Enhancing Competition Sometimes Decreases Investment

Perhaps there are instances where government policies can both stimulate competition and investment. That arguably was the case when the Telecommunications Act of 1996 was first passed, for example, legalizing competition in U.S. local access markets that had been sanctioned local monopolies until that point.

As a historical matter, investment climbed at the same time as competition bloomed. Looking at cable TV capital investment, there was a huge run-up in investment after the Act was passed allowing cable TV companies to create new roles as the most-significant new providers of consumer voice and Internet access services.

After reaching a peak, investment later declined to levels that are generally higher than previously had been made. In that sense, an argument can be made that both competition and investment were enhanced, over the medium to long term.

On the other hand, one might also argue that the higher levels of investment have little to nothing to do with legacy services, and everything to do with new services that might, or might not, have been dependent on the Telecom Act.

It is plausible, perhaps even certain, that investment levels were hiked to support new revenue streams based on the Internet, and had nothing to do with the deregulation of voice services.

source: Techdirt

source: US Telecom association

In other instances, policymakers often face tougher choices. Policies that promote competition might increase investment in the short term, but also might depress investment in the long term, if investments in a specific industry consistently lag investments elsewhere.

In other words, whatever the near term impact of any policy decision, long term investment will flow to where firms believe returns are higher, and decrease in any areas where companies believe returns will fall, or are slim and in danger of reaching zero.

Something along those lines seems to be happening in India, where the Department of Telecom (DoT), to preserve competition, has decided to maintain existing rules about the maximum amount of spectrum any single provider can use.

Those rules will prevent several of the larger mobile service providers from rationalizing their spectrum holdings in ways that lead to lower costs.

The DoT decision means larger telcos will not be able to share spectrum, or trade spectrum.

Under the existing rules, a telecom operator cannot hold more than 25 per cent of total spectrum assigned to all companies in a circle and over 50 per cent of total spectrum assigned in a particular frequency band.

To be sure, the ultimate impact on investment is not entirely clear. Service providers always have multiple tools for increasing capacity, and one way to do so is to build more cells, with smaller coverage radius.

Prevented from adding more spectrum by trading or sharing, service providers might well be forced to invest in additional cell sites. On the other hand, service providers might conclude the faster route is to buy out competitors, thus adding their networks and spectrum. That might mean less investment in new facilities, but also less competition.

Is U.S. Mobile Operator Capex Growing, or Not?

Service provider capital spending trends are important for any number of reasons. Aside from the immediate relevance for firms who supply infrastructure, such trends offer clues about service provider strategy.

Quite often, spending ramps up when a next-generation network platform is being deployed, when competition heats up or a major new revenue source requires such investment.

Spending often ramps down when a network build is finished, when a major recession or other financial disturbance pinches revenues or when service providers decide to momentarily shift resources elsewhere (acquisitions; major spectrum purchases or required investment elsewhere in the business).

Sprint and AT&T offer examples.

AT&T plans on significantly lower capital investment over the next few years. In some part, that is because AT&T has finished its fourth generation network build, is deploying capital to make acquisitions, and likely is conserving on capital for expected spectrum auction investments as well.

From the second quarter of 2013 to the end of the second quarter of 2014, AT&T spent on average $5.7 billion a quarter on network-related infrastructure. 

Since then, the average is $4.4 billion (excluding capital related to AT&T Mexico networks investment), representing a dip in U.S. capex of perhaps 21 percent. But some might argue that capex dipped for a year between 2014 and 2015 before resuming a typical profile.

Some might argue AT&T capex has not shrunk, but it has shifted to new locations outside the United States.

source: Telco 2.0

Sprint, on the other hand, after a similar slowdown in 2014, has hiked capex--as a percentage of revenue--to remedy network deficiencies, compared to other leading competitors. The key there is “revenue.” Sprint simply has less revenue available to offset any incremental move in capital spending.

source: Telco 2.0

On an aggregate industry-wide basis, U.S. mobile carriers have grown capex since about 2012. Given expected spending on additional spectrum--and new expected competitive threats--overall capex might remain at higher levels for some period of time.

As much as a rational mobile service provider executive might prefer to spend a lower percentage of revenue on capex, or even lower gross amounts, the market might continue to require relatively higher levels of investment.

The entry of Google Fi and the coming entry of Comcast into the mobile business are examples of how competition could change in the future, irrespective of any continuing market share battles between the four big national service providers.

source: Telco 2.0

Satellite Market Shows Classic Signs of Competitor Behavior in Deregulating Industries

Some trends are “evergreen” in the communications business, or have been so since the advent of deregulation, new technology and competition starting in the 1980s globally.

Among the recurring themes is pricing instability--or pricing wars--in virtually every segment of the business, driven by new competitors with disruptive price offers based on use of new technology.

So it is not surprising that U.K.-based satellite services provider Talia warns of pricing wars in many regional satellite markets.

“It is becoming a price war among satellite operators,” Alan Afrasiab, Talia CEO told Via Satellite. “We cannot make decisions to buy additional capacity or even renew capacity because we don’t know when the bottom price will be reached.”

“At the moment it is unstable, and it’s bad for everybody,” he said. “I think big satellite operators now realize the market needs lower prices, especially on Ku-band, simply because of the Ka-band prices and also some of the smaller operators that have been quite aggressive.”

High throughput satellites and Ka-band are two big influencers of price today, he said. Afrasiab said HTS is pushing prices down, and putting pressure on traditional Ku-band pricing. Anybody familiar with .

Shifts in demand towards the terrestrial networks also are happening, leading to a situation where “the satellite industry overall has less demand.”

None of those laments are unusual. One of the hallmarks of any market that formerly was a monopoly and then gradually is deregulated is the emergence of new competition, notably from outside the traditional industry boundaries.

One example might be the shift of capacity demand away from satellite to to terrestrial networks. New technology also often underpins new competition. So we see the growing level of competition from HTS and Ka-band competitors.

Virtually always, some new competitors attack using the “same product, lower price” marketing platform, and that also is a trend Talia notes. In response, Talia is moving to create a hybrid fixed and satellite business, an example of another common trend in deregulating markets, namely the emergence of new product niches and roles in a relatively undifferentiated market for services.

Comcast Begins Move into Mobile Services

The waiting is almost over: Comcast Corp. is planning to launch its own mobile service. As some of us recall, the deal called for an initial right to resell Verizon service, but later the ability to act as a mobile virtual network operator.

That suggests the first steps will involve Comcast bundling mobile service (still branded as “Verizon” service) with triple-play bundles. After a period of time, Comcast would then create an MVNO business, allowing Comcast to brand the service.

A market trial of a Comcast wireless service could begin six months after a notification to Verizon, which apparently has been made.

Comcast has the right to use Verizon as the underlying network provider as part of a sale of spectrum to Verizon in 2012. As part of that agreement, a consortium of cable companies led by Comcast sold nationwide spectrum licenses to Verizon for $3.6 billion and secured the rights to resell its wireless services.

Commercial service could start late 2016, some believe.

Verizon Chief Financial Officer Fran Shammo has said unnamed cable companies have informed the carrier they now want to execute the reseller part of the agreement.

“Obviously, the industry is moving,” Shammo said. “Cable is going to do what they’re going to do, and we’re going to do what we’re going to do.”

Comcast eventually would leverage its network of homespots and public Wi-Fi hotspots, connecting customers to such Wi-Fi hotspots whenever possible to reduce payments to Verizon for use of the mobile data network. Comcast alone has deployed perhaps 10 million such homespots.

It isn’t yet clear whether Comcast would want to start out that way, however, given the learning curve of becoming first a mobile reseller and then later a branded service provider.

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.