Will 600-MHz Auctions Flop?

Is it possible the upcoming 600-MHz auctions of U.S. TV broadcast spectrum will flop? And is that possibility more or less likely than huge demand for spectrum that leads bidders to overpay?

Right now, it is hard to say which outcome is more likely.

Some might argue the prospect is for overpayment, as bidders compete for high-quality spectrum. The precedent is surprising high prices paid in the 700-MHz AWS-3 spectrum.

In fact, some might say, the results of that precedent already are being seen in reverse auction prices for 600-MHz spectrum auctions.

In some cases, initial prices have been reset at an order of magnitude higher ranges. In New York City, the median bid for a full power station rose to $660 million from $410 million.

In Los Angeles, initial prices  jumped to $560 million from $340 million.

In Portland, Ore., the initial price  rose to a median of $170 million from just $18 million. In Nashville, Tenn., prices climbed to $220 million from $20 million.

On the other hand, some might argue the pressure will run in the other direction: namely less demand for the 600-MHz spectrum.

For starters, there are multiple ways mobile service providers can create more effective capacity. Spectrum resources matter. But so do network architectures, air interfaces and other signal processing techniques.

Bidders will have to decide how much emphasis to place on acquiring new spectrum, compared to other techniques.

Also, other spectrum options exist, and are developing. That means “scarcity” might be a relative concept. Longer term, there is lots of attention being paid to huge new blocks of spectrum in the millimeter range that previously have been unusable for communications purposes.

Nearer term is the possibility of spectrum sharing between current non-profit and government licensees and new commercial users.

An immediate possibility is use of spectrum not yet commercially deployed, especially the LTE spectrum amassed by Dish Network.

Dish Network has amassed a significant collection of spectrum assets to enable it to launch a new Long Term Evolution mobile network.

Whether Dish Network ultimately will do so is not clear, though. Some think Dish Network might ultimately simply sell the spectrum to another firm, or might create a national wholesale business, or sell all of Dish Network--video business and spectrum--entirely.

Any of those moves would affect demand for 600-MHz spectrum by reducing demand. Less demand would first mean less spectrum is made available, and then lead to lower prices for available assets.

In other words, one might argue there is as much likelihood of a relatively unsuccessful auction as of an auction that draws huge bids.

One might argue that “overbidding” is a danger to be avoided.

Mobile service providers have in the past misjudged the value of spectrum and nearly bankrupted themselves.

When auctions for third generation network spectrum were held in Europe, carriers overbid, creating financial pressures that nearly bankrupted a number of tier one service providers. (“Shocking,” some sarcastically will note).

And every cost anywhere in the delivery ecosystem ultimately is paid for by end users. So higher spectrum prices will mean higher retail prices, one way or the other.

Concern about excessive prices already has arisen in some 4G auctions. On the other hand, there has been some speculation that 700-MHz AWS-3 prices were bid up so much because carriers think the 600-MHz auctions might not provide as much value.

Indeed, the very structure of the 600-MHz reverse auction process encourages “high prices.”

In a two-step process, the auction has to encourage TV broadcasters to part with spectrum by offering large payments. Only then will spectrum be made available for mobile service providers to buy.

So high initial prices are not necessarily the ultimate prices buyers might pay. Also, the voluntary clearing process also means it might be hard to assemble uniform national footprints of new spectrum. That might lead to lower prices in secondary and tertiary markets.

So despite speculation that demand for AWS-3 spectrum was unexpectedly robust, demand for 600-MHz spectrum is less clear. Other spectrum alternatives are coming, longer term.

But some think the precedent of the AWS-3 auctions suggests higher prices for 600-MHz assets.

The impact of broader service provider debt loads is not to be discounted, either. Leading service providers face revenue pressure at the same time they face demands to invest in the next generation of services, plus pay for additional spectrum.

How much operators should--or can--pay is a growing issue.

Cloud Computing Now 5% of Enterprise IT Spending

One way of illustrating cloud computing prospects is to note that in 2014, cloud computing probably represented only about five percent of enterprise information technology spending.

