Where Available, Fixed and Mobile Internet Access Both Get Used, All the Time

Smartphones are expected to become the way most people in some markets use the Internet. In markets where smartphone adoption is significant, and where fixed network connections also are common, both mobile and fixed Internet access get used daily, a study by The Cocktail Analysis has found.

The study of female Internet users in Brazil, conducted in January 2014, found that smartphones were arguably the most-used platform for Internet access. About 81 percent of female smartphone users surveyed reported they used a smartphone for Internet app access every day.

Brazilian digital woman: Permanent Connectivity from The Cocktail Analysis

On the other hand, high speed access using desktops and laptops also get used daily for Internet access, 79 percent of respondents reported.

Tablets are used by 52 percent of owners to access the Internet every day, and tend to be used at home.

The point is that, in markets where mobile and fixed Internet is available, people use both forms of access, daily. 

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Why Not Let Users Decide if Some Apps Need, and Should Get, Delivery Priority?

One objection some have to strong versions of network neutrality is that some applications, especially VoIP and video (either conferencing or entertainment) are sensitive to jitter and delay that typically get worse when access networks get congested.

Some argue that more bandwidth fixes these problems, but some engineers would disagree.

It doesn’t make sense, one might argue, to deny end users the right to choose some apps that get priority, either all the time, or under conditions of congestion. Among the classic examples is when a user is on a VoIP call.

At such times, higher quality of experience results when email, website or software updates get delayed, or at least get a lower priority, than the more mission-critical voice or video-enabled communication sessions.

Under one proposal, AT&T U-verse and business customers might choose which sites they want to designate for expedited packet delivery, a way of allowing end users to decide when expedited packet delivery has value, and avoiding the need for strict “best effort only” Internet access that can pose issues for services such as voice and video.

An AT&T customer might choose to prioritize latency-sensitive and jitter-sensitive apps such as VoIP or video conferencing, for example.

Under the AT&T concept, AT&T and other ISPs would honor those end-user designations over that customer's "last mile" Internet facilities.

“There is no conceivable reason that such services, demanded and used widely by business customers today, should be foreclosed by regulatory fiat,” AT&T argues.

That solution avoids the charge that an Internet service provider is picking winners and losers, provides better user experience and remains under the customer’s control.

It is well worth considering.

Only 33% of U.S. Households Use the PSTN Anymore

Only about 33 percent of U.S. households actually use the public switched network anymore, according to USTelecom.

As of June 2013, incumbent local exchange carriers (telcos) served a total of about 78.5 million switched and VoIP access lines. That is just 44 percent of the 178 million telcos served at the end of 2000.

Traditional switched lines had fallen to 70.5 million by June 2013, or only 40 percent of lines served at the end of 2000.

In eight states, suppliers other than the telco had more wired telephone lines (switched access or VoIP) than the telco, and most of those were provided by the cable TV company.

In an additional 10 states, providers other than the telco had 45 percent to 50 percent of the wired voice connections.

And then there is mobile. The FCC reports that there were 305.7 million mobile voice connections in the United States as of mid-2013, about double the number of all fixed network voice lines.

Looking at the total voice market (including mobile, telco and cable TV or other fixed voice connections), telco market share fell from 60.5 percent to 18.5 percent from 2000 to 2012.

Total telco retail switched access lines have fallen by 60 percent since the year 2000, from 178 million to 71 million.

From the end of 2007 to mid-2013, there were almost 60 million retail switched access lines lost, and the rate of decline was still around 9.5 million per year as of mid-2013.

At the same time, and in large part because of legacy regulations, the majority of capital investments made by U.S. telephone companies from 2006 to 2011 went toward maintaining the declining telephone network (legacy voice), not the high speed access network that represents the future.

One might note that U.S. cable TV companies, that are not so regulated, now account for the “overwhelming percentage” of high speed access lines. The issue is not that cable TV suppliers have more than 50 percent market share in the high speed access market.

The issue is the percentage of market share at the top end of the market. Cable TV suppliers of high speed access have about 58 percent market share, but are getting 80 percent of the net new additions.  

“Today, a majority of American homes have access to 100 Mbps,” said Federal Communications Commission Chairman Tom Wheeler.

But it might soon be the case that as much as 75 percent of the fastest connections are supplied by cable TV operators.

In fact, cable modem services broke decisively from asymmetrical digital subscriber line services in 2006. Since then, digital subscriber line services have fallen far behind, and only telco fiber-to-home services have kept pace with cable modem potential speeds.

source: National Broadband Plan

So it is no surprise that telcos want legacy regulations removed. It comes as no surprise that competitors to the telcos want the legacy rules maintained.

