How We Measure Service Provider "Success" Will Have to Change

It seems a virtual certainty that investors will change the way they evaluate telecom access provider assets in the future, as they have done in the past. The reason is that the older metrics provide less value in assessing service provider prospects.

Once upon a time, access lines were a predictable indicator of telco performance, globally. With no competition and set prices, the primary variable was the number of access lines in service.

Once upon a time, basic video subscriptions likewise were a reliable indicator of how well a cable TV provider was doing or was expected to do.

That began to change with the advent of IP-based services, competition and multiple product lines. Because of competition, no provider formerly used to having 70 percent to 95 percent take rates could make those assumptions any longer. Instead, business plans had to be based on take rates as low as 20 percent to 30 percent, for any single product.

Also, with multiple products being sold, revenue per unit, or revenue per account, became more relevant than sheer numbers of accounts in service. Overall, “lines” or “subscribers” have become less meaningful measures.

At some point, especially as the IP transition continues, it is likely that newer metrics will start to emerge. Specific services, such as voice or messaging, might, or might not, be “revenue” sources in the same way.

When “bandwidth” begins to be an underpinning for all the other applications and services, it might be desirable, or necessary, to devise new metrics that correlate use of the network with revenue.

Some might argue that is a mere application of value based pricing to communications products, where retail prices are set based on customer perception of the value, not the cost of creating the products or the historical prices paid for those products.

Value-based pricing is predicated upon an understanding of customer value, a concept that will not be especially common for telecom executives, who for legacy reasons have set prices based on “cost.” In the monopoly period of industry operations, carriers made profits based on a cost-plus basis, so that made sense.

These days, matters are more complex. “Today, everything is about pricing, not cost,” says CHR Solutions SVP Kent Larsen. What he means is that “customer experience” now underpins the ability to price and sell products. One reason triple play offers work is that consumers rightly consider that they are getting a discount.

In other cases, offering free features is an obvious way to boost perceived value, even if, in fact, there is full cost recovery overall. But costs are an issue.

Here’s a really scary way of looking at how mobile and fixed network operating metrics might have to change: “costs per gigabyte must decrease by 90 percent every three to four years” just to keep service provider revenues and costs in the same relationship as they are now, according to Norman Fekrat, former IBM Global Business Services partner and VP.

And the bad news, says Fekrat, is that, at the moment, service provider costs are “increasing when it needs to decrease.”

“The cost structures need to be reduced significantly,” not incrementally, he says. And that will not be easy, Fekrat argues.

He thinks service providers will have to move to an alternative notion of “profit per gigabyte per service type,” where the actual cost of delivering a service is matched to the bandwidth consumed, for example.

That will be challenging. Consider the problem of pricing for consumption of video entertainment, the most bandwidth-intensive service. Though a two-hour movie might consume 3.8 Gbytes, the consumer might expect to pay about $5 for a viewing, or about $1.31 per gigabyte of revenue.

On the other hand, a month’s worth of voice might consume only hundreds of megabytes. Even if a user talks on the phone for 24 hours per day, every day for a month, using a high-quality codec, it would consume about a gigabyte each day, or perhaps 45 Mbytes for an hour.

If a user talks for an hour a day, that might represent consumption of about 1.35 Gbytes a month. On a flat rate $30 a month voice plan, that would work out to revenue of about $22 per gigabyte.

That shows only one aspect of value-based pricing. Some of the applications have high value, but consume little bandwidth. Other apps consume lots of bandwidth, but have only moderate value.

Simple pricing based on bandwidth consumed will not work, in a value-based scenario. But neither, over time, can service providers ignore their profitability delivering services that ultimately are related to bandwidth.

For some services, especially entertainment video, some combination of subscription and advertising probably will eventually be adopted, much as "free" over the air TV has traditionally been supported, as video subscription services and audio services now are supported.

Those approaches do not put the full retail cost of using the network on the end user, but partly on advertisers and business partners.

Can Service Providers Raise Prices?

Though it might sound almost silly, one wonders whether, given the key structural changes happening in the fixed network communications industry, service providers must not raise retail prices, somewhere, somehow, to offset both declining legacy revenues and growing costs.

And, one might add, do so at a time when many competitors will continue to attack prices.

In some real ways, fixed network service providers--especially smaller independent and rural providers--are being squeezed in a vice. Though demand for broadband remains high, and demand for video entertainment is relatively strong, the core voice product is a declining revenue source. And as demand dwindles, per-customer costs rise, since the fixed costs have to be spread over a smaller base of customers.

