Even Traditional LIne of Business Regulation is Being Swept into the Network Neutrality Framework

Ecosystems are tricky things. Value is created only when all the segments are aligned from the first supplier to the last consumer. But value and revenue within the ecosystem is unstable because one segment’s costs are another segment’s revenue.

Tougher still are situations where existing ecosystems bump up against new ecosystems. That is a big problem wherever whole industries once were regulated in silos, but now overlap, entirely or substantially.

How to treat Internet voice and messaging provides one clear example, as equivalent products and services now are provided under distinctly-different sets of rules.

But questions about how contestants in any market “should” be regulated or taxed now have been pulled into the language and thought categories “network neutrality.

Whether that makes sense or not remains to be seen. Consider the logic or arguments now raised in India about regulating Internet voice and messaging. Now even regulating “like things in like ways” is garbed in net neutrality language.

We might be stretching the slogan too much. Sometimes there might be very sound reasons for treating “like” services in unequal ways. That often happens early on, when policymakers want to encourage new ways of doing things, or new competitors.

More simply, the notion of consumer choice also suggests the ability to create different products, with different characteristics, at different price points. Net neutrality arguably helps app providers, but inhibits innovation on the part of Internet service providers who are bound by “best effort only” quality of service.

The new wrinkle is that older arguments about like treatment of like services is being recast in the thought patterns of network neutrality as well.

In India, service providers warn they might have to raise prices up to six times if new regulations treating Internet voice and messaging the same as carrier-provided voice and messaging are not adopted.

In other words, mobile operators want “over the top” competitors held to the same rules and standards as carrier voice in areas related to taxation and other fees paid by carrier voice suppliers.

Those issues are more important in a net neutrality context.

Net neutrality ultimately will raise capital investment requirements for mobile Internet access suppliers and possibly make unlawful some business models. The reason is the only way to deal with congestion is to supply more bandwidth. And that means higher infrastructure investments.

Equal treatment of like services, on the other hand, will make it possible for mobile operators to compete more effectively with OTT alternatives because all play by the same rules.

By prohibiting traffic shaping, net neutrality forces ISPs to rely on "brute force" bandwidth upgrades.

To the extent that net neutrality forbids zero rating, the rules also limit demand growth, and hence supply pressures.

OTT app providers, on the other hand, would see their costs of doing business rise by quite some amount, and those costs likely would be recovered from customers.

It is easy enough to predict that if most of the cost advantage of OTT voice and messaging is erased, the value of OTT apps will be reduced and consumption of carrier voice and messaging could grow, while OTT share shrinks.

Will Triple Play Service Revenue Drop 50% Over the Next Decade?

People who aren’t in the telecom business rarely understand just how much change, and how many challenges, service providers and their suppliers have had to face over the last several decades.

Since the 1980s the global industry has survived a fundamental shift from monopoly to competition; state-owned enterprises to private entities; the end of all communication monopolies; the rise of the Internet as an increasingly full-fledged competitor or enabler of full competition; steadily-decreasing profit margins and yet a huge extension of teledensity to embrace nearly everyone on the planet.

And yet the next decade will bring additional challenges of a profound nature. To point to the obvious growing tension today’s foundation strategy for fixed network services--the triple play--is itself coming under attack, because there are substitutes.

Google says a fixed network must sell both high speed access and linear video to be viable. Telcos and cable TV companies rely on the triple play.

But it will not last.

For more than a decade, the triple play has been the key retail strategy in the fixed network access market.

But every constituent service fundamental for the triple play now faces growing substitute products.

In other words, the fixed network revenue business model is going to face additional and fundamental challenges to the bulk of its current revenue.

Voice already is challenged by over the top messaging, VoIP, and mostly mobile substitution. Linear video faces disruption from Netflix and many other streaming video services.

And though high speed access is the newest service in the bundle, and arguably has proven most resistant to substitution, fifth generation mobile networks promise bandwidth available to every user or device of 1 Gbps to 10 Gbps, with latency of one millisecond.

As a rule of thumb, access providers since about 1977 have had to replace about half their present revenue streams every 10 years. It doesn’t seem as though that is about to change.

Voice already has been cannibalized; video certainly will face major substitution within five years, and then 5G will hit sometime after 2020.

It’s going to be another challenging and exciting decade, as access providers create or discover revenues equal to about half all their present revenue.