By about 2018, more than 60 percent of enterprises will have at least half of their infrastructure on cloud-based platforms, according to Saugatuck Technology.

Year over year growth for leading cloud services suppliers has been dramatic. Between 2013 and 2014, Amazon revenue grew 51 percent.

Microsoft’s cloud revenue grew 96 percent; IBM’s revenue was up 48 percent; Google’s cloud revenue climbed 81 percent and Salesforce revenue was up 37 percent. In the fourth quarter of 2014 quarterly revenues were about $5 billion.

At current growth rates, the cloud services market might generate $160 billion by 2020.

In 2014 Amazon Web Services  share of the worldwide cloud computing market was 28 percent, followed by Microsoft at 10 percent, IBM at seven percent, Google at five percent, Salesforce at four percent and Rackspace at three percent.

Cablevision Launches First "Wi-Fi Only" Mobile Service

Cablevision Systems has launched Freewheel, its new Wi-Fi-only mobile service. It costs $30 a month for customers who are not buying Cablevision high speed access, but only $10 a month for consumers who do buy Optimum Online broadband services.

The service should provide a huge real-world market test of the attractiveness of a "Wi-Fi only" approach to mobile device access, a possibility that observers have speculated about--as an alternative to mobile service--for decades.

The market window for such an approach might be somewhat limited, some might argue, as coming fifth generation (5G) networks are expected to feature an ability for devices to choose any available access network.

Perhaps significantly, this is not the first time Cablevision has actually contemplated building a service that is mobile and untethered, but not “full mobile.”

Back in the 1990s, when the U.S. government was auctioning a new block of spectrum still called Personal Communications Service (PCS), the thinking was that the new spectrum might be used to create new types of services distinct from mobile service.

At that time, mobile service was expensive and used primarily by people in business. The thinking was that PCS would be a lower-cost type of mobile service.

Predating many of today’s fundamental concepts, the thinking was that Cablevision could create a big network of small cells, with antennas perhaps located at every amplifier location, which would create a grid of transmitting sites supporting in-home or pedestrian call hand-off between cells.

The thinking was that a person walking on a street would be able to transition a call between one small cell and the next, something that would not be possible at highway speeds, though.

So basically, the thinking went, the service would work in the space between a “home cordless phone” and a full “mobile service.”

Cablevision never proceeded with the plan, but as so often happens, some of the basic concepts were correct, but just too early for the commercial market.

Lower cost service, in home or pedestrian use, new spectrum, small cells, a new transmission network and new market entrants were hallmarks of the original Cablevision plan.

On the other hand, as also often happens, the potential market shifted. Whatever thoughts proponents might have had, the release of new PCS spectrum--initially thought to be the underpinning for new types of service--wound up bringing much more competition to the mobile services business, changing a niche market into a mass market.

With the release of PCS spectrum, Sprint and what become T-Mobile US emerged as leading mobile providers in a new mobile mass market.

That competition lead to far-lower service prices, which eliminated the gap between cordless phone and mobile phone service, and also made mobile a viable replacement for fixed voice service.

But the Cablevision Freewheel offer nevertheless is historic, as the first U.S. Wi-Fi only mobile service.

On the other hand, Freewheel faces a market likely to change. Already, most smartphone owners use a “mobile-first, Wi-Fi often” form of access.

In fact, in some cases, the volume of data consumed might already be “Wi-Fi first, mobile second.”

All other service provider offers already incorporate the ability to shift to Wi-Fi as the primary network connection.

A number of providers use a “Wi-Fi first” approach, with a switch to mobile access as needed.

Also, a growing number of service plans are offered at prices comparable to the Cablevision “not a subscriber” price of $30 a month. it is the $10 “current subscriber” price that is disruptive.

So the primary customer base is likely to turn out to be existing Cablevision high speed access customers.

HIstory suggests the offer will face high obstacles. Rarely, if ever, do “non-standard” consumer electronics or communications offers succeed broadly when they deviate from the general market expectations.

That has applied to any number of appliances that blend in-home phone and Internet access capabilities, for example. None have gotten traction. Instead, people rely on smartphones.

