businesses communicating with its consumers within two years,” says Nick Lane, mobileSquared chief analyst. “Mobile is always-on, and the average user carries their device for an average of 16 hours a day. So if a company or brand is not already considering how to use mobile, then they need to because their customers are.”

As the typical mobile "phone" becomes a multi-purpose broadband device, it will be used for Internet applications. That is not to say the typical smartphone will replace a PC, or a fixed broadband connection. The application profile and mode of use will start to overlap. But each mode will retain key advantages for the bulk of usage. People will talk more on their mobile phones than on their PCs.

They will engage in research, document, calculation or process intensive operations, plus most long-form TV, on a PC or a notebook equipped for broadband access. But people will rely increasingly on their mobiles for social networking updates, location-related apps, real-time information and brief entertainment episodes, and sometimes for long-form video.

The point is that mobile broadband now consists of two distinct segments: smartphones and PC dongles. And while both overlap at times with fixed broadband, they are distinct. Wireless broadband used to connect PCs generally is a complement to fixed broadband access, not a substitute, though that will happen at times.

So the mobileSqured forecast, which essentially lumps all smartphone data accounts with PC dongle accounts to reach the conclusion that mobile broadband will be a bigger business than fixed broadband, is correct in one sense, but wrong in another. In fact, all forms of broadband access are increasing.

Order of Magnitude Increase in Mobile Bandwidth by 2015

U.S. mobile carrier traffic reach 724 TBytes per month in 2015, up from 15 TB per month in 2009, says Coda Research Consultancy, an overall compound annual growth rate of 90 percent. As you might expect, video is behind the sharp rise, growing 104 percent.

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In fact, by 2015, video is forecast to represent about two thirds of all traffic, or 459 TB a month, Coda Research says.

That could be a problem. Sprint and Clearwire, for example, argue their new WiMAX networks will provide three times to five times the bandwidth of 3G networks. That's all well and good, but this forecast suggests aggregate demand will grow 10 times from present levels.

Several issues: is there enough spectrum to handle all this growth? What is the cost of upgrading facilities, even if there is enough spectrum? Is there any video revenue model that pays for the investments? Will the mobile regulatory framework provide incentives or disincentives for investment?

Those are the big challenges. But the report has other nuggets for some parts of the mobile ecosystem.

Handsets will drive 68 percent of mobile carrier traffic by 2015, while netbooks will represent 14 percent.
Coda also estimates that mobile ad revenues will total $5.05 billion in 2015.

By 2015, mobile data revenue will grow to 47 percent of mobile service provider revenues, while voice generates 53 percent of revenue. This last prediction is important, as it suggests how and when mobile service providers will cope with the ultimate shift away from mobile voice business models.

How Not to Sell Hosted VoIP to Smaller Businesses

The single biggest mistake retail providers make when trying to sell hosted IP telephony to small and mid-sized businesses is that salespeople start with features, when they should start by reassuring buyers that “it is a reliable phone system,” Savatar VP Mike Ahearn told an audience of small telcos and cable companies attending a MetaSwitch marketing seminar.

The sales pitch has to begin with “it’s a high-quality phone system that is reliable and lets you keep your phone number,” says Chris Carabello, Meta Switch marketing director. In fact, establishing this lead proposition is so important retail sales personnel should establish that fact even before going to the “it will save you money” pitch.

Only after those two positioning efforts should sales personnel then add that hosted IP telephony “makes your life simpler.” The very last thing that should be discussed is that IP telephony offers new features.

And even then, when working with small business customers, even the discussion of new features should focus on a few new features that might appeal to the particular prospect.

That often is the reverse of the pitch made by many sales people, who lead with features first, says Carabello. The key message sometimes occurs at the very end of a discussion, but it needs to be delivered right up front, he adds.

It might seem unnecessary to emphasize that the product is “a managed, hosted IP telephony service that allows you to make and receive calls on IP phones or your computer,” but potential buyers are being asked to make a change in behavior that automatically raises the question of how well it will work.

