Spectrum Management Heading for a Historic Change

Spectrum not only is the foundation for all wireless and mobile services, it is a foundational matter for would-be service providers. And big changes are coming.

New spectrum formerly used for TV broadcasting is being reallocated to mobile communications. And at least some of that reallocation process will involve methods of adjusting the behavior of networks and devices dynamically, based on interference issues.

New thinking is happening about sharing existing spectrum as well. It simply is too expensive and time-consuming to conduct widespread "clear and auction" operations across much of the communications-capable spectrum below 3 GHz.

So much attention now is focused on how existing licensed users can be persuaded to share their frequencies with new commercial users as well. Incentives will play a key role: existing licensees will have to see clear financial benefits for doing so, and since so much licensed spectrum below 3 GHz is licensed to government and military users, such incentives will be tricky.

And the ways mobile operators use mobile licensed spectrum, unlicensed spectrum and fixed network assets is changing. Already, even without formal business relationships, perhaps 60 percent to 80 percent of mobile device Internet access occurs on Wi-Fi connections.

Some would say that reveals a key strategic weakness for mobile operators, whose costs of providing Internet bandwidth are too high to survive massive adoption of mobile video consumption.

And though there is more attention paid to global standards, the U.S. market will in some ways remain a bit different.

In some ways, the continental-sized U.S. market has allowed the U.S. communications business to develop based at times on local standards not shared with most of the rest of the world. The primary past example is use of CDMA air interfaces alongside GSM, where in most of the rest of the world GSM was the sole standard.

Frequency plans within the United States will be the salient example of this in the next phase of the mobile business, as most of the rest of the world tries to create a common 700-MHz band for mobile communications across Europe, Africa, Asia and Latin America.

Once again, because of past spectrum allocation decisions, the U.S. will remain a market without full frequency harmonization with most of the rest of the world. How important that might be is not so clear, though.

Global frequency coordination is helpful for manufacturers, as it allows more scale when developing handsets. It is helpful for international travelers who then can roam almost at will when traveling (assuming they don’t mind the international tariffs).

But advances in radio agility are important. In principle, it is possible to equip a device for frequency agility that can compensate for different frequencies used in different countries. And since all mobile carriers have agreed on Long Term Evolution as the common air interface standard (even if there are differences in modulation), frequency might ultimately be less an issue.

The issue for European regulators and industry concerns is whether the 2012

World Radiocommunication Conference of 2012, which decided to open up the 700MHz band across the EMEA region for mobile communications, will be able to come up with enough consensus to allow a further decision at the 2015 WARC meeting.

Of course, that process will be contentious, as TV broadcasters will have to be induced to surrender their use of spectrum to mobile interests. That has not proven easy, wheneve it has had to happen.

But such decisions now are among the growing range of ways national regulators are playing a fundamental role in setting the stage for the next phase of mobile communications growth. Though observers might disagree on how much additional spectrum is required, nearly everybody believes more spectrum will be needed.

And much of the focus will be on ways to find new ways to use spectrum already licensed for some other purpose, to some other users, as very little of the spectrum most useful for communications actually is unclaimed. That means a historically new look at ways to enable sharing of licensed spectrum, more use of frequency-agile networks and devices, and a new business role for unlicensed spectrum.

Erosion of Subscription Video is About 1% a Year

The strategic problem faced by traditional video subscription services is not that massive customer desertion is happening now. In fact, attrition, though real, is rather low at the moment.

According to The Diffusion Group, nearly 88 percent of all adult broadband Internet access users in the United States subscribe to a cable, satellite, or telco-TV service.

“The notion that we’re on the edge of a ‘mass exodus’ from incumbent pay-TV services to online substitutes is not supported by the data,” says Michael Greeson, co-founder of TDG and director of research.

The longer term problem is that younger consumers do not seem to buy the product as heavily as older consumers. And unless that changes, trouble lies ahead.

For example, TV subscription rates among those 25 to 34 are 82 percent, and 85 percent among those 18 to 24.

Note that the TDG metric is adoption of subscription TV among “broadband households.”

Of course, since household adoption of broadband Internet access is itself a percentage of all occupied U.S. homes, the adoption of video entertainment services as a percentage of all occupied U.S. homes might be  lower than 88 percent.

U.S. broadband penetration is estimated at 78 percent of U.S. homes. If 88 percent of those homes buy a video service, then video penetration hypothetically (some homes buy video service but not broadband or dial-up access) could be as low as 69 percent.

