Is a Price War Going to Break Out in Satellite Backhack Business by 2017?

Fears about overinvestment, overcapacity, plunging capacity prices and market share disruption happen periodically in many businesses, and within the last couple of decades have devastated large portions of the telecommunications industry.

That is about to happen again in the satellite business, but in a way that resembles the overinvestment in capacity in the undersea and terrestrial backhaul businesses during the telecom boom and bust from about 1997 to 2002 or so.

In that instance, huge amounts of capital were invested in long haul networks to support the explosion of Internet companies requiring capacity.

Too much, as it turns out.

Many will not remember Globalstar, Iridium or Teledesic, all using business models based on huge fleets of new satellites, using low earth orbit, not the geostationary satellites that are the industry mainstay.

The huge unmet need back then was voice communications, since mobile service at that time was expensive and lightly purchased by consumers. The problem, as outlined by David Burr, O3b Networks VP, was that mobile service unexpectedly caught fire with consumers, closing the LEO-based business market window.

Simply, mobility fulfilled market demand for voice communications, at the expense of fixed networks and LEO providers alike.

Rapid mobile adoption basically killed the earlier generation of LEO business plans and companies, argued  David Burr, O3b VP, essentially absorbing the demand the earlier LEO connectivity providers had hoped to serve.

“Where is that danger now?” Burr asked. Some of us might argue the answer is the same as last time: mobile service providers.

Some veterans of those ventures continue to work in the satellite industry, and were again speaking from the podiums at Satellite 2015. Firms such as OneWeb, O3b and LEOSat, plus others such as SpaceX were there, suggesting the new wave of potential LEO constellations that could disrupt business models and pricing across much of the satellite industry.

To be sure, different business models are being floated. Some providers plan to attack the consumer Internet access retail market. Others will focus on enterprise or business user segment.

Still others will seek roles in backhaul, either “conventional” backhaul for mobile operators, for example, or less traditional backhaul that competes directly with undersea capacity suppliers.

It’s too early to say how it will all play out. But it is clear that industry capacity and latency performance will be challenged, starting about 2017, if LEO capital and launch plans remain on track.

Low Earth Orbit Satellite Constellations Top of Mind at Satellite 2015

“Constellations,” in satellite industry parlance, are top of mind at Satellite 2015. The immediate reason is a sudden upsurge of low earth orbit satellite ventures that is bringing with it fears about overinvestment, overcapacity, plunging capacity prices and market share disruption.

Not for perhaps a couple of decades have such issues been so “top of mind” in the satellite segment of the communications industry.

The reason for the sudden eruption of talk about the impact of new constellations is the threat of industry disruption that happens in any capacity-related industry when suppliers use new technology to support mas market business models built on lower capital and operating costs, allowing new lower retail prices, leading to more price competition, at the same time also offering better performance and user experience.

It’s a recipe for potential disruption.

Consider consumer Internet access by satellite, which has one level of current offers the upstarts threaten to overturn.

Asked about the challenges of supplying Internet access across South Asia and Southeast Asia, where hundreds of millions cannot afford to pay 41 cents a month for Internet access,

Dave Bettinger, OneWeb CTO quipped off stage, we’re talking about “15 cents a month” as an “ability to pay” hurdle to be overcome.

That is an issue incumbent satellite service providers will have to confront, assuming there are at least some winners in the emerging LEO segment of the business.

No geosynchronous satellite Internet service provider can afford to sell retail access at such prices. To be sure, geosynchronous providers will be working on getting their own cost structures down.

The issue is how much more performance they can wring out of their operations.

That isn’t the only potential threat to existing providers. Latency always has been an issue for services based on use of geosynchronous satellites, especially for isochronous apps (events or sessions that rely on equal time periods) such as interactive apps such as videoconferences or voice.

That is another area where LEO constellations will be a new threat. Operating at lower orbits, LEO satellites will feature lower latency than geosynchronous service providers can provide.