Raising prices would be one logical way of recovering costs, under such circumstances, in part because the customers that remain tend to be the customers who value the product more than the customers that have left.

Bundling, to sell more units to the same customer, is another tested and proven  approach, even if price discounting is unavoidable.

But there is a paradox. “If you might characterize large telcos as being contemptuous of their customers, you might characterize rural telcos as being afraid of their customers,” says Kent Larsen, CHR Solutions SVP.

What Larsen means is that many in the rural portion of the business shy away from package deals, teaser rates or other inducements seen as devaluing the product. “Customers want those deals and even might expect it,” says Larsen.

The point is that marketing matters. Larger cable companies and telcos found out long ago that consumers value triple-play packages for one important reason: they save money. One can argue about “devaluing” the products, but the apparent reality is that consumers now have come to expect the fundamental triple-play promise: “buy in bulk and save money.”

Sometimes the “answer” is simply to hide the actual cost of products. Giving a customer something of value that is viewed as “free” is one such tactic, even if, in actuality, all costs must be recovered.

Verizon Wireless has made domestic U.S. voice and text messaging a sort of “network access fee,” the prerequisite for using a network, while broadband is now the variable cost part of the service. In essence, to use the network, customers pay a flat fee for unlimited U.S. voice and texting, and then select from a variable bucket of data usage across all devices.

At some level, customers for fixed network voice services will have to be enticed to keep the voice service, and bundling with video and broadband probably is the easiest way to do so. Yes, that will “devalue” voice. But the alternative is to lose the customer. And there is another advantage: less churn.

It might be hard to measure triple-play customer satisfaction. But one fact remains: triple-play customers tend to be more “loyal,” or at least to churn less. If that is the outcome, it might not matter how satisfied those customers are. They are satisfied enough not to choose another provider, despite what they might say.

And make no mistake, Fixed line telephone service routinely ranks as among the U.S. industries with the lowest consumer satisfaction scores, as measured by the American Customer Satisfaction Index, for whatever reason.

It simply is a fact that surveys of U.S. consumer satisfaction routinely show low scores for fixed line telephone service, compared to most other products people buy, and which are tracked by the American Customer Satisfaction Index.

Subscription TV scores rank even lower, but at least those typical scores have risen since 1994. Likewise, reported satisfaction with mobile phone service has risen since 2004.

Reported satisfaction with phone service has fallen 13.6 percent since 1994, the greatest drop for products in any industry, followed by newspapers, which have seen an 11 percent drop since 1994.

Industry executives might not like the comparison, since, by most accounts, the U.S. newspaper industry has been shrinking for decades, with economics that grow worse over time.

On the other hand, low satisfaction scores do not necessarily lead to product abandonment, either.  Airlines routinely get low satisfaction score, but people continue to buy airline tickets. But prices are rising, in part because there is no other way for airlines to stay in business.

But all might agree that, other things being equal, low satisfaction is a potential problem, and high satisfaction is the preferred outcome of business operations.

On the other hand, both airlines and fixed network telcos might face structural problems. Some might argue that U.S. domestic airlines cannot simultaneously provide “high quality, highly-satisfying service” and also offer customers the lower fares they prefer. In other words, airlines cannot afford to make their customers “extremely happy” and stay in business.

Some might argue that fixed network communications providers are in something of a similar situation. With customers abandoning the product, it is more difficult every year to raise investment in service attributes that might boost satisfaction. And costs are growing.

Could the service be made better? Some would argue it can, providing high-definition voice, or calling features, for example. But some might not want to make the investment. In that case, lower prices and bundling might be the other course of action.

The larger issue is whether the fixed network telephone industry now has attributes similar to the airline industry, namely an inability to provide “excellent” service and “low fares” at the same time.

The other issue is how prices can rise to cover growing costs, at a time when consumer demand is shifting away from the legacy voice product. Broadband is the obvious candidate.

Whether retail video prices can be raised, long term is an issue. And fixed network voice is going to face price pressures, no matter what service providers do, even if features and value are enhanced.

Time Warner Cable Drops One Lightly-Viewed Channel, Others Obviously will Follow

Time Warner Cable is dropping arts TV channel Ovation from its channel lineup on Dec. 31, 2012 the first channel to suffer removal as part of Time Warner Cable's policy of not carrying lightly-viewed channels.

