"Digital Divide" is Closing

Policy advocates and policymakers have worried about a "digital divide" in U.S. Internet usage, as much as global policymakers have worried about the difference between communications use in developed and developing regions.

But a new study by eMarketer suggests that the U.S. digital divide is closing fairly rapidly. By 2014, in four years, Internet usage rates by Americans of black ancestry will just about equal rates of U.S. "whites" today, while Hispanic American use of the Internet will rise to within six percentage points of the current U.S. average usage by "white" Americans.

That is not to say rates will be identical, but the point is that almost nobody thinks "white" Americans generally are victims of a "digital divide" today, though there are more issues in rural or isolated parts of the country. In fact, most of the non-adoption factors now are of a "demand" sort rather than a "supply" sort. In other words, most people who want broadband already buy it.

If by 2015 Americans of "black" or "Hispanic" heritage have those same rates, the significance of the "divide" should be largely moot. That is not to say the issue is completely moot, but closing the last percentage or two of gap in any endeavor always is a matter of effort and reward. And since the primary issue these days is demand, not supply, some circumspection might be in order, in terms of the amount of effort expended, compared to the potential benefits. The markets, and consumers, seem to be doing a relatively good job, unaided, in terms of closing the digital divide.

Apple iAd Wants to Change "Ads that Suck"

It isn't clear whether the typical mobile ad created for Apple's new iAd network will be as immersive and interactive as the example Apple CEO Steve Jobs shows here.

But the example suggests what Apple would like to see happen: ads that are closer to entertainment than anything we've seen so far, incorporating interactive and gaming experiences, for example. To use the obvious analogy, today's ads are outside the content; in the "Toy Story" example the ads are part of the content, essentially.

The issue will be how talented advertisers will be, not so much Apple. Unless firms are willing to allow Apple to produce the "creative," as well as handle the placement, it is doubtful most ads will be this well done.

Telcordia Warns of Mobile Operator Marginalization

Broadband access is becoming a commodity, even for mobile service providers, who must figure out what else they can offer consumers once basic mobile broadband connections have become a feature purchased by the majority of mobile phone users.

The good news for mobile operators in many regions around the globe, data average revenue per user (ARPU) has quadrupled over the past six years and now is nearly half of voice ARPU.

But that product will saturate, as has fixed broadband, leaving mobile providers to look for the next wave of services and applications to sell.

"The popularity of video and other third-party over-the-top services are breaking mobile broadband networks and business models because they siphon off revenue while adding to the network's workload," says Pat McCarthy, Telcordia VP.

Since Telcordia believes that effort must include measures to differentiate3 access services, it is obvious why extending "strong" versions of network neutrality to wireless networks is so dangerous: it would close off most of the ways such differentiated service can be provided.

McCarthy says operators must distinguish between different types of traffic and prioritize them. For example, personalized end user services that generate revenue for an operator and its business partners should enjoy priority access to network resources, while zero-revenue OTT content should be managed with a tiered bandwidth management solution, he says.

Most-if not all-service providers undoubtedly would agree, a fact that illustrates why network neutrality rules or even reregulating broadband access as a common carrier service would be so devastating.

"An operator's need to manage bandwidth is the first step toward realizing a profitable business, and they must build on that capability, forming active partnerships with end users and their choice of content providers, to get their fair share of the profits," says McCarthy.

Already, mobile broadband traffic continues to grow, but revenues aren’t keeping pace, McCarthy says.

Perhaps the biggest threat of all comes from over-the-top players, McCarthy notes.  Operators will be required to make all the investments in infrastructure and provide a reliable customer experience. And yet, if they aren’t careful, they will absorb the bulk of the costs, while allowing third-party content
providers to reap the biggest profits.

Print content and video content providers say they have learned the same lesson from the music industry's experience with online music. Telecom industry executives probably have to learn their own lessons from the experiences of the fixed-line broadband experience.

None of that will be easy, as application providers largely will resist. But revenue sharing across the ecosystem is the only stable way forward, where maximum innovation and network investment can occur.

"For a time, while the priority is building out the mobile broadband infrastructure, there may be a
competitive advantage in offering a better network," McCarthy says. "But soon enough, the pipe will become a commodity, and the long-term potential revenues will be in the delivery of services, applications, and other user-demanded content."

Ecosystem conflict is inevitable as the new value chains are constructed. But service providers can help themselves by figuring out ways to leverage assets they already have, and offerng them to business partners, for example. It won't be easy, but it is necessary.

Consumers Will Decide what iPad Is, Not Apple

It isn't clear yet whether the Apple iPad is a "mobile" device used outside the home, or a "cordless" device used inside the home. The notion that the iPad is a device "between a smartphone and notebook" suggests a "mobile" device that can be used both outside the home and inside it.