Caching helps with user experience in some cases, but encrypted HTTPS is a problem, compared to non-encrypted traffic, said Dave Rehbehn, Hughes Network Systems senior director. And the problem is growing, since more traffic is being encrypted.

HNS has a way of improving user experience by pre-fetching some web page elements, for example.

The unanswered question is what “outside the industry” developments might shape LEO success as “outside” developments once lead to the demise of Globalstar, Iridium and Teledesic (early LEO business plans and entities).

Rapid mobile adoption basically killed the earlier generation of LEO business plans and companies, argued  David Burr, O3b VP, essentially absorbing the demand the earlier LEO connectivity providers had hoped to serve.

“Where is that danger now?” Burr asked. Some of us might argue the answer is the same as last time: mobile service providers.

Comcast Will Launch 1 Gbps in 2015

Comcast plans to offer gigabit access service in U.S. markets starting in 2016, said Jorge Salinger, Comcast VP. The service will enabled by use of DOCSIS 3.1 technology that Comcast now is testing at employee homes. Salinger was too conservative, though.

Comcast will do so by the end of 2015.

"Our overall goal is to be able to deploy DOCSIS 3.1 and gigabit-per-second in a broad scale starting in 2016,” said Salinger.

DOCSIS 3.1 is in many ways a departure from past cable TV transmission schemes, in that it is the first to abandon the 6-MHz (8-MHz in many other countries) channelization plan that is a legacy of the industry’s origins as a TV retransmission network.

One question many will have is how Comcast will price the 1-Gbps service, to protect its legacy high speed access pricing. Comcast’s existing 505 Mbps service, primarily aimed at business customers, costs $300 a month, Comcast’s 105 Mbps high speed access services, aimed at consumers, costs perhaps $50 a month, depending on the package a consumer buys.

Most Internet service providers will face similar dilemmas, as they introduce gigabit services. In fact, some ISPs might find they sell more packages at slower speeds, even if gigabit access is the marketing headline.

Much depends on what speeds an ISP offers, at what price points. Google Fiber has a simple offer: a gigabit for $70 a month, or 5 Mbps for free. That pushes buyers immediately to 1 Gbps.

Other ISPs face tougher packaging choices. In my own Denver neighborhood, CenturyLink will sell a 100-Mbps service that costs $70 a month, with the price guaranteed for a year.

The 40-Mbps service costs $30 a month, guaranteed for a year. All those prices are for stand-alone service, with no phone service.

In that sort of environment, many consumers are going to conclude that 40 Mbps is “good enough,” and provides a better price-value relationship.

34% of all Video Now Consumed on Mobiles, Tablets

About 34 percent of all video consumed online--on a global basis--was watched on a mobile device (phone or tablet) during the fourth quarter of 2014, according to Ooyala.

Tablet and smartphone plays grew 200 percent in the past year, 500 percent since 2012 and 1600 percent since 2011, Ooyala says.  

December saw the highest percentage of video plays on smartphones and tablets at 38%. That’s the highest since the Global Video Index began publishing.

In fact, December mobile plays were 15 percent higher than in November and 114 percent  higher, year over year.

Does "Moving Up the Stack" Actually Work, and if so, When?

Whenever a leading service in the telecommunications or video entertainment business begins to suffer margin compression, lower take rates and usage, observers offer the advice that suppliers need to “add more value” or “move up the value chain.”

Such advice normally is given because the compressing profit margins are largely the result of price pressure caused by competitors.

Call me a cynic, but that advice rarely, if ever, has been shown to produce significant and sustained revenue improvements.

Some might argue that is because suppliers have failed to add new value. In that line of thinking, suppliers have failed to transform--or at least significantly enhance--products under pressure, and that is why the “add more value” approach seems not to produce serious gains.

Others might argue the efforts have largely come to naught because buyers do not want to pay more for the enhancements. In that alternative explanation, buyers do not see the value, or, if they see the value, do not wish to pay extra.

In the cable TV business, suppliers have justified rate increases because “we are giving you more channels.” But one can question whether most buyers actually wanted the extra channels, or want to pay more to receive them.