"Steeply escalating programming costs are forcing us to closely assess each network as it comes up for renewal,"  Time Warner Cable said. Ovation is not the only channel that doesn't get many viewers. Time Warner Cable says the channel is watched by "less than one percent of our customers on any given day."

The new policy is one step the cable operator is taking in an effort to halt the escalating cost of programming fees that threaten to make its video subscription service too expensive, relative to value, for many customers. 

Smaller networks without significant viewership will face similar problems, though the big test will come later, when the major network contract negotiations occur, some occurring several years from now. 

Of course, cable operators have other concerns than simply rapidly-escalating costs of video programming. The bandwidth used to deliver video progrramming could be used in other ways, such as to beef up the capacity available for business and consumer high-speed access services.

In fact, the conversion from analog to digital delivery formats was driven, in part, by the upside from freeing up capacity precisely to support high-speed access and voice services. 

Sprint Will Own Most Spectrum of All U.S. Mobile Operators

If the FCC approves the Sprint purchase of the rest of Clearwire it does not already own,  Sprint will be the largest spectrum holder in the United States with an average of just over 200 MHz of spectrum across the country. 

But there's something else important: Sprint will have fewer customers to contend for use of that spectrum. Of the total of 547 MHz of spectrum in use for mobile broadband, Sprint will own more than a third of the spectrum, but serve less than 17 percent of customers.

That means Sprint will have 3.57 MHz of spectrum to support each subscriber, compared to  Verizon, with 1.05 MHz of spectrum available for each customer.

That means Sprint has more freedom to attack the value-price relationship, something many observers are certain Softbank will do, as the owner of Sprint. 


It is virtually certain that mere operating efficiency between SoftBank, Sprint and Clearwire will not make the deal work. More likely is some oblique assault on AT&T and Verizon, not a direct competition using today's value proposition. Softbank is much more a consumer software company than Sprint, Clearwire, AT&T or Verizon. 

If there is a clue to what a SoftBank-owned Sprint might do with the Clearwire assets, that is the place it probably makes sense to look. For those of you who prefer more complicated possibilities, there always is Google.  

Few Consumers Like Data Caps; But They Dislike "Usage-Based" Pricing Even Less

Some observers argue that data caps, especially on wireline networks, are hardly a necessity. "Rather, they are motivated by a desire to further increase revenues from existing subscribers and protect legacy services such as cable television from competing Internet services," argues NewAmerica.net.

Although traffic on U.S. broadband networks is increasing at a steady rate, the costs to provide broadband service are also declining, including the cost of Internet connectivity or IP transit as well as equipment and other operational costs.

Whether one agrees with that point of view or not, most might also agree that charging users strictly on the basis of consumption (cents per megabyte, for example), on a fully metered basis, is even less palatable.

That has been the industry consensus since America Online shifted from a usage-based charging model to a flat fee model, back in the days of dial-up access. 

That 1996 pricing lead to an explosion of usage of the Internet. The other leading dial-up access providers also had announced a move to flat rate pricing. 

Whether causal or merely correlated, many observers would suggest that flat rate pricing lead to dramatically higher use of the Internet. Of course, ISPs legitimately worry about the business case for flat rate charging as bandwidth-consumptive video has grown to represent most Internet bandwidth demand. Internet video is now 40 percent of consumer Internet traffic, and will reach 62 percent by the end of 2015, according to Cisco's Visual Networking Indexing Forecast. 

But use of usage caps, or buckets of usage, are a compromise, connecting usage of the network and retail pricing, without reverting to actual metered usage that consumers are not fond of, as a charging mechanism, and prefer predictable flat rates.  

Nor is communications the only service or product consumers generally prefer to buy on a flat fee  basis. 

Mobile internet users across the United Kingdom and United States prefer flat-rate pricing, a new survey by YouGovhas found. That finding should surprise nobody in the U.S. market, given the development of the whole Internet access business since AOL dropped metered billing and went to flat rate packaging.

Unsurprisingly, respondents said they would use the mobile Web more if flat rate access is available. That does not necessarily suggest consumers would reject flat-rate plans that are tiered for usage, even if any rational consumer would say they prefer a low flat rate for unlimited usage.

Smartphone users might be used to low rate, unlimited access, but users of mobile PC dongles and cards are well accustomed to the idea that usage and price are related for "buckets" of usage.

