Phone Leasing--From Manufacturers--Could Disrupt Mobile Provider Revenue

A potential shift to smartphone leasing in the U.S. mobile business points out just how hard it is for access providers (mobile, fixed, cable TV, satellite, fixed wireless, independent ISP) to create value, and therefore sustainable advantage, for their services.

Traditionally, the bundling of subsidized mobile phones with service contracts reduced churn and created consumer “lock in.” That hasn’t changed very much with the recent shift to installment plans. Basically, that move simply shifted how mobile service providers record revenue: less for recurring service and more for device sales.

A potential move to device leasing might be another matter. That opens up “new opportunities for device suppliers,” said Jan Dawson, Jackdaw Research principal.

Conversely, carrier average revenue per account could drop substantially. Comparing the older model where the phone was bundled with service with a contract, and the newer pattern where the device is sold separately from service, but on an installment plan, aggregate mobile service provider revenue is basically revenue neutral, either way.

But all could change if consumers are able to lease phones directly from the device manufacturers themselves. In that case, there will be a direct hit to carrier revenues. 

It’s the difference between the grey line and the blue line. The magnitude of revenue shift depends on what percentage of customers shift from financing their phones from the device supplier or the access provider (mobile operator).

These are the sorts dangers for ecosystem participants when value shifts inside any value chain. Carrier executives always worried about the amount of value they represent in the ecosystem will not be terribly reassured by what could happen because of device leasing, directly from the device suppliers.

New Competitors, Mobile and Fixed, Will Take Share from U.S. Telco ISPs

As fundamental as Internet access is within the broader Internet ecosystem (without access, apps and devices do not work), there is no fixed relationship between the supply of a necessary function, and the segment revenue based on those functions.

In other words, access is necessary, but “who” supplies the access, and what the business models are, can change. That question matters greatly for traditional fixed telecom network services providers, mobile service providers, cable TV companies, independent Internet service providers, satellite and fixed wireless ISPs and government-related or non-profit ISPs alike.

One fact seems clear enough: U.S. mobile revenue will drive growth in the U.S. communications business in 2016, offsetting declines in the fixed network segment.

The important fact of note there is revenue contraction in the fixed network segment. The possibly more important fact is the emergence of new competitors, ranging from Google Fiber to independent ISPs offering gigabit services, plus municipal ISPs.

Another key trend: perhaps municipalities are learning to focus on providing incentives for ISP investment, rather than focusing on revenue to be directly gained in the form of fees on such efforts.  

In that sense, what happens in terms of local government policy could have as much impact on ISP investment and gigabit network deployment as anything done by the Federal Communications Commission at the national level. In fact, some would argue the FCC has actually made investment decisions more difficult for most mobile and fixed operators.

On the other hand, such limits make more feasible new competition by firms with different cost structures and revenue models. Some might make the argument that the long-term effect will include the imposition of usage caps by many of the largest ISPs, as more-difficult business models will place a premium on controlling costs.

“Unlimited usage” arguably is among the potential cost elements that have to be adjusted.

During periods of U.S. economic growth or recession, the mobile industry has faced a generally-declining rate of revenue growth, from 1987 to the present.

Taking into account the different accounting treatment of device sales and recurring revenue, U.S. mobile service provider revenue has been nearly completely unaffected by the substitution of device installment plans, compared to the previous bundled approach, where discounted phones were amortized over the life of a service contract.

That could change.

If a shift to device leasing affects business models more than a shift to installment plans, one can expect a focus on operating costs will come rather rapidly.

The point is that the Internet access business could change significantly, in terms of supplier base. Incumbent telcos likely will have a smaller share of the fixed market, and eventually less share in mobile as well, as new providers take more share.

source: Chetan Sharma

Western Europe Mobile Market Stabilizing, Still Not Growing

The French telecom market might not be as difficult as the Indian mobile market, but it remains difficult.

Though Bouygues now has raised its guidance for 2015 earnings (EBITDA), compared to its May 2015 guidance, the change is driven by performance of the construction unit, not the telecom unit.

In 2014, firm earnings were €694 million. The May 3015 forecast called for full-year earnings of about that same amount. The revised forecast calls for full-year earnings of around €750 million. If Bouygues is proven correct, that would boost earnings by eight percent, year over year.

Bouygues Telecom is forecast to do better than believed when the last forecast was made in May 2015, and better than it did in 2014. But Bouygues Telecom might still lose money for the year. In the first half of 2015, the firm lost about €54 million.