Nobody believes video subscription rates are that low, estimating that more than 102 million U.S. homes actually buy a subscription. That compares to about 115.6 million TV households altogether, including homes that only watch over the air TV.

If there are about 130 million occupied homes, that implies video subsription penetration of about 78 percent, oddly enough the same penetration rate as broadband.

60% of Surveyed Rural Telcos Offer Mobile, Fixed Wireless Services

Some 60 percent of about 31 rural telcos surveyed by NTCA:The Rural Broadband Association report they are providing “wireless service” to their customers, including both mobile and fixed wireless services, using a mixture of owned spectrum and facilities as well as resale or agency agreements with mobile service providers.

Some 82 percent sell fixed broadband Internet access (29 percent say they also sell fixed voice using wireless), while 49 percent sell  mobile services.

Of the respondents not currently offering wireless or mobile service, some 30 percent are considering doing so.

About 60 percent of independent and smaller rural U.S. telcos surveyed by NTCA:The Rural Broadband Association report they own at least one wireless license in the frequency range

below 2.3 GHz, according to NTCA.

Some 70 percent of carriers owning a license below 2.3 GHz have a 700 MHz license, 47 percent have an AWS license, 47 percent a PCS license, 13 percent some other license

(such as microwave), 11 percent cellular, six percent paging, and two percent SMR. For the most part, those are “access” frequencies.

About 21 percent of the 31 reporting companies hold at least one license above 2.3 GHz. About half of service providers holding a license above 2.3 GHz have a BRS license, 25 percent an LMDS license, 17 percent a 3.65 GHz, 17 percent a license at 11 GHz, and 17 percent a microwave license. While BRS and LMDS are “access” frequencies, the others likely are used for trunking.

The average cumulative investment in wireless facilities, excluding spectrum, is

$6.2 million, while average cumulative investment in spectrum totaled $646 thousand.

About 46 percent of respondents are using unlicensed spectrum to provide some

wireless services.

About 28 percent of those respondents offering mobile service  resell another carrier’s service under their own brand, and 21 percent do so under a national brand. So 39 percent “resell” or have an agency agreement.

Sprint Can Get Financing for T-Mobile Bid

Sprint reportedly has gotten assurances from at least 

o banks about the feasibility of raising enough money to finance a takeover of T-Mobile US. 

The proposals envision a total enterprise value (value of outstanding equity and debt) of about $50 billion for the deal.

It might cost $31 billion to buy all T-Mobile US shares and then also raise about $20 billion to cover the cost of assuming existing T-Mobile debt. 

But financing is likely to be the least of concerns about any such combination. The bigger issues involve antitrust clearance and approval by the Federal Communications Commission, since the U.S. Department of Justice already has said it considers the U.S. mobile market too concentrated already. 

Sprint to Enable Free Wi-Fi Calling?

Sprint reportedly is going to enable " no incremental charge" calling when users of at least a couple of Sprint phones are in a Wi-Fi zone, without counting against a customer's voice usage cap.

As reported, a customer will simply need a compatible device (possibly Samsung S4 Mini or Galaxy Mega), enable the feature through a web interface and begin using it. 

No monthly charge will be assessed for turning on Wi-fi Calling, apparently. 

Offering such features ("free calling") often makes sense for a service provider when the risk of cannibalizing revenue is slight and when the network is lightly loaded enough that a significant increase in usage will not stress the network and when there are other business reasons for encouraging usage. 

In this instance, the happy set of circumstances seems to include the fact that the Sprint 3G network will start to see less demand as traffic shifts to 4G (apparently the Wi-Fi calling feature requires presence of a 3G signal). 

The Wi-Fi calls are domestic only, and of course all the leading national providers have found that voice usage keeps dropping anyhow, freeing up voice network capacity.

In this case the 3G network resource primarily used might only be the signaling network, as most of the time only the signaling network actually will be consuming network resources. Only in case of an emergency call being placed would actual bearer traffic be imposed on the 3G network.

The new feature also might create some distinctiveness for 3G network access, the supported handsets and Sprint's access services in general. 

Spectrum Policy is Approaching a Revolution

Ever since the publishing of the U.S. National Broadband Plan in 2010, innovations in spectrum management have been at the forefront of thinking about the future of communications in the U.S. market.

In the United States, about half of all spectrum most suitable for communications, fixed and mobile, is licensed to various Federal government agencies, and, as you might well expect, much of that spectrum arguably is inefficiently managed.