Some 4,324 consumers,18 or older, were polled as part of the study.

In the United Kingdom, 33 percent of respondents  reported that they don't use the Internet despite having access on their phone, while 25 percent of U.S. respondents with an Internet-ready phone say they do not use that feature.

The point is that usage caps are not necessarily a plot by service providers to protect their revenues. At least in part, caps are a way to correlate usage and pricing in a way consumers are more willing to accept. 

Netherlands Mobile Service Providers Already Seeing 4G Spectrum Bid Problems

Vodafone shares fell 2.8 percent, and KPN said it wouldn't be able pay its promised end-of-year dividend. Those are two examples of how "success" in the Netherlands 4G spectrum auction is having financial effects on the auction "winners."

KPN bid €1.35 billion for 120 MHz of 4G spectrum covering the Netherlands, The Register reports. 

That doesn't necessarily mean Netherlands service providers have spent too much to acquire 4G spectrum. That can only be assessed over time. But there is recent precedent for the entire European mobile industry overspending for 3G spectrum, and some might say the industry is heading for that same mistake again. 

On April 27, 2000, the United Kingdom auctioned off five licenses for 3G wireless spectrum, raising $35 billion. Over the next year, a half-dozen other European countries held their own auctions, raising a combined $100 billion in a frenzy of overbidding. 

Ever since then, some have worried about the potential downside of "winning" a major spectrum auction. 

As you might expect, most of the new 4G spectrum that recently was won in the Netherlands spectrum auction were the biggest mobile service providers in the Netherlands. That happened despite restrictions on how much new spectrum the leading mobile service providers could acquire. 

In the auction, two spectrum blocks in the 800 megahertz band and one in the 900 MHz band will be reserved for new entrants. That was the provision that allowed Swedish mobile operator Tele-2 to secure 20 megahertz of spectrum in the 800 MHz band. 

Vodafone and KPN spent the most, with T-Mobile spending about 66 percent of what Vodafone and KPN invested. Tele-2 spent about 12 percent of what Vodafone and KPN spent, but also acquired a modest chunk of the new spectrum.

KPN has about 47 percent market share, while Vodafone has about 29 percent and T-Mobile has about 24 percent. Tele-2, a Swedish operator, also is entering the market. 

The 3.8 billion euros ($4.97 billion) proceeds were much higher than observers anticipated, far surpassing  the EUR400-500 million the government had expected.

European mobile phone companies spent $129 billion six years ago to buy 3G licenses  that were expected to trigger new revenue-generating services. As recently as 2006, though, that had not proven to be the case. 

The U.K.’s 3G auction raised £22.5 billion ($35.7 billion) in 2000, amounts that nearly bankrupted most of the firms that won the bids. 

As Much Bandwidth as You Need, Not "Want," is Key

In many cases, a fascination with broadband “speed,” however valuable, does not really measure total value as perceived by the user of the Internet access service. Mobile connections, for example, are slower than fixed connections. But mobility adds so much value that the slower speeds are outweighed by the virtue of “anywhere” access.

And it is hard to dismiss the value of low-speed text messaging or even dial-up access services in many parts of the developing world. Likewise, evaluating the importance or use of broadband is more complicated than simply measuring speed or even price per megabyte consumed.

These days, a majority of all broadband access now uses a mobile connection, and broadband increasingly is becoming something a “person” uses, not a “place.” And that’s important. One might argue that, despite the growing importance of video features and applications, much of the value of mobile broadband comes from use of lower-speed services and applications. 

Even though there is an order of magnitude, or perhaps even two orders of magnitude difference between Google Fiber, running at 1 Gbps, and a mobile broadband connection, the actual end user experience might be all that different.

In fact, mobile broadband seems to have surpassed fixed broadband in 2008. By the end of 2010, there were over twice as many mobile broadband as wireline broadband subscriptions, according to the Broadband Strategies handbook.

The point is that a narrow concentration on access speed probably does not capture the magnitude of value of such connections.

Wireless broadband is already more prevalent than wireline broadband, virtually everywhere. The number of wireless broadband subscriptions in Africa, for example, is more than four times that of wireline.

Europe’s wireless broadband penetration is nearly double the wireline penetration rate at 26 percent and 54 percent, respectively.

This suggests the potential for wireless broadband in areas where traditional wireline infrastructure may be absent, as well as in areas with substantial wireline build-out.

