Incumbent Telco VoIP Transition is Not Technology-Led

The fact that AT&T has asked the Federal Communications for a definite date to shut down the public switched telephone network is, like most regulatory filings made in Washington, D.C., more complicated than it might appear.

Virtually all telecom service provider executives believe IP voice is the future, whether in the mobile or fixed domains. But the economics of the transition are complicated, at least for an incumbent provider.

Attackers, such as cable companies or independent VoIP providers, have no installed base of customers to cannibalize. Incumbents most certainly do, and that makes all the difference in perspective.

A Verizon executive recently noted that, “at this point in time, the business case does not support a technology-led migration off of the PSTN with the combination of land line loss, the economy, competing priorities and competitive dynamics.”

The key phrase is "technology led." Cable digital voice, Skype and Vonage build on VoIP: the technology directly supports the business case.

For an incumbent telecom provider, the technology in some cases harms the business case. To the extent that VoIP services largely replace an existing service with no incremental revenue, added investment is not met by added revenue. To the extent that VoIP services are priced lower than the voice services they replace, the business case is negative.

Under such circumstances it is rational to harvest PSTN voice as long as possible, despite market share losses. At some point, the logic reverses, however. As the fixed costs of the old PSTN are shared over a smaller base of customers, it will at some point be advantageous to switch to IP voice, strictly on the basis of operating cost savings.

That point has not yet been reached, but it is inevitable. The issue right now is what regulatory regime will apply to incumbents as that transition occurs. And one might argue that is the real point of the AT&T request for the FCC to specify a firm timetable for shutting down the PSTN.

The replacement of PSTN technology with IP telephony also creates an opportunity for new rules about carrier obligations that directly affect the costs of providing such service. That is why the AT&T request also argues that legacy rules must be altered as the transition is made.

Those rules are arcane and of little visible consequence for the typical consumer user of fixed voice. But they have enormous impact on the voice business case, as viewed from an incumbent perspective. Basically, all the rules that govern how networks compensate each other for terminating traffic are the heart of the matter.

So incumbent sunsetting of the PSTN will not be "technology led." The institutional and business frameworks remain the key issue.

Broadband Stimulus Won't Change Much, Firm Says

Some observers seem to have believed the "broadband stimulus" program, as helpful as it will be for some organizations and service providers, would somehow "fix" a "broadband" adoption problem in the rural and some other "underserved" areas of the country. It appears reality is setting in.

"The bottom line is that the stimulus money is going to change any of the access issues," says Robert Rosenberg, Insight Research Corp. president. "It is far to few dollars to make any impact."

But "access" is only part of the "problem." In fact, Insight Research says, there are four different kinds of households that must be considered when looking at broadband "adoption" and "availability," which are quite different issues.

There are households "unable to buy" broadband service, at least from a terrestrial provider (most analysts seem to forget that there are two national providers of satellite broadband). There are households that can buy broadband, but choose to buy dial-up service.

There are households that do not own computers and households that own computers but do not use the Internet.

"I don't want to over-play the 'I can't buy it' issue, says Rosenberge. "Yes there is some of that, but it is also the issue of 'no computers' or 'dial up is fine for me,'" he says.

Insight says 60 million U.S. homes buy broadband access service, while 12.6 million homes buy dial-up access, for a total of 72.6 milliion Internet access buyers.

Insight Research says that if one adds up the households without any broadband service at all, plus dial-up households, perhaps 58 million households, or 49 percent of all U.S. households, potentially are candidates for broadband service and have not yet bought it.

Insight Research estimates that at least 12 million rural and non-urban market households do not have access to any broadband service (terrestrial) due to the lack of supporting terrestrial infrastructure. Given a minimum cost of $1,500 per household, it is easy to see that the price tag for expanding broadband access to 12 million new households could exceed $18 billion.

By definition, the funding available under the broadband stimulus program is just a bit over $7 billion, and that includes funding for middle-mile projects, computing centers and other projects that do not directly add new broadband access capability. In fact, only a theoretical $6.4 billion actually is available for infrastructure.

Insight Research projects that non-governmental funding will provide the majority of the
growth in broadband penetration for the next five years.