And though there is greater understanding now that hosted IP telephony actually works, possibly 22 percent of potential buyers continue to think VoIP suffers from major quality of service issues, says Ahearn. As many as 28 percent to 32 percent of potential buyers with 100 or fewer employees might believe that, so take the issue head on, right away, he adds.

The important implication is that every prospect has to be reassured, right up front, that “it works.” Conversely, “cost savings” are generally seen as an IP telephony value.

And though hosted IP telephony obviously provides a path to selling many other services that could range from Web hosting to email and data services, “make the hosted telephony sale first, then up-sell later,” suggests Carabello.

The generic pitch should begin with the notion that hosted IP telephony “is an easy to manage phone system that will save money and help you run your business more efficiently,” says Ahearn.

Only after that is established should the salesperson move to the fact that it uses the Internet connection to make calls. And since most small businesses buy on the basis of a basic “cost per employee per month,” emphasize that hosted IP telephony offers a lower cost per user per month than the existing solution.

But there is one prevalent fact that suggests a simple SIP trunking offer will resonate with small businesses who already have invested in IP PBX gear. Ahearn points out that the trunk-to-phone ratio for smaller businesses is pretty close to 1:1. But an IP phone system really does quite well with a 4:1 concentration ratio.

Firms with four to seven employees report buying one to 1.2 trunk lines for every phone in use. Firms with eight to 10 employees report having 0.6 to 0.7 trunk lines for every phone in service.

Organizations with 11 to 20 employees report having 0.5 to 0.6 trunk lines for every phone. Firms with 20 or more employees say they have about 0.4 trunk lines for every phone.

The implications are fairly clear. Organizations that need to support between a few trunks and 14 PBX trunks are vastly over-provisioning trunk capacity. The typical organization using IP phones can get along fine with a 4:1 ratio of phones to trunks.

For a firm supporting six phones, and buying six trunks, an alternative SIP trunk strategy could save as much as $1,915 a year.

An organization requiring 14 trunks could save $2,205 a year by swapping SIP trunks with a 4:1 concentration ratio for PRI trunks that are provisioned at a 0.4 concentration ratio of phones to trunks.

The clear implication is that a small organization can save money immediately by replacing PBX trunks with SIP trunks.

Telco Business Models Diverge

Until recently, most global communications providers had business models that were highly similar. These days, it is clear enough that providers are starting to differentiate, and that the future business will feature several to many different business models.

Four telco business models will exist in the future, says Forrester Research analyst Mike Cansfield. Some carriers will stick with the vertically integrated model of the past, because they still can make it work. You will tend to see this most frequently among the largest global carriers, with the biggest customer bases and very large bases of recurring revenue.

Others will move to a partnership-based model, where some functions previously conducted in-house are shifted to business partners. Smaller national carriers with moderate customer bases will frequently use this model, as will carriers making aggressive expansion moves outside their historic footprints.

Some might shift to a horizontal model, though Cansfield points out that no legacy telco has actually decided to do so. This approach has been tried by some new competitors though. Vanco, which knit together a global VPN capability, is one example.

In the United Kingdom, other new contestants have chosen this approach, including Tesco, the supermarket chain, as well as the U.K. Post Office, says Cansfield.

In the mobility space the mobile virtual network operator model uses the horizontal approach. No major established operators have yet shifted from a vertically-integrated model to the horizontal model, though in some respects the “functional separation” model or “structural separation” model is an example.

The disaggregated model likewise is mostly a concept at the moment, not a practical option.

The horizontal model splits the network from the retail business, but in the future it will be easier to consider, if not adopt, a very-disaggregated approach where different functions are assembled on a virtualized basis.

This is a sort of cloud computing or “software as a service” concept applied in a very big way and perhaps can be thought of as the partnership model on steroids.

This fourth variant is based on the premise that a telco has a choice, says Cansfield. Does it own, operate, and manage a network within a horizontal structure or not? If it decides on the latter, then it can choose to disaggregate itself and find partners/outsourcers that can provide more or less all things.