"Fiber to where you can make money" is one humorous way of analyzing how close to the home a fiber access network should be built. In a similar way, consumers will evaluate access speed in relationship to what it is they have to do, where they are, what apps and devices they are using, which networks they can use, and what use of those networks costs, incrementally. 

Is "Carrier of Last Resort" History? Give it A Few Years

Is it is possible AT&T and Verizon might be allowed by the Federal Communications Commission to stop serving customers in some rural areas, essentially abandoning their role as “carriers of last resort?”

The thought isn’t crazy. “Over the next five years, AT&T and Verizon will abandon some areas,” says Kent Larsen, CHR Solutions SVP. The reason is simply that executives no longer see a path to providing service that can earn a profit in some of their rural serving areas.

Neither do many investment analysts who study telco, cable or mobile industries. “The smart money left in 2006,” analysts say, according to Larsen.

It is likely AT&T and Verizon would only be allowed to do so if Long Term Evolution mobile service is available, and both firms could sell a fixed version of that service to customers in areas where landline service is terminated.

Still, the notion that the original bargain--”we give you a monopoly and in return you provide universal voice service”--no longer makes sense in a world of IP networks has merit. 

In most areas, even rural areas, there are two to five potential providers of broadband (A telco, a cable company, one or two satellite providers and often a fixed broadband provider.
And these days, if you can get broadband, you have voice.

Under those conditions, some will make the argument that a “carrier of last resort” obligation, particularly an obligation that applies only to one of the multiple providers, is just silly.

For clues as to what might happen, we all have to follow what the FCC is doing and saying about a transition to an all-IP network, with a shutdown of the legacy time division multiplex network. And there is a good reason the FCC is looking at such a change.

The IP transition for the whole U.S. communications business is getting new attention as the Federal Communications Commission launches a new effort to plan for an end to the time division multiplex “public switched telephone network.”

"The Technology Transitions Policy Task Force will play a critical role in answering the fundamental policy question for communications in the 21st century: In a broadband world, how can we best ensure that our nation's communications policies continue to drive a virtuous cycle of innovation and investment, promote competition, and protect consumers?" said FCC Chairman Julius Genachowski.

Dwindling use of the PSTN is driving the new attention.

The Federal Communications Commission Technology Advisory Council thinks U.S. time division multiplex fixed consumer access lines could dip to perhaps 20 million units by about 2018. At one time there were about 175 million access lines in service.

Others, such as Larsen, think lines overall could dip to about 50 million over the next five years, then to about 40 million on a long term and somewhat stable basis.

The TAC forecast might be tempered by its omission of business lines or perhaps voice lines provided over broadband connections. But the general direction, if not magnitude, are hard to argue with.

Access lines in use are declining. A peak seems to have occurred sometime between 1999 and 2001, in the U.S. market. Mobile lines leapt into leadership shortly thereafter.

Lots of potential changes could come with the IP transition. An end to traditional thinking about “carriers of last resort” and universal service obligations are just two of those changes.

Why Service Providers "Love" International Mobile Roaming

If there is anything constant in the communications business, it is that very-high prices will create incentives for new entrants to offer lower prices, and for regulators to act to lower prices. 

That is happening in the international roaming area, with respect both to voice calls and use of data networks, and for good reason: prices really are quite high. In Europe, wholesale rates for data roaming are dropping by regulatory action. 

Xigo illustrates the issue. 

Eurotariff maximum roaming charge per minute in Euros (without VAT)

Eurotariff maximum price while abroad	Making a call	Receiving a call	Sending an SMS	Receiving an SMS	Mobile Internet
Summer 2009	43 cents	19 cents	11 cents	free	-
Summer 2010	39 cents	15 cents	11 cents	free	-
Summer 2011	35 cents	11 cents	11 cents	free	-
Summer 2012	29 cents	8 cents	9 cents	free	70 cents/MB*

by NowSourcing. Check out our data visualization blog.

Sprint Buys Clearwire

Sprint Nextel Corp. has acquired the remainder of Clearwire Corp. it did not currently own for $2.97 a share.

Clearwire's board of directors has approved the deal, and Sprint has gotten commitments from Comcast, Intel Corp. and Bright House Networks in support of the deal, as well.

The $2.2 billion purchase values Clearwire at $10 billion, including net debt and spectrum lease obligations of $5.5 billion.

