Is Internet Access Business Sustainable?

Is the Internet access business sustainable--able to earn a return exceeding its capital investment--at the moment, or over the longer term? It’s a key question, and at least some analysts think the answer is “no.” 
Others disagree.

“We haven’t actually got a sustainable system at the moment,” Dr. Neil Davies, Predictable Network Solutions principal, says.

It’s a “crisis for the world’s telecom industry, in that they are not being able to construct the returns on investment they need for the capital,” he notes. That’s one view.

Others suggest the access business is stable and profitable, at least relatively recently,

source: Washington Post

Comcast, supposedly the greatest cable monopolist, averaged just a 4.5 percent return on invested capital for the five-year period from 2007 to 2012. The Time Warner Cable five-year average is -1.3 percent, some would note.

The problem, in essence, is that the switched telephone network, because of its design, actually enabled control of quality in ways that Internet Protocol architectures actually prevent.

For those of us who are more “business types,” the reasons for those conclusions are the domain of “bit doctors” who understand statistical multiplexing and its implications for large networks. But if I understand the argument correctly, the problem is that the IP architecture effectively removes the ability to control quality, on the part of any single domain within the broader network of networks.

Simply, no single domain owns or controls all the other elements that affect quality. So quality itself cannot actually be guaranteed. And if capital investment to protect or enable quality becomes nonlinear, with unknown results, then costs cannot be determined, for quality of service of any expected level.

It then becomes difficult to set retail prices at levels that recover, with certainty, the cost of investments. As the protocols are statistical, so profit and loss become statistical.

One salient implication might therefore be that no single domain actually can be certain that its own investments in network quality actually will have the desired results.

In the switched telephone network, there was a clear cost identifiable for every connection because all the resources along that path were now associated and reserved for that data stream. That is not actually possible with an IP network.

In the past, bits flowed along a fixed circuit, with one key advantage. A service provider could derive the actual cost of doing so, and price accordingly.

Packet networks are based on virtual and statistical processes at every turn, essentially. That means there are contention and congestion mechanisms happening “all over the place.”

In practice, this means no broadband provider can ever guarantee the quality and performance of the end-to-end transmission chain.

The corollary is that access providers might not be able to determine the cost of doing so, either, at least when levels of quality are part of the offer, and when there are performance guarantees, with financial penalties.

5G Changes Everything

If you look at all the capabilities the coming fifth generation (5G) mobile network will have to support, and 5G relationship to the core network, you’d have to conclude that 5G is the “network of everything.” It will have to support low, medium and high use cases for bandwidth, latency, mobility, battery life and reliability.

The proposed 5G network will have to be location and context aware; flexible; efficient; secure; energy efficient; software optimized and therefore virtualized.

The new network will share spectrum and networks.

In other words, 5G will change the whole network, not simply air interfaces.

Mobile App Revenes to Double, Access Revenues Will Fall 9%, Between 2013 and 2020

Global aggregated statistics, though useful, can hide significant regional or ecosystem differences, it always is fair to note.

Nice upward-sloping bar charts are compelling at a high level, but can obscure other trends. In the earlier parts of a lifecycle, such bar charts give the illusion of solidity. Only later, when growth tops out, and decline begins, do we see the expected full product lifecycle curve.

Also, many other trends often occur below the “headline” numbers. Consider the relative revenue shares in the mobile ecosystem, for example. As virtually all the participants are aware, shares of overall ecosystem revenue are shifting.

In 2013, mobile service providers claimed 59 percent of ecosystem revenue, app providers 10 percent of total revenue. By 2020, the GSMA estimates, service providers will earn half of ecosystem revenues, while app providers earn 20 percent of ecosystem revenue.

The global market still is growing, as many potential customers remain to be gotten. But, as tends to be the case, the incremental new users represent less revenue per account. And, inevitably, the market will saturate, rather sooner than many expect.

The key ecosystem change: app share of revenue doubles while access revenue declines nine percent.

source: GSMA

source: GSMA

There is no Net Neutrality for Wi-Fi, Which Increasingy is Going Carrier Grade

Perhaps oddly, given all the attention to network neutrality as applied to Internet access providers (mobile and fixed), it is Wi-Fi where the balance between “best effort” and “assured access” or carrier grade paradigms will be most important.

At least according to Rethink Research, there will be more “carrier grade” Wi-Fi hotspots than “best effort” hotspots by 2017. That means a majority of hotspots will use prioritization mechanisms.

So with or without network neutrality rules, hotspot providers will be able to groom traffic and take other measures to provide consistent user experience.

O3b Says it is the Fastest-Growing Satellite Constellation Ever

O3b Networks says it has become the fastest growing in satellite history, selling more capacity in the inaugural year of operation than any other satellite operator with global operations.

O3b also says it has sold capacity equivalent to nearly 10 percent of the contracted capacity of the three largest Fixed Satellite Service (FSS) operators combined.

O3b says it now is providing transport to 40 customers in 31 countries, supporting  mobile operators to expand 3G and 4G/LTE services to rural populations; ISPs to provide true broadband on isolated island chains; cruise lines to bring guests and crew high-speed broadband and mobile connections; oil and gas companies to reduce costs and improve crew welfare and governments.

The O3b Networks Medium Earth Orbit (MEO) satellite constellation greatly reduces latency and helps the constellation provide extremely high throughput.

Other contestants likewise are lining up to supply services using even lower orbits, despite some skepticism from providers of geosynchronous service, as one would expect, since MEO and LEO constellations pose new competition (and some would say better user experience).

Australia Orders 9.4% Lower Wholesale Acess Prices for Copper Network

The Australian Competition and Consumer Commission has ordered a 9.4 percent decrease in wholesale access prices on the Telstra copper access network, beginning on No. 1, 2015, and continuing until June 30, 2019.

That decrease, despite fewer customers on the network, incorporates other changing input prices.

Downward pressures come largely from lower expenditures, falling cost of capital and impact of migration of users to the National Broadband Network.

These more than offset upward pressures from a shrinking fixed line market due to consumers moving away from fixed line services and to mobile services, ACCC Chairman Rod Sims said.

The ACCC noted, however, that fewer customers on the copper network will mean higher costs to serve the remaining customers.

That is a generic issue for many fixed network operators. Sowmyanarayan Sampath, Verizon Communications SVP of transformation says Verizon’s copper-based revenue is declining eight percent to 10 percent a year.

At that rate, the revenue stream disappears in a decade. The business will have become unprofitable long before then. Some might argue the business already is unprofitable, if allocated overhead is included. Others would argue the business is slightly profitable, but getting worse as more customers churn off the network.

Verizon might have operations spanning 150 countries, but its revenue is highly concentrated in the U.S. mobile business. By 2016, the mobile business is likely to account for 85 percent of Verizon earnings (EBITDA).

In 2014, mobile contributed 70 percent of revenue, so mobile is generating an increasing share of earnings.

Comcast Continues to Grow Bandwidth at Moore's Law Rates

As crazy as it seems, U.S. Internet service provider Comcast, now the biggest supplier in that market, has doubled the capacity of its network every 18 months.

In other words, Comcast has  increased capacity precisely at the rate one would expect if access bandwidth operated according to Moore’s Law.

U.S. telcos have generally not been able to increase speed at such rates. That, in large part, might account for Comcast’s leadership of the Internet access market.

That said, across the whole market, access bandwidth has grown at rates very close to what one would expect if Internet access were governed by Moore’s Law.

source: IP Carrier

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.