With an estimated 40 million households still lacking broadband access by year-end 2014, the $6.4
billion in government funding would allow for an investment of $164 per household to provide broadband access to these non-broadband households.

The availability of such a small investment amount per household casts serious doubt that any significant expansion of broadband access will result from this government action, Insight Research says.

At the current estimate of $1,500 per household, at least $60 billion would be needed to deploy universal broadband access across the United States for 40 million households.

The broadband stimulus will not change much, it appears.

Amazon Sells More Kindle Books than Physical, On Christmas Day At Least

In a milestone of sorts, on Christmas day, Amazon sold more Kindle books than physical titles, the company says.
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But Kindle content sales have a problem akin to YouTube's similar problem. The device and application are popular, and getting more traction. But the company loses money on new releases and makes only a modest amount on older titles, thus losing an estimated $1 per Kindle book sale.

The old adage about losing money on a sale, but making it up in volume does, in this case, have a logic to it. If Amazon can make its appliance and service popular enough, if it starts to drive huge volumes, then content owners will have more incentives to cut Amazon better deals on wholesale access to titles.

Over time, that should allow Amazon to improve its margins. So the big issue, long term, is whether much-lower wholesale prices will drive incremental sales volume high enough to create a big new business. Some observers speculate that at retail prices are cut to $2.99 or $3.99 per copy, sales volume should soar.

Smaller gross sale amounts, but much-higher volume, could create a more-attractive business case for Amazon and its partners.

Small Businesses Challenged by Social Networking

As often is true in the communications business, tools that large enterprises find useful and helpful are not necesarily so helpful or useful for small businesses. Social networks likely fall into that category.

A survey of small business executives by Citibank, for example, found owners and managers giving short shrift to social networks as a help for their businesses.

The survey of 500 small business executives across the United States by Citibank / GfK Roper found 76 percent of respondents saying they have not found social networking sites such as Facebook, Twitter and LinkedIn to be helpful in generating business leads or for expanding their business during the last year, while 86 percent say they have not used social networking sites to get business advice or information.

The survey found that general search engine sites such as Google and Yahoo! trump small business-focused sites and the WSJ.com as destinations for small business owners to seek business advice or information. 61 percent of respondents say they rely on these search engine sites.

"Our survey suggests that small business owners are still feeling their way into social media, particularly when it comes to using these tools to grow their businesses," says Maria Veltre, Citibank EVP. "While social media can provide additional channels to network and help grow a business, many small businesses may not have the manpower or the time required take advantage of them."

That's a lesson even some mid-sized companies already have encountered. It isn't that social networking takes much capital or imposes much operating cost. What it does require is time. So the typical pattern is that a firm launches a social networking effort of some sort with time borrowed from executives and professionals who are very busy and scarcely have time to tackle the other issues on their agendas.

Over time the effort dwindles. That's one reason few small businesses have made sustained and vigorous social networking efforts.

One trend confirmed in other studies is that small businesses are making greater use of Web sites to support their business operations, marketing and sales.

About 42 percent of small business owners and managers reported that in the past year they have made greater use of their company's Web site to generate business leads and sales, though.

Among companies with 20 to 99 employees the percentage rises with 57 percent saying they have made greater use of their Web site.

Survey respondents are also using email marketing (28 percent) and online advertising (25 percent) to generate business leads and sales.

But the evidence on how well social networking works for lead generation is contradictory, so far.

A recent survey by Ad-ology found lead generation is the biggest benefit of social networking for U.S. small businesses, cited by one-half of respondents as being the case. Social networks were also considered a good way to keep up with the industry and monitor online chatter about the business.

Small businesses rated Facebook the most beneficial social networking site, with 33 percent of respondents reporting it was at least somewhat helpful. It was also the social network most likely to be used. Use of LinkedIn was less common, but the business-oriented site was claimed as beneficial by 21 percent of small businesses, compared with 19 percent that said the same of Twitter.

The biggest roadblock, however, was the perception that “our customers do not use social networks,” which 31 percent of respondents said they believed.