The deal removes one national mobile service provider from the U.S. market, and gives Sprint the full management control of Clearwire it will need if, as expected, Sprint launches some sort of new attack on industry pricing and packaging, something Softbank has indicated it will do in the U.S. market, as it has done in the Japanese market.

Data services are likely to be the focal point for any such effort, for obvious reasons. Voice and messaging services are a declining source of revenue for most providers, and Softbank attacked the Japanese market by disrupting data service plans. Softbank Japan already earns perhaps 66 percent of its revenue from data services.

Softbank does not view the U.S. market as saturated, in that respect. Aside from rapidly growing data service revenues, there is the possibility of enticing consumers to buy subscriptions for tablets and other devices.

That is the thinking behind claims that mobile data penetration of three hundred to five hundred percent is conceivable, a claim Verizon Wireless itself made years ago, referring to machine-to-machine services as an example.

In 2006, when Softbank decided to buy Vodafone KK assets, it likewise was criticized in some quarters for undertaking a risky gambit.

Some will argue Softbank is taking another huge risk by entering a country where iit has no previous operating experience, and by assuming a huge new debt load, after only recently shedding a similar debt load.

Softbank argues it is a reasonable risk, and that its prior experience taking on NTT Docomo and KDDI show it can compete in a market dominated by larger service providers.

Softbank, many believe, will use the same strategy it used in Japan, which some would describe as providing a large number of complementary features or services to create a “sticky” relationship with the end user.

Others will point to the pricing strategy. In Japan, Softbank’s 2006 acquisition of the Vodafone unit was not universally considered wise.

But in just one year, Softbank managed to boost its subscriber base from 700,000 in fiscal 2006 to 2.7 million. By the beginning of 2008, Softbank had grabbed 44 percent of Japan’s new mobile subscribers, well ahead of KDDI’s 35 percent and NTT-DoCoMo’s 11 percent.

Some think Softbank will be willing to launch a price war, as well.

In Japan, Softbank was willing to sacrifice voice average revenue per unit to make market share gains.Back in the 2006 to 2008 period, Softbank was willing to accept a $13 a month ARPU decline to build market share.

Spectrum will among the assets Softbank will be able to leverage. Hence the presumed need for full control of Clearwire.

It already is clear that Softbank has vaulted into the top ranks of global mobile service providers,measured either by subscribers or revenue.

There are growing signs that the U.S. mobile service provider market is unstable, in terms of market structure, though it remains unclear precisely which segments might fare the worst.

Some would point to the whole prepaid segment as one example, while others would say the smaller regional providers are most at risk. Some might argue it is the other national carriers most at risk, should Sprint succeed in attacking market pricing.

"What is clear for now, in our view, is that the current strategy, indeed the entire current business, isn't working," said Craig Moffett, an analyst at Sanford C. Bernstein. Moffett seems to be referring to the regional U.S. wireless carriers.

Others might argue that the financial stresses resemble the earlier transition from dial-up Internet access to broadband access. In this case, the transition is from feature phone to smart phone business models.

In that earlier transition from dial-up to broadband access, many suppliers found they no longer could compete in the broadband business. The reason was that dial-up Internet access was an “app” using the subscriber’s existing phone line. That meant suppliers did not have to pay to use the line.

With the advent of broadband, customers had to buy the new access service, and dial-up economics ceased to be viable, as would-be broadband suppliers had to lease wholesale lines, or build their own networks,  to provide the retail service.

Now, in mobile, it appears that the cost of supporting handset subsidies is pinching operating revenue, while the cost of building fourth generation networks likewise will hit earnings.

The immediate stress is heavy for the regional mobile providers, often using prepaid models, since the cost of handset subsidies now becomes a major operating expense.

Regional or prepaid service providers clearly have had a tougher 2012 than had been the case in the mid-2000s, for example. Leap hasn't been profitable since 2005, for example. MetroPCS profits dropped 63 percent during the first quarter of 2012.

A study undertaken by Tellabs suggests that mobile service provider profitability could become extremely challenging for some mobile operators within three years, with costs surpass revenues for many operators.

In North America that could happen by the fourth quarter of 2013 or as early as Q1 2013. Developed Asia Pacific service providers could see problems by the third quarter of 2014. In some cases this could happen as early as Q3 2013, Tellabs said.

Service providers in Western Europe could run into trouble by the first quarter of 2015. In some cases this could happen as early as the first quarter of 2014.