The 30% Rule Usually Works

I may have an overly-simplistic way of looking at the odds of big mergers in the access business, but there is a simple rule of thumb: antitrust opposition arises in the access business whenever any single provider is poised to exceed serving more than 30 percent of U.S. households.

It’s a simple rule of thumb, but it tends to work. In that regard, the Comcast purchase of Time Warner Cable, had it succeeded, would have given Comcast access to 84 million U.S homes, representing about 70 percent of the entire population, in a market where AT&T, the biggest provider in terms of homes reached, might potentially reach 50 million homes.

If total U.S. homes are about 123 million, and occupied units are about 116 million, then Comcast would have had access to 72 percent of U.S. homes. AT&T, by way of contrast, has access to 43 percent of U.S. homes.

“Access” is different than “active account at that location,” though. Since there are two to four major suppliers of any single service in every market, the market share held by any single provider is a fraction of total addressable homes.

AT&T knows it will not be allowed to increase its fixed network footprint. Comcast positioned its acquisition bid as being primarily about video accounts, where market share would have been held at about 30 percent.

Others had said the relevant “market” was high speed access, not video. Had the deal been approved, Comcast would have had about 57 percent share of the high speed market, and an overwhelming share of accounts in the fastest speed categories, and the widest footprint of gigabit and 2 Gbps service availability.

Verizon Communications, for its part, recently reported it had 42 percent adoption of FiOS Internet access services where FiOS is available, and 30 percent FiOS entertainment video adoption where that service is available.

At AT&T first quarter results were less robust. In the quarter, AT&T had U-verse TV adoption of 22 percent and U-verse  high speed access adoption of 21 percent.

High Speed Access was the Relevant Market for Antitrust Officials Looking at Comcast Bid to Buy Time Warner Cable

I may have an overly-simplistic way of looking at the odds of big mergers in the access business, but there is a simple rule of thumb: antitrust opposition arises in the access business whenever any single provider is poised to exceed serving more than 30 percent of U.S. households.

It’s a simple rule of thumb, but it tends to work. In that regard, the Comcast purchase of Time Warner Cable, had it succeeded, would have given Comcast access to 84 million U.S homes, representing about 70 percent of the entire population, in a market where AT&T, the biggest provider in terms of homes reached, might potentially reach 50 million homes.

If total U.S. homes are about 123 million, and occupied units are about 116 million, then Comcast would have had access to 72 percent of U.S. homes. AT&T, by way of contrast, has access to 43 percent of U.S. homes.

“Access” is different than “active account at that location,” though. Since there are two to four major suppliers of any single service in every market, the market share held by any single provider is a fraction of total addressable homes.

AT&T knows it will not be allowed to increase its fixed network footprint. Comcast positioned its acquisition bid as being primarily about video accounts, where market share would have been held at about 30 percent.

Others had said the relevant “market” was high speed access, not video. Had the deal been approved, Comcast would have had about 57 percent share of the high speed market, and an overwhelming share of accounts in the fastest speed categories, and the widest footprint of gigabit and 2 Gbps service availability.

Microsoft Cloud Revenue is Really Growing Fast

It remains difficult to precisely estimate the amount of cloud service revenue Microsoft actually generates, as it once was difficult to determine the size of Amazon’s Amazon Web Services business.

Microsoft’s cloud revenue is spread across a couple of business units, and also is bundled with revenue from non-related products.   

IDC expects the overall cloud infrastructure market to top $32 billion in 2015, with public cloud claiming $21 billion of the market, roughly double its private cloud peer.

Until a day ago, it has been guesswork to determine how much of that public cloud market is owned by Amazon. As it turns out, analyst estimates were very close, estimating AWS revenue at roughly $5 billion in mid-2014.

Analyst Karl Keirstead at Deutsche Bank, had estimated current AWS annual revenue of about $6 billion. As it turns out, that is the current run rate.

Microsoft now is viewed as the number two provider, by revenue share, with a blistering sales growth rate. Some think Microsoft’s cloud revenue run rate (the most recent quarter, times four) is about $4 billion annually.  

New Rule: No Triple Play Provider can Grow by Acquisition Beyond 30% Share of Any Single Service

The emergence of the triple play bundle now has affected its first big merger victim, one might argue. In the past, the rules for market leaders were fairly simple. In the voice, linear video and now high speed access market (it seems), the old rule of thumb was that no service provider would be allowed to gain more than 30 percent share.