And as has been the case noted above, nearly 50 percent complained that they did not have the time or staff available to do a good job with social network marketing.

Vonage World Mobile Launches

Users of the iPhone, BlackBerry and iPod touch can subscribe to Vonage World Mobile, a new global calling feature available for "Vonage Mobile," Vonage's mobile calling application. Vonage World Mobile provides customers with unlimited mobile international calls to over 60 countries for one flat monthly rate when calling from their mobile device.

The service works on cellular or Wi-Fi (iPhone), just Wi-Fi for the touch and only using mobile spectrum for the BlackBerry.

Current Vonage World residential customers will receive a 40 percent per month discount on their home service when they buy Vonage World Mobile.

Vonage World Mobile costs $24.99/month and is available as a free download at www.vonage.com and the iTunes App Store.

Mobile Terminations Now Exceed Fixed

Mobile subscribers have become a powerful force in the international voice market. In 2008, mobile-originated international traffic grew 19 percent, and accounted for 36 percent of total international traffic, up from 32 percent in 2007, according to TeleGeography.

Mobile terminated traffic grew 18 percent in 2008 and accounted for 48 percent of international traffic terminated in 2008. TeleGeography projects that mobile terminated traffic will exceed traffic terminated on fixed lines in 2009.

If you want to know why Sprint is selling "no incremental cost" calling to any domestic U.S. mobile, that is one of the reasons.

That would be a first. Up to this point, more calls have been terminated on fixed phone lines. To be sure, more calls still are originated on fixed lines than mobiles, but even that gap is narrowing.

Mobile phone subscriptions overtook fixed lines in 2002, TeleGeography notes.  By 2008, there were four billion
active mobile accounts globally, accounting for 77 percent of global phone lines. In recent years, growth has shifted to developing countries. Mobile subscriber growth in Africa has led the world in recent years, growing 35 percent in 2008 after having increased 39 percent in 2007.

While growth rates in Africa are tremendous, the subscriber base remains very small—mobile penetration in Africa is still only 39 percent.

Still, India gained 112 million new mobile subscribers in 2008, a net increase that exceeds the total number of mobile subscribers in Germany, says TeleGeography.

China gained 89 million mobile subscribers in 2008, and Brazil, Indonesia and Vietnam all gained more than 30 million mobile subscribers. Conversely, mobile subscription growth in more mature markets has slowed.

Good News for VoIP, Bad News for Wired Telecom Providers

"VoIP" was the "industry of the decade," according to IBISWorld, which says the industry earned that accolade because of its 1,655 percent growth rate between 2000 and 2009. IBISWorld notes that VoIP, as a new industry, only began to earn any revenue in 2002, so it is starting from a "zero" base.

Wireless telecommunications ranked eighth for industries of the 2000 to 2009 period, posting revenue growth of 183 percent.

IBISWorld also predicts VoIP will show the most revenue growth in the coming decade as well, growing 150 percent between 2010 and 2019.

The bad news for the 2010 to 2019 period is that wired telecommunicatons carriers will show negative 52 percent revenue growth. Telecommunications resellers likewise will show negative 26 percent revenue growth over that same period.

Public Wi-Fi: Smartphones Driving Usage

Originally envisioned as a for-fee service used by users who wanted Internet access for their notebooks, public Wi-Fi hotspots increasingly are used by smartphone users.

As a percentage of total sessions, handheld access increased from 20 percent in 2008 to 35 percent in 2009, according to In-Stat.. By 2011 handhelds are anticipated to account for half of hotspot connections.

There are lots of reasons for the trend. The number of devices equipped with Wi-Fi capability is growing fast. In-Stat estimates that, from 2007 to 2008, Wi-Fi-equipped device sales inreased more than 50 percent. Service providers also are encouring users by offering Wi-Fi hotspot access as an amenity to their fixed broadband, smartphone or PC card customers.

More devices able to use Wi-Fi, plus a "no incremental cost" charging model are boosting activity. The other development is use of devices other than PCs and phones that can use Wi-Fi. The Apple iPod "touch" is perhaps the best example, but In-Stat points out that shipments of Wi-Fi-enabled entertainment devices, such as cameras, gaming devices, and personal media players, will increase from 108.8 million in 2009 to 177.3 million in 2013.

