AT&T, Verizon Video Strategies Fit Their Revenue Sources

Differentiating business strategies are among the key features of a global telecom business since the wave of privatization and deregulation starting in the 1980s. Where monopoly telecom service providers once looked remarkably alike, in terms of customer bases, products and strategies, they now are beginning to diverge.

In the U.S. market, some now say the clearest example of differentiation between Verizon Communications and AT&T lies in their approach to video entertainment services. Where AT&T bought DirecTV, increasing its exposure to linear TV distribution, Verizon purchased AOL and launched a mobile video service (Go90).

Actually, that divergence arguably is based on other earlier divergences. Verizon, with a smaller fixed network footprint, has become a mobile service provider with about 15 percent of revenues generated by all fixed network operations.

AT&T remains far more “balanced,” earning 44 percent of total revenue from fixed services. Given that profile, it makes sense for Verizon to focus on mobile video, and for AT&T to focus on linear video.

While DirecTV, as a satellite-delivered service, is not strictly “landline,” nor is it “mobile” service. Functionally, however, DirecTV will resemble a “fixed” service, sold to fixed locations.

Both company strategies, though, focus on the ability to sell an entertainment video services that matches its network assets (Verizon earns 85 percent of revenue from its mobile platform; AT&T earns 44 percent of revenue from fixed services).

Bharti Airtel, Idea Cellular Could Lose 5% of Profits from New Call Drop Rules

Bharti Airtel and Idea Cellular could lose up to five percent of their pre-tax profits as a result of new Telecom Regulatory Authority of India (TRAI) rules about compensation to consumers for dropped mobile calls.

Under the new rules announced by TRA,, mobile users will get a compensation of Re 1 for every dropped call, starting on  January 1, 2016.

The thinking is that the penalties will be larger than actual earnings on many calls. Whether that is literally the case, or not, some of us might argue that billing costs will be a material factor.

In other words, the time and expense of verifying whether a specific refund is to be applied, and then applying the credit, will be larger than the profit margin on any specific call. Nor is it entirely clear that all “call drops” can be accurately measured.

Part of the difficulty is determining when a “dropped call” has occurred. That is a judgment call, to some extent.

The reason is the definition used by mobile operators is very different from what a customer understands as a dropped call, said Kartik Raja, founder and managing director of Phimetrics Technologies.

“When I can’t hear you and the line just goes mute, but my phone shows that the call is still on, from a network point of view it is not a call drop,” he said. “For the network, only when they receive a message saying the call is dropped, it is counted as a call drop.”

Phimetrics conducted a study of telecom voice services, which began by defining a dropped call from a customer’s point of view rather than use a telecom company’s definition.

Using that method–when two users can’t hear each other for more than 10 seconds–the dropped call rates of two percent and three percent looked more like five percent and 15 percent, respectively.

"We consider this regulation as hard to implement in the current form and expect telcos to contest this ruling,” said Bank of America Merrill Lynch.

Dish Network Will Not Allow its Mobile Spectrum Assets to Fall to "Zero"

The only certainty, where it comes to what Dish Network might do with its mobile spectrum assets, is that the firm will never allow the value of those assets to fall to zero. Beyond that, almost any monetiztion strategy is conceivable.

Despite the difficulties, some analysts think Dish Network might finally move to create a mobile business by first striking a long-term spectrum leasing deal with Verizon before the start of the 600-MHz incentive auctions planned for the first quarter or second quarter of 2016.

In general, any such deal would have Verizon trading long-term spectrum rights obtained from Dish Network for turned-up mobile capacity Dish Network could use to launch its mobile service.

Another scenario is Dish creating a spectrum leasing company that supplies different spectrum assets to different customers, including Verizon, AT&T and Sprint.

Though one cannot completely discount Dish doing a deal of some sort with either T-Mobile US or Sprint, neither of those companies could easily consider any major cash deals, and neither company really needs more spectrum right now.

In principle, a spectrum deal, or creation of a spectrum leasing company, would not necessarily prevent Dish from inking other deals with other carriers. Dish might well require retail store support, for example.

Perhaps Dish’s business plan would combine both mobile and fixed access. About the only scenario not conceivable is that Dish Network would allow the value of its spectrum holdings to fall to zero.

And though any such deals are logically discrete from the upcoming 600-MHz incentive auction, any such deals would affect contestant interest in that auction.

In addition to the decision by Sprint to sit out the auctions entirely, removing a major bidder for the reserve spectrum, now Verizon is hinting that it sees less value in the 600-MHz bands, because it already relies on 700-MHz spectrum.