Much of the new thinking centers on fundamental changes in the process whereby spectrum is made available for communications uses.

As a practical matter, though there are several ways to wring more effective use out of a finite spectrum resource, the absolute amount of spectrum useful for communications is limited.

As demand continues to grow, we bump up against physical constraints, even if demand shaping (Wi-Fi offload, tariffs), better technology (signal compression, better algorithms, agile frequency hopping) and network design (small cells, carrier Wi-Fi) can have meaningful impact.

Still, making better use of existing spectrum is among the tools policymakers can wield.

The President’s Council of Advisors on Science and Technology (PCAST) report makes a couple of nearly-revolutionary statements. Among the observations is the impractical method traditionally used to reclaim and then commercialize spectrum (“clear and auction”), simply because the costs of transition are so high.

The other really-novel insight is the observation that assigning spectrum in slivers, each with an assigned application profile, is inefficient, in light of modern technology.

In the wireless and mobile communications business, spectrum exhaust is a perennial problem. But there is new thinking that perhaps such scarcity is perhaps partly a result of allocation policies, not an absolute “shortage” of spectrum as such.

2014 Telecom Revenue Growth Picture is Mixed

Of all the trends affecting the global telecom business since the advent of competition, nothing is more striking than  diverging strategy and revenue performance.

For example, telecom service providers in Asia and North America are posting three perent to four percent annual revenue growth, while revenues in Europe have been dropping for some years.

Moody's Investors Service has said  the outlook for telecommunications service providers is “stable” in the  Asia Pacific region, with “ moderate revenues and earnings growth” and  gradual declines in profit margins.

"The telecommunications companies that we rate in Asia Pacific should record average revenue growth of around four percent over the next 12 months to 18 months, a level which is broadly in line with average GDP growth rates in the region," says Yoshio Takahashi, a Moody’s analyst.

In contrast, Europe's telecom operators will see a fifth year of revenue decline in 2014, although operating margins will stabilize, helped by cost cutting and the end of regulatory cuts to mobile call termination fees, Moody's said.

About the best outcome would be “revenue stabilization” in 2014, Moody’s says, with the telecommunications service sector remaining on negative outlook.

"While we expect revenues to stabilize or marginally decline by zero percent  to -0.5 percent in 2014, it is not clear how sustainable any recovery will be," said Carlos Winzer, a Moody's Corporate Finance group SVP. "We have had a negative outlook on the sector since November 2011 and would expect to see a predictable and sustainable one percent to three percent annual revenue growth to make it stable."

Moody's estimates that the European industry's average EBITDA margin will be down approximately one percent in 2013, but will probably stabilize in 2014.

In Latin America, Moody’s think both 2013 and 2014 will be good years. Moody's says South African, Russia as well as Middle East, market trends are more stable than in Europe.

In the U.S market, the mobile segment of the business “will continue to generate strong levels of free cash flow,” acording to Moody’s.  Earnings (EBITDA) minus capital spending growth, a proxy for free cash flow, will accelerate to 13 percent to 15 percent in 2014 for the six largest carriers.

“We also expect overall industry EBITDA to gain eight percent next year as industry service revenues grow three percent to four percent,” Moody’s forecasts.

Moody's expects that prices in some of the most competitive European markets will continue to drop Integrated incumbent operators such as Deutsche Telekom, Orange, KPN, Telefonica and Portugal Telecom will fare better than companies with just mobile or fixed offerings.

That’s an important observation: the firms that will fare best own both fixed and mobile assets. The other obviously significant observation is that revenue growth rates now have diverged around the world, with some regions faring better than others.

Despite the tough European conditions, or perhaps because revenues are challenged, Moody’s forecasts an average capex/revenue ratio of approximately 18 percent or higher in 2014.

In Asia, Moody’s predicts mobile service provider capex will decline to about 20 percent of revenue in 2014.

But it is possible European capital investment could increase, especially as Vodafone begins to upgrade its networks and other competitors invest to keep up.

But Asia remains a bright spot for the global industry. Moody's forecasts average adjusted EBITDA margins in the region will contract by approximately 0.5 percent to one percent in 2014.

"Increased data usage on mobile phones will continue to drive the Asia Pacific industry's revenue growth, although rising mobile-penetration rates and competition will slow the pace of growth,” Moody’s said.

