Structural Separation or Facilities-Based Competition?

Creating more fixed network services competition--leading to consumer benefits--is never easy. High fixed costs, heavy capital investment and a plethora of competing delivery platforms are ever-present realities.

Where policymakers believe there is little practical opportunity for rival facilities-based networks to emerge, structural separation remains one of the few potential avenues for change.

Structural separation--breaking an incumbent telco into a wholesale unit and a retail unit--has in the past been a way policymakers attempt to create competition and foster investment in the Internet access market at the same time.

That is the actual policy in Australia, New Zealand and Singapore.

The argument has been that multiple facilities-based approaches are inefficient and a waste of capital. That might often be the case, especially in regions where there is no facilities-based cable TV industry that already offers a facilities-based alternative to incumbent telcos.

That is a tough matter, politically speaking. Few incumbent service providers ever have been willing to submit to such separattion policies. 

SingTel was willing to do so in order to obtain freedom to grow internationally, in new lines of business. Telstra, after much struggle, agreed to surrender its monopoly in exchange for assets and freedom in the mobile arena.

The former Telecom New Zealand simply seems to have been motivated by a belief that it would do better if separate retail and wholesale companies (Chorus becoming the wholesale company) were created.

On the other hand, some would argue that more interesting amounts of competition and innovation come when competition takes the form of  facilities-based rivalry. But that largely hinges on pre-existing and substantial investment by cable TV operators.

The reason is simple: when every retail provider uses the same network, the amount of innovation and pricing is limited. Compare that to a situation where two to three access networks exist, and the managers of each network look for all sorts of ways to create distinctiveness.

As many executives would say, an entity relying on wholesale access cannot control its costs.

The new wrinkle, at least in U.S. markets, is the emergence of third-party Internet service providers such Google Fiber and other independent ISPs. That emergence, in turn, appears partly fueled by a change in local government thinking and policy.

For decades, the objective, in substantial part, had been the ability to wring revenues from access provider operations, in the form of franchise and other fees.

Today, the thinking seems more focused on creating infrastructure that supports economic development (which, in turn, leads to higher tax revenue).

The change means municipalities generally are willing to forsake franchise fee revenue to gain state-of-the-art Internet access facilities, and also are willing to substantially improve the speed and efficiency of other key rules such as issuance of permits.

Where policymakers believe it will be possible to encourage facilities-based investment and competition, what happens at the municipal level might well be far more important than what happens at the level of national policy.

National policy still matters, and can be decisive in situations where “only one network” is the expected outcome. How much fiber-to-home progress is possible might hang in the balance.

source:Light Reading

AT&T Voice over Wi-Fi: Feature, Not a Service

A waiver granted by the U.S. Federal Communications Commission to AT&T now allows the firm to offer Wi-Fi calling. The business model is not yet fully visible, as the service has not yet been fully launched.

The context is that Apple’s iPhone, since iOS 8, has supported voice calling using Wi-Fi connections. But full value also requires that the service interwork seamlessly with carrier voice. Until now, that has not been possible.

The new feature illustrates the challenge of voice business models. At least so far, voice calling using Wi-Fi is mostly a capability, not a direct revenue driver for AT&T.

As with use of Wi-Fi for Internet access, the feature might be most useful, in the U.S. mobile market, for callers in areas where indoor mobile signal is weak and Wi-Fi signals are strong.

Though some tier-one service providers have launched their own voice over IP services, they arguably have gained little traction, compared to the third party app and service providers.

In a broad sense, the notion that access providers could compete successfully with over the top providers in voice has proven incorrect.

VoIP has mostly shrunk the retail revenue opportunity for voice, and shifted demand to third parties, and away from carriers.

Eventually, the feature might have greater indirect revenue implications, however.

As one or more cable TV operators enter the mobile market, they are expected to lean on their own hotspot networks and Wi-Fi for network infrastructure.

In that case, voice over Wi-Fi will help the overall business model, offloading demand from mobile to the fixed network.

That could have direct financial implications. To the extent that cable TV companies rely on wholesale access provided by other mobile operators, offload to Wi-Fi will mean lower payments to the wholesale services provider.

Bonding of Mobile and Wi-Fi Spectrum is a Land Grab

Wi-Fi interests worry about interference issues as new protocols are developed for bonding mobile and Wi-Fi resources. “Playing nice” always is a legitimate matter for users of shared spectrum.

As always, there are commercial advantages and interests at stake as well. “It’s a land grab,” said Roger Entner, Recon Analytics principal. “Are the cable guys blocking or are the mobile operators responding to future spectrum shortages?”

Maybe some element of each is at work.  