And Verizon’s thinking would definitely shape its need and willingness to bid in the 600-MHz auctions.

Verizon has said it does plan to bid for 600-MHz spectrum, but Verizon also seems to be signaling that it has other options, and might not bid as aggressively as some had thought likely.

To be sure, such statements might, aside from other reasons, be positioning tactics, designed in part to dampen expectations that Verizon would be forced to bid “whatever it took” to acquire spectrum in the 600-MHz auction.

Perhaps Verizon also is signaling that it is less interested in 600-MHz spectrum than some had hoped Verizon would be, perhaps tempering expectations of license sellers and containing prices.

On the other hand, such statements also signal that a potential deal with Dish Network for wholesale access to its spectrum at 2-GHz is perhaps more interesting. That might also dampen price expectations for 600-MHz spectrum.

"Higher frequency spectrum is capacity and that's really what we need at this point in time," said Fran Shammo, Verizon CFO.

But it also would be necessary for Verizon to conclude any such deals before the 600-MHz auctions start, to comply with anti-collusion rules.

Most mobile spectrum is valued on either its coverage or its capacity dimensions, the basic trade off being that lower-frequency spectrum is better for coverage, but less valuable for capacity, while higher-frequency spectrum is better for capacity than coverage.

Verizon arguably has a reasonable amount of “coverage” spectrum, but not so much “capacity” spectrum.

source: Daily Wireless

source: Barrons

The Force Awakens

Because you need to relax, sometimes. 

66% Mobile Broadband Adoption in Middle East, North Africa by 2020

Mobile broadband networks will support more than 66 percent of all mobile connections across the Arab States of the Middle East and North Africa by 2020, according to a new GSMA study.

The study predicts there will be 350 million 3G or 4G mobile broadband connections in the Arab States by 2020, accounting for 69 per cent of the region’s total connections by 2020, up from just 34 per cent at the end of 2014.

The number of smartphones connections in the region is forecast to almost triple between 2014 and 2020, reaching 327 million.

Many Large Public Hotspot Networks Will Be Carrier Grade (and Use QoS) by 2020

It would have been easy to predict, in advance of the promulgation of network neutrality rules, that such rules would simply push suppliers in other directions, either to improve business models or introduce differentiated new services.

That appears to be happening.

Despite the existence of network neutrality regulations--which apply to consumer access services--it appears quality of service mechanisms are going to be quite a prevalent feature of end user experience on many public hotspot networks, as such rules are enablers of new services and revenue streams.

Some important consumer applications actually benefit from, and under conditions of congestion, might require, quality of service (packet prioritization) mechanisms. And public Wi-Fi hotspot networks now are emerging as one expression of support for such QoS-enabled services.

That apparent contradiction is easy to explain, if one thinks about the matter. Though retail consumer Internet access services are covered by present network neutrality rules, business services are not covered.

A public hotspot is a business service, not consumer service. Whether the buyer is a hotel or coffee shop, or part of a network of public hotspot services, amenity Wi-Fi is a business service, not “consumer Internet access.”

So there is no violation of network neutrality rules, if a public hotspot is used to support QoS-enabled services such as carrier voice.

Juniper Research estimates that Wi-Fi networks will be carrying 60 percent of mobile data traffic by 2019. Cisco estimates that Wi-Fi will handle 63 percent of all traffic that year. And some of those services will benefit from quality assurances.

Separately, says the Wireless Broadband Alliance, among operators with hotspot networks in place, 57 percent have a timeline in place to deploy a next generation hotspot (Passpoint) standard network. By definition, Passpoint employs quality of service mechanisms.

Some 61.5 percent of respondents already have NGH or plan to deploy it over the coming year, while a further 29.5 percent will roll it out in 2017 or 2018.

The dominant business driver is the need to enhance or guarantee customer experience for revenue streams such as  TV everywhere or enterprise services.

source: Wireless Broadband Alliance

The Wireless Broadband Alliance, which created the Passpoint standard, also has promulgated quality of service mechanisms. Wi-Fi Certified WMM added quality of service (QoS) functionality in Wi‑Fi networks.

With WMM, introduced in 2004, network administrators and residential users can assign higher priority to real-time traffic such as voice and video, while assigning other data traffic to either best-effort or background priority levels.

Introduced in 2012, WMM-Admission Control further improves the performance of Wi‑Fi networks for real-time data such as voice and video by preventing oversubscription of bandwidth.

