Access Remains the Foundation for all Access Provider Revenue Opportunities

About half of revenue growth over the next several years will come from new lines of business, telco executives believe. But most of that opportunity still consists of line extensions built on current capabilities. That should not come as a surprise. 

What fundamental, unique and irreplaceable role do access providers play in the Internet ecosystem? Access. Service providers also provide applications (historically voice and messaging, more recently video entertainment). But the irreducible long-term role is "access" to the Internet. 

Unless a service provider wants to get out of the business entirely, the great bulk of revenue opportunities must hinge on access services. That suggests that the long term, most fruitful new lines of business will involve use of the network and its features, in some way, to add more value to "access."

Existing core services might provide upside up to about nine percent, STL Partners has reported. Vertical industry services have potential to provide as much as 10 percent of revenue growth. 

Infrastructure services (wholesale services, essentially) might provide eight percent of growth. 

Allowing third parties to embed communications features into their apps might drive 10 percent of growth. Providing other services to third party app providers could represent as much as 12 percent of revenue growth over the next three years. 

Telcos providing their own "over the top" apps might provide five percent of revenue growth.

The takeaway is not so much that half of potential new revenue will come from new lines of business, but more that each opportunity builds logically from what service providers already provide.

Echoing that line of reasoning, some would argue that telecom operators shouldn't bother trying to build an exhaustive suite of cloud services in an effort to compete with the likes of Amazon.com, Microsoft Corp. and Salesforce.com, says Sean Bergin, head of global telecom markets for Southeast Asia at BT Global Services. That will likely strike most of you as eminently sensible advice. 

Instead, access providers should strive to enhance the cloud services ecosystem, Bergin says.  "competing head-to-head" with cloud services specialists is pointless," Bergin said. If you think about the matter for only a very short time, that will make total sense. 

There's a reason all software these days is built using an open systems interconnect model that allows different functions to become virtual objects, so developers can innovate within a layer without needing to disturb all the other layers of functionality, Bergin argues. 

But that very model also means "network access" is a separate object from "applications." The fundamental skill sets, forms of organization and points of view are going to vary between software layer "objects."

Telcos, while able to develop and offer certain services themselves, such as virtual data centers, managed SIP-based communications and videoconferencing offerings, should look at aggregation models that play to their infrastructure strengths. 

Bergin wasn't saying "be a dumb pipe," but he was saying telcos need to stick to what they do best. 

4 Fundamental Telco Business Models

Just four fundamental business models lie ahead for global communications service providers, say researchers at Booz and Company. Half the models essentially are wholesale in orientation; one requires global operations and one is the traditional model, but with operators moving further up the value chain.

The "Network Guarantor" model has network infrastructure providers operating in a wholesale mode, providing other retail providers network services. 

The "Business Enabler" is a mixed model, including both retail broadband services as well as wholesale broadband, managed services, transaction and billing support, and platforms such as hosting and cloud computing. 

The "Experience Creator" is closest to the current retail model used by most service providers globally. Experience creators will look to move up the telecom value chain and provide end-users, both consumers and business customers, with the ubiquitous connectivity they demand, with targeted applications, fresh content, and a distinctive experience, and with the ability to create and distribute their own content.

The "Global Multimarketer" model is a retail model, but requires global operations and scale beyond a single nation.  Already, more than 75 percent of telecom subscribers in regions such as Europe and the Middle East are owned by global operators,” Booz & Co. says. 

There are challenges for service providers in all four scenarios. The "wholesale only, Network Guarantor" model offers a trade off. There is less sales, marketing and customer service cost, since the products are wholesale, sold only to retailers, not to actual end users. On the other hand, gross revenues likely are smaller, and profit margins also will tend to be lower than is typical for retail operations. 

To the extent that executives are worried about being reduced to the role of "low margin dumb pipe providers," this model guarantees it. In this scenario, service providers supply connectivity and other network services to all other retail entities, who have the actual relationship with end users. Also, companies that want to "own the customer relationship" will find this model unattractive, since it abdicates that role. 

The "Business Enabler" model has a mix of advanages and disadvantages. It retains the retail role, implying both higher sales, marketing and customer support costs, but also higher gross revenue potential and higher margins for those retail services. But this model also includes sale of infrastructure services to third parties, on a wholesale basis. 

That means there is inherently a possibility of channel conflict, as the service provider essentially competes with its wholesale customers in the retail market. 