The "cordless" use case is different: the iPad ultimately winds up being a media consumption device mostly used around the house as a shared device, where a mobile phone or a netbook or notebook tends to be a "personal" device used by discrete people.

Imagine something that lies around on coffee and end tables, on kitchen counters and gets picked up and used for various reasons on a casual basis, but which is a "shared" device rather more like a cordless phone  or remote control. That implies a lower price than currently is the case, but everybody expects that to happen.

Nobody can say for sure whether these, or even other undiscovered use cases will eventually emerge. In the near term, the iPad might wind up being used as a game platform, an e-book reader, a video consumption device and an educational content platform, at least if user consumption matches the current supply of applications in the App Store.

According to App Store analytics company Distimo, out of 2,385 iPad-only apps, 833 of them are games, about 35 percent of all the iPad-only apps currently available in the App Store.

The other popular categories are ‘entertainment’ with 260 apps, and ‘education’ with 205 apps.

But the emphasis on games and entertainment also is true of the iPod as well. In fact, 70 percent of the most popular applications on the iPhone are published in entertainment and education categories, compared to 40 percent on the iPad.

About  83 percent of applications on the iPad are offered on a paid basis, while 73 percent of all applications are offered "for fee" on the iPhone. The average price of all paid applications that are solely compatible with iPad is $3.61 compared to $3.55 for applications compatible with iPhone.

Medical applications are most expensive on both the iPad ($9.39) and iPhone ($10.73). On the contrary, Education ($9.10), Healthcare & Fitness ($4.41), Music ($6.86) and Sports ($4.95) applications are significantly more expensive on the iPad.

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"Most Mobile Ads Suck," Says Steve Jobs

You can count on one thing whenever Apple does something new: it will always say the old way of doing things "sucks." And that's what Steve Jobs, Apple CEO, says about most mobile advertising, in introducing  iAd, a new mobile advertising platform that will be built in to the new iPhone operating system, iPhone OS 4.0.  In typical Steve Jobs fashion, the Apple CEO said "we think most of this kind of advertising sucks." 


Apple tends to reshape just about every market it enters, so its entry into mobile advertising has to be noted. Just as signficantly, iAd is expected to provide a monetization vehicle for many developers of free apps for the Apple App Store, driving the apps business, not just marketing. 


"When you look at ads on a phone, it's not like a desktop," says Jobs. "On a desktop, search is where it's at." 


"But on mobile devices, that hasn't happened," says Jobs. "Search is not happening on phones; people are using apps."


"And this is where the opportunity is to deliver advertising is," he argues.


"The average user spends over 30 minutes every day using apps on their phone," he says. "If we said we wanted to put an ad up every three minutes, that's 10 ads per device per day." Assuming 100 million devices in the user base, that's one billion ad opportunities per day, Jobs noted.


"This is a pretty serious opportunity, but we want to do more than that," says Jobs. "We want to change the quality of the ads too."


"What we want to do with iAds is deliver interaction and emotion," says Jobs, and he undoubtedly is thinking about video and audio. Apple will keep 40 percent of ad revenue, and give developers whose apps host the ads 60 percent of ad revenue.

Studios Throw Blockbuster Video a Lifeline

It is not unheard of for one or more content providers to favor one channel, or even one contestant within a channel. As a rule, theatrical exhibition gets priority for new movie releases, with a standard set of release windows for other channels. In recent decades, the home video and DVD windows have changed the most, since home video and DVD channels now represent the single-biggest source of revenue, by channel.

But there are stresses in the channel as the revenue from home video and DVD, especially DVD purchases, is declining. In the once-hugely-important, and now simply important video rental channel, Blockbuster, historically the single most important video rental channel, and now the largest remaining place-based retailer, is struggling to survive, and seems to be getting a lifeline thrown to it by some of the leading stuidos.

Blockbuster recently got an exclusive deal with Time Warner, and apparently now has distribution deals with the Twentieth Century Fox Home Entertainment and Sony Pictures Home Entertainment that give Blockbuster an advantage: new release rentals will be available at Blockbuster, and not through Netflix or Redbox, about a month earlier.

Basically, that means Blockbuster will be able to rent new hit movies and releases on the same day they become available for purchase. Since each form of distribution satisfies part of the fixed demand for any new title (most people view a movie only once), it makes a difference in terms of sales volume that one channel partner has a month advantage.

The unusual new arrangement with Blockbuster shows just how important a distribution channel it is deemed to be. So appparently concerned are studios about the company's survival that some are giving Blockbuster a significant sales advantage over the rival video rental distributors.