Prioritization of traffic includes categories for voice, video, best effort data, and background data, managing access based on those categories.

And many large hotspot network operators presently believe carrier-grade hotspots will represent 57 percent of all their locations, with carrier-grade hotspots accounting for 90 percent of locations by 2020.

Despite network neutrality rules, support for such apps likely is coming. All the technology tools are there to do so on big Wi-Fi hotspot networks.

Most Incremental Revenue Opportunities are Enterprise Focused, Not Direct Consumer Services

With one notable exception, a panel of global service provider executives surveyed by E&Y expects enterprise services--not consumer services--to drive future revenue growth.

That notable exception is video entertainment services, expected by 54 percent of respondents to be the service with best opportunities for incremental revenue growth. Among the more-promising fields identified by the executives, 51 percent saw enterprise cloud opportunities as most promising.

Also notably missing from the list of expected revenue contributors are Internet of Things apps. In large part, that might speak to a structural fact of life, namely that most IoT apps driving significant revenue might require sponsorship and involvement by third party app providers. Also, even most large service providers will not have the scale to drive significant success.

There was much less consensus about many of the other services deemed drivers of future revenue growth. And though some of the services could be marketed directly to consumers, most of the opportunities seem logically to involve an enterprise partner.

Competition is Top Service Provider Concern

Competition in general, and competition from over the top providers in particular, are the top two challenges global telecom executives say they face.

Fully 73 percent of service provider executives surveyed by E&Y say disruptive competition is the leading industry challenge.

But 64 percent of respondents also say regulatory uncertainty is an issue, as well. No other concerns are cited by more than 45 percent of respondents.

Of regulatory issues, access to new spectrum is cited by 78 percent of executives as the top concern.

OTTs (app providers) represent the chief competitive challenges--even more than traditional firms within the telecom business--the study finds. The reason is that app providers now set pricing environments, cannibalize legacy revenues and create new consumer expectations.

App providers, such as WhatsApp, are viewed as the top driver of new consumer demands by 61 percent of respondents.

In developing regions, 67 percent of executives say device suppliers are likely to be key shapers of end user demand.

Service providers overall get about 55 percent of ecosystem revenue.

Survey respondents believe that app provider share of industry value chain revenues reached the 10 percent mark in just a few years according to EY estimates. That underestimates impact, however.

The challenge is that OTT apps redefine consumer price expectations. So the revenue impact on legacy providers is not so much loss market share but lower profit across the board.

SIP Trunking at 45% in North America

About 45 percent of North American respondents use Session Initiation Protocol (SIP) today for a portion of their voice connectivity requirements, a survey conducted by IHS finds.

By 2017, the number of enterprises using SIP should rise to 62 percent.

Though businesses are migrating to SIP trunking, few have done a full cutover. Of those surveyed who already use SIP trunking, SIP represents about 50 percent of voice trunk capacity.

“SIP trunking’s been around for a while, but our survey shows inertia on the part of businesses tied up with existing contracts and services is inhibiting growth,” said Diane Myers, IHS research director.

The supplier market is fragmented and no single provider dominates. SIP trunking connections also are currently dominated by native support on the PBX rather than edge equipment such as enterprise session border controllers (SBCs) or gateways

Special Access Battle Heats Up, Again

Some of us cannot remember a time when “special access” was not a contentious issue. The reasons--irrespective of all valid public policy concerns--are that special access has been, and remains, a major product for business customers.

The other issue is that most sellers of special access do not own their own facilities, and lease access--for their own use or for resale--from a few companies that do own facilities. So disputes over wholesale pricing typically are at the center of dispute.

So it is not surprising that special access once again is on the docket of the U.S. Federal Communications Commission, and not surprising that prices are at the center of the dispute.

By some estimates, annual sales of special access circuits (T1 and DS3, for example) are about $24 billion.

To be sure, access is transitioning to Ethernet, but smaller customers and sites frequently rely on time division multiplexing (TDM) access.

In some ways, continuing debates about legacy TDM access, at a time when everybody agrees the legacy network needs to be shut down in favor of modern IP infrastructure, is curious.

In fact, some might argue it is silly to stupid to delay rapid network modernization to protect a $24 billion business that is shrinking and as much a part of the legacy infrastructure as “all copper” access media.

To be sure, many advocate a logical approach, namely preserving TDM access as IP infrastructure is turned on, at the legacy prices. There is room to debate the notion of fair” prices.

After all, new optical infrastructure and all-copper legacy infrastructure have different cost recovery requirements. New infrastructure is not fully amortized. Copper infrastructure might be nearly fully amortized.