The issue for the latter three models is that ownership of access assets remains valuable, and most would likely say strategic. Ubiquitous wired access networks are so expensive there always will be few of them.

Spectrum rights likewise are relatively scarce and expensive to acquire. Most executives probably would agree ownership of such assets, when possible, confers clear business advantage that should not be disaggregated. Some executives in some countries do not have a choice, of course.

The vertically-integrated communication service provider model is not going away, Cansfield argues, though it will not be the only model. Some providers will largely be able to retain the traditional model, where one entity controls the channel; owns, operates, and manages the technology deployed (usually meaning fixed and mobile); and runs the underlying network that delivers services.

The reason is simply that the networking business remains one where scale economies exist, allowing a large provider to operate efficiently where smaller providers simply cannot. A large provider of services to wholesale customers, enterprise, smaller business and consumers can leverage investments across multiple customer segments where a smaller provider cannot.

So the former incumbents of the world clearly will be prominent users of this model. Still, it is more than a semantic shift to note that the network becomes a platform in the new model, not the center of the model. Software, content and many new applications partially created by end users will be key.

That said, scale in and of itself will prove necessary but not sufficient. Carriers still will have to leverage scale to meet customer demand better than other providers can.

The multiple models also will lead to changes in performance metrics. While traditional financial performance is key for all contestants, there are changes in the need to measure product profitability and network performance, Cansfield argues.

This might sound odd, but what he appears to mean is not so much that the profitability of any single application or service need not be measured, but rather that it should be increasingly possible to gain visibility into the real costs and real profit margin for any service when providers gain the increased visibility many of the models allow.

That isn’t to say any service provider can dispense with a need to measure network and element performance.

At the network layer, measures like jitter and latency will clearly remain important. But Cansfield says other operating metrics assume new importance.

Non-traditional measures such as time between “lead to cash” also are measures of effectiveness. Likewise, the time taken from order to receipt of payment; cost to serve, or discrete analysis of how much it really costs to provide service to a specific customer and cost per transaction are better measurements of provider effectiveness.

This approach will enable the telco to benchmark itself against Google rather than other “me-too” operators, he says.

Those types of analysis are easier when a service provider actually sources inputs from partners, as there is a measurable and discrete cost. The traditional problem with conducting analysis at this level is that the traditional vertically-integrated model requires “guessing”: costs largely are allocations. And allocations inherently are political, based on any number of formulas that may not reflect the actual cost to create a product, sell and support it.

Getting a better handle on transaction or sales costs also is required, so service providers can derive unit total costs per service, a key step in understanding and then maintaining profitability, Cansfield says.

That is important if one assumes that retail pricing for products will decline over time. If that happens, more efficient sales and provisioning mechanisms are needed.

Rather than just focusing on metrics like financials, network performance and customer retention, new metrics also are needed. Measures such as cost per transaction, discrete customer profitability, and returns from bundles become important, he says.

The changes are propelled by choices in revenue dynamics. “Only five years ago, voice revenues at British Telecom amounted to 45.4 percent of total revenues,” says Cansfield. “In 2007 and 2008, BT voice revenues accounted for 39.3 percent of the total.” And virtually nobody thinks the basic trend can be reversed, though many think it will stabilize at some point.

But some other changes suggest where the communications industry already is headed. “Communications is no longer a discrete sector,” says Cansfield. That might overstate the case, but it is the direction things are moving as we move from single-purpose networks to multi-purpose networks.

83% of Enterprises Have Deployed Unified Communications

About 83 percent of 745 North American enterprise and mid-market executives have unified communications capabilities in place, or are planning to, while 17 percent report they still are not interested, says Henry Dewing, Forrester Research analyst.

Web conferencing and collaboration services, though, are seen as a priority by 55 percent of SMB respondents, as well as storage and backup services, also seen as a priority by 55 percent of SMB respondents.

Integrated communications that unify voice, email and instant messaging are the most-wanted capabilities, with twice the number of executives saying that is important, compared to other features such as presence, integration with business applications, can conferencing capabilities.

