Tech Sector Is In A Bubble

"We're in a new tech bubble, heading for a crash, just like the dot com bust of 1999," some now argue. After two bubble burses in the first decade of the 21st century (Internet in 2000, housing in 2008), we might be headed for the first bubble burst of the second decade of the 21st century. 


So the question is "what will it mean for the telecom industry?" At the very least, a significant deflation of equity values, which will mean less ability for firms to make acquisitions, raise capital for network investment and otherwise invest in their operations, right at the point that Long Term Evolution network builds are underway. 


That could delay network modernization for a few years, and slow down consumer demand as well. 

The best case scenario is that the tech bubble remains just that: a tech bubble that does not disrupt other market segments too adversely. 

The worse case scenario is that other sectors facing bubble conditions burst synchronously. U.S.farmland is among the sectors ripe for a major crash, for example. 


Some speculate that a massive default wave on student loans could set up the next financial bubble. 

To be sure, most would argue that telecom is relatively immune from bubbles. But telecom is not fully immune. 

The problem with bubbles is that one never knows one is in a bubble until it is over. 

Why is Time Warner Cable Losing Customers?

Time Warner Cable in the coming year that about 40 percent of the cable company’s service area will be overlapped by AT&T U-verse and Verizon FiOS.

In 2013, Time Warner Cable faced AT&T in about 27 percent of the Time Warner Cable service territory. Time Warner Cable likewise faced Verizon FiOS networks in about 13 percent of its coverage area. As the competition with video-capable networks grows to 40 percent, another one million homes also passed by the Time Warner Cable networks will face potential encroachment from either AT&T or Verizon.

That underscores a key background factor for telco TV success. Up to this point, few cable TV operators actually have had to face a telco TV competitor. In fact, cable TV operator market share losses to telco TV, which have been steady, if unspectacular, are mostly an artifact of low telco TV availability, not marketing prowess or consumer preferences.

Consider that Time Warner Cable, which has seen significant customer defections in video and voice take rates in its consumer customer segment, also seems to be facing escalating availability of rival services from both AT&T and Verizon communications. Though the company blames third quarter 2013 performance on a CBS contract dispute, others might doubt that is such a material factor.

Some would argue it is the growing availability of a product substitute (U-verse TV or FiOS TV) that explains the weakness.

Though high speed Internet access was a bright spot, at least 24,000 Time Warner Cable broadband customers also departed.

Analysts had expected the company to gain more than 46,000 broadband customers during the quarter.

To be sure, revenue grew, despite the subscriber losses.

Coverage is a major factor enhancing or limiting video service provider market share. Cable TV companies operate in virtually every city and town in the United States. Satellite providers likewise cover nearly 100 percent of the surface area of the entire country.

Because telco TV is not ubiquitously offered, U.S. phone companies have about 10 percent  market share, where cable TV companies have about 55 percent share, and satellite firms have close to 30 percent share.

The issue is coverage. By 2015, AT&T, for example, will be able to market to only about 33 million locations.

Verizon’s FiOS covers about 17.8 million homes, so the two telcos will pass about 51 million U.S. homes, by 2015, out of perhaps 145 million U.S. homes by 2015. That implies coverage of about 35 percent of U.S. homes. Other telcos will sell telco TV as well, but collectively could only theoretically reach about 14.5 million homes, or so, by 2015, best case.

Even under the best of circumstances, it is unlikely U.S. telcos will be able to pass even 45 percent of U.S. homes by 2015, using their own facilities.

That is one reason why over the top streaming appeals to telco TV executives: it could enable universal coverage without requiring huge capital investments in access networks “out of region.”

Is the U.S. Ahead, Behind or at Par, in Terms of Broadband Speed, Price? Answer: Don't Blink

Whether the United States is ahead, behind or about par in the area of fixed network broadband speeds and prices seems always to be contentious. In fact, you can find, without looking too hard, analyses that claim the U.S. market is “behind” others.