The Experience Creator model is the closest to today's model, where a service provider sells retail services to end users. It offers the least dramatic changes to the current model, but arguably also offers the smallest chance of dramatic changes in overhead and operating costs. Also, to the extent that there is risk in moving into new roles within the application space, there is the danger of failure. This model virtually requires a more-active role in content and applications delivery, a terrain not historically favorable for telcos. 

The Global Multimarketer role is most logical for larger, well-capitalized firms with some ability to leverage a strong brand in additional markets. This strategy probably is not viable for small national firms with weak brand name assets and small market capitalization. This strategy also is likely to prove attractive only for firms with the ability to provide mobile services. 

In many ways the Global Multimarketer and Experience Creator models are mutually exclusive. Operators too small to operate globally are likely confined to their internal national markets. Likewise, the Experience Creator and Network Guarantor models are mutually exclusive. Only the Business Enabler strategy might be used by large and small service providers operating locally or globally. 

What has Changed in Telecom Since 2010?

Two years isn't a long time in the telecom business. But it's long enough for Google to become a smart phone manufacturer, average U.S. broadband speeds to increase about 30 percent a year, long enough for Long Term Evolution to become a commercial service offered by three of the four top U.S. mobile service providers, long enough for tablet suppliers to prove they operate in a sustainable new business.

Two years is long enough for Sprint and Clearwire to make a decisive turn to embrace LTE in place of WiMax, Apple to launch two versions of its iPhone, Samsung to emerge as the world's second most important smart phone supplier (by sales volume and profit), long enough for Research in Motion and Nokia to wobble badly and for Microsoft to prepare for what some believe will be its last effort to become relevant in smart phones, and others believe will be its move into the top ranks of mobile operating system market share. 

Two years is long enough for "network neutrality" rules to become law, but not long enough for all the practical ramifications to become clear. 

Two years is long enough for Verizon Wireless and AT&T Mobility to make a fundamental shift in pricing of mobile services, where domestic voice and messaging essentially are unlimited use, flat fee services and broadband Internet access is the variable element in the revenue model. 

What has not been substantially accomplished is the fundamental strategic challenges, among them the transformation from revenue models based on minutes of voice usage to bytes consumed. What has not changed is the degree of certitude service provider executives have about future business models.

It remains very much a work in progress for service providers to figure out how to create new, widely-adopted services network users want to use and pay for, which presupposes clear understanding of the value proposition an access provider delivers in an "application and device driven" era. 

Some of that sense of underlying challenges is as relevant in 2012 as in 2010, when Metaswitch Networks conducted a survey of 165 service provider executives. 

In that survey, service provider executives said uncertainty about new services and revenues, plus competition, remain the top concerns over the next decade. That has been true for most of the past decade, and the survey results confirm that the search for new revenue sources and the pressure of competition remain dominant facts of life in competitive and changing marketplaces.

The significant new difference is that telecom regulators—and what they might do—appeared  among the top three concerns. 

Asked to rank the level of threat, with a "1" being the "greatest" threat, and a "7" being the "least threatening," about 34 percent of survey respondents indicated regulators were the single biggest threat they face, but competition from other cable companies or telcos also are top concerns.

And in a sign of where new threats are perceived, Google is seen as a challenge as big as competition from “other telcos,” the 165-company survey found. 

About 27 percent of respondents indicated cable companies were the single biggest threat. Some 20 percent of respondents indicated “other telcos” were the second-biggest threat. 

But Google was not far behind cable or telco competition as a perceived threat for all contestants, the Metaswitch survey of service provider executives found. Some 17 percent of respondents said Google posed the single greatest threat to business success over the next decade. 

Apple and Microsoft were viewed as the least threatening of seven potential sources of competition, while Skype and other telcos are seen as mid-level threats. 

The sobering findings indicate that executives now correctly understand that regulatory risk must be added to the list of top commercial risks for the next decade, even though the search for new revenues, the business models that underlie new services, and staying abreast of competitors remain top issues. 

New service creation, especially uncertainty about potential demand, was cited as a huge issue. Some 45 percent of respondents indicated such uncertainty was the greatest of five challenges they face, vastly greater than ability to innovate, regulatory impact, risk of technology failure or brand exposure. 

“Do Not Track” Unintended Consequences

If "Do Not Track" becomes law, consumers would be able to opt out of behavioral advertising. That would significantly disrupt advertising revenue for a wide range of applications, rendering the Facebook Exchange virtually useless, for example, argues Eric Wheeler, 33Across CEO.