That isn’t to say there is little or no interest in features such as desktop call control or mobile integration, but that demand for those features is about 2.5 times less important than unified handling of voice, email and IM traffic.

And while demand for specific features is relatively unevenly distributed, the business value drivers are fairly broadly distributed. Saving money, providing better customer service, improving communication flows and saving time all are cited as key values.

At a time of very-tight information technology budgets, more than a third of respondents say they are hiking spending on hardware, servers and desktop software. About 15 percent report they are increasing spending for managed UC services.

The situation at small and medium-sized businesses and organizations is a bit different, as you might suspect. Where 83 percent of enterprises have unified communications projects in place or in progress, only about 24 percent of SMBs say that is the case at their organizations.

And about 20 percent of SMB executives surveyed say they really have no interest in UC.

And though it seems logical to many of us that SMBs remain prime candidates for hosted services that avoid major capital investments, most SMB executives say they are more interested in premises-based solutions.

When asked how interested they are in buying a managed UC solution sometime in the next 12 months, 56 percent of SMB executives say they “are not interested.”

About 21 percent say they are “somewhat” interested while four percent say they are “very interested.” About 11 percent of SMB executives surveyed by Forrester Research say they currently are using a hosted UC solution.

So it appears industry advocates have some ways yet to go in convincing SMB executives that hosted UC solutions are a better approach than premises solutions.

Recent surveys of IP telephony adoption by SMBs have suggested a similar attitude towards hosted IP telephony as well. About a quarter of SMB executives say they would consider a hosted IP telephony solution, while about three quarters still say they would be more comfortable with a premises-based solution.

Call it habit, inertia or lack of trust. SMB executives still have not embraced hosted IP telephony at rates many of us expected. Some have suggested that fear about making a mistake with a mission critical tool is compounded by fear of choosing the wrong supplier.

Extreme fragmentation of the supplier base, as also is typical of the information technology support business, means no single name generally stands out—in the service provider space—as a “logical” supplier of IP telephony or unified communications.

On the other hand, buyers seem more familiar with the brand names of the firms supplying them phone systems, which then are likely vehicles for a move to IP telephony or unified communications as well.

So far, the hosted IP telephony industry does not seem to have tipped the scales, though one might argue that 25 percent penetration of the customer base for a relatively new solution is not shabby.

Is Rural Broadband Penetration Close to 100 Percent?

Is it possible that rural broadband penetration actually is pretty close to the penetration of Internet users? In other words, is it possible that use of broadband in rural areas now is close to 100 percent of Internet users?

New data from comScore suggests that might be closer to the truth than many believe. The latest estimates are that, in rural areas, broadband penetration is at 75 percent. If one assumes some rural users still use dial-up, that suggests perhaps 85 percent of rural households now use the Internet.

In 2007 the U.S. Department of Agriculture Economic Research Service estimated that 63 percent of all rural households had at least one member access the Internet.

If rural broadband penetration now is up to 75 percent, as comScore indicates, that would imply that Internet usage is at least that high, in other words.

That would seem to have implications both for setting of national broadband policy and policy in rural areas. For starters, the new data suggest that rural broadband is growing robustly, without any additional government activity.

Some might argue that broadband usage remains lower in rural areas than in metro areas, and that remains true. Metro broadband penetration is at 89 percent. But virtually every study has shown that Internet usage also is lower in rural areas. The point? Lower Internet usage obviously means lower broadband access penetration.

One has to be careful with statistics, though. By definition, a household with no ability to access the Internet would not be an Internet-using household. So a better way to describe comScore’s findings are that, when wired facilities are available, rural households are buying broadband at rates not dissimilar to urban users.
That isn’t to say adoption is equal to urban rates, but that the gap is closing awfully fast.

Broadband penetration in U.S. rural areas increased 16 percent from 2007 to 2009, while metro area broadband penetration grew 11 percent, according to comScore.