But a reasonable person might well conclude it is foolish to maintain rules that funnel investment capital into a network offering services consumers do not want. That capital is badly needed elsewhere, to create faster access networks supporting Internet Protocol services and apps.

Google Messaging App Just for India?

Is it too late for Google to create a messaging app to rival Whatsapp, Line, WeChat, Viber and Line? And, if so, what chance would any tier-one telco have of doing so?

We might get a local test of whether it is now “too late” to get into the messaging app space as Google seems to be preparing for the launch of an India-focused messaging app in 2015.

Google has been “too late” before. Google missed “social” and “social on mobile.”

One might argue Facebook bought WhatsApp and Instagram to address both those features.

But Google might conclude India along is a big enough market to attempt a catch-up strategy.

Of the 600 million WhatsApp users, 65 million are in India. Viber has about 25 million Indian users. LIne has about 18 million users in India. WeChat might have between 25 million and 60 million users, in India.

Reportedly, Google will not charge a fee (WhatsApp charges $1 a year), will have Indian language support, and possibly voice-to-text features. The rumored message app might also not require Google single sign-in, either.

India is expected to become the world's second-largest smartphone market after China by 2019, and that might be the incentive to launch a Google messaging app for India.

How Much Potential for Dark Fiber Arbitrage of Leased Capacity?

Arbitrage, the exploitation of price gaps between products in markets, or prices between markets, always has been an important strategy in the telecommunications market.

One might argue that VoIP represented Internet arbitrage of the public switched telephone network.

Some free conference calling services likewise are built on arbitrate of access prices in some rural U.S. areas.

And though it is possible to argue that price arbitrate is not sustainable over the long term, it can be an important underpinning of business strategy, at least in the short term, allowing competitors to get a foothold in a market before transitioning to a more-sustainable model.

That, in fact, was the hope some held for local exchange carriers allowed to compete for the first time in the U.S. local telephone business as a result of the Telecommunications Act of 1996.

The thinking was that competitors would rapidly enter markets using resold connections, but then transition to facilities-based networks. For the most part, it did not work out that way, as it was the facilities-based cable TV operators that were able to build sustainable businesses, once wholesale tariffs were raised.

Something similar tends to happen in the wholesale capacity business as well, where most suppliers refuse to sell dark fiber, preferring the high gross revenue and profit margin of selling “lit” services.

But there almost always is customer demand for dark fiber, despite the general reluctance to sell the product. In some markets, the opportunity for arbitrage might not be so great, some argue.

“At some point, the cost of leased capacity and dark fiber is the same,” says Rozaimy Rahman, Telekom Malaysia EVP. That probably refers to total cost of ownership. But the point about arbitrage remains.

Some large enterprises, and certainly many carriers, will conclude that, at least in some instances, they will operate at lower costs when they are able to buy dark fiber and turn up their own networks.

By refusing to sell dark fiber, service providers might be creating a market opportunity for suppliers willing to do so.

In the long run, Rahman is likely correct: total cost of ownership, for an end user, might over the long term be nearly equivalent, for leased capacity or dark fiber approaches.

But arbitrage works because there are exploitable price differences in the short term. And Rahman is correct: the difference between dark fiber and managed bandwidth services, has at times past, n some markets, not been so great.

source: http://www-pam.usc.edu/volume5/v5i1a1print.html

Mobile is the Next Big Venue for Advertising, but Shift from TV to Online is Bigger, Near Term

When looking for key opportunities or threats in any business, it always is useful to follow the money.

Daryl Simm, Omnicom Group CEO of media operations, manages an operation representing  $54.4 billion in advertising spending globally.

So it is noteworthy that Omnicom Group has recently been advising its clients to move 10 percent to 25 percent of their TV advertising commitments to online video.

If clients follow that advice, the traditional gap between attention and advertising spend will start to close. In 2012, for example, advertising spend on television and print exceeded the audience those channels represented.

Mobile, which represented 12 percent of the actual audience, got just about three percent of the advertising. Internet audiences, representing 26 percent of the time spent with media, got about 22 percent of the ad spending.

To be sure, the gap between audience and ad spending has narrowed considerably over the past decade. The next big shift will be to mobile channels, given the wide gap between audience and advertising.

Over the long term, advertising will follow the audiences. Online audiences are growing. So are mobile audiences. TV, radio and print are shrinking. The money will follow.