Every large telco knows that, and Comcast likewise has known it would bump up against the 30 percent rule when it proposed buying Time Warner Cable.

It seems the math is a bit more limiting now, since no single bundle provider can have more than 30 percent of voice, linear video, high speed access of any other future consumer service that might be created in the future.

So now service providers have to worry not only about failing, and modest success, they also have to worry about robust success, as too much customer share in any one segment makes the evaluation of expansion through acquisition in any other area problematic.

Comcast now has reached a point where it likely cannot expect to gain any more fixed network customer share--defined as percentage market share for any of the triple play services--through acquisition.

As AT&T discovered with its failed effort to buy T-Mobile US, once that 30-percent limit is reached--in any single segment--growth by acquisition is blocked.

AT&T’s effort to buy DirecTV only has a shot at success because AT&T will not exceed 30 percent share in fixed network voice, linear video or high speed access.

Comcast Will Look for Another Big Deal, but Not Domestic Consumer Access Assets

The Comcast decision to abandon its pursuit of Time Warner Cable might be viewed through the lens of competition policy, industry structure or product lifecycles.

One might speculate about whether the abandoned deal ultimately promotes investment, competition or innovation.

One can debate the impact on industry structure or future strategy choices. Some might see an impact on the linear video product itself.

But the deal actually might have very little impact in any of those domains.

Comcast might have a little less scale, and still lack a footprint in the New York market. But consolidation in the cable industry will continue, and no combination of mergers is likely to change the fact that the owner of Time Warner Cable assets will be the second-biggest operator, as presently is the case.

Comcast would not, in any case, had gained much share in video, though its leadership in the Internet access space would have increased significantly. As with other firms such as AT&T that have had big scale acquisitions blocked, Comcast will look elsewhere for growth.

That might include international, non-access assets or non-fixed access assets.

But the need to transform revenue sources and packaging does not change. Investment might be affected by regulatory uncertainty, but the degree of competition is increasing, so investment as a defensive measure will be necessary.

Nor will the continuing evolution of media be affected. The trend, for decades, has been in the direction of consumers watching “what they want, when they want to and where they want to.”

As AT&T pivoted elsewhere, so will Comcast. There will be consequences for Comcast, Time Warner, Charter Communications and others who would have been affected by a successful acquisition. But the dynamics of the market will not change.

It has been rather clear for some time that Comcast would not be allowed to gain more access market share (a general rule is that no single access provider is allowed to gain more than 30 percent share).

Comcast will look for another big deal. LIke AT&T, that is the way the firm has grown.

One simple observation: it is inconceivable that Comcast does not have a major mobile capability within a decade; likely within five years.

AWS is Profitable, and a $5 Billion Annual Business, with a $6 Billion Run Rate

The most interesting number in the Amazon first quarter earnings report was confirmation that Amazon Web Services indeed generates $5 billion a year in revenue and earned $1.6 billion in the quarter. This is the first time Amazon has reported quarterly revenue for AWS.

The other interesting numbers are AWS growth rates--50 percent or so--and the fact that AWS is profitable, with about a current $6 billion run rate annually. AWS earned $265 million in the quarter.

In the first quarter of 2015, operating cash flow increased 47 percent to $7.84 billion for the trailing twelve months, compared with $5.35 billion for the trailing twelve months ended March 31, 2014.

Free cash flow increased to $3.16 billion for the trailing twelve months, compared with $1.49 billion for the trailing twelve months ended March 31, 2014.

Net sales increased 15 percent to $22.72 billion in the first quarter, compared with $19.74 billion in first quarter 2014.

Excluding the $1.3 billion unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales increased 22% compared to first quarter 2014.

Operating income increased 74 percent to $255 million in the first quarter, compared with operating income of $146 million in first quarter 2014.

Net loss was $57 million in the first quarter, or $0.12 per diluted share, compared with net income of $108 million, or $0.23 per diluted share, in first quarter 2014.

Project Fi: Back to the Future

Google’s Project Fi contains a amount of irony. Though talk and text are flat rated (all you can eat), Internet usage is metered.

Think about that: consumer advocates always argue that people want and need unlimited usage, and it is only the “greedy” Internet service providers that want to match consumption with end user payments.

But Project Fi actually positions consumption-related pricing as a consumer good.

Beyond that, metered pricing, consumption pricing or per-bit pricing--take your pick--actually is a throwback to the earliest days of consumer Internet access. That was the way America Online, the first mass market dial-up ISP, priced Internet access.