It isn’t hard to do. A few nations, typically including South Korea, Singapore, Hong Kong and often Japan, are cited as the world leaders in typical, average or minimum speeds, year in and year out. That much is not in dispute.

The latest version of the “U.S. is lagging” analysis comes from the New America Foundation, which argues that “in comparison to their international peers, Americans in major cities such as New York, Los Angeles, and Washington, DC are paying higher prices for slower Internet service.”

Furthermore, the report emphasizes that “our data also shows that the most affordable and

fast connections are available in markets where consumers can choose between at least three

competitive service providers (fixed network only, as there also are satellite and mobile ISPs in virtually every market).

“Methodology is destiny,” one might argue, and so it always is important to specify what is being measured, how it is being measured and perhaps why something is being measured.

Suffice it to say, some studies show U.S. typical speeds are higher than is common in Europe, for example. Other studies show that more than 80 percent of American households live in areas that offer access to broadband networks capable of delivering data with speeds in excess of 100 megabits per second.

A study by the International Telecommunications Union argues that U.S. broadband actually is more affordable than in most other countries.

To be sure, never tends to rank much better than eighth on any survey of global teledensity or Internet access speeds. There are reasons for that, such as the continental-sized land mass, longer loop lengths, lower population densities and even consumer preferences.

Small countries, with shorter loops, higher population densities and different financing mechanisms often do score higher than the United States does.

In the end, what matters is that the U.S. market is highly dynamic. In many of the cities cited by the New America study, there are municipal broadband networks whose prices for gigabit service recently were reduced from about $300 a month to about $70 to $80 a month. That’s progress, you might argue, but the bigger story is the amount of dynamism in the market.

It isn’t just Google Fiber launching gigabit service for $70 a month. It is the upgrades other ISPs are undertaking, the significant and growing role played by mobile Internet access, and expectations that speeds will continue to grow at a healthy clip. Snapshots are fine, but the U.S. Internet access market never stands still.

In fact, U.S. Internet access speeds double about every five years. And it is reasonable to project speed increases of two orders of magnitude within a decade.

Though it is an argument some might continue to make for some time, Internet access speeds and prices really are not going to be a significant problem in the U.S. market for long, even if some believe that is the case right now.

Patent War Erupts Again: Time to Stop It

On Oct. 31, 2013, a consortium of Google rivals, including Microsoft, Apple, RIM, Ericsson, and Sony, filed 15 lawsuits against Samsung, Huawei, HTC, LG Electronics and other manufacturers that make Android smartphones, using a trove of patents the complanies acquired from the bankrupt Nortel. 

Enough already. Intellectual property protection is a good thing. But such "patent trolling," sometimes aptly called "privateering," might aptly be called extortion of a new sort. 

In 2011 and 2012, the number of lawsuits brought by patent trolls has nearly tripled, and account for 62 percent of all patent lawsuits in America, according to a study on patent trolls.

The victims of patent trolls paid $29 billion in 2011, a 400 percent increase from 2005.

Intellectual property protection is one thing. An out of control patents system, and the new use of litigation as a weapon of business competition, has to stop. It is going to damage innovation. 

Between $15 billion and $20 billion was spent on patent litigation and patent purchases in the smart phone industry from 2010 to 2012. 

In 2011, spending by Apple and Google on patent litigation and patent acquisitions exceeded spending on research and development of new products.

Google’s $12.5 billion purchase of Motorola, according to its own statements, was undertaken in large part to prevent patent suits from competitors.

If you have ever read patent applications, you know that some "patented processes" seem to defy logic. Where patents once were intended to protect the specific implementation of a process or device, now people and companies try to patent, in an overly-broad way, entire processes. It's dumb. It should not be allowed. 

"Coverage" Limits Telco TV Gains

Coverage is a major factor enhancing or limiting video service provider market share. 

In fact, coverage limitations are the biggest barrier to telcos taking more market share from cable operators.

Cable TV companies operate in virtually every city and town in the United States. 

Satellite providers likewise cover nearly 100 percent of the surface area of the entire country.