In the voice business, VoIP services priced close to zero seemingly have gained usage and market share compared to other forms of voice with “enhancements” (high definition audio quality).

In fact, the successful adaptation seemingly has been to “cut prices,” the polar opposite of “adding more value.” True, selling at lower prices, and bundling features that formerly could be obtained only at extra cost, might be positioned as moves that add value.

Reasonable people will debate whether that is an example of “adding value” or an instance of cutting price.

No doubt, as streaming video suppliers begin to proliferate, there will be calls for video entertainment suppliers to “embrace the trend,” much as voice suppliers were urged to embrace VoIP.

The “cannibalize yourself” strategy has merit, to be certain. But the greatest merit tends to happen when suppliers cannibalize their legacy revenue streams by replacing them with entirely new revenue sources, not “adding value” to legacy services.

In other words, cable TV did better by getting into the new voice, high speed access and small business communications businesses than it did by “adding more value” to basic cable.

Telcos did better by getting into linear video, high speed access and mobility than by innovating in voice.

Generally speaking, competing on price has helped preserve the declining products, but hasn’t really enabled service providers to innovate themselves out of mature product problems.

In other words, recent history suggests that harvesting a declining business while growing new lines of business is what works. So far, one would be hard pressed to cite many instances where adding more value actually reversed a trend of revenue or subscriber decline.

That does not necessarily mean that adding more value is irrelevant. One might argue that adding more value can slow the rate of business decline. That can be an important business objective, and well worth some amount of investment.

What seems clear is that such efforts have yet to demonstrate they can sustainably reverse a pattern of decline, in a mature business category.

Apple to Launch New Streaming Video Service?

Now that Dish Network, HBO, CBS and NBCUniversal have announced plans to market new streaming video services, it perhaps was inevitable that Apple would do so.

The Dish Network and Apple services offer bundles of perhaps 20 to 25 channels at prices between $20 and $40 a month. HBO will cost $15 for a single channel. Pricing for  the CBS and NBCUniversal offers are not yet public.

As always for a content-driven and content-based business, value and price will matter. Given the emphasis on reaching a customer base that, it is believed, does not want to spend $90 a month for linear video, as well as the demographics of the resisters, the initial content focus will be on channels or bundles of channels believed to appeal to a Millennial demographic, with or without children.

The initial thinking seems to be that broadcast TV and HBO, plus sports content, are the key demand drivers. The other bit of thinking is that Millennial buyers with children will want programming for them as well.

Eventually, we are likely to see experimentation with other bundles or channels, aimed at other possible segments of the market, with or without devices, with or without multi-network access.

Facebook, Google Are, Will Be, ISPs. Will Apple or Amazon Follow?

Few observers would be shocked if Facebook moved ahead with plans to create a satellite-based Internet access service aimed at billions of potential users in the global south. Facebook has talked about using satellites and drones as ways to deliver affordable Internet access services.

Facebook also has discussed other methods, including low earth orbit satellites, and has been working on free satellite-delivered Internet service in Africa.

Boeing Co. said it could get a deal in 2015 to build a high-throughput communications satellite for at least one leading application or device supplier.

The type of satellite Boeing talked about would be deployed in geostationary orbit.

Who the buyer might be is the big question. Some suggest it could be Facebook, Google, Apple or Amazon, or perhaps discussions have occurred with all four firms.

Google already has purchased satellite manufacturing assets, and invested $1 billion in SpaceX , which has announced plans to launch a new fleet of satellites to provide Internet access. Some might note that the Google investment appears to be in SpaceX as an entity, not just the new fleet of satellites.

And Google is testing a variety of methods for supplying Internet access across the global south, including drones, balloons and apparently, satellites.

Separately, OneWeb plans a huge fleet of new low earth orbit satellites to provide Internet access services.

Jim Simpson, vice president of business development and chief strategist for Boeing Network and Space Systems, says big technology firms have direct financial interests in expanded Internet access.