In part, that is because rural markets have more room to grow. The analogy is wireless voice growth, which is highest in places such as India, China and Africa, where penetration is lowest.

“With low-speed DSL priced at about the same level as dial-up in many areas, there is little incentive for households to remain on dial-up,” says Brian Urutka, comScore VP.

Rural markets with a population less than 10,000 grew broadband penetration by 16 percentage points. Areas with population between 10,000-50,000 grew penetration 14 percentage points while metropolitan areas with populations of 50,000 or more grew penetration by 11 percentage points.

Critics sometimes say that even if access is not a problem, access speeds are, and that is an argument that makes sense. The issue there, though, quite often is the “middle mile” trunking between major points of presence and the actual rural communities.

Basically, the problem is not the Internet backbones, and not even so much the local access networks, as it is the trunking network to backhaul traffic to the Internet PoPs. Many rural ISPs find, for example, that they have access to a T1 or two T1s in the middle mile. That makes it tough to deliver faster broadband access to customers on the local access networks, for obvious reasons.

The Internet backbone is a firehouse. So are the access networks, for the most part. But the middle mile is a straw.

Solve the middle-mile problem and broadband access probably ceases to be an issue in many communities. Yonder Media CEO Craig Vallarino estimates that half the cost of building fixed wireless networks in rural areas is in the core network and middle mile.

The radio infrastructure represents about 20 percent of cost while customer premises investment represents about 30 percent of cost. In other words, it isn’t the access infrastructure which is the main investment barrier: the middle mile is.

That said, there still will be some locations so isolated that only a satellite connection really will ever make sense.

What Has Changed Since 2000

A few statistics will illustrate just how much has changed in the global telecom business since 2000. Prior to the turn of the century, most lines in service used wires and carried voice.

By 2007, 74 percent of all lines in service used wireless access or carried data, says the Organization for Economic Cooperation and Development.

Mobile alone in 2007 accounted for 61 percent of all subscriptions while standard phone lines have dropped to 26 percent. And the change has come swiftly: in just seven years.

Mobile revenues now account for nearly half of all telecommunication revenues—41 percent in 2007—up from 22 percent 10 years earlier.

Along with the change in access methods and applications is the sheer number of connections. The total number of fixed, mobile and broadband subscriptions in the member nations of the OECD grew to 1.6 billion in 2007, compared to a population within the OECD nations of just over one billion inhabitants.

To put that in perspective, consider that there were seven access paths in use in 2007 for every access path in use in 1980. That includes broadband, wireless and voice connections.

To put those figures in even greater perspective, consider that the percentage of household budgets devoted to communication expenses has climbed only slightly over the last 10 years. In most OECD countries, households generally spend about 2.2 percent and 2.5 percent of household income on communications, year in and year out, though one can note a slow rise since 1998.

The big exception is Japan, where household spending on communications is close to seven percent of household income. That might be something to keep in mind when making cross-national comparisons. It is true that Japan has very-fast broadband and has pioneered any number of mobile application innovations.

But Japanese households spend very close to three times as much as U.S. households on their overall communications. That’s worth keeping in mind. It always is difficult to make meaningful comparisons between nations.

Generally speaking, though, OECD consumers have added seven new connections for every existing connection in 1980, while spending about the same percentage of their incomes on those services. That’s an obvious example of an explosion of productivity.

Much has changed in the Internet access realm as well. Broadband is now the dominant fixed access method in all OECD countries. In 2005, dial-up connections still accounted for 40 percent of fixed Internet connections but just two years later that percentage had fallen to 10 percent.

Also, while many criticize the industry for retarding innovation and behaving as “nasty monopolists,” prices have tended to fall for virtually all communication services on all platforms.

“Over the previous 18 years, residential users saw the real price of residential fixed-linephone service fall roughly one percent per year while business prices fell 2.5 percent per year,” the OECD says.

Mobile subscribers also benefitted from declining prices between 2006 and 2008. The average price of OECD “mobile baskets,” representing a number of calls and messages per year that normalizes features and prices, fell by 21 percent for low usage, 28 percent for medium usage and 32 percent for the heaviest users over the two-year period.