The company reported a current operating loss of €54 million in the first half of 2015, €17 million better than in the first half of 2014.

Including an extraordinary (one time) item--costs related to network sharing with Numericable-SFR--the operating loss was €109 million.

Bouygues Telecom revenue remained stable in the second quarter 2015 at €1.1 billion, down one percent from the first quarter. The firm booked €2.2 billion revenue in the first half of 2015.

First-half 2015 EBITDA rose €21 million to €323 million, while EBITDA margin grew 1.5 points to 17.1 percent.

Though many are hopeful of a trend reversal in the Western Europe mobile market, with some clear signs of revenue stabilization, few would yet be prepared to predict a long-term “rising retail revenue trend.”

Mobile operators in India fear that unregulated over-the-top messaging and voice applications could destroy about 30 percent to 50 percent of total industry revenue.

The fear is rooted in trends elsewhere, including Western Europe, where voice and messaging revenue declines have not been offset by the growth of data revenues.

Between 2010 and 2020, it appears highly likely that voice and messaging revenue will have dropped by half.

Ovum forecasts that mobile revenues in Europe will decline by 1.7 percent year-on-year in 2015. In Western Europe, revenues will decline by 2.7 percent year over year compared to a rise of one percent for Eastern Europe.

The perhaps-encouraging news is that 2015 will fare better than 2013 and 2014, as the deficits are shrinking.

source: Analysys Mason  

Mobile OS Market Now a Duopoly

To a great extent, operating systems create market platforms. The advantage is direct for more closed systems such as Apple’s iOS, direct but of arguably less magnitude for Android.

At the moment, the global mobile operating system market--despite the interest by service providers and potential platform suppliers--has settled mostly into a two-provider structure, with Apple and Android the dominant suppliers.

At least for the moment, the efforts some have mounted to create credible new operating system options largely has failed.

source: the Register

Industry Volatility is High, Getting Higher

There are periods when communications policy is fairly static, and other times when major change erupts. The same holds for spectrum policy. And it might be fair to say a new period of heightened change is coming.

That holds the potential for huge changes in market structure, contestants and changes in retail offers and rates, across fixed and mobile segments.

Consider what is happening, or could happen, in the mobile services arena, regarding spectrum access. Some have noted that auctions for licensed mobile spectrum are sort of at an end, after the incentive auction for 600-MHz spectrum.

So scarcity could become a bigger issue. That might be why mobile service providers are working so strenuously on integrating LTE with Wi-Fi for access, for example.

If providers think licensed spectrum really will be hard to come by in the future, then ways to maximize what they mostly already have could take on new importance.

So what does that mean? Clearly, the value of using unlicensed spectrum becomes even more valuable to a firm fundamentally based on use of licensed spectrum. As many would note, Wi-Fi already represents more bandwidth than all mobile spectrum put together.

Ironically, it is not clear what greater availability of license-exempt spectrum will mean for the strategies of various contestants.

On one hand, much more license-exempt spectrum reduces the scarcity value of licensed spectrum. That should have positive implications for app, device and service providers who can expect they can get to market at lower costs, where access is concerned.

That likewise suggests licensed spectrum could, in some ways, become less valuable, or at least less a barrier to market entry by new providers.

On the other hand, as the need to support more mobile video becomes a fundamental requirement, access to much more unlicensed spectrum will be essential. So the release of more license-exempt spectrum will help mobile service providers. Indeed, it likely is essential.

Also, ironically, more license-exempt spectrum, available only “best effort,” could reinforce the quality advantage traditionally claimed for licensed spectrum.

Strategically, ownership of fixed network assets, or access to them, also becomes more valuable to any mobile Internet access provider, if the capital and operating costs are be “right sized.”

It is getting harder and harder to wring profits out of triple-play fixed network assets, as valuable as fixed network capacity is as the essential precursor to Wi-Fi abundance.

According to the International Telecommunications Union, the business case for fiber to the home or fiber to the curb is feasible in less than half of all locations globally.

The point is that all the activity you now are hearing about in the spectrum area, plus conflicts over Internet app and access policy, plus potential emergence of new access providers, is a reflection of the tumult that now is breaking out globally.

It is not simply regulatory activity that is at a high level, but also business models and technology that are changing very rapidly.

There are times when volatility in the broader telecom industry is low. This is not one of those times.

