Communications Policy is Becoming Disconnected from Reality

High speed access markets in the United Kingdom and United States show a pattern that should fundamentally challenge the prevailing communications policy framework. Simply put, lightly-regulated cable TV operators are emerging as the dominant suppliers of consumer triple-play services.

Telcos not only are losing installed base and market share, but not are facing additional pressure from cable TV suppliers in small business, mid-sized and increasingly enterprise services as well.

Soon, cable TV will enter the mobile business as well. At every turn, some telco advocates have suggested cable would not succeed. Those predictions have been wrong, every time.

Now we also see lightly-regulated Google Fiber, independent ISPs and municipalities creating new alternatives as well.

That is going to cause bigger and bigger problems for regulators and policymakers over time, as policy becomes ever more disconnected from commercial reality.

Increasingly, not only is the “telecom is a monopoly” framework ceasing to be relevant, but policies that assume that framework are clashing with market realities that eventually make clear that legacy telcos are, in fact, not dominant providers, in any sense of the word, in the fixed networks business.

Consider only the strategic high speed access market.

In 2014, for the first time, U.K. cable TV high speed Internet access connections had average speed higher than that of fiber broadband services for the first time.

In the United Kingdom,  cable operators also are providing a disproportionate share of the fastest connections.

Average telco ADSL speeds were 6.7 Mbps in November 2013 compared to 5.9 Mbps in May 2013, according to Ofcom.

In the U.K. market, the average download speed of residential cable broadband connections was 40.2 Mbps in November 2013 compared to 34.9 Mbps in May 2013, an increase of 5.3Mbps over six months.

source: ISP Review

In the United Kingdom and the United States, cable TV high speed connections are faster than fiber to home connections.

Half of households in the U.S. market were, in 2013, able to buy access at speeds between 100 Mbps and a gigabit per second. Some 80 percent could buy service at 50 Mbps or more.

Just about 30 percent of telco customers were able to buy service at 50 Mbps or faster. Just about 10 percent of telco customers were able to buy service at 100 Mbps or faster.

In fact, Bain and Company suggests telcos might have about 30 percent of the installed base of high speed access customers in 2020, and could drop further to about 20 percent installed base by 2030.

source: Bain and Company

Cable access has been faster than digital subscriber line in the U.S. market since at least 2005.

source: FCC

source: Ofcom

The point is that our older models are ceasing to correspond with “facts on the ground,” where former monopoly providers are being displaced by new competitors.

That might not be true--so far--in the mobile business. But trends in the fixed network business are clear enough. Where the original problem was limiting telco market power to encourage competition, the future problem will be whether former telcos have viable business models, and if so, how they will have to change.

Some of us would therefore argue that it almost never makes sense to waste time regulating more heavily any industry--or industry segment--in decline. Market dynamics already are erasing former incumbent market power.

Of course, that still leaves two fundamental choices: equalize and lighten regulation for all providers, or tighten and equalize regulation for all providers. People will disagree about which approach is better, in terms of encouraging continual innovation and investment.

But the current framework cannot continue forever. It is breaking.

Ofcom Decides Not to Fully Separate Openreach from BT

The U.K. regulator, Ofcom, has concluded, after a review of U.K. communications structure, that it is not best to fully separate fully separate BT from Openreach, the wholesale services division of BT, as a way of promoting innovation and investment in U.K. fixed network communications.

In Australia, New Zealand and Singapore, full separation exists as the current framework for access services.

Inevitably, disagreement will continue, as the present structure might not satisfy competitors or regulators  over the long term. Wherever wholesale access is provided, there are never-ending disagreements between retail buyers and facilities owners about the appropriate prices and policies for allowing such access.

A number of other approaches to robust  wholesale access already have been taken by a number of other countries, though without embracing the full “divest the network” approach taken by Australia, New Zealand and Singapore.

In Belgium, Germany, the Netherlands, Sweden and Spain, wholesale access to “bitstream” services is the framework.

In France, wholesale access to access fiber is the wholesale framework. In the Netherlands and Sweden both bitstream and fiber access products are available.

In most cases, the objective has been to encourage further investment in next-generation access networks, in addition to fostering competition.

All those efforts revolve around ways to encourage--or force--incumbent telcos to invest, while also encouraging immediate competition.

The problem, some would note, is that the two objectives might be mutually exclusive, to a large extent, in the absence of significant facilities-based competition.

Incumbents virtually always complain that the huge upfront capital investments they must make place the risk squarely on the incumbents, while competitors are able to avoid the investments, yet still reap the rewards of using the networks.

Other competitors, of course, are quite able to model the financial impact on their own businesses of building their own facilities, instead of leasing access. Those competitors nearly always conclude that they are better off renting access, rather than building and owning.