User voice behavior also has changed. The number of minutes of communication per mobile phone is increasing while the minutes on fixed networks are decreasing. In other words, the mobile is becoming for most people the primary voice device while the landline is a backup.

Some might argue that ultimately has implications for pricing. In some real ways, the mobile is the “premium” device and a landline represents a supplemental service. That probably means the value is such that consumers ultimately will think it should be priced as a backup service.

Data between 2005 and 2007 suggest people are making fewer domestic calls on the fixed network in most countries, OECD says. When people do use fixed networks they are increasingly making calls to users of mobile phones.

This trend is well highlighted by Austria where the introduction of flat-rate voice telephony on mobile networks has shifted calls away from the fixed-line network. Voice traffic on Telekom Austria’s fixed network fell 13.3 percent in 2007 as a result of the shift to mobile
communications.

There was an OECD monthly average of 272 minutes of outgoing calls on fixed line telephones in 2007. This is down 32 minutes per month from 2005.

But there was an interesting landline rebound trend appearing recently in a number of OECD countries.

The number of PSTN minutes per line declined until 2005 when the numbers started rising again. For example, French minutes per PSTN line fell until 2004 when they started to increase.

One explanation is the shift in France to flat-rate national calls offered by a number of carriers. That suggests U.S. landline voice providers might stem some of the traffic erosion by offering aggressive, flat-rate, all-distance services within the domestic market, as VoIP providers generally do.

On the mobile side, the OECD average number of outgoing minutes of completed calls on mobile networks was 220 minutes per month in 2007, up 56 percent from 2005.

Subscribers in the United States make far more outgoing calls on mobile phones each month than any other country in the OECD. The average number of minutes per mobile subscription was 443 in 2007, more than double the OECD average. One might argue that is because of the reasonable cost of calling great distances. In Europe, many calls that would be domestic in the United States are international calls.

Broadband prices have fallen as well over the same time. OECD broadband prices declined significantly over the previous three years. Prices declined an average of 14 percent per year for DSL and 15 percent for cable between 2005 and 2008.

The average price of a low-speed connection (2 megabits per second or less downstream) was $32 per month in September 2008. At the other end of the scale, broadband connections with download speeds advertised as faster than 30 megabits per second averaged $45 per month.

Despite the falling price-per-unit trends, telecommunications services, about a trillion dollar market in the OECD, continues to grow at about a six-percent annual rate. That remains to be tested as we finish 2009, but there is reasonable historic precedent for continued growth, though perhaps not at a six-percent rate.

Regarding voice and new mobile and data services, we might as well note that landline voice appears to be a product like any other. That is to say, like any other product, it has a product life cycle.

To be specific, wireline voice looks like a product in its declining phase. Optical fiber-based broadband looks like a product earlier in its cycle, with 56 percent compound annual growth since 2005.

Digital subscriber line and cable modem services likely are further along their curves. DSL grew at a compounded rate of 21 percent per year while cable modem service grew at 18 percent rates between 2005 and 2007.

Mobile voice markets grew by 10 percent each year since 2005 but may be nearing saturation levels in a number of OECD markets. Mobile broadband clearly is early in its product life cycle.

Analog lines, used for voice, facsimile and dial-up Internet access, also seem to be in decline. The number of analog subscribers fell by 34 million between 2005 and 2007.

The decline of Internet dial-up services also means that many households no longer need a second analog line. The same might be true for in-home fax machines. And many additional lines once used by teenagers now have been replaced by mobiles.

Finally, the number of “mobile-only” subscribers has increased as well.

The penetration rate for fixed telephone lines (analog and ISDN) in 2007 was 41 subscribers per 100 inhabitants, which was less than the penetration rate ten years earlier.

Overall, the penetration rate rose from 43 percent in 1996 to a maximum of 47 percent in 2000, only to decline again to 41 percent in 2007. The year 2000 appears to be the turning point in the technological life cycle of fixed-line telephony.