Telco TV providers do not yet have ubiquitous coverage, though where they do operate, providers such Verizon have gotten about 35 percent market share, where the cable provider might get 39 percent or 40 percent share, with satellite providers getting the balance of accounts of homes that do buy video entertainment.

To be sure, AT&T and Verizon are now the fifth and sixth biggest subscription video entertainment providers in the United States, trailing Comcast, Time Warner Cable, DirecTV and Dish Network.

Still, because telco TV is not ubiquitously offered, U.S. phone companies have about 10 percent  market share, where cable TV companies have about 55 percent share, and satellite firms have close to 30 percent share.

You might think the telcos have issues with content, marketing or retail packaging. That isn’t the case. The issue is coverage. By 2015, AT&T, for example, will be able to market to only about 33 million locations.

Verizon’s FiOS covers about 17.8 million homes, so the two telcos will pass about 51 million U.S. homes, by 2015, out of perhaps 145 million U.S. homes by 2015. That implies coverage of about 35 percent of U.S. homes. Other telcos will sell telco TV as well, but collectively could only theoretically reach about 14.5 million homes, or so, by 2015, best case.

Even under the best of circumstances, it is unlikely U.S. telcos will be able to pass even 45 percent of U.S. homes by 2015.

That is one reason why some observers believe either AT&T or Verizon might eventually buy either DirecTV or Dish Network, or a combined entity, should the two satellite firms wind up merging with each other.

That is the only way, aside from launching robust streaming video services offering virtually all the standard channels sold as part of a standard cable TV, satellite TV or telco TV offering, that a telco could achieve full national coverage.

But changing customer habits and eventual content owner preferences are a wild card. Some might argue that today’s subscription video business is past its prime, and that streaming delivery is the future.

If so, a distributor could achieve national distribution by using an over the top approach. And that might ultimately be viewed by a few telcos as the best way to proceed.

Doing so would mean national coverage without the need to build access facilities, for example.

Netflix is Bigger than HBO and Comcast, on One Measure

With the important caveat that average revenue per account and profit margins are disparate, Netflix is, by at least one or two measures, bigger than HBO , and also is bigger than Comcast on one measure.

Netflix is bigger than Comcast when measured by paying subscribers, and Netflix is bigger than HBO in terms of gross revenue and subscribers.

Comcast is far bigger than Netflix in terms of average revenue per user, while HBO is vastly more profitable, in terms of profit margin. 

HBO probably has margins in the 33 percent range, while Netflix margin is in the five percent range. Also, Comcast has average account revenue above $80 a month. Netflix has average revenue per user of about $10 a month.

Comcast third-quarter 2013 results showed the firm lost 129,000 video subscribers, ending the period with more than 21.6 million video customers. Netflix has about 30 million U.S. subscribers.

Comcast also lost 348,000 video subscribers through the first nine months of 2013, as well.

Comcast now has almost as many high-speed Internet subscribers (20.2 million) as video (21.6 million), and that business still is growing. Comcast gained nearly 300,000 broadband subs in the quarter.

Some think the growing popularity of Netflix is one reason Comcast recently launched an antenna basic plus HBO package that offers consumers a low price and access to HBO, seen by some as a competitor to Netflix, in many ways.

Netflix on Comcast X1 Platform "Not a High Priority," Comcast Says

Comcast EVP Neil Smit says getting Netflix onboard its X1 platform, making Netflix an app on the set top box, "is not a high priority" for Comcast.

"Our customers can receive Netflix in a number of ways, so it’s not really a high priority for us," said Smit. "We’re open to putting apps on our X1 platform. We have, for example, Facebook and Pandora there now."

But at this point, Netflix does not seem likely to get such treatment from Comcast. Some might speculate that Comcast has designs for a streaming video service of its own, at some point, so that might explain some of the apparent reticience. 

Nor does Comcast want to use the Netflix content delivery network, either, said to be a condition for Netflix doing such deals. 