Cable operators see their huge networks of public hotspots as an asset to be monetized. Dense networks of hotspots can support a mobile business plan. Those same networks can drive wholesale capacity businesses as well.

As mobile and Wi-Fi bonding becomes possible, and assuming interference and access rules are respected, the wholesale opportunity arguably diminishes.

Mobile operators have their own incentives. Wi-Fi offload already is an essential part of network operations. Wi-Fi bonding would make the process more seamless, and might even create some new revenue opportunities.

Among the available strategies for dealing with emerging new competition is to get regulatory bodies involved. Keeping innovations from being deployed, if nothing else, allows more time for some contestants to get their commercial offers ready for mass deployment.

“Wait for standards” is one argument sometimes made, as part of that strategy. But competitors often want to seize business advantage now, rather than waiting.

Every technology standard has commercial implications. Every change in network capabilities has potential business model impact, both within and between industry segments or value chain participants.

There are, and will be, many legitimate technology issues to be addressed as various new forms of spectrum sharing are developed and deployed. There will be lots of sparring about the “right framework” and “right policy.”

But contestants are not unmindful of their commercial interests. It is a land grab.

Google Wants Faster Mobile Web

Google’s core business model is enhanced when everybody uses the Internet, and when the Internet can be experienced “faster.” Most of what Google has done in the access area relates directly to those two interests.

Google now is launching a new open source content initiative intended to speed up performance of the mobile web.

Accelerated Mobile Pages aims to dramatically improve the performance of the mobile web, allowing rich content to load instantaneously.

The other objective is allowing the same code to work across multiple platforms and devices so that content can appear everywhere in an instant, no matter what type of phone, tablet or mobile device you’re using.

The project relies on AMP HTML, a new open framework built entirely out of existing web technologies, which allows websites to build light-weight web pages.

Over time we anticipate that other Google products such as Google News will also integrate AMP HTML pages. Nearly 30 publishers globally have agreed to support the framework.

Mobile Media Usage is Saturating

No market ever grows to the sky, and growth rates for any popular service or product slow as most people already have bought.

So it is not surprising that mobile media growth rates are slowing considerably. Non-voice time spent on tablets and mobile phones will grow just 11.3 percent in 2015 to two hours and 54 minutes, according to eMarketer.

That slowing trend has been underway since 2012.

In 2016, growth of time spent on mobile will fall into the single digits, with U.S. adults spending an average of three hours and eight minutes per day on mobile devices, excluding voice activities.

“As the data shows, a large majority of American adults are already using mobile devices,” said eMarketer forecasting director Monica Peart. “This means there will be fewer new smartphone and tablet users added each year.

“Also, the number of activities currently possible on mobile devices limits the amount of time a user can spend per day. For these reasons, growth in the amount of time spent on mobile devices will slow down significantly,” Pearl said.

Much of the growth in time spent on mobile devices will come from people spending more time within apps.

In 2015, U.S. smartphone and tablet users will spend an average of three hours and five minutes a day using mobile apps, up from two hours 51 minutes in 2014.

By 2016, mobile device users will spend three hours 15 minutes per day using apps.

Time spent on mobile browser activities will hold steady at 51 minutes in 2015 and 2016.

Do Net Neutrality Rules Achieve the Unstated Objectives?

Where public policy is concerned, stated formal outcomes are accompanied by unstated expected unstated outcomes. In other words, there are private interests at work whenever public policies are proposed.

Rarely are any major public policies honestly assessed, in terms of whether the formal stated objectives--and the expected causal chain believed to achieve the objectives--actually happened.

Most observers looking at policy debates in the Internet ecosystem would likely agree that Internet app interests have won virtually all the “important” debates when the contest is between app providers and access providers.

At least a few would honestly admit that among the actual objectives of many policy rules, whatever the state valid public purpose, is the fostering of domestic app industries, and limitations placed on perceived leaders based in other nations.

In a new analysis, Strand Consult takes a look at network neutrality rules and the possible impact on consumer welfare and app provider financial performance.

Strand’s conclusions are troubling or enlightening, depending on one’s point of view. Contrary to intentions, “countries that use hard rules (legislation and regulation) have a lower rate of ‘edge provider’ innovation created in the given country,” Strand says.

Supporters of strong versions of net neutrality rules have argued that the rules will support app provider innovation. The issue Strand tackles is whether that winds up being true.

To be sure, most people and most governments support some basic net neutrality protections, such as end user access to “all lawful apps.” Most believe lawful apps should not be blocked, although there often is disagreement on the part of some governments about what is lawful.

The issue is strong forms that seemingly forbid treating any application, or any bits, “differently.” Extending the concept beyond rules about end user “access” to apps (without blocking or intentional degradation for commercial or political reasons), some now believe net neutrality extends to business models or commercial practices.