Facebook and Google as ISPs

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Does Technology Drive Growth, or Does Growth Drive Technology Investment?

The conventional wisdom is that investments in information technology and high speed access and other forms of communication contribute to economic growth.

Like many other bits of conventional wisdom, the relationship between economic growth and technology investment is unclear.

Though most believe that technology investment “causes” growth, some might argue that it is economic growth that drives technology investment. And the issue might be more complicated than that.

Some would argue that it is not “technology” that contributes to economic growth, but “innovation,” and that might be quite a different matter. Using computers to create online retailing perhaps is an innovation.

Using computers instead of typewriters to create documents, while more efficient, might not represent so much innovation.

And there is a complicated “dark side.” Huge economic transformations, such as the Industrial Revolution, also disrupt the economic fortunes of huge numbers of people.

“Somehow, information and communications technology and Internet Protocol help grow the economy,” said Rozaimy Rahman, Telekom Malaysia Global EVP.

Rahman noted Malaysia’s stated goal of “becoming a fully-developed nation by 2020.”

But one might note the high rates of economic growth across Southeast Asia and argue that it is growth that is driving communications adoption and investment.

 source: Malaysia Chronicle

The problem is that investment in information technology does not necessarily lead to near-term boosts in productivity.

Some of us might argue that technological advances do increase productivity, but only after a lag. The lag might be as short as a decade, but might take longer.

As a practical matter, policymakers will behave as though they believe the theory that information technology and high speed access drives growth. Though the actual causal process is not so clear, the risk of betting wrong is simply deemed too great.

How Crucial are Video Streaming, Linear Video for ISPs, Long Term?

Redbox Instant by Verizon, the streaming service Verizon created with Redbox, is shutting down on October 7, 2014. The closure says less about the current or longer term viability of the business, and more about how tough the current business might be. Redbox Instant simply was not able to get traction.

The logic was simple enough: leverage the Redbox base of 30 million customers to create a rival $8 a month streaming service able to compete with Netflix, among others.

For $8 a month, users were able to stream with no limits plus have four nights of rentals from the local Redbox DVD kiosks.

Redbox Instant customers also could rent console games from the kiosks.

But Redbox Instant simply failed to get traction. Some will point to the catalog, noting that Redbox Instant had thousands fewer titles than Netflix, for example. A bigger issue was that most of those titles could be viewed on Amazon Prime or Netflix as well.

And while Netflix and Amazon Prime offered popular TV services as well as movies, Redbox Instant was a movies-only service.

Consider that TV content might account for as much of 66 percent of all Netflix streaming views.

Some might also argue that Redbox Instant was not available on as wide a range of devices as Netflix can reach.

Netflix is available on every major console type--not just Xbox--and most smart TVs and DVD players sold in the recent past. Redbox Instant could not match that level of device ubiquity.

Also, given the drive for content exclusivity and original content, Redbox Instant simply had none.

Still, the fundamental business logic made sense: if Netflix was doing so well, there is a market. What Redbox Instant had to do was establish a value proposition.

That does not mean some other competitor might eventually challenge Netflix, only to note that, for the moment, Netflix is the service that sets the standard.

Verizon likely will simply try another tack. Compared to AT&T, Verizon executives seemingly have become skeptical about the profit margins from offering linear video subscriptions.

Many small and rural U.S. telcos likewise are rethinking their video strategy. The problem is that a small service provider lacking scale will find the video subscription business model quite challenging.

So even if the triple play now is the mainstay of the telco and cable TV provider business, there are growing signs even that could change.

Larger Internet service providers such as Comcast and Verizon likely see a future where high speed access is the core product and linear video might not be offered at all.

The only salient issue is whether to participate in the streaming business, and if, so, how. At least some smaller telcos already are retrenching, moving to a “voice and high speed access only” product model.

Not least of the reasons is that their business models hinge on universal service revenues, and universal service support now is available only to providers who sell high speed access plus voice.

Sprint Layoffs Illustrate Fundamental Telco Problem

Sprint Corporation has announced a workforce reduction plan (layoffs) that might mean the loss of 1400 jobs at Sprint.

Sprint says the cuts will cost $160 million in Sprint’s second quarter.

Such cuts always are disruptive for the affected employees. But the downsizing is not unusual for service providers these days, as difficult as the process might be.

“Costs are going up and revenue is flat,” says Anup Changaroth, Ciena director, portfolio marketing. “In some markets, there is negative revenue growth.”