There is less room to argue about the scarcity of high-capacity access, as access networks are scarce, and only one of two ubiquitous fixed network access suppliers in each market is subject to mandatory access requirements in most markets (some telcos, not any cable TV companies).

In 2013, incumbent local exchange carriers sold roughly 75 percent of the approximately $20 billion in annual revenues from the sales of DS1 and DS3 channel terminations, and received nearly 66 percent of all revenue from TDM sales.

That finding, in and of itself, might not be surprising, since only one provider in each market has both ubiquitous access assets and mandatory wholesale obligations (the underlying carrier makes money from its own retail sales and wholesale sales as well).

Only special access sales made by cable TV companies or independent providers with their own owned networks do not create revenue for the underlying carrier.

The latest inquiry centers on contract terms competitors say are unfair.

Some might also note that, no matter what is done, TDM-based access is going to keep declining, as do all legacy access methods do, when the next-generation network becomes ubiquitous and as end users switch from legacy to next-generation access equipment and software.

That is not to deny a transition period of some length. But TDM-based special access is going away, as IP access takes its place.

At one level, the issue is how to create policies that encourage faster transition while not disrupting legacy operations too much. At another level, the dispute is over relative commercial advantage. All valid public policy disputes always involve considerations of private interest.

Will Telcos Be Able to Compete in Triple Play Markets?

High speed access based on all-copper--and even fiber-reinforced hybrid networks--now poses a greater threat to AT&T and CenturyLink, says says Morgan Stanley analyst Benjamin Swinburne.

The reason is growing consumer dissatisfaction with slower speeds available on such networks, compared to services sold by Comcast and other cable TV firms, says Morgan Stanley.

That could be a growing strategic factor in many markets, though it appears mostly an issue in North America, at the moment. In most markets, there is no established cable TV alternative.

Keep in mind that cable TV providers already are the dominant providers in the U.S. market. Should a couple of proposed cable TV industry mergers get approval, no U.S. telco would rank higher than fourth among the largest providers of Internet access in the United States.

Cable TV firms are winning the overwhelming share of  net new accounts, as well. In the first quarter of 2015, for example, cable companies won 86 percent of the new accounts.

The other market change is the shift to gigabit speed access as the headline offer, even when most of the actual net additions come for services at lower speeds. Cable companies often can upgrade to gigabit speeds without a major physical revamp of their access networks.

That is not the case for telcos, who (in the U.S. market) will have to switch to fiber to home networks to compete.

If one believes high speed access is the strategic service in a triple play bundle, that has serious implications. In fact, some might even question whether telcos can compete, long term, in triple play markets.

In fact, it is conceivable that just three U.S. cable TV companies--Comcast, Charter and Altice--will soon have 75 percent to 80 percent share of the “25-Mbps and faster” portion of the market.

So it is that Swinburne argues there is yet further upside for Comcast, Charter, Time Warner Cable and Cox Communications. They already dominate the broadband market, but are positioned to gain even more market share.

Morgan Stanley surveyed 2,500 U.S. households during August 2015 and September 2015 on broadband and TV services, and found "U-verse and AT&T DSL had especially weak satisfaction results, and satellite pay-TV subscribers' broadband satisfaction fell materially year over year."

Cable customers reported an average speed of 38 megabits per second, while DSL subscribers said they had 21 Mbps service on average.

Verizon Communications FiOS customers on average had nearly 30 Mbps service and were happier, despite price hikes, says Morgan Stanley.

Two decades ago, one could have gotten a robust debate about the merits of fixed network access architectures using all-copper, hybrid copper-fiber or all-fiber access. The issue then, as now, was not over capacity as such, but the scalability of the business model.

Depending on typical loop lengths, it might still be possible to make a business case for all-copper access, but less so in the United States than in Europe.

Hybrid still works, but fiber-thin hybrid approaches do not work as well as fiber-rich hybrids. It is easier, in many cases, to make the case for all-fiber access, the Morgan Stanley survey suggests.

But in much of the world, the issue is not so much capacity as it is coverage. Any type of fixed access does not compete too well with a mobile approach.

Still, in some markets, one can fairly ask whether telcos will be much of a factor in tomorrow’s consumer markets.

If high speed access trends continue, if the voice business continues to dwindle and then the linear video market shrinks as over the top replacement markets grow, telcos lose even more.