That is why there is opposition in some quarters to zero rating, or any promotional policies offering temporary sales, coupons, incentives or other inducements commonly used when marketing products and services.

In countries with strong versions of net neutrality rules, the rate of native innovation declines once rules are put in place, but American internet companies such as Google and Netflix take a greater share of so-called edge innovation, crowding out locally made innovation, Strand argues.

In contrast, countries with soft rules (or even no rules in some cases) have a higher rate of locally-developed content and applications, Strand argues.

It is an important point for countries that wish to support their native industries that hard net neutrality rules may be ill-advised, says Strand.

As a caveat, it is not possible to be entirely certain about whether there is a causal effect, or simply correlation. But Strand argues there is causation, and that the impact actually might be the opposite of what supporters intended.

The report includes a detailed study of zero rating, and finds that the recent war against zero rating, a practice that is used by half of world’s mobile operators for almost a decade, is a campaign waged by opponents to reduce or remove usage caps as a commercial policy.

To be sure, people have the right to differing opinions about such matters.

Some of us argue zero rating is a proven and effective tool for introducing non-users to the values of the Internet, much as similar promotions are used to acquaint consumers with new products they have not used before.

Strand argues that bans on zero rating have no record of consumer complaint about the practice. Some policy advocates may not like the practice, but there is no evidence consumers dislike it.

In Slovenia, for example, the ban on zero rating cut traffic to local content and applications in half, Strand notes.

Debate will continue for some time. The consequences will take longer to assess. Strand is among the first to try and examine rule effectiveness. Unfortunately, other forces are at work.

FCC Acts to Level Playing Field for Voice over Wi-Fi

After pointing out to the U.S. Federal Communications Commission that competitors already were doing so, AT&T asked the Commission to grant a waiver allowing AT&T to offer voice over Wi-Fi services using a new method of handling hearing impaired functions.  

The Commission has approved such a waiver of the rules for AT&T.

In a letter sent to Federal Communications Commission Chairman Tom Wheeler on Oct. 1, 2015, AT&T said competitors Sprint and T-Mobile US already were offering a Wi-Fi calling service that doesn’t conform to accessibility rules relates to calls placed by people with hearing problems.

Specifically, the FCC requires all voice calls to support teletypewriter (TTY) functionality, which enables text-based communication over a telephone call.

AT&T Senior Executive Vice President of External and Legislative Affairs James Cicconi wrote to Wheeler that AT&T made the decision not to offer Wi-Fi calling services because of the lack of TTY support.

To do so, the FCC would have to issue a waiver to the requirement.

Installment Plans Have Not Disrupted Mobile Carrier Revenues, but Manufacturer Leasing Might Do So

A shift from bundled “device plus service contract” to “installment plan phone purchase” apparently has not disrupted mobile service provider revenues.

That might not be the case if phone leasing becomes a major trend, and especially if consumers shift purchases of devices from carriers to the manufacturers.

“Ever since U.S. carriers began experimenting with installment plans and no-contract options designed to transition customers away from traditional two-year contracts with subsidized phones, there has been concern that high-end smartphone sales would suffer,” says Carolina Milanesi, chief of research at Kantar Worldpanel ComTech. That has not happened.

“Our most recent dataset dispels the fear that the new plans would negatively impact high-end device sales,” she says.

Looking at all installment or no-contract plans associated with iPhones, 55 percent were for an iPhone 6, and 22 percent were for an iPhone 6 Plus.

Those two devices account for 68 percent and nine percent of traditional contracts, respectively.

Samsung’s devices purchased on installment or without a contract include the Galaxy S6 with 36 percent of sales, and the Galaxy S6 Edge, accounting for 12 percent of sales.

Sales of those devices in conjunction with traditional contracts included the Galaxy S6 at 28 percent and Galaxy S6 Edge at five percent.

For the three months ending August 2015, 47 percent of the smartphones sold in the United States were linked to installment plans, said Kantar Worldpanel ComTech.

During this same period, smartphone purchases connected to traditional contracts, once the bulk of such transactions, represented only 20 percent of sales. Prepaid sales represented 33 percent.

In the three months ending August 2015, 51 percent of iOS sales were associated with installment or no-contract plans, 37 percent were on a traditional contract, and 12 percent were on prepaid plans.

For Android, 46 percent of sales were on installment plans or no-contract, 15 percent were on traditional contract, and 39 percent were prepaid.

Apple recently launched an upgrade plan in the U.S. market that allows buyers of the latest iPhone models the option to get a new phone every 12 months.

Re

We will have to see whether that “buy direct” program significantly dents carrier revenues by removing significant device sales.

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.