"The real key to being able to do these type of things is ultra high-throughput capabilities, where we’re looking at providing gigabytes, terabytes, petabytes of capability," Simpson said.

Both Google and Facebook have talked about use of satellites as part of efforts to bring affordable Internet access to perhaps billions of people who cannot afford to buy it, or cannot buy it because affordable service provided by terrestrial networks do not reach them,  right now.

It would come as no surprise if Facebook emerged as the buyer, since Facebook has been most open about use of geosynchronous satellites for Internet access.

Some would deem Google a  “not surprising” but also not “most likely” buyer. The big shocker would be if a firm such as Amazon or Apple were the buyers.

Should the deal happen, within a couple of years at least one big app provider would emerge as a competitor to existing satellite retailers and mobile service providers.

It isn’t clear whether most observers would see Amazon or Apple as potentially more dangerous competitors than Google or Facebook, if only because observers expect to see both Google and Facebook get into the Internet access business, in some form. Indeed, Google already is an operating ISP in the U.S. market.

On the other hand, it is conceivable that either Facebook or Google could wind up being partners, to an extent, with mobile operators, though potentially competitive as well. Much depends on whether the new satellite-based ventures are retail or wholesale oriented, or at least what the balance is, between retail and wholesale operations.

That is almost an expectation. What would be more unexpected is an entry by Amazon or Apple into the satellite Internet access business, in some form.

When are Consumer Markets Effectively Competitive?

When is a market effectively competitive? And what are the key tests of whether markets are effectively competitive? To examine the matter simply, is it the number of suppliers in a given local market, or the market shares of those competitors?

Of course there is the argument that it is a combination of those two metrics. But the answers might hinge on which test is dominant.

The U.S. Federal Communications Commission, for example,  seems to apply different standards to different services within the triple play bundle.

In high speed access, the Commission appears to believe there is not enough competition, with two terrestrial providers and two satellite providers in just about every market.

In the case of linear video services, the FCC thinks competition is effectively competitive with the same number of suppliers in virtually every market.

So perhaps it is the market share test that is relevant.

Still, the market share held by the market leader in most local markets does not vary much, whether looking at high speed access or linear video.

Broadly, a cable operator has about 59 percent share of the high speed access market, while in linear video the local cable TV operator tends to have about 52 percent share.

What differs is the share held by other contestants. In high speed access markets, though there are a growing number of competitors (two satellite Internet providers, Google Fiber an independent ISPs), market share generally is held by the cable TV operator and a local telco.

On a national basis, a cable provider might have 59 percent share, the telco might have 40 percent share. Satellite and other providers have the rest of the share. Local markets will vary much more widely, however.

Still, high speed access tends to feature four providers in most markets, despite the fact that the market share structure is functionally a duopoly.

In linear video, market share is much more dispersed. Nationally, cable operators have about 52 percent share, while satellite providers have about 36 percent share, while telcos have about 12 percent share.

In the linear video market, virtually every market has four providers, as well. In 1993, a cable operator had about 93 percent share.

The linear video market arguably is more competitive, one might say. On the other hand, should AT&T succeed in buying DirecTV, the number of suppliers in linear video, in most markets, would drop to three.

The result would be that in many markets, where AT&T has fixed network operations, though hat a cable operator might still have roughly 52 percent share, AT&T might have 27 percent share.

Dish Network would still have perhaps 15 percent share. In some markets, where AT&T does not have local fixed network facilities, Verizon might have about 25 percent to 30 percent share of linear video.

More competition is coming, in voice, high speed access and linear video markets. But the FCC now seems to have concluded that voice and linear video now have become effectively competitive, though it believes high speed access and mobility have not reached that stage, yet.

What Shape Will Internet Access Price Regulation Now Take?

The Federal Communications Commission continues to insist it will not apply price regulation to the Internet interconnection and access businesses as part of its decision to regulate Internet access and transport under common carrier rules.

With the caveat that enforcing a “zero price” rule is price regulation, should the network neutrality rules survive legal challenge or legislative override, unexpected price obligations might still be incurred by edge providers, ironically enough.

