Regulatory Incongruity Will Increase; Multi-Purpose Networks are One Reason

The existing adage that regulation has a hard time keeping up with technology probably underestimates the challenge. Regulations have a hard time keeping up with end user behavior and new business models as well.

“How do you create a rule today that still is relevant and helpful in five years” is one natural question.

Five years might be too little time to trigger major changes in regulatory framework, though.

Fundamental matters, such as how best to use scarce communications spectrum, or how to apply a regulatory model, tends not to change that fast.

Though the matter is not on the public agenda, it has been obvious for some time that media delivery is changing. It is not just a switch from live performance to radio to broadcast television to wired network delivery to mobile delivery.

Each of those changes created whole new industries and new regulatory approaches. The perhaps-bigger challenge is that industry boundaries are dissolving.

Among the best examples is the incongruous fact that the cable TV industry operates under one regulatory regime that is substantially less rigorous than that applied to AT&T, Verizon and CenturyLink.

That, despite the fact that cable TV and telecom industry product offerings in the consumer and business market are fundamentally the same, if not identical.

More of those sorts of incongruities will arise. Consider TV white spaces, or the proposed 600 MHz auction proposed by the U.S. Federal Communications Commission whereby TV broadcasters can give up their broadcast licenses, allowing spectrum to be redeployed to mobile communications.

Why are regulators shifting spectrum from broadcast TV to mobile communications? Partly because more mobile spectrum is required.

The other incongruity, though, is that most people in the United States consume video entertainment using a fixed network delivery method, with an in-room untethered access, with a similar--if less clear pattern--in audio content consumption.

At some point, that will raise politically-charged new questions, such as whether it makes sense to allocate important spectrum for point-to-multipoint linear content distribution, as compared to other on-demand delivery methods, particularly using mobile networks.

The uncomfortable question will be whether the regulatory silo that separate “broadcasting” and “communications” must be reworked in some fundamental way. Given the size of each of those industries, the challenges will be difficult.

But difficult questions often cannot forever be avoided, as the boundaries between “industries” is becoming porous.

Three decades ago, researcher Nicholas Negroponte of the Media Lab at MIT suggested that broadband content devices received content “over the air” while narrowband devices received content using cables.

Negroponte argued that the reverse situation should prevail. A better use of available communication resources would be to deliver broadband content using cables and narrowband content using airwaves.

That came to be known as the "Negroponte Switch".

Updated for changes over three decades, the new issue is that linear content is being augmented by on-demand content, and devices increasingly are mobile or untethered, not fixed.

That might suggest the Negroponte Switch is outdated. Paradoxically, the issue of over the air delivery--in the Negroponte Switch sense--remains relevant.

Mobiles typically continue to use airwaves for video and other content delivery. But sometimes that access is shifted to the fixed network (cables to a location, then Wi-Fi for local device access).

The new wrinkle is on-demand video delivery (over the top streaming), sometimes accessed by people using the mobile network, sometimes using the fixed network.

At some point, the issue of symmetrical regulation is likely to seem more necessary. If, one day, mobile operators provide similar services or apps or content as “TV broadcasters,” what does that mean for the fundamental models of regulation?

It is another version of the challenges of “general purpose networks.” Cable TV and telco firms deliver the same services, but live under distinctly-different regulatory frameworks. Does that make sense?

Someday, it is likely similar questions could be asked about “TV broadcasting” and “mobile communications.”

Sprint and T-Mobile US Both Want to Grow, But Similarity Ends There

It often seems as if Sprint reports financial results that reflect a transition of some sort. And there is no question but that T-Mobile US has dramatically changed its operating performance over the last year or so.

But there is a fundamental difference in Sprint and T-Mobile US strategies, though both firms are attacking the market with a “value” approach.

Sprint’s new direction is based on long term organic growth. “ I am here to run Sprint for long-term value creation,” said CEO Marcelo Claure.

And even if T-Mobile US CEO John Legere points out that T-Mobile US has many options, T-Mobile US is a firm that almost everyone believes will be sold, relatively soon.

Often, that shorter-term approach can lead to a strategy of adding customer and revenue volume as rapidly as possible, the reasoning being that if the asset is to be sold at a multiple of revenue, then the value of the asset is higher if the revenue figure is higher.

