Marriott Zero Rates Netflix

The number of examples of “network neutrality” logic breaking down comes from Marriott. Starting initially at a handful of Marriott hotels, guests with Netflix accounts can watch their Netflix content directly from the televisions in their rooms, without buying the hotel Internet access.

Some people would say that is a clear example of sponsored data usage. To the extent that network neutrality is framed as “all bits and apps are treated alike,” it is hard to square this use case.

To be sure, many think sponsored data or sponsored apps are not a violation of the network neutrality framework, any more than “toll free calling,” coupons, Groupons or discounts and promotions in general are a problem.

But that’s part of the problem. Restricting consumer access features to “best effort only” does not allow for quality features some apps require, some customers might prefer and some ISPs might use to differentiate and innovate.

Only available at six hotels for now, with another six coming soon, Marriott plans to offer access in 100 properties by the end of 2015, and plans to support such access at nearly all of its 300 U.S. hotels should be on board by the end of 2016.

5G Really Will be Different

To the extent that core network principles such as network functions virtualization, big data, information-centric networking, cloud computing and software defined networks are part of the vision for fifth generation mobile networks, it might be argued that the fifth generation is the first to be virtually inseparable from the core network.

That is a major departure. Always in the past, the access or edge networks could be upgraded or rebuilt without necessarily affected the core network, and vice versa.

But 5G is the first network--assuming present thinking accurately reflects the future standard--that eradicates the difference between separate access and core networks.

In one sense, that is clear in the access functionality. New 5G networks will “use any available access.” That includes Wi-Fi, and might also include any other mobile or fixed network.

So 5G is quite different from all prior mobile network generations, and the first of the mobile networks not defined by its air interface.

But 5G might also move value to the core networks, or more specifically, the core networks and the content and app services that use the core network. It is a new kind of network.

Global Telecom Business is Getting More Unstable

The global telecom business has been getting more competitive for decades, starting with a wave of privatizations of former government monopolies in the 1980s as well the authorization of competition in the business.

Add on the impact of the Internet, and the growing ability to provide any service over the Internet, and the challenges have grown far beyond the mere threat of competition from other telcos.

Over the past couple of decades, mobile networks have begun to take customer share as well, shifting buying towards mobile services, and away from fixed.

Now satellite services threaten to become a major factor for Internet access globally, especially in regions where the cost of traditional service is prohibitive.

Space Exploration Technologies (Space X) has asked the Federal Communications Commission for permission to create and launch a new  low earth orbit satellite constellation of thousands of satellites that would be able to provide Internet access at unprecedented speeds anywhere on the globe.

The LEO constellations now proposed would provide a key challenge to fixed or mobile facilities in the Internet service provider business, at least in terms of coverage. In principle, every inch of the earth’s surface would be covered.

The unknown issue is the business model. It isn’t clear what the retail pricing would be, or how much market share any LEO constellation might be able to obtain.

The proposed Space X constellation would change Space X from a launch company to an Internet service provider.

That illustrates both the growing instability in the broader communications business, possible in large part because there are increasing incentives for Internet ecosystem providers to enter adjacent niches.

In other words, specific application, device or infrastructure providers can find lucrative an expansion into the actual Internet service provider business.

Orbiting the earth at just an altitude of around 750 miles, the new constellation would orbit at lower than conventional communications satellites at 22,000 miles.

That has huge implications for bandwidth and latency, potentially enabling bandwidth between 50 Mbps and gigabits for any specific end user, a huge and qualitative advance over what has been possible in the past.

In a non-related development, Facebook and Google reportedly have abandoned potential plans to launch their own geosynchronous satellites for Internet access services. One might argue the upsurge in LEO plans makes geosynchronous a largely non-competitive alternative, in terms of the amount of bandwidth any single customers can get, at any specific hard-to-reach location.

Space X Takes Step Towards Becoming an Internet Service Provider

More evidence of new interest in low earth orbit satellite constellations to provide Internet access: Space X has asked the Federal Communications Commission for permission to create and launch a new constellation of LEO satellites.

The low earth orbit satellite constellation likely would be aimed at potential customers anywhere on the globe where traditional fixed or mobile facilities are expensive to create or non-existent.

The proposed Space X constellation would change Space X from a launch company to an Internet service provider.

In a non-related development, Facebook and Google reportedly have abandoned potential plans to launch their own geosynchronous satellites for Internet access services. One might argue the upsurge in LEO plans makes geosynchronous a largely non-competitive alternative, in terms of the amount of bandwidth any single customers can get, at any specific hard-to-reach location.