In U.S. Market, Use of OTT Video Streaming is Nearly Ubiquitous

In 2015,  181 million people in the United States will watch video using an app or website that provides streaming content over the Internet and bypasses traditional distribution, according to eMarketer.

That means 90 percent of digital video viewers are watching OTT streaming video. Virtually of those viewers watch YouTube.

The YouTube audience will reach 170.7 million monthly video viewers n 2015, eMarketer estimates, or 94.3 percent of all OTT video service users.

As you would guess, there is not much room for YouTube to grow its user base.

That is not the case for other streaming providers. Netflix, for example, will grow its U.S. audience by more than 20 percent in 2015 to 114.3 million, or 63 percent of OTT viewers.

Netflix will be viewed by nearly 72 percent of all OTT viewers by about 2019.

Hulu will reach 82.2 million people by 2019, eMarketer estimates.

Amazon’s video streaming service will reach 88.6 million OTT video viewers by 2020.

No Mobile Roaming Charges in EU by 2017, With Some Exceptions

The European Union is moving towards an end to mobile data roaming charges by 2017. Or maybe not. A new document suggests some fair use rules will be permissible.

Such policies, originally developed for “unlimited” Internet access plans, impose additional charges or limit access in some ways once a threshold of unusually-high usage is reached.

So even if most users will not ever encounter the fair use rules, it is not going to be literally correct that “no roaming charges” ever can be levied within the EU.

“Retail roaming surcharges in the European Union will be abolished as of 15 June 2017,” the document states. “However, the compromise defines two situations when the application of surcharges is still authorised, subject to specific criteria.”

“Roaming providers will be able to apply a 'fair use policy' to prevent abusive or anomalous usage of regulated retail roaming services,” the document says. “Once the fair use policy has been exceeded, a surcharge may be applied.”

Also, “where roaming providers will not be able to recover overall costs of providing regulated roaming services from overall revenues of providing such services, they, subject to the authorisation by the national regulatory authority, may apply a surcharge, but only to the extent necessary to recover those costs,” the new rules will stipulate.

So, generally speaking, roaming charges within the EU will end. But unusually-heavy usage might still trigger roaming costs. And in some instances, carriers will be able to apply surcharges to cover actual roaming costs.

Facebook Teams with Eutelsat for Internet Access to Sub-Saharan Africa

Even if Facebook recently seemed to deemphasize satellite Internet in favor of unmanned aerial vehicles, it now has inked a deal with Eutelsat to directly provide Internet access to parts of sub-Saharan Africa.

Eutelsat said it had signed a "multi-year" pact with Facebook to provide Internet access using “the entire broadband payload on the future AMOS-6 satellite," with the service expected to go live in the second half of next year.

It isn’t immediately clear what the business model will be, or what roles Facebook might play. But it seems likely Facebook will primarily act as a backhaul supplier, working with local partners for access.

Business Model Still is a Problem for Hotspot 2.0 (Passport)

Hotspot 2.0 deployment remains slow, according to researchers at ABI Research. Lack of a clear and compelling business model likely is the problem.

“Operators, however, still lack the tools to generate revenue streams from this technology,” said Ahmed Ali, ABI Research analyst.

The other issue is that it remains unclear which access suppliers will gain most. In addition to Hotspot 2.0, also called Passpoint, mobile carriers and their suppliers are working on several other ways of bonding mobile spectrum to Wi-Fi, potentially making use of Passpoint less compelling or useful.

Passpoint still would be useful for providers of public hotspot service such as Boingo, or cable TV operators operating large public hotspot networks.

Still, an eventual move into mobility services by some large cable TV operators would raise the issue of relative importance.  Passpoint still makes sense for providing seamless

access to hotspot services.

But interworking with mobility services could well represent a parallel and equally-important capability.

Some mobile operators that have deployed the technology in countries such as the United States, the United Kingdom, Australia, South Africa and Hong Kong, have launched the service with VoLTE side by side, aiming for a complete seamless voice experience.

Finding a business model is not new for Wi-Fi: that problem has been present since the inception. Up to this point, some Internet service providers who have deployed large networks of Wi-Fi hotspots have used an indirect business model.

Access to the Wi-Fi networks essentially is an amenity that adds value to the fixed or mobile access service the ISP sells. A few companies have created “for-fee” hotspot services sold mostly to business users.

