Verizon Acquires Content-Delivery Firm EdgeCast Networks

In one sense, the Verizon acquisition of EdgeCast Networks is a simple way of gaining revenue and customer base in complementary businesses Verizon Digital Media Services sees as important, namely content delivery, transport services and hosting services. 

Verizon Digital Media Servicesprovides quality of service protection for studios, broadcasters and retailers.

Eventually, EdgeCast also could help Verizon in other ways, as Verizon itself could be a big user of such quality assurance features. 

EdgeCast competes with other content delivery networks, such as Akamai, and some would argue CDNs are an example of how a transport services provider can add value to its transport offerings, as well as adding new "services" revenue. 

EdgeCast has 6,000 accounts, including Pinterest, Twitter and Hulu, for example.

To Attack U.S. Mobile Pricing Structure, Sprint and T-Mobile US Will Have to AddressTheir Own Cost Structures

If a mobile service provider wants to attack prevailing retail prices in a serious way, it also has to attack its own operating and possibly capital costs.

That's the only way to sustain lower prices (and hence lower revenue) over time, while maintaining long-term profit margins at a level that allows the firm to survive.

And time works against even a successful attacker.

Given enough time, and enough success, a contestant in a market attacking with “low prices,” and operating with a better cost structure, eventually will find itself with fewer of those advantages. Consider Southwest Airlines, which revolutionized air travel and best exemplified the “discount carrier” concept.

In 2004, there was a 36 percent cost gap in terms of operating costs per available seat mile for the three largest US network airlines versus Southwest Airlines, a study on airline costs found.

But the cost gap has narrowed. By 2011, the “mainline” or “full service” airlines had gotten costs down as well. Southwest still had an advantage, but it was a narrower advantage.

Southwest's cost per average seat mile was still 30 percent lower than even the most efficient of the network carriers. For a brief period in 2008, the cost gap was greater than a 70 percent.

More has changed. Southwest now is the largest U.S. domestic airline, and by some reckoning, its labor costs are higher than the “mainline” carriers. Keep in mind that fuel represents 28 percent of total operating cost, while labor represents 24 percent.

At least so far, it would be hard to find an exact analogy in the U.S. or global telecommunications business. But, in broad outlines, legacy service providers have been chopping away at operating costs, while upstart providers, ranging from over the top app providers to metro fiber access providers have been building business models designed to attack retail prices by economizing on cost parameters.

Some might argue that robust wholesale access policies in Europe have allowed many contestants to enter markets and compete precisely because they can operate without the cost of building their own access networks.

Cable TV operators in the United States arguably have been able to build profitable voice and data access businesses because cable TV operators, while building their own networks, have chosen an approach that--by luck more than design--works well for broadband access and IP services.

Cable TV operators also have had lower operating costs, compared to legacy telephone network operators. As the Southwest example indicates, though, advantages can erode, or even flip, over time.

Whether or not that is possible, and to what extent, in the U.S. or other markets, is unknown. Fixed networks remain capital intensive affairs. And, to some extent, “service quality” is related rather directly to hiring enough people to handle the customer service load.

However, as Southwest Airlines and the U.S. airline industry experience already has shown, given time and will, legacy providers can reduce the operating cost advantage over lower-cost, competitors.

At the same time, the longer a competitive service provider remains in business, and the bigger it gets, the more its costs will tend to grow.

If a SoftBank-lead Sprint or T-Mobile US assault on U.S. retail pricing is to be sustainable, it also will have to be accompanied by creation of a cost structure that sustains reasonable profit margins over time.

How that can be done is the issue. Sprint says Network Visions is one such example. 

Motorola Modular Phone Prototype "Almost Ready"

The first prototype of a modular smart phone, likely including the exoskeleton and at least a few module variations that can be assembled to create a working smart phone with various features, is almost ready.

Though commercialization is a ways off, Motorola's Project Ara, working with Phonebloks, looks to be first out of the gate with such a device architecture. 

Project Ara is an open source project run by Motorola that aims to create a modular smart phone, where crucial components, such as screens, processors, batteries and radios are components that can be put together on a custom basis.

In principle, modular smart phones might be attractive for several reasons. Users could customize their hardware features to some extent, as they now customize the look and feel of their screens and have personalized app loads.

That should allow for the possibility of lower-cost devices as well, as devices are custom-built the way Dell used to assemble PCs only after they were ordered.

Less waste would be another advantage, since a device would not have to be thrown away when a major upgrade was required. Perhaps a module swap would do.