Though we are far from knowing precisely how the rules will be interpreted, if the common carrier framework survives legal challenge, there are all sorts of ways prices now might be regulated.

Zero pricing is the reality created by the "best effort only" or "no fast lanes" portion of the rules. That is the price at which consumer ISPs can price use of their networks by edge providers (apps). 

On the other hand, under common carrier rules, interconnecting networks pay compensation for termination whenever traffic loads are not equal. By definition, content domains (app and content providers) impose far greater, and highly unequal, termination traffic on "eyeball" domains (ISP customer bases).

It is one thing for the FCC to claim it will "forebear" from imposing price regulations. 

It might be quite another matter if the common carrier rules on network interconnection or termination apply as they have in the past. In that case, the FCC might be unable to prevent normal network termination charges from being applied, when traffic flows clearly are unequal.

Why Hybrid Cloud Now is Service Provider Focus

Despite the growth of public cloud operations, private cloud will represent 69 percent of cloud workloads in 2018, says Kelly Ahuja, Cisco SVP. That essentially explains service provider interest in hybrid cloud services.

"When people discuss cloud, they often focus on public cloud services or public cloud storage services,” Ahuja said. “Even with public cloud workloads having significant growth, by 2018, almost 70 percent of cloud workloads will still be private cloud-related.”

According to Gartner analysts, use of hybrid cloud will triple over the next three years. The percentage of organizations that prefer a hybrid approach will grow from seven percent to 20 percent in 2017, for example.

Put simply, there is a growing business for suppliers who are able to support hybrid cloud operations that bridge private and public cloud domains. No matter what the specific capacity or access provider involvement in cloud computing (simple transport, hosting, access, integration or cloud services of the software, infrastructure, platform, business process variety), hybrid operations are the largest potential segment, one might argue.

By 2018, 69 percent (113.5 million) of the cloud workloads will be in private cloud data centers, down from 78 percent (44.2 million) in 2013, and 31 percent (52 million) of the cloud workloads will be in public cloud data centers, up from 22 percent (12.7 million) in 2013, Cisco says.

Cloud operations also are growing as a percentage of total data center traffic. In 2013, cloud accounted for 54 percent of total data center traffic, and, by 2018, cloud will account for 76 percent of total data center traffic.

Through 2017, the average enterprise network will see a 28 percent compound annual growth rate(CAGR) for bandwidth due to the use of cloud computing, mobile devices and video, according to IDG.

By 2017, enterprises that do not control network use risk requiring up to 3 Mbps per user of

committed bandwidth, or more than 20 times the average need in 2012.

The bottom line is that capacity requirements, not to mention related integration and professional services, plus apps generated by hybrid cloud arguably arguably represent the single most accessible segment of cloud services revenue for most transport and data center providers.

Slowly, Google is Becoming a Major ISP

Up to this point, Google has been a direct retail Internet service provider only in the U.S. market, though there have been rumors Google is thinking about doing something similar in Europe.

Google now has announced it is launching a new mobile virtual network operator service in the United States, and most observers expect the intent is to test better ways of integrating Wi-Fi and mobile access. To the extent those efforts center on Long Term Evolution and Wi-Fi, the implications are global.

Years ago, Google began to build its own internal global undersea network. Opinions varied about whether there were wider implications. As it turns out, Google has indeed become a commercial ISP in the United States. Whether it will do so elsewhere is the new issue.

And though Google Fiber is a fixed network business, Google now is experimenting in mobile as well.

And it is certain Google will deepen its role in the Internet access business globally. Google recently made a $1 billion investment in a commercial satellite Internet access venture. And that is not all.  

Google’s fully-owned drone manufacturer--Titan Aerospace--has gotten two test licenses from the U.S. Federal Communications Commission, allowing Titan to test “Internet by drone” services for five months.

The tests will happen inside a 520 square mile area to the east of Albuquerque, from March 2015 to September 2015. The testing area would include Moriarty, where Titan Aerospace is based.