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Too Early to Make Judgments About iPad, Nexus One

Some accounts of Apple iPad sales have suggested sales were disappointing for the first full day. Similar reports have accompanied the launch of the Motorola Droid and the Google Nexus One. The point is that observers are spending way too much time commenting on sales over a few days or even months.
Some trends take many months to years to emerge. According to comScore, 45.4 million people in the United States owned smartphones in an average month during the December to February period, up 21 percent from the three months ending November 2009.

RIM was the leading mobile smartphone platform in the U.S. market with 42.1 percent share of U.S. smartphone subscribers, rising 1.3 percentage points versus the prior period.

Apple ranked second with 25.4 percent share followed by Microsoft at 15.1 percent, Google at 9.0 percent (up 5.2 percentage points), and Palm at 5.4 percent.

Google’s Android platform continues to see rapid gains in market share as more Android-compatible devices are introduced to the market. So the point is not necessarily how well the Nexus One sells, but whether Android devices are taking more share in the market, which clearly is the case.

According to comScore, over the three month period between November 2009 and February 2010, Android gained five share points, while Apple was flat, Palm lost nearly two percent and Microsoft lost four share points. Research in Motion gained about 1.3 share points.

Similarly, it doesn't matter how many iPads Apple did or did not sell on the first day. What matters is whether Apple can uncover a new device niche between smartphones and notebooks or netbooks, or whether it can redefine at least a sizable portion of the netbook and notebook markets.

Nobody can make such judgements after a day, or even a week or a month.

Court Deals Blow to Network Neutrality: Will FCC Overreach?

Wall Street Journal "Digits" video about the Overturning of Federal Communications Authority over broadband access services.

Small Business, Consumer Portions of Economy Still Struggling

Virtually all observers now say the U.S. economy has past the bottom of the recent economic recession. The common understanding in financial markets also is that the markets climb a wall of worry. And in the small business and consumer segments of the economy, there is plenty of worry.

The National Federation of Independent Business Index of Small Business Optimism lost 1.3 points in February, falling back to the December 2009 reading of 88.0 (1986=100), only seven points higher than the survey’s second
lowest reading reached in March 2009 (the lowest reading was 80.1 in 1980:2).

Separately, analysts at Deloitte say rising tax rates, combined with declines in real wages and median home prices, drove the third straight monthly decline in the Deloitte Consumer Spending Index during February 2010.

To emphasize what that means, consider that "the persistence of Index readings below 90 is unprecedented in survey history," says NFIB Chief Economist William C. Dunkelberg. "Unprecedented."

The new NFIB survey confirms what other surveys suggest: there is a recovery under way, but it is painful. Employment per firm, seasonally adjusted, fell 0.13 workers, an improvement over the 0.5 workers per firm that had been lost every month for the previous fourteen months.

About 10 percent of the owners increased employment by an average of 5.0 workers per firm, but 19 percent reduced employment an average of 3.2 workers per firm, seasonally adjusted.

Over the next three months, eight percent plan to reduce employment and 13 percent plan to create new jobs, yielding a seasonally adjusted net negative one percent of owners planning to create new jobs.

The frequency of reported capital outlays over the past six months was unchanged at 47 percent of all firms, barely ahead of December’s record low reading. Capital spending is on the sidelines as is the demand for loans to finance these activities.

A revival of capital spending will require a significantly improved business outlook and some support from reluctant
customers. Plans to make capital expenditures over the next few months were unchanged at 20 percent, four points above the 35 year record low.

Four percent characterized the current period as a good time to expand facilities, down one point from January. A net negative nine percent expect business conditions to improve over the next six months, down 10 points from January.

Deloitte points out that real wages, exacerbated by rising energy costs, have been serving as a drag on consumer spending since December 2009. However, in February 2010, state and local tax increases and possibly weather-related weakness in home prices also contributed to a 7.8 percent dip in the consumer spending index.

Despite this recent downward trend, Deloitte still advises retailers to be prepared for an increase in consumer spending in the near future, though.

“Consumers have been resilient in the face of adversity and have gradually shown they are regaining their willingness to spend,” says Stacy Janiak, vice chairman and Deloitte’s US retail leader. “In the coming months, retailers should be prepared to respond to a potential uptick in activity, or risk having empty shelves when consumers are ready to replenish. Retailers that have systems in place to quickly analyze and respond to customer data may be better prepared to replenish inventory and stock the right assortment to capitalize on a release of pent-up demand.”

Unemployment claims have come down sharply during the past nine months, which historically has been a reliable signal of economic recovery. In the past month, however, claims have gone back up slightly.