Passpoint or other methods of bonding mobile and Wi-Fi services will face similar issues. The capability is likely to be monetized indirectly, as a feature that adds value to an access service.

Globally, there will be nearly 341 million public Wi-Fi hotspots by 2018, up from 48 million hotspots in 2014, a sevenfold increase, according to a study conducted by iPass Inc. and Maravedis and Rethink.

Perhaps six million of those 341 million public hotspot locations will support Hotspot 2.0 features by about 2020, according to ABI Research.

Some service providers in 2014 expected substantial growth of their deployments.

source: IHS Infonetics

Europe will have the greatest number of hotspots, with 115 million hotspots by 2018, with North America a close second, with 109 million hotspots, according to Cisco.

Globally, Wi-Fi connection speeds originated from dual-mode mobile devices will nearly double by 2019, according to Cisco.

The average Wi-Fi network connection speed (10.6 Mbps in 2014) will exceed 18.5 Mbps in 2019. North America will experience the highest Wi-Fi speeds, of 29 Mbps, by 2019

Hot Spot 2.0, also called Wi-Fi Certified Passpoint, is a standard for public Wi-Fi hotspots that enables seamless roaming among Wi-Fi networks and between Wi-Fi and mobile networks.

Developed by the Wi-Fi Alliance and the Wireless Broadband Association, the intent is to  to enable seamless hand-off of traffic  without requiring additional user sign-on and authentication.

Merger to Create Stronger Number-One Mobile Operator in Pakistan

Pakistani mobile operators Mobilink and Warid Telecom have reportedly agreed to merge their operations, creating a new firm with the largest customer market share in the Pakistan market.

Part of the thinking apparently is to bolster both 3G and 4G operations, as Warid is 4G-only while Mobilink is 3G-only, according to Telecomasia. That is important for a couple of erasons.

Smartphone usage in Pakistan--and therefore the need for bandwidth--is growing. At present, smartphone usage in Pakistan is above 31 percent, and growing steadily.

The deal also better positions the new entity against both of the rising carriers, Telenor and ZONG.

Telenor, which is gaining market share, along with ZONG, has the highest share of data accounts, but only operates a 3G network. Telenor has no 4G assets, yet. 

The merger also will allow Mobilink to compete head to head with ZONG in 4G. ZONG and Warid are the only providers operating 4G networks.

3G/4G Subscribers
Operator	Technology	2014-15	Jul-15	Aug-15
CMPak (ZONG)	3G	2,898,094	3,094,684	3,452,634
	4G	105,128	132,502	169,435
Mobilink	3G	3,656,345	3,956,653	4,031,096
Telenor	3G	4,162,616	4,695,904	5,091,114
Ufone	3G	2,570,283	2,613,066	2,881,504
Warid	LTE	106,211	121,602	139,897
Total		13,498,677	14,614,411	15,765,680

source: PTA

But there likely are additional reasons for the merger. Mobilink and Warid have lost market share to Telenor and ZONG since 2013.

ZONG is the fastest growing mobile operator in Pakistan and is strong in urban areas.

source: techjuice

source: techjuice

Smartphone usage in Pakistan has been climbing steadily since at least 2013 as well, making 3G and 4G assets more important.

source: phoneworld

OTT Voice, Messaging Actually Could Shrink Mobile Revenue 30% to 50% in India

Mobile service providers in the hyper-competitive Indian market, who earn nearly 80 percent of total revenue from voice, warn that they could lose perhaps 30 percent to 50 percent of current revenue from OTT voice and messaging competition.

You might argue that is simply a typical warning from incumbent service providers facing new competition, intended to buttress the argument for industry protection.

As valid as that observation might be, it also would be valid to note that voice revenue declines of at least that magnitude already have happened in many mature markets.

In the U.S. fixed network business, for example, revenue dropped 50 percent between 2002 and 2013.

Other products also have seen that magnitude of decline. In 1997, half of total telecom provider revenue was earned from long distance services in the U.S. market.

By 2007, mobility services had replaced long distance, which dropped more than 50 percent from 1997 levels.

Between 2001 and 2011, looking at consumer spending on communications, mobility spending grew from 25 percent to 48 percent of total spending. Other components obviously decreased by precisely the percentage mobility spending grew.

The point is that, even if one believes such claims of financial damage are a normal part of industry jockeying for position, there is good historical reason to believe revenue declines of that magnitude are quite within the realm of possibility.