The Facebook Exchange needs anonymous cookie data about consumers who browse off Facebook in order to target them with relevant ads on Facebook, Wheeler notes.

Advertisers also require the ability to measure the online ads they run on Facebook in the same way they measure performance on other sites. Doing so requires use of anonymous third-party cookies that "Do Not Track" could block.

Paradoxically, a measure that aims to protect user privacy, arguably a good thing, also will undermine the revenue model for many applications users find valuable, thus causing unexpected harm. It's an example of how well-meaning laws to benefit consumers can have unintended consequences that actually harm consumer welfare in other ways. 

How Fast Can Bandwidth Demand Really Grow?

There is a running debate in the communications ecosystem about just how fast bandwidth demand might grow, either in the wireless or untethered spheres. A decade and a half ago, most executives and analysts might have suggested growth of 100 percent, or more, each year.

For a couple of reasons, those forecasts proved too high. There is a "law of large numbers" effect, for starters. Any new development or trend that is very popular, but starting from a low installed base, will show "big growth" numbers on a percentage basis.

Just as certainly, growth slows over time as the installed base becomes very large. So it is that annual year over year bandwidth growth now is more on the order of 40 percent than 100 percent. That's still a big percentage, meaning that, in the aggregate, bandwidth consumption doubles about every two and a half years or so.

But user behavior is highly responsive to pricing signals. People already have learned how to offload much traffic from their mobile devices to fixed networks (untethered use), since the per-biut prices of mobile bandwidth are significantly higher than rates for fixed network bandwidth.

There are other ways to shape demand, though. A higher use of unicast video (people watching YouTube video, for example) creates more demand, compared to any multicast method. That is why point to multipoint delivery of audio and video traditionally has been in "broadcast" mode.

So, over time, suppliers or users can shape demand by consuming more video in multicast mode than in unicast mode. One might argue that consumption is shifting to on-demand modes, but store and forward is a very efficient way of meeting much of that demand.

In other words, suppliers can broadcast content, but users can use DVRs to capture and store that content for later on-demand, or "near on demand" viewing. Users can choose to time shift their consumption as well, delaying "watching video" sessions from full mobile scenarios to offloaded sessions on their home Wi-Fi (untethered) connections.

Over time, one should not discount the amount of behavior change possible when price signals are sent about consumption modes. In other words, people will behave rationally if they know it makes a price difference when consuming video on a mobile, using the mobile network, compared to consuming that same video when at home, with demand shifted to the fixed network.

The point is that there is nothing "inexorable" about bandwidth demand. It can be shaped by suppliers or users, using price mechanisms, and will be shaped in such ways. Analysys Mason projects that mobile data in Western Europe will grow at a compound annual growth rate of just 29 per cent from 2012 to 2017, for example.

At a global level, Analysys Mason predicts that mobile data will grow by a multiple of 5.5, equivalent to 41 per cent CAGR. Over time, it is reasonable to expect continued growth, but the rates further are susceptible to changes in user behavior in response to pricing signals. 

In other words, there is nothing inexorably fixed about bandwidth consumption or rates of growth. Like any other product, higher prices will lead to less consumption, lower prices will lead to higher consumption. 

73% of Mobile Owners Do Comparison Shopping on the Phone

Some 73.2 percent of survey respondents with smart phones said they “sometimes” or “always” use mobile devices inside stores to conduct price comparisons. 

On the other hand, 68 percent of smart phone owners recently surveyed by CreditDonkey.com said they did not want to replace their cash and credit cards with mobile payment apps (mobile wallets). 

None of that should be terribly surprising. People do things that provide clear value. Price comparisons of items a shopper wants to buy have immediate perceived value. Storing loyalty credentials appears to offer less obvious value. 

Mobile payments offers the least value, at least at the moment. 

HOW MUCH OF YOUR SHOPPING IS DONE WITH MOBILE DEVICES? © CREDITDONKEY

WOULD YOU LIKE TO REPLACE THE CASH YOU CARRY WITH A MOBILE WALLET? © CREDITDONKEY

DO YOU FEEL YOUR PHONE IS AS SECURE AS YOUR WALLET? © CREDITDONKEY

DO YOU USE A MOBILE DEVICE IN PHYSICAL STORES TO COMPARE THE PRICES WITH THOSE ONLINE? © CREDITDONKEY

I MAKE MORE IMPULSE PURCHASES WHEN SHOPPING © CREDITDONKEY

Some other results from the survey

79 percent of respondents usually pay their bills online, versus 9.7 percent by mail, 6.1 percent in person, 3.6 percent by phone and 1.6 percent from mobile devices.