Nobody outside Google knows precisely what Google might ultimately do, and where, with a range of wireless and mobile Internet access platforms.

Google recently made a $1 billion investment in a venture to deliver satellite Internet access services.

In addition to ownership of Titan Aerospace, Google is testing the use of unmanned balloons to deliver Internet access.

At least three mobile service providers are testing the platform, which interworks with a Long Term Evolution mobile network. Were those efforts to become commercial operations, Google would operate as a backhaul provider for mobile service providers, as well as a retail service network.

Google also owns Skybox Imaging, a manufacturer of satellites.

Then there is the mobile virtual network operator business Google is launching in the United States, plus Google Fiber, the gigabit fixed network Internet access business, plus Google’s operation of Wi-Fi networks for U.S. Starbucks locations, and its investment in mobile apps of many types.

In the past, Google has made investments in Clearwire, the former U.S. mobile services company, municipal broadband, Android operating system and Nexus phones and tablets.

Nobody knows which of these efforts will emerge as significant commercial operations and which are intended primarily to influence wider market adoption of practices Google considers helpful to its own business.

Should Google commercialize even a few of the new initiatives, it would emerge in a variety of potential roles, including backhaul provider, retail Internet supplier, or both. In such cases, Google might be a partner for some ISPs, a competitor for backhaul suppliers or a competitor to retail ISPs.  

And, it goes without saying, Google is both emerging as a potential new competitor to other access providers, a partner and supplier. In all cases, though, Google's business objective is to reduce barriers to the use of the Internet and the cost of Internet access. 

That means, among other things, that Google has a vested interest in lower cost smartphones, computers and tablets, as well as lower cost Internet access, both mobile and fixed. Always.

Uh Oh. The "Bubble" Word Reemerges

Those who lived through the telecom bubble and bust know viscerally what it means when trillions worth of telecom assets suddenly evaporate. So many will be chilled to hear suggestions that the U.S. market might be in a position similar to the pre-burst conditions of the middle 1990s.

Between 1997 and 2003, the global telecom industry lost $2.8 trillion of market value, collapsing from $4 trillion to $1.2 trillion, an event virtually without parallel in the industry, and arguably in any industry.

Some might argue that irrational behavior occurred because capital markets relied too heavily on Federal Communications Commission rules and regulations, either favorable or unfavorable.

Massive capital misallocation--and huge losses--in a very short time, was the result.

Ironically, some might argue, we now are about to see the reverse of the irrational over-investment, namely rational underinvestment, but with a similar causation: federal telecommunications regulation.

The argument is that with profit potential in the U.S. high speed access market, leading contestants will find they can earn a better return elsewhere than in the U.S. market.

Common carrier regulation in general, and network neutrality rules in particular, will limit supplier business models and prospects for revenue growth in the U.S. high speed access market--at least for many of the tier one suppliers.

Supporters argue the gap will be filled by new suppliers, operating with lower costs. That essentially is what happened when cable TV operators, for example, successfully attacked the U.S. fixed network voice and high speed access markets.

That seems already to be happening, on a small scale, as independent Internet service providers launch new gigabit service operations on a local basis. Eventually, given enough scale, such new competition will pressure tier one provider business models.

The point is that major shifts in U.S. telecom policy within the last two decades have lead to drastic changes in investment, competition and innovation, with what can only be called huge distortions of capital allocation.

Some might note the irony that the passage of telecom legislation intended to increase competition lead to greater dominance by the incumbents. In one sense, that might be correct. In the wake of the Telecommunications Act of 1996, hundreds of new competitors arose, only to crash and burn by 2003.

In other other vital sense, competition did increase, however, as U.S. cable TV companies became major players in voice and high speed access, arguably now taking the lead in the strategic high speed access category.

What now happens will be worth watching. Investment is going to change. The only issue is how much, and where that investment will shift. AT&T’s moves in Mexico might provide a bit of insight.

More significant will be Verizon’s response, since Verizon has bet its near term future on robust U.S. market growth. If that should change, so will Verizon’s strategy.