Will Mobile App Revenue Decline in 2013?

Mobile application downloads, mostly driven by mobile app stores, will reach about five billion in 2014, ABI Research predicts, up from 2.9 billion in 2009.

Despite the proliferation of apps, the firm expects sales to start declining in 2013 as free or ad-supported versions of "must-have" apps undercut the paid ones.

That is perhaps the single most intriguing prediction, as it tests, to a certain extent, both developer ability to create compelling for-fee apps as well as the much-discussed "freemium" business model, where some applications or functionality are given away for free and additional functionality is added "for fee."

In part, ABI Research expects revenue from mobile app sales to decline by 2013 due to competition, which will lead to downward pressure on application prices.

But ABI Research also believes “must-have” applications now sold in app stores will face competition from free or advertising-supported substitutes. This has already started to happen, with the launch of Google’s free turn-by-turn navigation service, says Bhavya Khanna, ABI Research research associate.

As with all such predictions, it might turn out to be partly right, partly wrong. Music, games and other entertainment apps likely will be able to charge fees. The same likely will be true of business, utility, content and productivity apps.

The analogy probably is today's software business. Widgets are free. But lots of other utility, productivity and content apps are sold.

To be sure,  GPS-maker TomTom recently cut the $100 price of its iPhone app in half as a result of Google launching its own free Android counterpart. The ways people acquire GPS capability likely will change over time, it is true. Some people will want stand-alone devices, others will buy such capability as a built-in part of their smartphone purchase. Some will pay for fully-featured apps while others might be willing to use free or low-cost apps.

Some for-fee apps will face pressure when they are confronted by companies such as Google that have some other revenue model that allows them to subsidize functionality other providers rely on as their core revenue stream.

Users who regularly download paid apps spend approximately $9 on an average of five paid downloads per month, AdMob noted in July 2009. People do not seem to mind applets that cost less than $2 each. That suggests, at least so far, an emphasis on micro apps as the revenue driver for mobile app stores. That is a different market than most "shrink wrapped" apps sold today using other channels.

Still, there is a chance of disruption. Ask any telco what happened when Skype, Google Voice and other IP-based firms were able to provide voice calling functionality because it was not their legacy business.

Some for-fee providers likewise will face pressure from competitors that have lower cost structures. But that's a generic business problem. Ask any executive from an established grocery chain what they had to do when Wal-Mart showed up in their local market.

But not every conceivable application will face those problems. Consumers will pay for valuable products, and app stores likely will prove an important way for innovators to sell valuable functionality, at relatively low prices, much of the time.

We likely will see lots of new revenue and business models develop, and app stores will allow creators to sell their products at lower prices than possible before. So some of us might not agree that app store sales revenue will decline, ever.

Among other findings, ABI Research predicts that Android's share of the market will grow from 11 percent to 23 percent over that same period. "This rapid growth is driven by the mass adoption of the Android OS by both vendors and consumers from 2009 onwards," says Bhavya Khanna, ABI Research research associate.

There are now more than 14 phones that run the Android OS, and many more will launch in 2010. This, coupled with the rollout of application stores from both smartphone vendors and network operators, will see the iPhone’s share of the total market shrink between 2010 and 2014,” says Khanna.

64% of U.S. Broadband Connections Now are Mobile

There are more mobile broadband subscriptions in service in the U.S. market than fixed line.

The CTIA notes that there are now 103 million mobile broadband customers in the United States, according to Informa Telecom and Media. There are more than 58 million fixed line subscribers, according to Insight Research Corp.

By that measure, there are 161 million U.S. broadband subscriptions. So mobile connections represent 64 percent of broadband connections now in use. And mobile broadband has exploded over the last 18 months.

In June 2008, mobile broadband accounted for more than 59 million high speed subscribers, about 45 percent of all broadband connection in the United States, according to the Federal Communications Commission.

Clearly, any effort to create a national U.S. broadband policy would have to recognize the leading role wireless now plays.