People did not like it, and usage surged once AOL moved to unlimited pricing. Now Project Fi moves back to that older model.

Pricing is linear, and based on consumption.

That’s ironic. Linear pricing--metered usage--is the traditional way service providers generally have sold their products. Unlimited use was the innovation.

Now Project Fi insists that strictly metered consumption is, in fact, quite pro-consumer, compared to buckets of use that almost always feature breakage (consumers pay for what they do not use) or “overage” charges when they exceed their allotments.

Consumer advocates generally have argued such plans are not consumer friendly, but also have opposed metered usage as well.

Perhaps Google is trying to spur mobile ISPs to invest more in infrastructure (more than they seem already to be doing) by creating new incentives for supplying capacity. Ironically, ISPs have preferred metered pricing all along.

Comcast Drops Bid for Time Warner Cable

As had seemed increasingly likely, the Comcast effort to acquire Time Warner Cable now has been abandoned, Bloomberg reports. 

Comcast has not formally confirmed the rumor, but with the Federal Communications Commission signaling opposition, and the probsbly frank private meetings recently held by Comcast and Time Warner Cable with antitrust officials, it has seemed very likely the bid wouild be abandoned.

It appears that has happened. What happens next depends, in part, on what course Time Warner Cable might choose for itself. Other bids from Charter Communications are expected, but Time Warner could decide not to sell, but become an acquirer.

It does appear that history did repeat. The staff of the Federal Communications Commission had called for a hearing by an administrative law judge on the proposed acquisition.

In 2011, AT&T and T-Mobile USA dropped a planned $39 billion merger after the Justice Department filed an antitrust lawsuit to block the deal and the FCC issued a hearing designation order on the deal.

It appears the call for a hearing has had the same impact as the same sort of call did for the AT&T effort to buy T-Mobile USA.

How Long Before Comcast Ends Effort to Acquire Time Warner Cable?

If history provides any guidance, the Comcast bid to acquire Time Warner Cable is going to be withdrawn. The staff of the Federal Communications Commission has called for a hearing by an administrative law judge on the proposed acquisition.

In 2011, AT&T and T-Mobile USA dropped a planned $39 billion merger after the Justice Department filed an antitrust lawsuit to block the deal and the FCC issued a hearing designation order on the deal.

That would still leave Time Warner Cable “in play,” and another bid by Charter Communications is generally expected. In all likelihood, a successful Charter bid would create a new number-two U.S. cable TV company by customer market share.

Verizon and AT&T See Slight Impact from Marketing Wars, Apparently

With first quarter financial reports now in from both AT&T and Verizon Communications, it is possible to say that both firms seem to be holding up rather well, despite the heavy marketing pressure in the mobile segment of their businesses.

Churn rates are stable, average revenue per account is stable and gross revenue is up, though operating income dipped, year over year.

For the quarter ended March 31, 2015, AT&T's consolidated revenues totaled $32.6 billion, up 0.3 percent versus the year-earlier period.

More to the point, however, AT&T had first quarter mobile revenues of $18.2 billion, up 1.8 percent over the same quarter of 2014.

Some might point profits that were down 12 percent to $4.4 billion, but that is largely an accounting artifact, caused by the continuing shift of revenue to “Mobile Share” no-subsidy plans that result in higher device revenues but lower recurring service revenues.

Churn rates suggest AT&T and Verizon are not suffering as much as observers might have guessed from attacks by T-Mobile US and Sprint.

AT&T, for example, reported its best-ever first-quarter churn at 1.02 percent, down from 1.07 percent for the first quarter of 2014.

Still, margins are under slight pressure, in part because operating costs are higher. Compared to the first quarter of 2014, AT&T operating expenses were $27.1 billion versus $26.2 billion; operating income was $5.5 billion versus $6.3 billion; and operating income margin was 16.7 percent versus 19.3 percent.

Verizon grew total revenues 6.9 percent year-over-year, with a 35 percent operating income margin.

Verizon’s first-quarter 2015 operating income reached $8.0 billion, an 11.2 percent increase compared with the first quarter of 2014.

Verizon consolidated operating income margin was 24.9 percent in first-quarter 2015, compared with 23.2 percent in first-quarter 2014. Cash flow from operating activities increased to $10.2 billion in first-quarter 2015, compared with $7.1 billion in first-quarter 2014.