From 2002 to 2013 the largest 15 service providers lost 69 percent of their former revenue-per-subscriber revenue,” Changaroth said, quoting data provided by IBM.

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Over the same period, profit margins dropped four percent to 22 percent.

Competition that attacks top-line revenue is part of the problem. Also, shifts in perceived value are an issue as well.

Nor is it clear such job cuts would have been avoided if Sprint’s bid to buy T-Mobile US had succeeded. Any large merger of that sort would be expected to result in some job losses, as “synergies” generally are possible.

Left on its own, Sprint, which many expect will fall from the third position in market share to fourth, simply has to find ways to cut cost, if it cannot grow revenues fast enough.

Also, if Sprint really wants to challenge T-Mobile US as the undisputed “value provider” among U.S. mobile companies, it would have to drive its operating costs lower, to compensate for expected hits to top-line revenue.

The planned employee layoffs, expected to be largely completed by October 31, 2014, will include management and non-management positions, Sprint says.

Sprint expects to recognize a charge of approximately $160 million in the second fiscal quarter of 2014 for severance and related costs, but Sprint also says additional material charges associated with “future labor reductions may occur in future periods.”

In other words, this might only be the first of multiple employee cuts.

As traumatic as the cuts might be, they are not unexpected. No firm that is having trouble on the top line can avoid making changes below the top line to preserve the bottom line. And with Sprint’s new resolve to take price leadership of the U.S. mobile market, the top line is going to be under pressure.

Sprint is not the first, nor will it be the last “old line” telco that has to confront the growing implications of a changing market. As unpleasant as such cuts might be, a shift of value in the communications ecosystem has been underway since at least 2000.

The phrase “software eats the world,” where value shifts to Internet apps and processes, captures the direction of the shift.

While it is reasonable for access and transport service providers to take measures to increase the value of their services, it is hard to ignore the broader shift of value creation and equity value to application providers, within the communications ecosystem.

Under such conditions, access and transport providers will find growing pressure to align costs to revenue, when value continues to shift to app providers.

The Downside of "Reliability"

It might seem strange to argue that "reliability" is a potential negative in the telecommunications business, but in some ways "high reliability" can be a problem, rather than an advantage. 

The simple problem is that "high reliability" costs money. And in today's market, it isn't clear that consumers and business buyers are willing to pay a service provider for traditional reliability standards. 

A presentation by Sam Johnston, Equinix director of cloud IT services, nicely captures many of those challenges are faced by the global telecom business.

If you extrapolate from the shift in the way computing is accomplished, and the way software strategies evolve, you will see clearly why the traditional "telco" value-price proposition increasingly is being disrupted.

Consider "over the top" apps such as Skype, cloud-based productivity apps such as Google Drive, Google Docs, messaging apps such as WhatsApp. 

When creating apps and services of any type, designers have choices to make. They can assume or create "reliable software" designed to run over "unreliable hardware." That largely is the position occupied by major consumer and enterprise-facing apps. 

That also is the way major data centers are designed, using racks of cheaper servers instead of a smaller number of reliable servers. 

Conversely, at launch, the strategy might be "unreliable software" running over "unreliable hardware" or "reliable hardware." 

That approach might be taken by a newly-launched over the top app, aimed at the bottom of the functionality scale, or with an initial set of features that grows over time to provide more robustness.

The approach that arguably does not work so well is "reliable software" running over "reliable hardware." The reason is that this approach costs too much. 

You might argue that approach--reliable software running on reliable hardware--is the traditional telco approach to business, in the monopoly era.

That is why so much attention has been paid to "five nines" of reliability, and stringent testing of new apps. "Our name is on it" is one way of describing the traditional telco concern about app or service robustness. 

Today's software apps typically do not use that approach. They often launch in beta, expecting some things to break, and fix those problems on the fly. 

The point is that this approach necessarily involves a different approach to product development and market launches. "Moving fast" requires a willingness to launch products that are not yet fully formed and completely robust. 

Telcos typically do not create or launch products that way, which means telco apps tend to take longer to develop, and imply more cost. 

And that is the problem. It no longer is the case that high-cost approaches such as "reliable software running on reliable hardware" will work, in a competitive and fast-moving market. 

"Good enough" reliability really is the new requirement. Consumers are used to mobile phones that do not work some places, calls that drop occasionally, operating systems that need to be rebooted, perhaps daily. Users understand how to deal with using apps that do not always work perfectly, but work well, most of the time, and feature very low cost. 