Cablevision suggests the service might appeal to several potential  customer segments, including people who do not travel outside the New York metro market that often, or

spend their typical days in WiFi-rich environments, including colleges, offices and homes.

Other potential customer segments include users who worry about overspending on data.

Also, Cablevision suggests, the service might appeal to customers who live in in areas that suffer from poor cellular reception  

The low price for Cablevision high speed access customers ($10 a month) might make it a useful service for children getting their first phones, the company suggests.

The issue is how long the market window exists for a Wi-Fi-only service, given the growing trend to “use any access” approaches.

Consumers Choose, Churn From Mobile Service Providers for Very Different Reasons

U.S. mobile service providers tend to lose customers for different reasons, a new study by Consumer Intelligence Research Partners has found, and the reasons are congruent with each firm’s positioning in the market.

AT&T and Verizon tend to lose customers because of the cost of service. That would make sense, as Verizon has a reputation as the “most expensive” carrier. AT&T does not hold quite that position in the market, but might generally be seen to be more expensive than Sprint and T-Mobile US.

Over half of consumers who switched from Verizon or AT&T said cost was the primary reason, compared to less than 40 percent for other deserting customers of Sprint or T-Mobile US.

On the other hand, customers leave Sprint and T-Mobile US because of perceived problems with network quality. That also might make sense, given the broader network coverage of the Verizon and AT&T networks.

Almost 40 percent of Sprint and T-Mobile departing customers say “network quality” is the reason they switched.

But customer churn also is less an issue than often is believed, the survey indicates. “Mobile phone customers are very loyal to their carrier,” CIRP argues.

Almost 80 percent of customers stay with their current mobile phone carrier when they buy a new phone, far more than stay with their operating system or brand of phone.

That 20 percent churn rate, spread over a two-year period, implies a churn rate less than one percent a month, at least when phones are replaced.

Loyalty varies somewhat among customers, with AT&T and Verizon maintaining the most loyal customers, and Sprint and T-Mobile have somewhat lower loyalty rates, CIRP notes. That is congruent with churn rates, which are lower at AT&T and Verizon than at Sprint and T-Mobile US.

As a generic, consumers arguably switch carriers for many reasons. Lower price, high cost, network quality, plan structure, device exclusivity or perhaps customer service quality might drive a change of service provider. But the survey shows the concrete reasons vary by carrier.

As you might guess, consumers also choose new carriers for different reasons.

AT&T and Verizon tend to appeal to consumers based on network quality, even though consumers think they cost more.

Consumers think that T-Mobile provides a lower-cost service, at the expense of network quality.

Sprint draws customers based on plan features, such as friends and family pricing or unlimited data.

Consumers do not appear to switch carriers based on the quality of customer service received from their old carrier or anticipated from their new carrier.

Verizon Sells 3.7 Million Lines, 7.1 Revenue Generating Units to Frontier Communications

Verizon Communications will sell its fixed network business in California, Florida and Texas to Frontier Communications Corporation for $10.54 billion (approximately $9.9 billion in cash, plus $600 million in assumed debt) for the business and related assets in these states.

At the end of fourth-quarter 2014, these operations served approximately 3.7 million voice connections; approximately 2.2 million high-speed data customers, including approximately 1.6 million FiOS Internet customers; and approximately 1.2 million FiOS Video customers.

The transaction includes Verizon’s FiOS Internet and Video customers, switched and special access lines, as well as its high-speed Internet service and long-distance voice accounts in these three states.

The consumer and small business wireline operations that Verizon is retaining provide service in nine states and the District of Columbia and had approximately 16.1 million wireline voice connections; seven million high-speed data customers, including approximately 5.1 million FiOS Internet customers; and 4.5 million FiOS Video customers.

The states in Verizon’s contiguous consumer wireline footprint are Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and Washington, D.C.

At the same time, Verizon is returning a significant amount of capital to its shareholders through a $5 billion accelerated share-repurchase program.

In a separate transaction, Verizon also has agreed to lease the rights to over 11,300 of its company-owned wireless towers to American Tower Corporation, which will also purchase approximately 165 Verizon towers, for a total upfront payment of approximately $5 billion.