AT&T to Bid for Vodafone?

If you think regulatory scrutiny of AT&T’s effort to buy T-Mobile US was contentious, just wait until AT&T tries to buy either Vodafone Group or EE in the United Kingdom, a move that reports  suggest is under active consideration at AT&T.

AT&T reportedly also considered a purchase of Telefonica, but Spanish regulators quickly moved to signal disapproval.

In recent days Mexico’s America Movil encountered opposition by an independent KPN  shareholder group to its bid to buy the remainder of KPN it did not already own.

Both America Movil and partner AT&T were rebuffed in 2007 in an effort to buy Telecom Italia, as well.

Opposition could arise from national regulators, company poison pill defenses or independent foundations set up to ward off unwanted takeovers.

Combined, Vodafone and AT&T would be the largest telecom firm on the planet, with a market capitalization exceeding $250 billion and large-scale operations in the U.S. and across Europe.

That level of scale might be important to the firm as it explores new lines of business where scale is important, ranging from advertising to video entertainment, and probably also would help the carrier when negotiating with handset suppliers and other suppliers of infrastructure.

Though AT&T might wind up not making a bid, it could not move before the closing of the Vodafone sale of its Verizon Wireless stake, expected in early 2014.

Will Access Networks Lose Value in Mobile Business?

Two decades is a very long time in the communications and application ecosystem. That is long enough to make a transition from “no Internet” to “dial up Internet.” A couple decades is enough time for Internet access to move from dial up to broadband, or from video-constrained to video-capable.

Two decades is long enough for new business models to be created, as from “streaming is very difficult” to “streaming is commonplace or dominant.”

Two decades also is sufficient time for value in the networks ecosystem to undergo huge change. Precisely what changes might occur remains to be seen. But it is not unreasonable for some to suggest that the relative value of core and access networks could change.

Historically, both access and core networks were scarce. In the 1980s, core networks became less scarce, as firms such as MCI, Sprint and others built their own long haul networks.

In the 1990s, access networks become less scarce. as mobile networks became more commonly-used assets. In the first decade of the 21st century, fixed networks became more common, and less scarce, as cable TV networks became communications networks and specialized metro fiber networks proliferated.

In another couple of decades, might the value of access and core networks change again? Almost certainly, “yes.” The only issue is which changes will be most crucial for service provider business cases.

What will the network of 2030 look like? More outsourced, more virtualized, more reliant on the value of spectrum as a “core competence” or source of value.

At the same time, say analysts at iGR, it might be possible for competitors to pick and choose their underlying network resources choices further. Perhaps mobile virtual network operators will own their own core networks (long haul assets and application servers) while “renting” radio access.

Think Google, Apple, Amazon or others with their own data centers, long haul transport and app servers. Each could rent radio access from a third party to provide the “last mile connection” to device users. That would something of a reversal of historic patterns, where many service providers owned their access facilities, and leased long haul facilities.

That approach--owning the core network and leasing radio access, might also have other implications. As voice service providers often select termination facilities based on “best quality now” or “best cost now,” the future network could well employ dynamic access selection.

When one radio access network gets congested, new style mobile virtual network operators might automatically shift traffic to different terminating networks, based on cost or quality parameters, much as long distance voice providers often do.

In such a scenario, the “scarcity value” of an access network is lessened, with more value shifting the core network provider. The reason, in part, is further outsourcing of the actual radio network, not simply the tower sites, where mobile access becomes a purchased service, not an owned part of a network.

That of course will prove financially beneficial for service providers of all types, but might be especially attractive to brands with core network capabilities that could be leveraged to create a new mobile service capability by renting wholesale access, especially on a dynamic basis.

The extent to which that is possible will hinge on the degree of wholesale access to spectrum. Where today mobile virtual network operators rent “complete circuits and capabilities” from underlying network owners, in the future other possibilities might arise.