Google, QR Codes and Mobile Tagging

You might wonder why Google is interested in "QR codes," two-dimensional bar codes that can contain any alphanumeric text and often feature URLs that direct users to sites where they can learn about an object or place.

Camera-equipped mobile devices provide the "reading device." Mobile always are with a user, so the QR reader software allows people to get information about anything with a QR code, wherever they are. Combine that feature with Google's advertising revenue model, location-based services and one ends up with the mobile equivalent of "tagging."

Beyond the ability to create richer information about places and things, widespread QR creates a richer platform for mobile advertising. That is all the incentive Google needs to push the technology.

The codes are increasingly found on product labels, billboards, and buildings, inviting passers-by to pull out their mobile phones and uncover the encoded information. QR codes can be used in newspapers, magazines or clothing.

Tracking information for products in industry, routing data on a mailing label, or contact information on a business card are other potential applications.

QR codes also are part of the move to "augmented reality," providing richer information and context about the physical world around any mobile user, where they are. Again, the marketing possibilities are obvious.

What Business is Google In?

Looking back from where we are, and recalling the vigorous debates analysts and observers once had about "whether Google wants to be a phone company," it now appears the original question has no simple, unambiguous answer.

Does Google want to be a regulated common carrier providing communication services to consumers and businesses? No. Does Google want to be a provider of Web-enabled IP telephony services? Yes. That's what Google Voice does.

Does Google want to be a "Skype-like" provider of international calling services? Perhaps it was not originally thinking it wanted to do so, but Google Voice now supports for-fee global calling from whatever handsets Google Voice users wish to employ.

Does Google want to be a facilities-based wireless services provider? No, but it has an investment stake in Clearwire. Does Google want to be a mobile phone manufacturer? No, but it is increasingly partnering with others, including hardware and service provider partners, to create new applications and business practices within the mobile industry, planning to introduce the "Nexus One," a Google-branded open and unlocked GSM phone, in 2010.

The point is that there is no unambiguous answer to any of these questions. Google slowly has been adding new roles in the communication ecosystem, but primarily to increase its core business model of indexing information and creating advertising revenue streams around the ways people use information.

To "answer" the decades-old question about whether an "ad-supported" telephony model can be created, again we are left with an ambiguous answer. The consumer voice apps Google provides are partially supported by end user fees, while the business-focused "Google Apps" productivity suite primarily is supported by user fees.

It remains unclear whether any sustainable "telephony services" business model can be 100-percent ad supported. But it seems likely such an effort can be partially ad supported, just as cable TV service provider evenues are partially ad supported.

So here's the next question: Will Google Voice, still in private beta, be configured as a small business service, much as Google Apps comes in both a consumer version and an enhanced business version? Michael Arrington at TechCrunch thinks that will happen.

"From what we've heard, Google is very seriously planning to add a version of the Google Voice product to its Apps suite of applications for businesses," says Arrington.

So far it sounds as though the service will be most applicable to the very-small business setting, as the likely deployment will feature a single inbound line and then mapped extensions that will redirect calls to a home business line, mobile or VoIP device.

The key here is management of the single trunk line. To keep the single trunk line available, Google Voice would have to connect an inbound call to the virtual extension, creating a direct connection between the caller number and the virtual extension, and then release the trunk line.

The same thing would have to be done for outbound calls, allowing the Gooble Voice virtual number to do the outbound dialing, setting up the connection between two physical phone devices, and then releasing the Google Voice trunk.

If that isn't done, there will be danger of high "line is busy" blocking.

Still, one would guess that the inevitable question--does Google want to be a provider of communications services to small business--likewise will wind up being only ambiguously answerable. The only unambiguous observation is that Google now is well entrenched in the mobile, communications, application, advertising, IP communications spaces.

It is part of the ecosystem, but uncomfortably (for other ecosystem partners) unconfined to one role in the full ecosystem. Perhaps a better way of phrasing the question is: "Does Google want to make itself the center of a new ecosystem?". There's likely a single answer to that question.


Google started out as a search engine, and have since expanded, through product development and acquisitions, to include services in every link of the information chain, says Jay Neeley, a Web strategy consultant. So one way of looking at how Google might see itself is that it operates in core parts of the information ecosystem.