The move illustrates the porous boundary between Internet ecosystm participants, where an app, device or infrastructure supplier can cross the boundary and conemplate becoming an actual Internet service provider.

The long term implications for Internet service providers (former telcos and cable TV companies or specialized satellite service providers) is unclear, but certainly increasingly unstable and uncertain.

Will tomorrow's Internet service providers be the same as today's providers? It is getting to be an open question.

Facebook Tailors Ads for Bandwidth, Device Capabilities

Facebook knows, like all developers once understood, that bandwidth and devices impose constraints and enable features for content and advertising.

That remains a reality in many markets where 2G might be the expected network for many users. So Facebook advertising cannot make assumptions that all users are on high end devices and 4G networks.

To put it another way, Facebook looks different on a feature phone than it does on a smartphone.

The creative specs for feature phones and older smartphones differ from newer devices.

Bandwidth-based targeting on Facebook gives advertisers the ability to send ads based on the quality of a person’s network connection.

Brands are now able to develop and send rich media ads, such as videos, to people on faster connections and more relevant pieces of content, such as still images, for those accessing Facebook on a weaker connection.

Nikila Srinivasan, Facebook’s product manager of emerging markets monetization, says targeting an ad’s creative elements based on device and bandwidth improves ad effectiveness.

Users on smartphones and faster networks  might see a video, while users with low-end and feature phones just see an image.

In another case, users in urban areas might see different ad than users in rural areas.

The point, all stretched analogies to network neutrality notwithstanding, is that user experience benefits from code, features and services optimized for bandwidth and device constraints.

Pakistan Levies 20% Tax on Internet Access

Taxes are a major cost item for users of communications services, in Pakistan or the United States, and officials increasingly are looking at Internet access as a lucrative source of tax revenue.

In Pakistan, officials have proposed a new 19.5 percent general sales tax on Internet and data usage. The tax applies to fixed or mobile Internet access.

Import taxes also are applied to infrastructure required to build 3G or 4G mobile networks, as well as all fixed networks.

Import duties for telecom equipment range from five percent to 20 percent, said  Sohaib Sheikh, Information Communication and Technology Think Tank (ICT3) president.

Economics matters, and prices matter, so it is easy to predict that adoption rates for mobile Internet access will be negatively affected.

In the U.S. market, Internet service taxes might be coming, as well.

Eventually, it would seem inevitable that high speed access service revenues will be taxed to support universal service programs in the U.S. market, for example.

Will 5G Move Value to Core Networks?

It might not be intuitive why fifth generation networks might be more important for the core network than the “mobile” network, or why 5G could be a step in the direction of further separating applications from access.

Alert readers will immediately grasp the business implications. To the extent 5G moves in the direction of “use any available access,” it essentially further makes all access networks commodities, including the mobile network.

So where is the value? The managed services and apps. The implications for mobile operators could not be clearer: value shifts to apps and managed services, and away from access.

In one sense, that is further deepening of an existing trend, namely the separation of access from apps that is the foundation of all Internet Protocol networks. When and if the day comes that IP itself is transcended as a protocol supporting the Internet, 5G might eventually be seen as a step along the way.

Oddly enough, IP has enabled a shift to “multi-purpose” networks, and away from “single purpose” networks, as once was the case. Where we once built networks specifically to support voice, TV, radio or satellite TV, we now mostly build IP networks that can deliver any sort of application.

If 5G develops as expected, with core networks virtualized, and able to support apps, devices and users across almost any network, one might argue that value will shift further into the core network and away from access.

Oddly enough, as important as mobility will remain, access will be a less important part of the “mobile” business. It will be the features of the core network that really drive value.

That is a huge change. Once upon a time, it was mobility itself that drove the value of the mobile network and its services. That will still be true. But we might be moving towards a network and a business, where mobility is simply a feature of core network apps, whether provided on a managed or third party basis.

One More Coming Internet Tax

In the service provider business, revenue related directly to high speed access drives revenue growth, and is the single most strategic service. That arguably is true even for funding of universal service.

Eventually, it would seem inevitable that high speed access service revenues will be taxed to support universal service programs in the U.S. market, for example.

The current problem for USF administrators is that the traditional funding mechanism--taxes on purchases of interstate and international revenues--is diminishing as use of fixed network voice diminishes.

You might well ask why that is the funding mechanism, and the answer is simply that, historically, that was where the money was, as industry profit margins were highest in those categories. Regulators and lawmakers being anything but dumb where government revenue is concerned, logically decided to tax the highest-margin services driving what once was the bulk of revenue.