Proposed India Call Drop Rules Already Have Produced Financial Damage

Whatever else happens as a result of new proposed dropped call credits for consumers, and penalties on mobile operators, equity prices for public Indian mobile firms initially have taken a hit, falling about three percent.

Concerned about call drop rates, Telecom Regulatory Authority of India has proposed a credit of about one rupee (about one U.S. cent) for as many as three call drops per day, paid to customers. In addition, there are penalties for the mobile service provider as well.

"Taking an average four-percent call drop rate, our analysis shows that the penalty could have three-percent hit on revenues and seven to eight percent hit on mobile EBITDA for Bharti and Idea," says Sunil Tirumalai, Credit Suisse research analyst.

Some might argue the potential damage could be higher than that. Though it is virtually impossible to quantify, the cost of billing operations to identify which calls actually dropped, and then apply service credits, might cost more than the one-rupee penalty itself.

EPB Fiber Optics Sells 10-Gbps Service Across Whole Footprint

Chattanooga’s EPB Fiber Optics is introducing a consumer 10 Gbps service for “every home and business in a 600 square mile area”.

The 10-Gbps residential service is available for $299 per month with free installation, no contracts and no cancellation fees.

EPB also is launching 5-Gbps and 10-Gbps Internet access services for small businesses as well as 3-Gbps 5-Gbps and 10-Gbps products for larger enterprises.

The existing consumer gigabit service sells for $70 a month.

For Fixed Network Operators, Competition Really Has Changed Everything

In the telecom business, competition changes everything, a realization that has grown over the decades as increasing portions of the market are exposed to robust competition.

You might think competition matters primarily because market leaders face rival providers who often use the “same product, less cost” marketing platform. That is an issue, but not the biggest issue.

Instead, what really matters is a change in fundamental cost structure for any facilities-based service provider--especially fixed network operators.

In a monopoly environment, the provider of a highly-popular service (voice or video entertainment) might reasonably expect that 85 percent to 95 percent of locations actually will be customers.

In other words, most locations generate revenue. In a duopoly market, assuming two competent providers, each contestant can reasonably expect to split the available market. That might mean a theoretical limit of about 43 percent to 47 percent of locations will generate revenue, for each contestant.

Add a third competent provider and the numbers shrink further. In that scenario, maximum customer locations might be 28 percent to 31 percent.

In other words, a fixed network could well find that fewer than one in three locations passed by its network will generate revenue. That obviously affects and shapes the business model. The reason there is so much emphasis on triple play services is that the strategy helps contestants compensate for the tougher business model of a two-provider or three-provider market.

Internet Protocol makes matters worse for facilities-based providers, since the separation of apps from access means any potential customer can, in principle, buy any key service from any lawful third party service, once a suitable Internet access connection is in place.

At least in principle, widespread availability of over-the-top services further stresses the business model for any facilities-based access provider.

If you want to know why incentives for investment are so important, that is the reason. Even if it is the responsibility of each discrete operator to manage and “right size” costs, it has gotten progressively harder to earn a sustainable return from an effectively-dwindling number of potential customers.

Consider AT&T, which now reports revenue in four buckets: business solutions, consumer mobility, entertainment and Internet services and international.

Business solutions represents 54 percent of total revenue. Consumer mobility represents 27 percent. Entertainment and Internet Services generates about 18 percent of revenue, while International produces only about one percent of revenue.

In other words, 81 percent of revenue is generated by business solutions and consumer mobility. That also is the case for some other fixed network providers that formerly earned most of their revenue from the consumer segment, but now rely on business customers for half or more of revenue.  

The operating income story is more skewed. Business solutions represents 66 percent of total operating income. Consumer mobility represents 38 percent of operating income. Entertainment and Internet Services has negative operating income, as does the International segment.

In terms of operating income, it all comes from business solutions and consumer mobility.

One suspects that will change when AT&T starts reporting results that reflect DirecTV operations, with the entertainment and Internet operations segment assuming both a higher role in revenue, but also contributing operating income.

But that noted, consider the implications. AT&T generates 81 percent of revenue from business customers and its mobility network. By definition, comparatively little revenue is earned from consumers using the fixed network.

The other problem for AT&T is that cable TV companies are the leading providers of high speed access in the U.S. market, especially at 25 Mbps and higher speeds.In fact, by some estimates, fiber to the home is feasible in less than half of all locations globally.  

Fully 54 percent of total AT&T revenue is generated by business customers, on the mobile and fixed network. Stranded assets are not really a problem for the mobile network. But low-earning or stranded assets are a big and growing issue for the fixed network.