But profit margins will stay at 37 percent to 38 percent. The area to watch in Asia is financial leverage, which will remain “moderately high,” Moody’s says,  as the companies deploy excess cash to increase shareholder returns, rather than significantly reducing debt.

While specific in-market consolidation deals may be completed in the next 12 months to 18 months in Europe, Moody's does not expect a wave of cross-border consolidation.

The four largest integrated incumbent telcos, including Telefonica, Deutsche Telekom, Orange and Telecom Italia, are either in selling mode or do not have much flexibility or appetite to lead this process.

But that obviously should shift attention to U.S., Mexican or other potential acquirers.

The main point is that competition now has lead larger telecom providers to diverge, in terms of strategy, revenue models and actual revenue growth.

HP to Sell "Voice Tablets" in India

HP will be selling two "voice tablets," (others might call them phablets), featuring a six-inch Slate 6 and seven-inch Slate 7 "VoiceTab."

IDC reports that phones with screen sizes ranging from five to seven inches grew 17 times in the second quarter of 2013, year over year.

In the third quarter of 2013, IDC said phablets accounted for 23 percent of the overall market for phones.

Some of us might note that such purchasing patterns suggest the decades long effort to create $100 PCs for developing nations has been eclipsed by commercial offerings that serve the same purpose. 

Skype-to-Skype International Call Volume Up 33% in 2013

Some recent patterns in international voice have not changed: Skype keeps growing, but so does the volume of carrier voice. But prices per minute of usage also continue to decline.

Skype’s on-net (Skype to Skype) international traffic grew 36 percent in 2013, to 214 billion minutes, says Telegeography.

Generally speaking, Skype-to-Skype volume growth has outpaced carrier voice since about 2009.

International telephone traffic from fixed and mobile phones continues to grow as well, increasing seven percent in 2013, to 547 billion minutes.

However, recent growth rates are well below the 13 percent average that carriers posted over many of the past 20 years, and the benefits of traffic growth have largely been offset by steady price declines, Telegeography notes.

Skype added 54 billion minutes of international traffic in 2013, 50 percent more than the combined international volume growth of every telco in the world, says Telegeography.

Increase in International Phone and Skype Traffic, 2005-2013

Source: TeleGeography

Appeals Court Strikes Down "Network Neutrality" Rules

A Federal appeals court has struck down current network neutrality rules, largely on procedural grounds.

The decision issued by the District of Columbia circuit court says that the Federal Communications Commission does not have authority to issue network neutrality rules, which essentially mandate “best effort only” retail Internet access offers, on fixed networks. The FCC rules had exempted mobile Internet access services, at least for the moment.

The DC circuit court’s decision in Verizon v. FCC means the 2010 net neutrality rules are rescinded.

To be sure, the matter is not fully settled. An appeal might be launched. And Congress has the authority to pass legislation giving the FCC authority to impose net neutrality rules.

Most might conclude it is unlikely that Congress will do so in the near term. The court did not strike all the rules. A consumer protection clause, requiring ISPs offering quality of service features to disclose that fact to end users, remains in force.

As with earlier strife over such rules, a public policy objective (Internet access should only be allowed on a “best effort” basis) reflects a mix of corresponding private interests and a healthy dose of conflict between legacy regulatory models.

At the heart of the question is the proper regulatory format for an Internet access service, with potential models arguably representing some mix of a legacy “common carrier” approach with a “content industry” framework.

And that’s the rub. Traditionally, content providers essentially have been unregulated, with data services seen in that manner. Common carrier regulation has been the rule for “telephone” services.

In between are the “broadcast and cable company” models, which involve a mix of rules, less restrictive than common carrier rules, but more restrictive than pure content company rules (newspapers, magazines).

So network neutrality is an issue not only because huge business interests are lined up on opposite sides of the argument about whether best effort access and quality-assured access can coexist, but also whether ISP access business models necessarily restrict freedom and innovation for Internet application providers.

The argument on one side is that allowing ISPs to create content delivery networks maintaining or boosting quality of experience for applications using such CDN services necessarily alters the “open” nature of Internet app development.

The opposing argument is that content delivery networks already are routinely purchased by application providers, over the Internet backbone, and nobody seems to think that is inherently anti-competitive.

The larger problem is that the Internet supports multiple media types and revenue models that make a mockery of traditional regulatory frameworks.

When voice, text communications, “print” content, video entertainment, business apps and retailing all occur over the Internet, should some revenue models be outlawed as incompatible? Or should all lawful revenue models be allowed?