Real wage growth, the biggest contributor to the Index until recent months, is down slightly compared to a year ago as energy prices are pushing up the price level and hurting the real purchasing power of modest wage growth.

The housing market deteriorated in the most recent month, possibly due to weather. Mortgage applications are declining sharply. The weakness in home prices could be a weather-related phenomena or it could be a sign that the economy is deteriorating after a brief second half bounce in 2009.

As we are a couple of weeks away from the start of the first quarter financial reporting season, observers will be looking for signs that sales and earnings are increasing at most reporting firms, especially as the year-over-year comparables should be favorable.

FCC Loses Net Neutrality Case on Appeal: No Authority to Regulate Broadband

Flash! The Federal Communications Commission does not have authority to regulate broadband services, the U.S. Court of Appeals for the District of Columbia Circuit has ruled.

The FCC had fined Comcast in 2008 for subjecting BitTorrent to traffic-management practices. The federal court has reversed a lower court decision, ruling that the FCC does not have authority to regulate broadband, in essence. The full text of the ruling is not yet available, but the decision potentially sets in motion a new direction in broadband regulation by the FCC, which now must either get new legislative authority from the Congress to regulate broadband services, or must take a potentially-divisive alternative approach: attempting to regulate broadband services as "common carrier" services.

That would set off a nuclear war between the FCC and telecom and possibly cable companies, who would feel compelled to fight the change with every weapon at their disposal. Should the FCC ultimately prevail, the nation will face years of ruinous lawsuits, bringing new broadband investment to a grinding halt as private investment drys up.

The FCC can appeal the decision, but the big question now is whether it is willing to risk nuclear war with the telecom and cable industries.

iPad Halo Effect on Netflix

Despite immediate reactions about sales volume for the new Apple iPad, it is way too soon to make an assessment of the device's importance. But it is not too soon to note that the iPad already is having some direct impact on other firms in the ecosystem. 

Shares of Netflix, for example, hit a 52-week high early this week to $80 a share after its app for Apple Inc.'s iPad became available. 

Netflix members can watch an unlimited number of TV episodes and movies on the new iPad at no additional cost. Subscriptions begin at $8.99 per month.

And though the iPad has been widely seen as a competitor to the Amazon Kindle, Kindle inventory is immediately available on the iPad, which should help sales of content, even if eventually reshaping demand for the Kindle hardware reader. 

Touch Screens Lead to Higher Device Satisfaction, Survey Suggests

Overall satisfaction among smartphone and traditional handset owners whose phones are equipped with touch screens is considerably higher than satisfaction of owners of phones that have other input mechanisms, according to J.D. Power and Associates. That likely comes as no surprise, given the impact the Apple iPhone has had on the entire handset business.

Among smartphone owners whose device has a touch screen, satisfaction averages 771 on a 1,000-point scale, nearly 40 index points higher than among those whose smartphone uses other input methods, such as a text keyboard.

In order of importance, the key factors of overall satisfaction with traditional wireless handsets are: operation (30 percent); physical design (30 percent); features (20 percent); and battery function (20 percent).

For smartphones, the key factors are: ease of operation (26 percent); operating system (24 percent); physical design (23 percent); features (19 percent); and battery function (eight percent).

Apple ranks highest in customer satisfaction among manufacturers of smartphones with a score of 810, and performs particularly well in ease of operation, operating system, features and physical design. RIM BlackBerry (741) follows Apple in the rankings.

LG ranks highest in overall wireless customer satisfaction with traditional handsets with a score of 729, and performs well in all five factors, particularly physical design, features and operation. Sanyo (712) and Samsung (703) follow LG in the rankings.

The study finds that both smartphone and traditional handset owners are increasingly using their phones for entertainment and sharing media. Among traditional handset owners, 25 percent indicate they frequently send and receive multimedia and picture messages, an increase of 25 percent from just six months ago.

Smartphone users are nearly twice as likely to share multimedia messages. In addition, nearly one-fifth (17 percent) of smartphone owners with touch screen-equipped handsets indicate they frequently download and watch video content on their device, which is significantly higher than the segment average.

Global Positioning System capabilities are a desired feature among both traditional mobile phone and smartphone users. More than one-third (35 percent) of traditional mobile phone owners say they want GPS features on their next handset purchase, while 15 percent of smartphone owners say they want GPS.

Some 60 percent of smartphone owners say they download third-party games for entertainment, while 46 percent say they download travel software, such as maps and weather applications.

About 31 percent say they download utility applications, while 26 percent say they download business-specific programs, indicating that smartphone owners are continuing to integrate their device usage into both their business and personal lives.