No mobile network ever approaches "five nines" levels of availability. Nor do operating systems, browsers or other apps. 

Instead, the approach is "high value" experiences that "mostly work" but which are not as reliable as traditional telco services. 

Service Provider Business Models are About to Change, Really

Since about 2009, U.S. cable TV companies might have gained about 10 million high speed access accounts, while losing about five million video subscriptions, according to researchers at Moodys.

In 2014, cable high speed access and video units sold are about even, at about 50 million units of each.

In fact, by about 2015, U.S. cable operators might find that high speed access is the product that represents the most accounts or units sold.

That would be a first for the cable TV industry, which began life selling just one product, namely TV channels.

Cable operators will not be alone in seeing such transformations. At some point, tier-one telcos will likewise find high speed access is their anchor product as well. Mobile operators will someday make more money from Internet access than voice or text messaging.

To some extent, that trend already is appearing in other ways, as well. Even if it now is a truism that a consumer services provider sells a triple play or quadruple play package of services, even that conventional wisdom might reverse, in some cases.

Small independent telcos in the United States have different economic models than tier-one service providers--either of the cable TV, mobile or fixed line sort.

Some of the difference flows directly from scale. There are just some lines of business a small provider cannot reasonably expect to undertake, because scale is required. Mobile service, video entertainment or services for enterprises provide examples.

Without scale--both lots of customers and wide geographic scope--those businesses have tough business models. In fact, for years, small telco executives have said, either in private or in public, that they do not actually make money selling linear video entertainment.

Linear video is a business with substantial shared costs. And, by definition, better economics are obtained when a service provider can spread fixed costs over a large base of customers. A tier-one provider can do so; a small provider cannot do so.

The potential customer base also dictates and limits business models. Larger national or regional providers actually have viable enterprise segment opportunities, many small and mid-sized customer possibilities and lots of consumer accounts to chase.

Small providers, operating in rural areas, have few, if any, enterprise customers or prospects. They have smaller number of opportunities to serve small and mid-sized firms as well.

And population densities are much lower in rural areas.

Without in any way intending to demean, there actually is not a sustainable business model for many small telcos in rural areas. That is why universal service funds exist. Without the support funds, actual profitably or self-sustaining operations might not be possible for a fixed network or mobile service provider.

So even if it is quite clear that the triple play or quadruple play now is the offer sold to consumers by tier-one providers, that might not be feasible for at least some rural providers.

Whether a sustainable business model exists for high speed access, with voice, and without video entertainment, by fixed line operators in rural areas, is not yet possible to ascertain with certainty.

The key issue is that universal service funding now goes only to service providers who offer high speed access and voice. And if universal service funding is the difference between sustainability and failure, then it sort of makes sense that some executives would decide to get out of the costly and typically money-losing subscription video business altogether.

They won't be alone. Nearly all business models will change, over the next decade.

Global Telecom Capex Will Slow in 2015

Globally, mobile and fixed network service providers will have increased their capital investment by about three percent in 2014, according to Dell’Oro Group.

As you might guess, capex in the mobile segment significantly outpaced investment in fixed networks. Mobile network infrastructure investment was in double digits, while investment in fixed networks was in the low single digits, Dell’Oro Group says.

But Dell’Oro Group also predicts that capex spending will decline in 2015, for reasons that are entirely logical. Capital investment in either mobile or fixed segments tends to occur in stair step fashion.

Investments are made to enable new services or alleviate congestion, create brand new networks or significantly upgrade existing networks. But those construction jobs, once finished, also mean investment will slow until the next required round of infrastructure investment.

Hence the stair step pattern. Also, service providers tend to invest in direct proportion to revenue generation. When they are generating more revenue, they tend to invest more. Conversely, when revenues are declining or flat, they invest less.

“Higher device penetration, decelerating mobile data growth rates, lack of new revenue streams, and increased competition in both the developing and developed markets have caused worldwide revenue growth to decelerate in the last couple of years,” says Stefan Pongratz, Dell’Oro Group analyst.

In particular, “slower growth in service revenues coupled with the rapid network progress during 2014 in China, North America, Japan and Europe will also put some pressure on worldwide capex upside in 2015,” Pongratz said.

One example is investment to support 3G networks. The amount of mobile capex required to support incremental mobile data usage has declined more than 50 percent per year since the smartphone boom started.

On the other hand, with new demands for faster fixed networks, fiber to customer investment and building of new Long Term Evolution 4G networks will drive service provider telecom capital investment in 2014 and 2015.