It is worth noting that voice revenue trends have been through two fundamental cycles, with a third on the way.

At one time, international long distance was the highest-margin product, followed by domestic long distance. That changed fundamentally between 1997 and 2007. Over that 10-year period, long distance, which represented nearly half of all revenue, was displaced by mobile voice services.

If you want to know why USF officials seemingly constantly talk about “new revenue sources,” the decline of long distance revenues explains why that is the case.

Among proposals to reform the USF are ways to expand the base of assessable revenues (add service providers, add services taxed) or change the contribution methodology or some combination of both.

The single biggest structural issue faced by the USF is the decline in the assessable revenue base as end users move to internet based services.

Currently, service provider revenues from Internet broadband service are not part of the base of assessable revenues that contribute to the USF.

That is partly why the USF tax is about 17.4 percent.

Of the current proposals for change, one approach is to tax use of telephone numbers, which would “broaden the base.” Eventually, regulators are likely to look at taxing Internet access.

The reason is a structural problem. As more end users migrate to IP based services, the base of interstate and international revenues subject to USF contribution has decreased while simultaneously the demand for USF funds has increased dramatically, CCMI argues.

In 1998, the assessable revenue base was $80B, but in 2012 the base had declined to $66.1B, a 17 percent reduction. That is a measure of the decline in use of voice lines, and partly a decrease in use of long distance, as well as huge pricing declines for use of long distance.

In the same period, the demand for USF funds had grown from $3.9 billion to $8.5 billion, an increase of 118 percent

The FCC has capped the overall size of the USF at $12.1 billion. But the move to over the top Internet-based services means that the assessable revenue base will continue to decline, and the quarterly contribution percentage will continue to grow, even with the cap in place.

Eventually, policymakers will conclude they are better off taxing high speed access, which is where the subsidies arguably are needed, as well.

Will Verizon Become a "Video Supplier?"

It might be aggressive to argue firms such as Verizon will one day be video suppliers on a major scale. 

But it would not be out of place to argue entertainment video will be key to revenues from services sold to humans, rather than machines. A shift to consumption of mobile Internet video is the reason why this is so. 

By definition, people consume lots more data when watching video. And so long as access providers can price in some relationship to consumption, that automatically drives revenue.

Already, 36 percent of smartphone video viewers surveyed say they watch long-form videos (5 minutes or longer) daily or more frequently, as compared to 58percent of respondents who say they watch short videos (under 5 minutes) at that level of frequency.

Mobile video consumption also is growing, as you would expect.  Some 35 percent of respondents report watching more video on their smartphone in 2015 than in 2014.

That especially was true in some markets, including the United States (50 percent), Canada (42 percent), New Zealand (42 percent), South Africa (42 percent), and the United Kingdom (40 percent).

Daily consumption of short videos is significantly higher than consumption of long videos, but retail packaging seems to have a clear impact on long-form video consumption.

Consumers with an “unlimited” data package are significantly more likely to be ‘frequent’ consumers of mobile video.

source: IAB

It's Hard to Say Which Provider Has the "Fastest" Network

Any Internet user’s perception of access speed is highly contingent. Though many users shift from mobile access to Wi-Fi in part because they expect better performance, that might not actually be the case, most of the time.

In early 2015, for example. global Long Term Evolution access speeds were faster than Wi-Fi by quite some measure, according to OpenSignal.

Speed also is highly contingent on network loading. A new network, lightly loaded, will be faster than that same network, over time, as more users are added. So possession of the marketing moniker “fastest network” always will be fleeting.

Results vary based on where the tests are conducted, which network (4G or 3G) is tested, the time of day, the specific cell tower, the test devices and the apps being used to test access speed.

Verizon often leads in measures of “speed” or coverage. But such rankings drift over time.

Sprint now is arguing it will, in a couple of years, have the fastest U.S. network.  

Global Messaging Market is Flat, in Terms of Revenue

The messaging market, including both carrier text messaging and over the top messaging, will decline from $113.5 billion in 2014 to $112.9 billion in 2019, a decline of $600 million, or less than half of one percent.

Volume growth is not the issue, as messaging traffic is predicted to double by 2019, according to Juniper Research. Most of the growth is driven by over-the-top messaging applications, which will see 300 percent growth in usage.

The number of messages sent will grow from 31 trillion in 2014 to 100 trillion by 2019, globally.

Revenue generated from each OTT message is forecast be less than one percent of revenue generated by text messaging (SMS) in 2019.

None of that will come as a surprise to anybody who follows the messaging market.