Canada had the highest fixed-line penetration in 2007 with a penetration rate of 54 subscribers for every 100 inhabitants. Sweden, Luxembourg and the United States all

had penetration rates greater than 50 per 100 inhabitants. Mexico, the Slovak Republic and Poland had the lowest penetration rates in 2007.

There’s an interesting observation we can make about those figures. Nobody seems to argue that the United States has a big problem with voice service availability. In fact, availability is not the issue: consumer demand is the issue. One doesn’t hear people complaining about the lack of voice availability in Canada or Sweden. But penetration is in the 50 percent range, per capita.

Nearly all Internet users in the United States use broadband, not dial-up. And yet broadband penetration might well be higher than voice penetration, on that score. People who want the product generally buy it.

That said, there are some methodological issues here. “Per capita” measures might not make as much sense, as a comparative tool, when median household sizes vary. Adoption by households, adjusted to include people who use the Internet only at work or at public locations, or using mobiles, would be better.

Broadband adoption, by people who actually use the Internet, might make the most sense of all. Broadband is a product like any other. Not every consumer values every product to the same degree.

DSL network coverage is greater than 90 percent in 22 of the 30 OECD countries. Belgium, Korea, Luxembourg and the Netherlands report 100 percent.

Cable coverage is extensive in some countries such as the United States (96 percent) and Luxembourg (70 percent), but non-existent in others such as Greece, Iceland and Italy.

An analysis which followed the evolution of broadband plans over four years shows that speeds increased by 28 percent for DSL and 72 percent for cable on average between 2007 and 2008.

A survey of 613 broadband offers covering all OECD countries shows the average advertised speed grew between 2007 and 2008 across all platforms except for fiber. The average advertised DSL speed increased 25 percent from 9.3 Mbps in 2007 to 11.5 Mbps in 2008.

Advertised speed of course is not user-experienced speed at all times of day. Still, it offers some measure of changes in the product.

The average advertised fiber speed actually declined between 2007 and 2008 as operators introduced new entry-level offers at speeds below 100 Mbps.

For example, Dansk Broadband in Denmark offers symmetric broadband offers over fiber at speeds between 512 kbps and 100 Mbps.

The average fixed wireless offer in 2008 was 3 Mbps, up from 1.8 Mbps just a year earlier.

Fixed wireless speeds grew by 64 percent but remain only one-quarter of the average advertised speeds of DSL providers. The average cable offer is five times faster.

There are some insights about mobile broadband in the OECD’s analysis. The amount of data traffic carried over mobile networks remains small in relation to other broadband data networks.

For example, Telstra in Australia reported in a 2008 investor briefing that data consumption increased from 100 kilobytes per month per user in 2007 to 250 kilobytes in 2008. Compare that to the gigabytes consumed on landline connections.

Data from the Netherlands also show relatively low data traffic in the first half of 2008.

Between January and June 2008, Dutch mobile broadband subscribers downloaded 358 gigabytes over mobile networks.

It is possible to calculate an estimate of mobile data traffic per 3G subscriber per month in the Netherlands by making a few assumptions. If the ratio of 3G to total mobile subscriptions in the Netherlands is equivalent to the OECD average of 18 percent, then the average amount of data traffic per 3G subscription per month in the Netherlands works out to be only 18 kilobytes per month.

Of 52 mobile broadband packages evaluated in September 2008, the average headline speed was 2.5 Mbps. Subscribers to these plans were allowed an average of 4.5 gigabytes of data traffic per month.

Much has changed in the global telecommunications business in just seven years. Landline voice might still provide the revenue mainstay, but it is a product in the declining stages of its life cycle.

Even mobile voice, DSL and cable modem service are products at something like the peak of their cycles.
Mobile broadband and optical fiber access are early in their product life cycles. Mobility is becoming the preferred way of consuming voice communications.

That’s an awful lot of change in just seven years. And we haven’t even discussed VoIP, over-the-top applications, content or video.