As an analogy, if a customer wants to buy, and a provider wants to sell, video entertainment with varying levels of quality (less than standard definition, standard definition TV, high definition and 4K), should that be possible?

And if, to make that possible, access traffic has to be shaped, should the shaping be unlawful? As video providers routinely impose higher costs for consumers to receive content with HDTV resolution, should ISPs be able to charge for the higher costs of delivering such content?

Sprint Ends "One Up" Frequent Device Upgrade Program; the Issue is Why

It isn’t completely clear why Sprint has decided to end its One Up program that allowed users to upgrade devices more often, as the other major carriers earlier had decided to do as well. But Sprint’s launch of new “Framily” plans might have something to do with the rationale.

First, consider why carriers decided to change policies on device subsidies in the first place. In part, the thinking was that some customers really did want to upgrade devices more often than every 24 months. So the One Up program was intended as a response to such demand.

But Sprint might have found that actual use of the program wasn’t as high as some had thought. On the other hand, by some estimates, perhaps 40 percent of account holders, with multiple lines on each account, would consider switching plans, but are deterred by early contract termination fees.

That is why both T-Mobile US and AT&T Mobility are trying to lure customers on such plans by agreeing to pay the ETF fees when an account switches.

Perhaps Sprint concluded that the bigger upside, either in terms of customer retention, or customer acquisition, is not so much related to phone upgrades, but keeping and getting multi-line accounts.

Sprint’s “Framily” plan formalizes the process of creating “family” or multi-user accounts including unrelated persons, billing each account separately though applying discounts as though all were on a single family plan.

There are other possible explanations for what seems a rather abrupt shutdown of the device upgrade plans. Sprint might be closer to launching some other initiatives deemed more important, and no carrier wants to support too many different programs all at once.

But one might guess that Sprint already has discovered that there actually is less demand for rapid device upgrades than it had expected, or that the battle over mulit-user accounts now seems the most-important customer segment to protect and grow.

A Bad Month for Near Field Communications

It hasn’t been a terribly good month either for mobile wallet business or other applications using near field communications, as the U.K.’s O2 has shuttered its mobile wallet application, while France’s Bouygues Telecom apparently has ended its NFC program  entirely.

You might argue the O2 move was motivated more by inability to gain scale rapidly, while the Bouygues Telecom move was motivated by an even more difficult problem, namely identifying reasonable candidates for apps requiring NFC that could create a new revenue stream for Bouygues Telecom.

While neither move necessarily indicates that NFC itself is destined to fail, each initiative shows how difficult it is for mobile service providers or telcos to launch new services, based on new technology, when there is no clear end user understanding of a “killer feature” or “killer value proposition.”

As sometimes happens, new technologies and capabilities do not automatically translate into obvious business opportunities, as much-touted next generation networks have in the past failed to gain widespread traction.

In fact, few telco next generation network platforms have succeeded wildly. ISDN had modest success. It’s successor, broadband ISDN (asynchronous transfer mode) likewise has failed to gain widespread traction.The current network--Internet Protocol--wasn’t even a telco proposed next generation network, but a sort of accident.

Now we also are seeing other proposed next generation network protocols, including IMS and RCS, for example, work to become widespread. A realist with a sense of history might retain a sense of skepticism. 

Mobile networks arguably have done better with each successive generation of mobile air interfaces, perhaps because each successive generation featured at least one clear new advantage. The second generation added digital transmission, enabling new signaling features and leading to text messaging as a byproduct.

The 3G network created the foundation for mobile email and mobile Internet. The 4G network allows mobile operators to lower the cost per delivered bit, and enables video services with satisfactory experience for the first time.

Also, mobile networks get replaced about every 10 years, so perhaps there is no confusion about any single next generation network being “the last upgrade.” Practitioners know they will upgrade again, perhaps allowing a bit more focus on the one or two big new opportunities to be grasped over a decade’s time.

Whether NFC will be a really big deal, or not, remains unsettled. That isn’t so unusual for telco “new technology” efforts.

French Mobile Operator Abandons Near Field Communications Program

After eight years of preparatory work, Bouygues Telecom reportedly is ending its near field communication program, meaning it will not publicize NFC features on handsets it sells, nor try to create new services based on NFC.

Presumably the French mobile operator has concluded that new revenue-generating applications cannot be created or popularized in the immediate future.