Revenue cannibalization is a problem for nearly every business confronting an Internet-based competitor. The phrase “analog dollars, digital dimes, mobile pennies” captures the sense of the dynamic.

So consider the position communications service providers face. The dollars to dimes to pennies dynamic now affects every one of their core revenue streams, fixed or mobile.

And there are other issues. As a Verizon executive said recently, “we are running out of people to sell service to.” In other words, the mobile market, for decades the industry growth driver, is rapidly maturing.

That explains the high interest in Internet of Things. Sheer opportunity explains it. Selling connections to billions of machines will be a crucial revenue substitute as services sold to people stalls or actually begins to go in reverse, in terms of revenue.

It might also be fair to offer a reflection on an old question. Fifteen years ago, one could have gotten a robust argument about the future of networking. Some would have argued the “Internet” was the next generation network.

Others would have argued vociferously against that notion. It might still be possible to draw a distinction between “Internet” apps and services and “carrier” apps and services.

But it would be quite a bit less controversial today to say the Internet represents the future of most networking, apps and services, even if managed services remain important.

For Dish Network, it is "Speak Now, or Forever Hold Your Peace"

If you buy the argument that the most logical buyer of Dish Network spectrum is Verizon Communications, then it would have crossed your mind that if Verizon wanted to acquire those assets, the time to do so might be before Dish Network has purchased T-Mobile US.

U.S. regulators would in all likelihood not allow Verizon to acquire a Dish Network that owned T-Mobile US. On the other hand, many would argue Verizon does not want to increase its debt profile, as it is paying down borrowing for the purchase of the Vodafone stake in Verizon Wireless.

Of course, some might see a remedy: a sale of Verizon Communications landline assets, in a big deal, to Altice, which is buying U.S fixed network assets. Okay, that is a lot of moving parts. And it is hard to see to whom Verizon would, in turn, spin off the legacy Dish Network assets.

Verizon is not a believer in the linear video business in the long term, and the company cultures would clash. Verizon arguably would have been more interesting in Dish Network video assets 10 years ago, before thinking about prospects for over the top streaming had changed so much.

So some of us would be surprised, indeed, were Verizon to purchase Dish Network. A more logical scenario, if the fixed network business were divested, is that Verizon would use the liquidity to acquire spectrum the old-fashioned way, in an auction.

Dish Network likely would not want to divest the spectrum assets that now largely define the value of the whole company.

How 5G is Different from All Prior Generations

It perhaps already is clear that fifth generation mobile networks (5G) will be quite different from fourth generation networks, in fact quite different from all prior mobile network generations.

All earlier generations were built on distinct radio interfaces. But 5G, though it might incorporate new radio interfaces, will not be distinctively characterized by new interfaces.

New spectrum will be used, as has been the case for prior generations. But even use of new spectrum will not be the distinctive 5G feature.

At least as presently envisioned, 5G will be an ecosystem, not primarily a matter of radio interfaces, spectrum assignments or offered bandwidth and latency.

In fact, 5G will “be more than a new wireless access technology”  according to Susan Miller, ATIS CEO and president.

“5G is an ecosystem, not an air interface,” said Brian Daly, AT&T core network and government regulatory standards. In fact, 5G is more an integration effort than earlier generations, he said.

Joking that 5G is “one more G than four, ” 5G is different. It is not based mainly on new technology, but will mostly allow all technologies to work together, better, according to Scott Migaldi, Sprint senior research scientist.  

“5G will not be a single standard that supports everything,” said Jim Ragsdale, Ericsson executive and ATIS WTSC RAN chairman. That’s true.”

That’s different. And much more challenging.

Mobile Customer Satisfaction in South Africa Falls in 2014

South African consumers’ satisfaction with mobile network service providers has declined since 2014, with consumers giving the mobile networks industry a satisfaction score of 75.4 out of 100, according to South African Customer Satisfaction Index (SAcsi).

Still, that performance is among the world’s “best,” in a product category that nevertheless ranks near the very bottom of industries.

Relative to scores in other nations, South Africa is in line with “best” scoring mobile industries in other countries such as Portugal (75), Turkey and the United Kingdom (74), South Korea (73) and the United States at 72.

But customer satisfaction with virtually every communications service is low to quite low in the latest American Customer Satisfaction Index survey, for example.

Customer satisfaction scores for subscription TV, Internet, mobile and fixed line telephone service, plus computer software, collectively dipped 3.4 percent to an ACSI score of 68.8 on a 0 to 100 scale, the lowest level in seven years.