A longer-term approach based on sustainable growth tends to value profit margin (bottom line) more than the revenue top line. Sprint wants more scale, and therefore more revenue and customer account growth.

But it also now has to be concerned with the bottom line, which is why cost reduction and efficiency moves also are underway.

The difference in strategic thinking also might explain why T-Mobile US reporting on its third quarter focused entirely on top-line growth, rather than bottom-line results.

T-Mobile US touted its “best quarter ever of branded postpaid net adds,” as T-Mobile US added 1.4 million net postpaid accounts.

Branded postpaid phone net adds more than doubled quarter-over-quarter to 1.2 million and branded prepaid net adds up more than four times quarter-over-quarter to 411,000, T-Mobile US said.

T-Mobile US has added 10 million total customers added over the last six quarters, and 2.3 million in the third quarter alone.

T-Mobile US service revenues grew 10.6 percent year-over-year to $5.7 billion, on the strength of the “best ever average billings per user of $61.59 a month,  up 4.2 percent year-over-year.

Adjusted T-Mobile US EBITDA of $1.35 billion was “flat” year-over-year, but declined sequentially, T-Mobile US said.

Adjusted EBITDA of $1.35 billion was down 7.2 percent sequentially from $1.45 billion in the second quarter.

In the third quarter, T-Mobile US generated a loss of $0.12 per share, compared to estimates for a $0.02 per share profit.

At least momentarily, it appears T-Mobile US is being run for growth, even at the expense of the bottom line, while Sprint will try to grow while maintaining profit margins.

Sprint reported net operating revenue of $8.5 billion in its second quarter of 2014, representing an operating loss of $192 million, with adjusted EBITDA of nearly $1.4 billion (EBITDA is operating income/(loss) before depreciation and amortization. Adjusted EBITDA is EBITDA excluding severance, exit costs, and other special items)

Consolidated adjusted EBITDA of nearly $1.4 billion grew three percent over the prior year period.

Total Sprint net subscriber additions of 590,000 were lead by wholesale net additions of 827,000, balanced by postpaid net losses of 272,000 and prepaid net additions of 35,000.

Tablet net additions were 261,000 in the quarter, up 207,000 year-over-year but down 274,000 sequentially, as Sprint refocused sales efforts on postpaid phone accounts, Sprint CFO Joe Euteneuer said.

Sprint expects increased selling costs associated with significantly higher gross additions and upgrade volumes in the fiscal third quarter of 2014; part of Sprint’s new effort to become the price leader in the U.S. mobile market.

Sprint also warned that “the significant loss of postpaid phone customers over the last few quarters has pressured wireless service revenue, and this trend is expected to continue into the next quarter.”

As has so often seemed to be the case, Sprint is once more in a transition, with a new strategy and new leadership. So it is too early to take measure of the prospects for future success.

But new CEO Marcelo Claure pointed out gains after just a few short months of his tenure. “We have seen a notable turnaround in our postpaid phone addition trends.”

In September 2014 Sprint achieved its highest monthly postpaid phone gross adds since December of 2012, a 40 percent increase over the August run rate. In October, Sprint grew another seven percent sequentially.

September represented the first month in 2014 where Sprint achieved year-over-year growth in phone net adds, as well.  

And Sprint says it also is doing better at adding customers who pose lower credit risk.

“Our top priority now is to get back to postpaid customer growth and given the trends we are seeing in the market today, we are optimistic we will be able to deliver positive postpaid net additions in Q4,” Euteneuer said.

Smartphones represented 95 percent of Sprint postpaid phone sales in the quarter and now account for over 86 percent of the Sprint postpaid phone base. About 62 percent of the Sprint platform postpaid base is on LTE devices, including 73 percent of the Sprint platform postpaid smartphone base.

Sprint announced another 2,000 cuts in staffing levels, as well as "targeting $1.5 billion of annualized cost reductions compared to 2014 spending levels."

Sprint also cut its full-year capex guidance by about $1 billion to less than $6 billion, after a similar reduction a quarter ago.

All those moves make sense if Sprint is committed to becoming a price leader. That implies a lower cost structure than it has at present.