Such devices also would to a greater extent be easier to repair, as a module swap would be possible in some cases, not replacement of a whole device.

The whole idea is to create a smart phone that is completely modular, so each component, including the display, processors, battery, storage, camera, Wi-Fi and Bluetooth, for example, all are all separated into discrete blocks that all attach to a main board and are secured by just a couple of screws.

Usage-Based Billing Might be Good for Many Enterprise and Consumer Users

Gartner analyst Robert Desisto notes that suppliers of software as a service (SaaS) for the enterprise continue to resist to the move to “pay as you go” because it will have a very big impact on their business model predictability. 

As understandable as that is, SaaS suppliers are vulnerable to viable suppliers willing to offer true "on demand" pricing where users pay on a "usage" basis.

Oddly enough, that's the model some policy advocates think is so detrimental for consumer users. To be sure, there would be winners and losers in a "usage-based" enterprise software market, as there certainly would be in a "usage-based" consumer market for Internet access.

Some lighter users would be better off with usage-based billing. Heavy users would pay more. 

U.S. Smart Phone Penetration Reaches 63%

According to comScore, U.S. smart phone penetration now has reached 62.5 percent. 

That probably surprises nobody, as smart phones are becoming "phones." 

As often is the case, the oldest age cohorts adopt at lower rates.

Over time, smart phones simply will be what people think of as "phones."

Enterprise Customers Say More Cloud, More Consolidation of Service Providers was Trend in 2013

Moving applications to the cloud and providing more mobility support for an enterprise's customers are the two notable emphases for respondents to a Forrester Research survey. 

Among the bigger changes is attitudes toward cloud-based apps, up sharply. That suggests stronger markets for cloud-based hosting services and bandwidth, if the trend holds up in 2014.

Also notable was the significantly higher interest in consolidating communications suppliers. Look for more supplier churn, if that trend continues. 

Nearly as big a change is the desire to consolidate or change equipment suppliers, as well. 

Does the Telecom Industry have a Life Cycle?

Though the roster of contestants within any industry changes over time, few entire industries actually disappear.

Much depends on how one defines "industry." One might argue that the computing industry has gotten bigger over time, even though the "mainframe," minicomputer" and now "personal computer" segments have declined.

One might ask the same about the telecommunications industry.

In some ways, the question seems odd.

Over nearly every time period, global telecom revenue grows. The only possible exceptions were the years 1929 and 2001, but even there the dips were relatively slight.

For that reason, many consider telecommunications “recession proof,” a theory that was tested in 2000 and 2008. For the most part, aggregate revenue remained fairly stable, though there were some changes in composition of revenues.

And that generally remains the present revenue trend, where annual revenue, on a global basis, grows about 2.7 percent.

That, however, is a secular trend that was in place before the recessions, so the actual impact of specific recession-induced changes is hard to measure.

So while revenue growth might slow, the 2008 global recession did not halt revenue growth. The impact of the Great Recession beginning in 2008 is easy enough to describe. According to TeleGeography Research, revenue growth  slipped from about seven percent annually to one percent in 2009, returning to about three percent globally in 2011.

To be sure, growth prospects vary between regions. In fact, growth in Western Europe has gone negative, perhaps the first time in history that communications revenue actually has seen a declining trend.

The point is that any particular telecom product or service has a life cycle. The bigger question is whether telecommunications, as an industry, also has a life cycle. That does not necessarily require that people “stop communicating.”

The issue is whether the presently-constituted communications industry represents the way people do those things, in the future, or to the same magnitude.

Glimmers can be seen in the role cable TV companies now have assumed in the communications business.

Whether “communications revenue” earned by the cable TV industry has shifted to “another industry,” or whether cable TV providers simply have become part of the communications industry, is a judgment call.

From a telecom service provider’s perspective, it does not really matter how one classifies the revenue and market share. Telecom providers have lost revenue and market share to new providers, across the consumer and business segments, and across the voice and data services markets.

To be sure, telcos have compensated by earning new video entertainment revenues and by making the formerly distinct “mobile communications” business a core part of the telecommunications business.

So the question of industry life cycle is no mere speculation. Can a telco go bankrupt? A few already have, though so far no former incumbent telco has literally disappeared altogether.

But it remains an open question, albeit not a major issue, whether the way communications services and access will be provided exclusively by today’s telcos, cable TV companies and other access providers in the future.

Google Fiber poses the challenge in somewhat concrete terms. Again, one can argue that revenues earned by Google Fiber are simply “communications revenues” earned by a new provider in the traditional business.

But one might also argue that Google Fiber might eventually be something else, namely part of a shift of the traditional access business to a new industry.