American Tower will have exclusive rights to lease and operate over 11,300 Verizon cell towers.

The average term of the lease rights is about 28 years. As the leases expire, American Tower will have fixed-price purchase options to acquire these towers based on their anticipated fair market values at the end of the lease terms.

Verizon will sublease capacity on the towers from American Tower for a minimum of 10 years for $1,900 per month per site, with annual rent increases of two percent. Verizon will have customary renewal options that could potentially extend the full term of the sublease to 50 years.

Earlier, I had estimated that “if Verizon acquires $10 billion worth of assets from Verizon Communications, and the value of a subscriber is about $3000, that implies the purchase of about 3.3 million subscribers. At $3200 per subscriber, the deal implies the purchase of about 3.13 million subscribers.”

The price actually wound up being about $2835, for a mix of consumer and small business accounts.

I Now Can Buy a Gigabit High Speed Access Service, But Won't Do So: Here's Why

Gigabit high speed access is a good thing, most might agree. But actual consumer behavior--inclding mine--might be quite different than some expect, when gigabit and 100-Mbps services are available, and people really have to make choices with financial implications.

For years, the fastest speed I could buy was about 20 Mbps, in Denver, even if other neighborhoods had been upgraded to 40 Mbps. The retail offer wasn't quite so good, as the preferable prices could only be gotten when high speed access was bundled with a voice line, a product I have no use for.

That now has changed. I now can actually buy either gigabit access or 100 Mbps from CenturyLink.

CenturyLink in 2014 said it would bring gigabit high speed access to 16 cities across the United States.  Some have questioned how widespread the service footprint would be, or the pace of upgrades.

Quietly, it seems, CenturyLink has been upgrading networks, including mine. 

In Denver, 16 neighborhoods seem to have been upgraded. In addition to gigabit services, customers also can buy 100 Mbps services.

In my own neighborhood, a gigabit will cost $110 a month, guaranteed for a year. The 100-Mbps service costs $70 a month, with the price guaranteed for a year. The 40-Mbps service, which I was told in 2013 was not available in my neighborhood, costs $30 a month, guaranteed for a year. All those prices are for stand-alone service, with no phone service.

Both the price-value and other terms and conditions are as good as I have been offered at any time over the past decade.

Now here’s the “bad news.” Having just experienced a speed upgrade from Comcast to 105 Mbps, (with consistent speed over time, of 75 Mbps)…..wait for it….I cannot easily detect, as a “dumb end user,” the benefit.

Let me say that again: after an upgrade from typical speeds of 15 Mbps to 75 Mbps, I cannot really tell the difference.

I wish I could say something noticeable happened. It has not.

That is going to be an issue, eventually. Line speed really doesn’t directly improve end user experience as much as one might envision, at least when there are not contending users sharing the line.

Oddly enough, despite waiting so long for 100 Mbps, to say nothing of a gigabit, and being able to buy both services, I am choosing not to by a gigabit. I can. I just don’t think it will provide any incremental value over 105 Mbps.

Shocking, I realize. It is surprising. But so far, I cannot tell the difference between the old 15 Mbps and the new 105 Mbps. And for that reason, I will not be upgrading to a gig. I could, but why?

More Trouble for Linear TV?

Total live TV ratings were down 12.7 percent year over year across the networks of major media companies, according to Nomura Research

That is part of a pattern of declines in linear video consumption that might now be on the verge of accelerating, trends recently highlighted by 21st Century Fox, which cut its revenue forecasts for 2015 because of declining viewership.

Sprint Gains Subs, Loses Operating Income

Sprint posted strong account gains but lower operating income in its latest quarter, adding nearly a million net new accounts, while net operating income dropped two percent and postpaid churn grew slightly.

Those account gains represented net customer additions up 42 percent year-over-year, while postpaid gross additions (not net additions) were at the highest level in three years, Sprint said.

The strong points were the subscriber gains and a shift in the customer mix towards higher-quality. Those gains came at the cost of higher churn rates and a dip in income.