I USUALLY PAY MY BILLS © CREDITDONKEY

67.9 percent said they would not like to replace cash with a mobile wallet.

WOULD YOU LIKE TO REPLACE THE CASH YOU CARRY WITH A MOBILE WALLET? © CREDITDONKEY

66.7 percent said they would not like to replace credit cards with a mobile wallet.

WOULD YOU LIKE TO REPLACE THE CREDIT CARDS YOU CARRY WITH A MOBILE WALLET? © CREDITDONKEY

65.2 percent said they never negotiate with physical retailers – even after finding better prices online. Another 28.7 percent said they occasionally negotiate, and 6.2 percent claim that they “regularly” or “always” negotiate prices.

HOW OFTEN DO YOU NEGOTIATE WITH THE STORE AFTER FINDING BETTER PRICES ON YOUR MOBILE DEVICE? © CREDITDONKEY

43.7 percent said they have never used a mobile coupon; 42.5 percent said they occasionally use mobile coupons; 12.4 percent use them regularly, and 1.4 percent said they always use mobile coupons.

HOW OFTEN DO YOU USE MOBILE COUPONS? © CREDITDONKEY

Could Apple 5 Aluminum Explain NFC Absence on the Device?

Some might suggest there is a purely physical reason why the iPhone 5 does not support near field communications. 

The iPhone 5’s all-aluminum-and-glass body would block information from being transmitted to a terminal, according to Will Strauss, an analyst of Forward Concepts, a research firm that follows digital signal processing and chips.

In other words, iPhone 5 is physically incapable of supporting near field communications for reasons related to the design of the case. “NFC employs lower-frequency operation than cellular, requiring a longer antenna,” says Strauss.

A  metal back shields any radio waves from reaching a nearby data terminal. Only plastic, Kevlar or something similar allows the radio connection for NFC. 

PC Platforms Clearly are Shifting

Asymco created a couple of charts showing how much the computing business is changing. Up to this point, smart phones have been the biggest new factor. But tablets are destined to be a bigger portion of the market in the future. 

Another way of looking at matters is the post-2007 market share for Android and Apple computing platforms, compared to "WinTel."

Telecom Italia Considers Spinning off its Network

Telecom Italia's chief executive said the idea of spinning off its fixed network  had become "interesting" and that talks with a state-backed financing body over joint broadband projects were under way. "There is a dialogue that continues," Marco Patuano said. 

"The possible separation of the access network into another company is an option that both Telecom and Cassa Depositi e Prestiti are looking at with interest," Patuano said. 

In April, Telecom Italia first suggested a separation of the network, an asset valued at an estimated 9-15 billion euros ($11.6-$19.4 billion).

Telecom Italia and Fastweb, controlled by Switzerland's Swisscom AG, also have signed a memorandum of understanding to develop a  fiber access network in Italy, the companies said.

The two companies will share costs and investments in infrastructure construction, but "will retain total freedom and autonomy in the development of their own network platforms, technology decisions and commerical offerings."

Fastweb has pledged to invest  EUR 400 million investment plan to bring fiber optic technology to 20 percent of Italian companies and homes by 2014.

FCC Will Push for Spectrum Sharing in 3.5 GHz Band to Support Mobile Small Cells

The Federal Communications Commission will, by the end of 2012, initiate formal steps to authorize spectrum sharing in the 3.5 GHz band, potentially adding about 100 megahertz worth of spectrum intended to be used to support mobile network small cells. 

The set of frequencies between 3550MHz and 3650MHz is currently used in radar systems but could be shared with other wireless services. It would possibly be a complex undertaking.

However, in order for the government to keep using the spectrum for radar systems, other uses would have had to be blocked for about 200 miles inland from all U.S. coastlines, leaving out a majority of the country's residents, PCAST said in its report. A spectrum-sharing system could dramatically shrink or eliminate those exclusion zones, the group said.

Because of its high frequency, the 3.5GHz band would be better suited to fixed wireless Internet service than to mobile, according to Farpoint Group analyst Craig Mathias. 