Where today an MVNO might buy turnkey capabilities (voice, messaging, Internet access as complete wholesale offers) from an underlying carrier, in the future, it is possible that more virtualized networks would allow some brands with their own data centers, feature servers, billing and networks could simply buy radio access to create a full end to end service.

Conceivably, that would allow a tier-one mobile service provider in one country to create a new network in another country by purchasing radio access services from a third party. Likewise, some firms with popular brands, end user scale and data center and backbone network assets (think Google, Apple, Microsoft, Ford, Mercedes, Amazon) also could become MVNOs in a new way.wi

When Customers Like Your Service Less, the More They Use It

For reasons that probably are intuitive, customer satisfaction tends to increase as the length of customer relationship with a particular product or service provider increases. Unhappy customers will leave, and therefore no longer register "unhappy" responses about a customer service operation.

Also, the longer a customer remains with a particular supplier, the more likely it is that the customer will have learned how to use a product, and will have fewer questions about value, billing or "how to use the product."

That is not to say the relationship between customer satisfaction and customer loyalty is especially direct. In many industries, even satisfied customers can churn at significant rates. That especially can be the case when the leading suppliers all offer comparable experience and value for money offers.

In such cases, satisfied customers might well change suppliers for a relatively modest price advantage, for example. 

That is one "hard to quantify" advantage of customer loyalty. Customers with longer tenure tend to cost less to serve, aside from the likelihood that such customers also spend more than newer customers. 

The bad news for travel suppliers is that the reverse pattern tends to occur. Customers who have two years experience tend to rank customer service lower than when they were "new" customers. 

One might suggest there are reasons for those findings as well. There are relatively fewer things a travel experience supplier can do to make a customer interaction more satisfying, when the chief source of customer service inquiries have to do with something that went wrong.

Clearly, seat comfort, meals and baggage fees also are issues. People are not generally too happy about those attributes of the travel experience, so the odds of unhappiness with customer service systems is likely to be weighted in a negative direction. 

So the caveat for service providers might be that experience with your product should, with longer customer tenure, lead to higher satisfaction with your customer service. That is, unless the core experience is not so good. 

In those cases, customer service satisfaction might drop over time, a reflection of general dissatisfaction with the primary experience of the product.

A disproportionate share of customer contacts will be about cancelled flights, late flights, flight delays, lost reward program credits, redeeming reward program credits and billing issues, for example. There is a high probability that consumers will be interacting under conditions where they are unhappy. 

That is one reason why airlines tend to fare worse than other segments of the travel industry. 

Bandwidth Matters: Sprint LTE Gets 6-8 Mbps at 1.9 GHz, 50-60 Mbps on 2.5 GHz Spectrum

Sprint expects to have Long Term Evolution 4G network coverage of about 100 million pops, using the 2.5-GHz former Clearwire spectrum (120 MHz in most major U.S. markets) by the end of 2014. That probabnly is less coverage than some observers had expected. 

But Sprint ought to be able to dramatically increase its LTE top speeds, once it activates the former Clearwire spectrum. 

In the 1.9 Ghz band, Sprint says it is seeing LTE provide 6 Mbps to 8 Mbps on a consistent basis. 

In areas where LTE now is avaialble on the 2.5 GHz band, Sprint is seeing 50 Mbps to 60 Mbps peak speeds. The difference is simply that Sprint can use bigger channels on the 2.5-GHz spectrum.

Parenthetically, Sprint majority owner SoftBank saw its revenue jump 44 percent in the most-recent quarter, suggesting SoftBank will have capital to fuel an expected Sprint assault in the U.S. market. 

Sprint Makes Progress in 3Q 2013

Sprint hasn't yet turned the corner on subscriber growth, largely, one might argue, because of lingering losses from its former Nextel business, but Sprint has managed to keep growing revenue, in its key postpaid "Sprint" business, for 13 or so quarters. 

In fact, a rational person might conclude that Nextel was the problem all along, as the Sprint side of the business has not fared badly. 

In most recent quarters, Sprint has added net customers even as Nextel has bled them.