It’s a bit of a stretch to label Google Fiber access or video entertainment revenues as “application” revenues. Google’s advertising revenues generally are measured as a distinct business from that of communications access.

But the boundaries are getting porous, as Google manufactures and sells mobile devices and Internet access as supports for its application and ad revenues business.

Indian Mobile Market Illustrates Key Principle About Retail Pricing

This chart of subscribers and price per unit in the Indian communications market illustrates a principle that economists always point out: when the price of a desired product goes down, demand goes up (the reverse also is a key principle).

Economic rules apply in telecom, no less than in other markets.

Why Sprint is Certain to Launch a Price War

SoftBank cut retailer fees 35 percent to defend its small merchant point of sale service, operated with PayPal, from an attack by rival Square.

In October of 2003, SoftBank had launched a price war with Rakuten, Japan’s biggest Internet mall, by cutting fees for merchants to use SoftBank's online shopping portal. 

Those moves are consistent with SoftBank's approach to pricing for mobile service. SoftBank, it is fair to say, surprised the two larger Japanese mobile firms when it launched a price war upon acquiring Vodafone's Japan business, which had struggled to get market share.

Since 2006, SoftBank has maintained it always would offer lower prices than the other carriers.

So many believe Sprint will do so as well, once SoftBank has put all the necessary pieces into place in the U.S. market.

T-Mobile US already is attacking the market with lower prices, and seems to be taking market share primarily from AT&T.

A Scary Bit of History

This is a scary chart, not that history repeats. And then there is the opposite view. We might hope for the latter, as much as we fear the former.

 Be careful out there.

Video Traffic is Moving from "North-South" to "East-West"

A recent Bell Labs study forecasts total metro traffic will increase 560 percent by 2017, largely driven by IP video and the increasing adoption of cloud/data center services and applications.

IP video and data center (DC)/cloud traffic are the largest drivers for growth. According to the study, metro video traffic (including subscription TV and Internet video) will increase 720 percent.

Metro cloud and data center traffic will increase 440 percent by 2017, the study predicts.

As the demand for video content increases, video caching is now being implemented within metro networks, moving content caching deeper into the network.

As a direct consequence, traffic between data centers in metro areas will grow, keeping much traffic off the backbone networks. That’s a significant change.

Until recently, metro traffic had a “north-south” flow from a content source to the end user with content sources typically located at a national central location and delivered over the wide area

backbone network.

But there is a change coming, Alcatel-Lucent says. The north-south flows increasingly will be replaced by “east-west traffic  flows for traffic flows from data center to data center, increasingly located within metro centers.

There are revenue implications for providers of high-capacity metro networks.

Rare Earth Elements Underpin Modern Electronics, and Really are Rare

Rare earth elements really are rare, in the sense that replacements are difficult to non-existent, according to a study. Rare earth elements are used in smart phones and other modern electronics. 

In looking at substitution potential for 62 different metals, researchers found that, for a dozen different metals, the potential substitutes for their major uses are either inadequate or appear not to exist at all.

Those 12 elements are rhenium, rhodium, lanthanum, europium, dysprosium, thulium, ytterbium, yttrium, strontium, thallium, magnesium, and manganese.

Further, for not one of the 62 metals are exemplary substitutes available for all major uses.

U.S. Auction of Broadcast TV Spectrum by Mid-2015?

Sometime in 2015, the U.S. Federal Communications Commission hopes most TV broadcasters will be willing to sell their analog 600 MHz TV spectrum back to the government, allowing the FCC to hold a separate auction where U.S. mobile service providers can buy that spectrum.

"I believe we can conduct a successful auction in the middle of 2015," says Tom Wheeler, Federal Communications Commission chairman.

Since 2012, when the Federal Communications Commission voted to launch the

incentive auction process, the United States has been the first nation in the world to implement a new auction process to repurpose broadcast television spectrum for mobile broadband use.

The auction will actually have two linked auctions. In the initial “reverse auction” phase, TB broadcasters will submit bids to give up their 6 MHz channels, selling the spectrum back to the FCC.

There are some 8,402 total television stations operating in the UHF and VHF UHF and VHF bands which can be sold back to the FCC, each assigned a 6 MHz block of spectrum covering a particular local geographical area.

Then spectrum will be “repacked” by the FCC so that broadcasters not willing to sell their spectrum can continue to operatre.

Finally, the FCC will conduct a traditional "forward" auction in which mobile carriers will bid for the spectrum.