Some segments fared worse than others. Customer satisfaction with subscription TV service dropped to 63, the absolute worst score among 43 industries covered by the Index.

But Internet access service, which one might think would fare better, had the same score of 63, at the bottom of the index, across industries.

The SAcsi surveyed 2 195 randomly selected customers of Vodacom, MTN, Cell C and a category called “other” (that includes Telkom Mobile and smaller carriers. With the exception of Cell C which showed a small improvement, each of the brands received lower scores than last year.

Vodacom emerged as industry leader with a score of 76.7 out of 100; MTN was on par with the industry average at a score of 75.6. Both Cell C and “other” scored below par at 72.9 and 69.4 respectively.

 

There were no changes in the overall level of expectations for the large network providers compared to last year’s results.

Perceived value, which describes the perception of price given the quality and the perceived quality given the price, is four points lower at 74.8 out of 100.

The net promoter score which indicates the likelihood of customers to recommend a particular brand, has decreased significantly across the industry, from 38 percent in 2013 to 31 percent at the end of 2014.

Will LInear Video Follow Voice and DSL Patterns?

Are telco voice and high speed access the future model for what happens to the linear video business model? Some might argue that is reasonable.

It just stands to reason that an eventual shift to video streaming could have negative repercussions for some entertainment video distributors, the model and precedent being the replacement of digital subscriber line accounts with fiber to home or fiber to neighborhood replacement services, and the earlier switch out of fixed voice to mobile voice.

In the first switch, fixed line voice customers stopped using fixed voice, and started using mobile instead. Also, the suppliers that got the replacement product revenue often were not the same firms selling the legacy products.

So revenue recipients shifted as the legacy market shrank. But it is a complicated transition.

Where the consumer fixed voice product involved just one or a couple of lines per location (in the days of dial-up Internet access), the advent of mobile voice actually expanded the addressable market to "people, instead of places."

So where a three-person household bought one fixed voice line, it now buys three mobile accounts. "So units sold" grew substantially.

On the other hand, revenue per account arguably is lower for mobile products, compared to fixed products. Where a fixed voice line might cost $50 a month, a mobile account might represent $20 a month, for the voice portion of the service.

But won't linear video distributors also begin to offer OTT alternatives? Yes, Dish Network, for example, already does so. But there is some amount of cannibalization of existing accounts, in addition to net subscriber gains.

We have seen this pattern before, when telcos replaced DSL with fiber connections for Internet access, and earlier when customers switched from dial-up to broadband.

On one hand, a supplier gains a new fiber-based high speed access account. On the other hand, that same supplier also loses a copper-based access account when a customer switches from legacy to optical access service.

PwC’s annual five-year forecast for global entertainment and media shows slower advertising growth rates.

In 2014, PwC predicted advertising would increase 5.5 percent annually over the next five years; now PwC says that rate will slow to just four percent annually through 2019.

In the United States, TV ad spending is growing by just a little more than three percent annually on average, compared to five percent growth rates between 2013 and 2014.

Those dips are happening because OTT services are siphoning off viewers, and ad rates are set by the size of audiences.

That is one example of how the advent of over the top video streaming will act to lower gross revenue and profit margins in the TV business, as has happened in other businesses faced with replacement of legacy products by Internet-enabled products.

Since we are early in the transition from linear to over the top, it is hard to predict the revenue impact on legacy distributors. But it already would be reasonable to argue that Netflix has capped the growth of linear video subscriptions, at the very least, siphoning off growth that otherwise might have gone to pay per view and premium channel spending. In other words, Netflix is a substitute for HBO and Showtime.

Gross revenue might be an issue as well. A Sling TV subscription costs $20 a month. Netflix might cost $8 to $16 a month. A typical basic linear TV subscription easily can run $80 a month. So gross revenue compression is a clear issue for any linear video provider moving to OTT distribution.

And as telcos have found, what one gains can easily be offset by accounts replaced. So far, the displacement in linear video has not proven so large. In 2012, 80 percent of Americans bought subscription linear video. By 2016, 77 percent will do so, PwC forecasts.

But what happens if the mainstream consumer begins to replace linear subscriptions with OTT subscriptions? Perhaps nobody really knows, yet

What percentage of $80 a month accounts drop to $40 a month or are abandoned? Keep in mind that both happened with voice services: a majority of consumers simply stopped buying, switching to mobile voice.

Many consumers pay less because they buy discounted triple play services. If past proves to be precedent, linear video will suffer subscriber losses, gross revenue decline and margin compression. even if some amount of new OTT business is gained.