On the other hand, new supply is poised to come to market, including Dish Network’s proposed new Long Term Evolution network, and possible new networks from Globalstar or LightSquared, which could provide more support for mobile virtual network operators.

The point is that the U.S. mobile market is entering a period of greater instability and potential disruption.

What If They Hold a 4G Auction and Nobody Bids?

Australia's minimum prices for new spectrum to be auctioned are too high, and some bidders already are saying they won't be bidding bidding.

The Australian Communications and Media Authority has set the reserve price for 700 MHz spectrum at $1.36 per megahertz (MHz) per population. 

Vodafone and Telstra say they won't bid at those prices. Optus says the minimum price is too high.
3G
Auctions held recently in the Netherlands saw prices higher than anticipated, which as service providers worried a ruinous bidding war could result. That was a near-disaster when the same thing happened during 3G auctions.  

European mobile phone companies spent $129 billion six years ago to buy 3G licenses  that were expected to trigger new revenue-generating services. As recently as 2006, though, that had not proven to be the case. 

Service providers cannot afford to make that mistake again. 

The 3% Rule for Pricing Broadband Access Services, Anywhere

Why are broadband access prices so different, around the world? There's a simple answer, actually: retail prices are directly related to cost of construction in each market, and also substantially directly related to median household income.

You might think "things cost what they cost," and that is true, but what things cost varies from place to place

Recent studies published by ITU reveal that broadband penetration is directly related to its cost,  relative to an average family income, as well as to the availability of products and services that accommodate the general population’s purchasing ability.

That also explains why high speed access costs vary rather broadly from country to country. Areas where it costs more to create the infrastructure will tend to be more expensive, at the retail level. Areas where it costs less to create networks will correlate with lower retail costs.

For example, as the annual cost of broadband drops below three percent of a family’s annual income, broadband usage begins to increase dramatically.

For developed countries, this relative cost has already been achieved, but for at least 34 countries worldwide, the cost of broadband remains higher than the average annual family income, the ITU says.

But that’s an important bit of retail pricing advice for would-be ISPs in developing regions: set monthly prices no higher than three percent of median household income.

And prices are falling, globally.Between 2008 and 2009, 125 countries saw reductions in access prices, some by as much as 80 percent, the ITU says.  Between 2009 and 2011, for example, prices for fixed broadband have dropped by 52.2 percent on average and mobile broadband prices by 22 percent, globally.

Affordable broadband programs are starting to emerge in countries such as Sri Lanka and India, with service providers offering connectivity solutions starting as low as US$2 per month.

And while it is natural for a seller to want higher prices, for Internet access providers, less is more, in the sense of keeping at or below the “three percent of median household income” rule for retail pricing.

The trade-off is lower average revenue per user, but many more users. So where median high speed access costs in developed regions might run about $30 a month, in the BRIC+TIM areas costs might be $18 a month.

Somewhere between $2 and $9 a month would reach another billion or so households in a number of regions and countries. In the poorest nations, prepaid plans costing less than $2 a month will be needed.

Brazil, Russia, India, China, Turkey, Indonesia, and Mexico (BRIC+TIM countries), for example, could grow their available market by 860 million people by reducing the cost of entry for broadband by about 50 percent..

In 2011, the price of fixed broadband access cost less than two percent of average monthly income in 49 economies in the world, mostly in the industrialized world.

Meanwhile, broadband access cost more than half of average national income in 30 economies.  In 19 of the lesser developed countries, the price of broadband exceeds average monthly income.

By 2011, there were 48 developing economies where entry-level broadband access cost less than five percent of average monthly income, up from just 35 countries the year before.

To take the example of Kenya, family income levels mean that only about seven percent of the population can afford a service that offers uncapped monthly broadband access for US$20 per month. A prepaid broadband access service capped at 200 MB of data for US$5, however, could be within the reach of more than 60 percent of the Kenyan population.

Safaricom, the largest Internet service provider in Kenya, launched a segmented prepaid broadband offer in the end of 2009 targeted at different income levels.


There were 589 million fixed broadband subscriptions by the end of 2011 (most of which were located in the developed world), but nearly twice as many mobile broadband subscriptions at 1.09 billion, the ITU says.

Beyond that, since trenches, ducts and dark fiber represent as much as 70 percent of total cost to build a broadband network, the wisdom of using wireless is obvious. Wireless attacks that part of the effort consuming up to 70 percent of capital investment.