The FCC's proposed band plan calls for 5 MHz blocks of spectrum to be auctioned. The FCC anticipates that there will be 6 MHz guard bands to separate spectrum blocks used by carriers, and that the "white space" between the blocks will be open for unlicensed use. "I believe we can conduct a successful auction in the middle of 2015," says Tom Wheeler, Federal Communications Commission chairman.

Another Cycle of Faulty Predictions and Forecasts is Upon Us

This is the time of year where we start seeing lots of stories about “the year ahead.” At least some of the “what will happen in 2014” predictions will prove reliable, especially those which simply extrapolate from trends already in place.

Far harder are predictions about what might happen in five, ten or 20 years. And yet we are compelled to keep making predictions, sometimes for unworthy reasons, such as when trying to prove to others “how smart we are.”

But lots of firms make a business about predictions, because there is a market for such things, even when the forecasts are unreliable. Just how unreliable is the issue.

Philip Tetlock's Expert Political Judgment: How Good Is It? How Can We Know? found that “specialists are not significantly more reliable than non-specialists in guessing what is going to happen in the region they study.”

Sam L. Savage’s The Flaw of Averages points out that plans based on average assumptions are wrong on average, because uncertainty in life is much more pronounced than people generally assume to be the case.

Nassim Talib’s The Black Swan likewise deals with the powerful impact of unpredictable and unexpected developments.

In fact, some would go so far as to say that forecasts always are wrong. That isn’t necessarily a bad thing, as minor fluctuations along a predicted trend line nearly always happen. That is true of most economic forecasting, some argue.

What is important is the trend line, not the actual results that fluctuate around a trend line.

The bigger problem is when a forecast trend fails to materialize at all, has far-lower magnitude than expected or fails to conform to a forecast timeline.

In other words, there are bigger problems when a forecasted series of events fail to happen at all, represents a much-smaller change than expected, or takes significantly longer to occur than expected.

In such cases, whole companies or industries fail to develop, fail to have big consequences and impact or happen too far in the future to have immediate practical consequences.

Forecasts nearly always become less accurate the farther into the future one predicts. One might suggest a logical reason for that failure: we tend to extrapolate present trends into the future, when history suggests different assumptions of unclear dimensions will operate in the future.

Granted, there arguably is a difference between “forecasting,” the attempt to identify ranges of possibilities and “prediction,” the attempt to describe with certitude a future event or set of events.

In practice, the dividing line is likely arbitrary and porous. The future is nearly impossible to predict, and at risk of great, sometimes fundamental error, even when forecasting.

All that said, get ready for the “2014 predictions.” And that isn't a prediction! It's an observation!

Regulators in Mexico, Brazil Act to Spur Competition in Mobile Markets

Regulators in Mexico and Brazil are taking steps they hope will increase the amount of competition in mobile communications markets.

In Mexico, where a brand-new regulatory authority has been created, and where intent to intervene in the communications and television markets has been clear, the Federal Telecommunications Institute (IFT) has notified America Movil that it will be investigated as part of IFT’s examination of market dominance in telecom and TV broadcasting.

Since America Movil has 70 percent market share, the investigation undoubtedly will find that America Movil is a “dominant provider,” and then will face restrictions intended to benefit competitors, in both fixed line and mobile realms.

Actions could range from regulating America Movil more heavily than its rivals, forcing America Movil to unbundle its network or sell assets.

In fact, asset sales already are on the agenda in Brazil, where the Brazilian antitrust authority Cade has ruled that Spain's Telefonica, which owns stakes in two firms operating in the Brazil mobile market, must sell its stakes in TIM Participações SA or seek a new partner for Vivo, Brazil's largest mobile phone carrier and part of Telefonica Brasil.

Cade believes Telefonica, which generates most of its growth from South America, has

too much market share, and is acting to force Telefonica to reduce its presence, since Telefonica has equity stakes in two of the four leading mobile service providers in Brazil.

Telefonica owns all of Vivo and has indirect ownership of TIM Participacoes.

At the moment, Vivo and TIM Participacoes have more than 50 percent market share in the Brazil mobile market.

Vivo has 29 percent share of subscribers, TIM has 27 percent, America Movil has 25 percent and Oi has 19 percent.

Telefonica owns 66 percent of the firm that in turn owns 22.4 percent of Telecom Italia, which further owns TIM Participacoes.

Cade also does not want the number of competitors in the Brazil mobile market to be reduced.

That might prohibit America Movil, Oi and Vivo making a joint bid, then breaking up TIM Participacoes between them. That might suggest an opportunity for a new contestant to enter the Brazil mobile market.