BT Nails Deal to Buy EE

BT Group, Deutsche Telekom and Orange have agreed to terms by which BT will buy EE for £12.5 billion ($18.98 billion) in cash and stock, a move that will put BT back into the consumer  mobile services business after a decade absence, and also merge the U.K.’s largest fixed network operator and the U.K.’s biggest mobile service provider.

As part of the deal, BT will gain 30 million accounts, including some 24.5 million consumer mobile accounts and a Long Term Evolution fourth generation network that covers about 75 percent of potential U.K. customers.

The deal has to be approved by shareholders and regulators, but is part of several trends. European service providers now believe they need more scale to compete, driving mergers and acquisitions.

Also, because of the difficulty of growing in saturated markets, tier one service providers are blending mobile and fixed network services, moving towards quadruple play services (video entertainment, voice, high speed access, mobile).

Verizon Sale of Fixed Assets Could Boost Mobile Revenue to Nearly 75% of Total

If Verizon acquires $10 billion worth of assets from Verizon Communications, and the value of a subscriber is about $3000, that implies the purchase of about 3.3 million subscribers. At $3200 per subscriber, the deal implies the purchase of about 3.13 million subscribers.

Precisely how many fixed network subscribers Verizon presently has is a bit of an estimate, since “revenue generating units” tends to be the new metric, in a triple-play market.

But assume total high speed access subscribers are in the range of 9.2 million units, and that high speed access is about 50 percent of total fixed network active household accounts. That implies 18.4 million homes provided with at least one service.

So a sale of perhaps 3.13 million subscribers might reduce Verizon Communications fixed network accounts by about 17 percent.

In any event, Verizon soon will be generating even more of its revenue directly from mobile services, not fixed services. In the past, Verizon has generated 69 percent of revenue from its mobile segment. Selling 17 percent of its fixed network subscriber base will boost mobile even further. As a rough approximation, the sale of fixed assets might boost mobile segment revenues to about 74 percent of total.

Add Low Reputation Scores to Low Customer Satisfaction Performance

It will not come as a surprise that Internet service providers, telcos, cable TV or satellite TV firms suffer in virtually all studies of customer satisfaction. It appears they also have that problem in the area of company reputation as well.

A study of company reputation shows telcos, cable TV and satellite TV companies in the bottom half of the rankings. The top score was earned by Wegman’s, the grocery chain. If you ever have shopped there, you will know why.

Apple and Google scored 80 and change. Verizon Communications scored 69. Sprint, AT&T and T-Mobile US scored 67.

DirecTV scored a 65, while Comcast and Charter Communications scored 60. Dish Network scored 58.

One might argue those scores are the result of deliberate choices, not malfeasance or dumbness. Some businesses arguably cannot afford to spend very much on “delighting customers.”

Car dealers, for example, might reasonably assume that “repeat buying” opportunities actually are rather rare. If that is the case, only so much rationally should be spent on customer experience.

Most consumer telecom or video subscription companies might rationally assume the average account life cycle is four years, perhaps less. If so, practitioners might be making rational choices about how much to spend upgrading customer experience and service.

Occasionally firms might underspend too severely, and see churn rates increase. But in all likelihood no firm in the consumer segment wants to overspend. And that might account for the generally low customer satisfaction or reputation scores earned by service providers.

How Much Revenue Could U.S. ISPs Lose as Competition Builds?

Some argue the U.S. Internet service provider business could lose about $2 billion a month in subscriber revenues were the market to use a regulatory framework such as exists in the United Kingdom and most of Europe, where most ISPs operate using wholesale access provided by an underlying carrier.

Even if one argues that a major shift of regulatory framework does not happen, it still is possible to argue that U.S. high speed access competition will grow, in the near future, if for no other reason than that new providers, including Google and a growing number of other firms, see the gigabit access market as interesting and sustainable.

Verizon Wireless, historically the U.S. mobile service provider most hesitant to compete on price, has launched new offers offering more for the same price.

At the same time, for a growing number of consumers, mobile Internet access is becoming a viable substitute for fixed network access. That trend is likely to accelerate as 5G networks, supporting speeds up to a gigabit per second, are launched in a decade or so.