“Sharing is a long-term process, and we are at day one of a long journey,” analysts at  Rysavy argue. Currently, there are three sharing models:

• Geographic sharing, in which a wireless carrier may use a federal agency's frequencies only in certain geographic areas;

• “Temporal” sharing, in which a wireless carrier may use a federal agency's frequencies only during certain times of the day or year; and

• Technology-based sharing, in which wireless carriers and a federal agency would each use a cognitive, or “smart,” radio device that can search wide swaths of a spectrum band for “quiet,” or unused, frequencies over which to transmit and receive data.

Such operations can be complex, many would note. 

Canadian Competition Bureau sues Big Three Telcos

The Canadian Competition Bureau is taking legal action against Canada’s big three mobile service providers,  along with their main industry association, to force them to stop what it alleges is misleading advertising that promotes “costly premium texting services” that slam consumers with hidden fees.

Rogers Communications Inc., BCE Inc., Telus Corp., and the Canadian Wireless Telecommunications Association are being sued for consumer refunds and possibly $31 million in fines.

Apple IPhone 5 Will Cost U.S. carriers $10 Billion in Device Subsidies

Stifel Nicolaus analyst Christopher King estimates that U.S. mobile service providers will wind up incurring about $10 billion in device subsidies as they sell iPhone 5 devices.

If so, those sales would likely affect operating margins for both companies during the entire second half of 2012.

“Given our assumption of approximately $425 in carrier subsidies per handset, we believe the U.S. carrier market could be on the hook for more than $10 billion over the last three and a half months of the year alone, entirely due to the new iPhone launch,” he said.

If you wonder why service providers have a "love-hate" relationship with the iPhone, that's why.

HP Thinks it "Must" Offer its own Smart Phone

HP CEO Meg Whitman offers a simple explanation for HP's belief that the company "has to" sell its own smart phone.

"We have to ultimately offer a smartphone because in many countries of the world that is your first computing device," says Whitman. "You know, there will be countries around the world where people may never own a tablet, or a PC, or a desktop."

"They will do everything on the smartphone," Whitman says. "We’re a computing company; we have to take advantage of that form factor."

The logic is sound enough, but whether HP is simply too late is the issue. It's hard to imagine how HP comes up with a differentiated offer or a big enough application store on its own.

HP seems almost forced to try to leverage an existing mobile OS and developer community, such as Android operating system ecosystem, or possibly the Windows Phone platform, though the applications community for Windows now is much smaller than that of Android.

But going with Android means taking on the likes of Samsung. Having stumbled with its Palm acquisition, HP is unlikely to want to make the same mistake by buying Research in Motion.

Whitman makes a cogent argument for why HP has to be in smart phones. What remains to be seen is how HP can pull that off.

200,000 Time Warner Cable RGUs Exposed to Google Fiber Threat

Time Warner Cable's CTO Irene Esteves says Google's Kansas City 1-Gbps Internet access and TV service bundle doesn't pose a huge threat to the cable operator's overall business. Of course not. What Google Fiber does threaten is about 200,000 revenue generating units Time Warner Cable presently sells in the Kansas City market.

Of the 300,000 homes that Google Fiber is expected to pass in the area eventually, Esteves estimates that Time Warner Cable has 100,000 Internet and 100,000 video subs at risk.

If you assume that half the broadband customers in the Time Warner Cable service area buy high speed access from Time Warner, while half buy from AT&T, and if broadband penetration is 70 percent of homes, then you might assume Time Warner Cable's risk would be about 35 percent, or roughly 105,000 customers, which just about matches the Time Warner Cable figures.

If Google Fiber takes share equally from AT&T and Time Warner Cable, and if initial take rates are about 18 percent, one would expect losses of about nine percent for both incumbent service providers. That implies a potential Time Warner Cable loss of perhaps 9,000 high speed access customers.

If half the high speed access customers also buy the video service, then Time Warner Cable also potentially faces the loss of about 4,500 video accounts as well.

Among the other competitors in the Kansas cities market are DirecTV Group, Dish Network Corp., AT&T and SureWest Communications.

Apple's iPhone 5 Won't Work on 4G in Much of Europe

Apple's iPhone 5, launched to great fanfare in the United States on Wednesday, will not work on superfast mobile broadband networks in much of Europe, potentially confusing consumers and setting back the development of 4G services in the region.

Some carriers will benefit. Only Deutsche Telekom and Everything Everywhere in the UK will initially be able to offer the fastest internet access to iPhone 5 users in their markets, because they are the carriers holding the right frequencies.

The iPhone 5 is not compatible with 4G services on the 800MHz and 2.6GHz bands deployed across much of western Europe, including Spain, Italy and France.