T-Mobile US, on the other hand, says it already was the most-efficient operator among the top four, and therefore arguably has less room for cost-cutting initiatives. wan

"Keep Copper Network and TDM," Some Argue

Creating good public policy in the communications realm is never easy, as regulators constantly are balancing. But it does seem as though “balancing” has become more precarious recently. Consider the whole matter of what to do about the legacy copper network, the “transition to Internet Protocol networks” and support for legacy services.

To be sure, the Federal Communications Commission has multiple goals. For example, the FCC says its mission includes “promoting competition, innovation and investment in broadband services and facilities, and “supporting the nation's economy by ensuring an appropriate competitive framework for the unfolding of the communications revolution.”

To some extent, of course, the goals of promoting competition and promoting investment are contradictory. As both U.S. and European regulators have discovered, promoting competition by expanding wholesale access to incumbent facilities often succeeds quite well.

But that same success also discourages further investment in facilities, since the owner of the scarce access network automatically enables robust competition when it invests in next generation facilities.

Likewise, the transition to the next generation of broadband networks would seem to require creating and maintaining incentives for facilities investment, balanced with the goal of promoting competition.

Sometimes that translates into rules that specifically require maintaining legacy facilities and services, even if that conflicts with the goal of supporting next generation network investment.

Ironically, we now see support both for expanded optical fiber access to support gigabit networks, and talk of preserving the life of copper networks to preserve competition.

The problem, of course, is that the copper network and legacy services are serving fewer and fewer customers, meaning the costs of serving each remaining customer are growing. at the same time the legacy services are being replaced by next generation services.

It isn’t easy, all might agree. But neither are matters helped when waffling occurs, as tough as firm policies might be. Granted, there are constituencies for keeping the copper network, and legacy services, alive.

But few seem to think it would be better if Internet service providers slowed their migration to fiber access networks, slowed the rate of speed increases or put obstacles in the way of faster Ethernet and IP services.

It is a balancing act, to be sure. But some methods of protecting competition actually are harmful to the goals of expedited investment in next generation infrastructure.

Making matters worse are asymmetrical regulatory frameworks that do not treat all providers of access and other services the same way.

The biggest U.S. high speed service providers (and Internet access is the strategic service)  are AT&T, Verizon, Comcast and Time Warner Cable. But they play under different rules.

In fact, in terms of subscriber share, Comcast is the biggest, followed by AT&T, then Time Warner Cable, then Verizon, according to Leichtman Research Group.  

High Speed Internet Access Subscribers	Subscribers 2Q 2014	Net Adds 2Q 2014
Cable Companies
Comcast	21,271,000	203,000
Time Warner	11,965,000	86,000
Charter	4,850,000	62,000
Cablevision	2,779,000	(9,000)
Suddenlink	1,103,300	200
Mediacom	987,000	3,000
WOW (WideOpenWest)	769,600	12,900
Cable ONE	482,725	(1,443)
Other Major Private Cable Companies	6,475,000	25,000
Total Top Cable	50,682,625	381,657
Telephone Companies
AT&T	16,448,000	(55,000)
Verizon	9,077,000	46,000
CenturyLink	6,055,000	(2,000)
Frontier	1,900,500	27,500
Windstream	1,153,800	(16,600)
FairPoint	333,421	1,883
Cincinnati Bell	270,300	300
Total Top Telephone Companies	35,238,021	2,083
Total Broadband	85,920,646	383,740

source:  Leichtman Research Group

True, Comcast and Time Warner Cable are not yet in the mobile business. But that will come, meaning all the largest telcos and cable companies will compete across the full range of anchor products and customer segments.

And one might also argue that asymmetrical financial returns--that underpin investment--now flow to app providers and device providers in the ecosystem, not to access providers.

Granted, it is not the business of the FCC to oversee the financial health of the device and app industries that all agree contribute to the nation’s economy. On the other hand, if there were obvious shifts in business model that directly affected the health of all contestants in the access business, one would think that would inform decision making.

In Europe, communications regulators have discovered that decades of successful promotion of competition have also lead to decades of lessened investment, and that the “pro-competition” policies are directly related to those outcomes.

It’s a balance; a tough balance. But both investment and competition must be supported.

Is Wi-Fi a ¨Power Shift¨ in Telecommunications?

There has been a long-simmering debate about whether public Wi-Fi hotspots can become a competitor to mobile networks. As with many such debates, actual practice suggests the choice is false.