Also at least for a couple of more years, U.S. government policy is likely to continue in a direction of “more regulation, not less.”

Whether such competition could shave $24 billion in existing annual ISP revenues is the issue. For starters, it is increasingly difficult to identify the size of the high speed access revenue stream, since most U.S. consumers buy a triple play package where the actual revenue contributors are accounting issues (attributed revenues).

“It seems, at the moment, likely that some version of increased competition will drive prices down in the next five years,” Point Topic argues.  

In fact, the Federal Communications Commission already has tried that approach, in the wake of the passage of the Telecommunications Act of 1996, and abandoned the approach in favor of facilities-based competition, a move many would credit for rapid investment in next generation access facilities.

The perhaps-unpleasant reality is that “competition” and “investment” are contradictory goals, where it comes to the use of wholesale facilities. The reason is simple enough to comprehend.

Where one actual network services provider is required to sell wholesale access with significant discounts (half retail price, for example), there is almost no incentive for a retail service provide to invest in its own assets.

If the underlying carrier must provide highly-discounted access to the network, the value of the upgrade cannot be captured.

To use an analogy, how much innovation would Apple be willing to pursue were it forced to sell as an original equipment manufacturer to all other device retailers, allowing them access to all the core features, including iTunes and the app store, at a 50-percent discount?

On the other hand, there is little incentive for the network services provider to invest further, if it is required to make the new facilities available to wholesale buyers on the same terms as presently required.

The Federal Communications Commission has not yet voted on rules that would classify Internet service providers as common carriers, but the legal challenges already are being prepared. As always, the challenges will rely on specific points of law outside the domain of a typical consumer’s frame of reference.

The point is that business headwinds in the U.S. high speed access market are building.

Big IoT Revenue Impact Within 3 Years?

Expectations for business benefit from the Internet of Things (IoT) arguably are wildly overestimated at the moment.

Many would agree IoT will be big, at some point. Accenture has estimated a $14.3 trillion impact by 2030, just in industrial applications. But there arguably is a big gap between hopes and actual business models that help organizations realize those dreams.

Consider the results of a survey by Gartner that found more than 40 percent of 463 surveyed IT and business leaders expect the Internet of Things (IoT) to transform their business or offer significant new revenue or cost-savings opportunities over the next three years.

At the same time, most also said their organizations have not established clear business or technical leadership for their IoT efforts.

Less than 25 percent of survey respondents report they have established clear business leadership for the IoT, either in the form of a single organizational unit owning the issue or multiple business units taking ownership of separate IoT efforts.

"The survey confirmed that the IoT is very immature, and many organizations have only just started experimenting with it," said Nick Jones, Gartner VP. "Only a small minority have deployed solutions in a production environment.

Google, Amazon, Microsoft Pay Adblock Plus "Not to Block"

Google, Amazon and Microsoft pay Adblock Plus, the world’s most popular software for blocking online advertising, to stop blocking ads on their sites. That is ironic.

Many advocate strong network neutrality rules, in large part, on the grounds that any paid forms of packet delivery are unfair. Paid prioritization gives big companies who can pay for expedited delivery an advantage over small companies who cannot pay for such services.

So here we have Google, Amazon and Microsoft paying to given their own advertising priority over ads shown by all other advertisers who do not pay for the privilege.

Don’t get me wrong. Adblock Plus can do as it likes to stay in business. Google, Amazon and Microsoft have the right to try and protect their revenue streams. I as a user can avail myself of Adblock Plus, or not, as I choose.

Big firms, or firms with lots of money or other advantages, will use those advantages in the marketplace, just as many firms already pay for content prioritization, using content delivery networks.

Adblock Plus, Google, Amazon and Microsoft can do as they please with their voluntary business arrangements. But others should be able to do so as well, so long as the deals are voluntary, mutually agreed upon and available to any who wish to participate in such deals.

No, it is not “completely fair.” Nothing in business, and little in life, actually is “completely fair.”

So long as people can use any lawful Internet app, and have choices about their Internet access providers, firms should be free to compete as they see fit. We always have antitrust tools to wield if the market doesn’t work so well.