The biggest single hit came in July 2013, when Sprint shut down the entire Nextel network, losing about 1.3 million customers. Still, going forward, Sprint without the drag of Nextel should surprise to the upside in the subscriber growth area. 

Granted, Sprint still is losing customers overall, and still lost money in the third quarter of 2013. But it is making progress, and has yet to unveil precisely what it plans to do with the now-consolidated Clearwire spectrum and SoftBank assets. 

Sprint Might Have an Opportunty with its Clearwire Spectrum

Sprint owns the most spectrum of any mobile service provider in the U.S. market, a fact most observers expect will play a role in an anticipated Sprint assault on the U.S. market leaders. 

Some observers, though, will note there are advantages and disadvantages for the 2.5-GHz Clearwire spectrum.

The higher frequency means signal reach is less than at 700 MHz and 800 MHz frequencies that Verizon Wireless and AT&T Wireless have in greater abundance. Signals at 2.5 GHz do not penetrate walls as well as the lower frequencies, either.

In terms of network infrastructure, that lessened propagation distance means Sprint needs 13 to 15 tower sites, at 2.5 GHz, to cover the same area as a single 700-MHz macrocell.

On the other hand, precisely because of the higher frequency, 2.5-GHz signals are capable of delivering more data, compared to 700 MHz or 800 MHz signals, using any particular coding technique. As a rough rule of thumb, 2.5-GHz networks, using the same coding, can deliver as much as three times to four times more data, using the same bandwidth as a 700-MHz or 800-MHz signal. 

But there are some new variables, including the tendency for users to consume as much as 80 percent of their smart phone or tablet data at home, when they are able to use fixed network Wi-Fi. 

Also, in some cases, as in dense urban environments, it might be quite feasible to use small cells or Wi-Fi to offload even much out of home data consumption. 

So except in rural areas where signal reach is a real advantage, Sprint might find its high-bandwidth network very useful in urban areas, which increasingly are seeing scenarios where small cells covering small distances are quite useful. 

At least in principle, Sprint might be able to use its trove of spectrum to provide the "fastest" service in many areas, if not perhaps ubiquitously across the country. The reason is simple: Long Term Evolution is limited principally by the amount of bandwidth allocated for it. 

Channels of 20 MHz provide much faster experiences than channels of 10 MHz, for example. 

SoftBank might also be able to bundle applications (especially video-related apps) with its faster access in ways that create uniqueness, much as Dish Network is expected to emphasize video entertainment as a distinguishing feature of its would-be LTE network as well. 

NFC Will "Never" Lead U.S. Mobile Payments?

Virtually every banking-related or payments-related initiative in the United States has to begin with an understanding of how the U.S. market is different from others. The high use of credit cards, compared to most other markets, is one such distinction.

The ubiquity of the banking infrastructure is another example. The way consumers pay for retail purchases is another key underpinning realities.

Put simply, mobile banking is shaped by the fact that "access to banks" is not generally a problem. Nor, generally speaking, is "paying for retail purchases." So many would note one requirement for retail mobile payments success is adding new value to a process that is not fundamentally broken.

Likewise, as ecosystem participants scramble to gain influence and control over the new processes, communication methods are seen as a way of gaining such influence. Some observers have confidence in near field communications, while others think other approaches might win the day. 

You can count Forrester Research senior analyst Denee Carrington as among those who are skeptical about NFC. Carrington says she does not expect NFC to ever takeover the mobile wallet space.

NFC might well be crucial for other retail applications and experiences, though. 

Tom Wheeler Confirmed by U.S. Senate as New FCC Chairman

Tom Wheeler has been confirmed by a vote of the U.S. Senate as the new chairman of the Federal Communications Commission. Some might complain about an FCC chairman who has in the past lead the major trade associations for cable TV and mobile communications.

Others will say that probably is a combination of experiences that might prove exceptional useful as U.S. communications policy adapts itself for an IP-based communications environment that transcends historic regulatory boundaries, faces new forms of competition and calls for major investments in next generation infrastructure.