These days, mobile operators consider Wi-Fi access an integral part of the overall access resources picture. And even mobile operators that might like to base all their access operations on Wi-Fi acknowledge that a combination works best.

EE has argued LTE users use Wi-Fi less. But those users do not stop using Wi-Fi. Still, the questions might grow as the footprint offered by public Wi-Fi hotspots grows.

Maravedis Rethink estimates there will be 47.7 million public Wi-Fi hotspots deployed worldwide by the end of 2014.

By 2018, the number of global hotspots will grow to over 340 million, Maravedis Rethink estimates.

France, the United States and China will have the biggest public Wi-Fi footprints. Already, China has five times more commercial Wi-Fi hotspots than any other country.

And many of those locations are networked so that roaming is possible. Some 22.7 million Wi-Fi hotspots are enabled for roaming between different provider networks in 2014, and will grow to 289.3 million in 2018.

Some questions might remain about how prevalent ¨homespot” networks will become. Homespots leverage private end user Wi-Fi locations to create public Wi-Fi hotspots.

There are perhaps 40 million such homespots in operation in 2014, growing to over 325 million in 2018. The big question is potential demand for homespot connections in suburban and less-dense areas.

Executives at iPass argue (perhaps understandably) that Wi-Fi is changing the power structures of the telecommunications industry.

Perhaps 50 percent of all commercial hotspots are controlled by brands whose core business isn't telecommunications, argues Evan Kaplan, iPass CEO. ¨We are witnessing a power shift from traditional telcos to business owners, such as cafes, hoteliers and retailers who are all getting in on the Wi-Fi game.¨

There is plenty of room for debate about the future role of Wi-Fi as an access medium, and in most cases, the debate will center on how much each network--mobile and Wi-Fi) is used, where, when, by whom, for what devices and application scenarios, and what the business models might be.

But it might already be clear that pricing of mobile Internet access plays a role.

In France, for example, despite high levels of smartphone ownership (60 percent, according to a recent survey by Deloitte, up from about 53 percent in 2013 ), only 11 percent of respondents had a 4G phone.

Many respondents apparently were put off by the high costs of both 4G handsets and data plans, although there are indications this is a misperception, as perhaps 81 percent also report they pay no additional fees for 4G access.

On the other hand, Wi-Fi hotspot availability might have something to do with lagging interest, as France has the most public hotspots of any nation, according to iPass. "Most of the devices we use are Wi-Fi only and even on the most advanced 4G handsets, 78 percent of data goes over Wi-Fi,” said Kaplan.

LTE service pricing tends to reflect a desire by most operators to price Long Term Evolution as a premium service, a tack that generally has not been taken by U.S. mobile operators, which might explain high adoption rates in the U.S. market.

To be sure, as mobile revenue shifts from voice to Internet access, it is understandable that service providers would look to price at a premium.

Mobile data has emerged as the single most important driver of telecom revenue growth, according to Pyramid Research, which forecasts that mobile data revenue will reach $633 billion globally in 2018, increasing from 40 percent of overall mobile revenue in 2013 to 52 percent in 2018.

Asia-Pacific, the world's most populous region, which accounted for nearly 38 percent of the world's mobile data revenue in 2013, should lead the growth.

Pyramid Research expects the global 4G subscription base to grow at a 52-percent compound annual growth rate, from 211 million users in 2013 to 1,750 million users in 2018.

But that growth will still be conditioned by device costs and retail service pricing.

And then there is Wi-Fi. It remains unclear how much reliance users will continue to place on Wi-Fi access even when they have Long Term Evolution access.

WiFi is the connectivity of choice among LTE subscribers. According to a study by Mobidia Technology, a provider of mobile analytics, Wi-Fi accounted for an enormous 75 percent to 90 percent of all mobile data consumed in “leading LTE markets,”according to a study by Mobidia.

Is there a danger that Wi-Fi cannibalizes some mobile data revenue? Probably. But is Wi-Fi also necessary to keep customers happy by allowing them to use lots of data without stressing trhe mobile network? That also likely is necessary.

So pricing will play a huge role as consumers make decisions about which networks to use, and whether LTE makes good sense. Price LTE too high, and adoption will fall; price it too low and the mobile networks could crash.