Verizon added 565,000 net retail postpaid connections in the quarter and had postpaid churn of 1.03 percent.

One might conclude it is difficult to ascertain the impact of current mobile marketing wars on the mobile business.

The issue: where is the account growth at T-Mobile US coming from, if not from AT&T and Verizon?  

Google Mobile Serivice "Project Fi" Launches

It is doubtful Google would name its new mobile service “Project Fi” if it were really aiming for a service with large numbers of customers. Instead, Google calls it a “program” that is “similar” to the Nexus hardware program.

In other words, Project Fi is a smaller scale effort to demonstrate what can be done. Google confirmed that Sprint and T-Mobile US will provide mobile connectivity for Project Fi.

Among the project objectives is pioneering what should be standard when the fifth generation mobile network standard is finished: the ability to connect to the best-available network, “right now.”

Project Fi will automatically select the best network, whether a Wi-Fi hotspot or a specific 4G LTE network.

When a voice session begins while connected to Wi-Fi, Project Fi will seamlessly transition from Wi-Fi to mobile networks so sessions are not interrupted.

Project Fi also uses cloud-based phone numbers, allowing customers to talk on any number of Internet-connected devices, not just phones.

Google also will test a “simple” approach to service plans, offering just one plan. For $20 a month customers get talk, text, Wi-Fi tethering, and international coverage in 120+ countries), with a flat $10 per GByte for mobile  data while in the U.S. and abroad.

:Since it's hard to predict your data usage, you'll get credit for the full value of your unused data,” Google says. “You only pay for what you use.”

Project Fi is in an “early invite” stage, using the Nexus 6 device.

If you live where we have coverage in the U.S., request an invite at fi.google.com to get started.

Mobile Internet Access Generates at Least $1.1 Trillion Globally, Every Year

Globally, analysts at Boston Consulting Group estimate a mobile Internet ecosystem annual revenue of $2.9 trillion a year. If spending percentages globally reflect the average of 13 countries--39 percent of total mobile ecosystem spending--that would imply mobile Internet access revenues globally are about $1.1 trillion annually.

Smartphone users in the U.S. currently spend an average of $1,450 per year on their phones, data plans, apps, and content, BCG estimates.

If 41 percent of mobile ecosystem spending is for apps and content, 42 percent is mobile access and devices 12 percent, then U.S. mobile consumers spend $594.50 annually on content and apps.

Mobile Internet access, at 42 percent, represents $609. Devices represent about $174 a year in spending.

Revenues generated by the mobile Internet ecosystem in 2013 amounted to $682 billion in 13 countries (Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, South Korea, Spain, the United Kingdom and the United States) that account for approximately 70 percent of global gross domestic product.

Internet access revenues range widely from about 18 percent of total ecosystem revenues in Japan up to about 58 percent in Brazil, and an average of 39 percent across the 13 countries. About 34 percent of mobile ecosystem revenue us earned, on average, by app and content providers.

52 Mobile Operators Have Deployed LTE-Advanced, 58% at 300 Mbps

LTE-Advanced supporting downstream capacity between 150 Mbps and 300 Mbps, with 50 Mbps on the uplink, now are commercially deployed by 52 operators.

Some 30 of the networks support the maximum 300 Mbps downlink speed, operating in 20 countries: Australia, Austria, Belgium, Estonia, Finland, Germany, Greece, Hong Kong, Jersey, Norway, Portugal, Romania, Russia, Singapore, Slovenia, South Korea, Spain, Switzerland, United Arab Emirates, and the United Kingdom.

Altogether, 64 operators have commercially launched LTE-Advanced systems, using frequency aggregation, in 39 countries, the Global mobile Suppliers Association says.

Some 116 operators, representing about 30 percent of LTE operators, are investing in carrier aggregation technology worldwide.

Globally,  393 operators have commercially launched LTE networks in 138 countries, according to data in its latest Evolution to LTE report. 107 operators commercially launched LTE service in the past year. GSA forecasts there will be 460 commercially launched LTE networks by the end of 2015.

Globally, some 858 devices (about 30 percent of all LTE devices) support speeds up to 150 Mbps, while 69 devices (small cells, routers, MiFis, smartphones and tablets) support 300 Mbps.

There also are 13 deployed LTE-Advanced networks in commercial use or trial supporting 450 Mbps, in Angola, Australia, Finland, Japan, Portugal, Qatar, Turkey, South Korea, Switzerland, UAE and the UK.