As part of its activities in the "Internal Information Creation" segment, Google hosts or enables the creation of content.
But Google also is heavily involved in the "External Information Creation" segment, indexing information it has not created.

In the "Information Usage" segment, Google facilitates ways to share, edit, talk about, use, remix, and do all kinds of other things with information. In the "Information Reception" segment, Google offers a variety of ways for users to access and keep track of information.

"Information Aggregation" is another part of what Google does, culling information by popularity or usefulness and
making that information available in other ways, such as in Google Maps. "Information Analysis" is part of the analytics portion of the information business.

It just so happens that to extend its information business, Google might want to do lots of other things that impinge on other existing businesses in the communications, entertainment, applications, software, media and hardware spaces.

AT&T to Add an Android?

Earlier in 2009, Motorola indicated that it plans to release as many as 20 handsets in 2010 running Google's Android platform.

It appears AT&T will be launching at least one Android device in 2010, said by some observers to be called the "Backflip" or "Enzo,"

The device is rumored to run "MOTO BLUR," software that syncs Facebook, MySpace and Twitter updates with no log-ins and no apps to open.

Perhaps you would expect this, but at least some rumors suggest the AT&T Android device will not come preloaded with any Google apps except for Maps. Some people won't like that, but the point is that users can buy Androids that do feature Google apps, either on other Android devices sold by AT&T, or Android devices sold by other carriers. And there will be the Nexus One as well.

The whole idea of "open" neworks and devices is that diversity will happen. Some people might not like AT&T "dictating" what software load is on the device when purchased. Others might simply say that it is an option. If any user doesn't like it, don't buy it. That's the whole idea of the benefits openness brings. Users get choice.

The "Opus One" is said to be Motorola's first iDEN-based Android phone. That means it will work on Sprint Nextel's iDEN network and offer features such as walkie-talkie calling. According to the Boy Genius, it will run Android 1.5 with iDEN service enhancement.

Twitter Appears to be Profitable

Twitter appears to be profitable, on the strength of new deals with Google and Microsoft to allow indexing of Tweets, as well as lower telecom expenses, Bloomberg BusinessWeek says. As important as that is for Twitter and its investors, it also is good news for Twitter users, who now can have less concern that Twitter will vaporize for lack of a sustainable business model.

To be sure, the long-term model still must be created. But Twitter now has more breathing room to do so.

In exchange for making tweets, searchable on Google, Twitter will receive about $15 million, while the Microsoft partnership is worth about $10 million.

Twitter also achieved profitability by reducing expenses, particularly the money it used to pay mobile providers to disribute tweets as text messages.

Apparently Twitter has managed to renegotiate so many deals with carriers that the company pays far less for the services.

By some estimates, Twitter now requires about $20 to $25 million in operational costs. That means the two search deals basically cover Twitter's operational expenses, at least for the moment. That will allow Twitter to spend time creating an ad revenue stream and commercial services that would allow enteprises to analyze traffic, for example.

Is Broadband "Satisfaction" Directly Related to "Bundle" Savings?

The conventional wisdom is that high-speed broadband access is becoming a commodity bought by consumers primarily on the basis of speed and price.

A recent survey by Parks Associates also showed that there is not all that much difference between consumer satisfaction with any of the broadband network types.

With cable modem service and digital subscriber line as the baseline, consumers said they were a bit more happy with fiber to the home, and a bit less happy with either satellite broadband or fixed wireless broadband.

So the differences are a matter of performance, or speed or price, right? Well, maybe, and maybe not.

The Parks Associates survey also found that consumers were more satisfied with any broadband service purchased as part of a bundle, less happy when broadband was purchased a la carte. Since the primary end user benefit from buying any bundle is the cost savings, one might conclude that consumer satisfaction has less to do with the technical parameters (speed and reliability) and mostly to do with "saving money."

Since satellite broadband and fixed wireless services rarely are purchased as part of a multi-service bundle, that fact alone would explain lower satisfaction with either satellite or fixed wireless services.