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Title II Debate Redux

If you were following debates over Federal Communications Commission policy relating to the Internet back in 2006, you might remember that we were debating whether the Internet, and broadband access, should continue to be regulated as other data services are, under Title I, or as common carrier services, under Title II.

The economic, financial and policy stakes are no less important this time around, as we might be setting up for yet another lengthy battle over how best to regulate broadband access. Lots has changed since 2006. Broadband access by fixed line networks has become a legacy service. Mobile broadband is about to explode. Application innovation arguably is more robust than it was in 2006, and almost all of the innovation has something to do with mobility, not the fixed line Internet.

Congress could "remedy" the situation by passing new laws directly the FCC to take regulatory control of broadband access services. A majority of Americans might regard almost any such congressional moves with derision, given the general contempt that institution now inspires in the overwhelming majority of Americans who are polled about their impressions of Congress.

Will FCC Take "Nuclear Option"?

With the caveat that there is no direct relationship between the Federal Communication Commission's "National Broadband Plan" and the separate issue of "network neutrality," the two arguably might be related. The reason is that
a U.S. Court of Appeals for the District of Columbia Circuit could rule that, in fact, the Federal Communications Commission lacks sufficient authority to regulate broadband services, for reasons of network neutrality or mostly anything else related to broadband access and applications.

The Court of Appeals challenge by Comcast argues that the FCC has no authority to censure Comcast for throttling Bittorrent access by its broadband access customers.

New and express authority could, of course, be granted by Congress, but that would take some time. And if the FCC has not current statutory authority to create rules for broadband services, does it have authority to push through a reallocation of 500 megaHertz of wireless spectrum, arguably the centerpiece of its national plan?

If it loses, the FCC can appeal to the Supreme Court. But the court might not take the case, and even if it does, it could take years to get a decision.

So the FCC might try to move based on its current authority to regulate "telecommunications" services such as voice. That would overturn all existing federal rules relating to data services, and would incite a nuclear war with telecommunications providers, just as a threat to regulate cable TV industry as a common carrier also would trigger an all-out legal war with the cable industry.

Whether the FCC wants to trigger first an industry uprising and then years of legislation that will introduce massive uncertainty into the market, is unclear. Certainly the FCC cannot be unmindful of the industry response.

That is why any moves to reclassify broadband access, now a "Title I" data service, as a "Title II" common carrier service, will be a nuclear option. It guarantees that the full weight of the telecommunications industry, and possibly the cable TV industry as well, could be marshalled against any such changes.

And since all FCC thinking now is that only private investment will lead to advances in broadband access, a nuclear war with those interests seems self defeating. Not only will the regulatory fights be huge and determined, but no matter what the outcome, lawsuits will fly for years, further obstructing any serious progress. In the five years after the bloody battle, we will be about where we are now, but five years will have passed.

At a time of tumultuous change in the larger business, a six-year to seven-year period of extreme regulatory uncertainty would be damaging in the extreme, partly because investors would balk at investing and service providers would stop investing in wired facilities.

That's thing about what we used to call "mutually assured destruction." The problem with nuclear weapons under the old "deterrence" doctrine is that actual use of the weapons means failure. The only logic to nuclear weapons is not to use them. Oddly enough, we might stand on the precipice of just such a failure.

Who Bought the First iPads?

Most of the people who lined up in New York and Minneapolis to purchase the iPad on Saturday were already committed Apple users, according to the results of a survey of 448 iPad buyers by Piper Jaffray analyst Gene Munster.

Fully 74 percent of respondents were Mac users (26 percent presently ownanother kind of PC). About 66 percent own iPhones.

As far as intended application use, 74 percent planned to use their iPads to surf the Web; 38 percent to read books; 32 percent to e-mail; 26 percent to watch video; 18 percent to play games and other apps; eight percent to listen to music.

Munster apparently believes Apple has successfully created a new niche between the smartphone and laptop. Some of us are not yet convinced of that. The overwhelming percentage of respondents think they will use their iPads as they would use their laptops or PCs: to surf the Web. The 38 percent who plan to read books are using the iPad as an e-book reader. The other notable application interests also are routinely conducted on existing devices such as MP3 players, PCs or laptops.

About all one properly might conclude is that initial early adopters are Apple enthusiasts. Many of use would guess that people aren't yet sure what they really will do, and how the device might ultimately be positioned in the broader mobile consumer electronics arena.

At least so far, half of the intended positioning seems to be clear, though. Nobody thinks the iPad replaces their smartphone. The key question remains whether iPad represents a new category, or reshaping of an existing category (namely PCs and laptops or netbooks).

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