Granted, there are differences in legacy market structure and business thinking in the United States and Canada. There, there already are two broadband access networks ubiquitously deployed.

And though many policymakers would disagree, the U.S. emphasis on creating facilities-based competition is made easier since two fully-deployed networks already operate, virtually nationwide.

Recent investments by Google Fiber, third party Internet service providers (Sonic and Ting, for example), as well as a growing number of municipal and now some dark fiber networks suggest a growing number of actors believe they actually can build their own networks.

There still seems to be no single “right framework” for encouraging both rapid investment and robust competition.

The other huge issue is market context. In few countries can mobile alternatives be discounted. Nor, in most countries, can risk and reward in the fixed network business case be ignored, either.

Always a hugely capital-intensive undertaking, financial returns from new next-generation fixed network investment now are tougher to justify as most markets have gotten more competitive, anchor product categories have reached maturation and begun declining, and fixed wireless, mobile and other possible platforms make the return part of any business model less certain, and smaller than in the past.

Regulators have been studying and debating the merits of structural and functional separation for decades. Wholesale obligations, functional separation, structural separation or a reliance on new facilities competition all remain ways to promote investment or competition, or both.

But it seems nothing is definitively settled, for Ofcom or most other regulatory authorities.

Sonic Begins Marketing of Gigabit Internet Access in Parts of San Francisco

Independent Internet service provider Sonic, which operates in Northern California, says it has launched gigabit Internet access service in the Sunset and Richmond districts of San Francisco. One assumes that service is provided over Sonic’s owned fiber to home facilities.

Elsewhere in San Francisco, Sonic also is selling voice and Internet access that appears use AT&T’s fiber to neighborhood network (Sonic appears to be a wholesale ISP customer of AT&T).

Sonic’s Fusion Fiber service costs just $40 a month and includes “unlimited” domestic calling as well as unlimited international calling to 66 countries.

Sonic has previously delivered Gigabit Fiber in Brentwood and Sebastopol, Calif., plus business parks in Santa Rosa, Petaluma and Windsor, Calif.

At such prices, Sonic definitely undercuts the prices Comcast (which serves San Francisco) is likely to offer when it launches its own gigabit Internet access service in San Francisco, sometime later in 2016. In other markets, such service has sold for more than $100 a month.

U.K., U.S. Consumers Like Mobile Service More than Fixed Internet, Video or Voice

U.K. consumer complaints suggest that, overall, people are much happier with mobile service than they are with fixed network service.

U.K. consumers are roughly twice as unhappy with fixed network service disruptions than they are unhappy with mobile service disruptions.

They are nearly that unhappy with fixed network service quality, compared to mobile service quality.

Customer satisfaction trends are similar in the U.S. market, where satisfaction with Internet access and video entertainment service (and fixed voice service) is lower than satisfaction with mobile service.

source: ACSI

source: ACSI

source: ACSI

source: Ofcom

Internet Access is Not a Monopoly; Why Regulate It That Way?

The Internet ecosystem tends to move faster than government regulations are able to keep up with.

In the United Kingdom, the goal for some years has been to provide ubiquitous 30 Mbps Internet access. Under the current definition, “super fast” access is said to be 30 megabits per second.

But U.K. cable TV networks, which reach about half of U.K. households, are able to provide Internet access at speeds up to 100 megabits per second, on their own networks.

One still finds data collection on “fiber to home” capabilities, for example. But that simply ignores all the other ways ISPs already are providing service between 100 Mbps and 1 Gbps, on alternate commercial networks.

Some might argue there is no alternative but reliance on a single network. But that is not the case for a growing number of countries, where two or, in some cases, three fixed high speed access networks are commercially available.

Telecommunications is no longer a natural monopoly. Neither, it appears, is high speed Internet access. Maybe we should stop framing telecom policy matters as though monopoly still exists.

That is not to say some degree of market power might yet exist. But policy seems always to lag reality in markets and technology.

So policy might need to look more at where we are going, and less at where we happen to be at the present moment. Different decisions might then be deemed feasible.

source: Ofcom

source: Ofcom

Frontier Communications to Launch Linear Video in 40 Markets

Frontier Communications plans to launch linear video service to more than 40 markets, representing approximately three million households, over the next three to four-years.

Once complete, video service will be available to about 50 percent of the 8.5 million households in Frontier's existing footprint. Frontier also will be adding video subscribers as the result of its acquisition of Verizon properties in California, Texas and Florida.

In total, Frontier will pass about seven million homes with video-capable networks.

Some might think Frontier Communications is making a mistake, investing in linear video at a time when the market actually is shrinking. The same sort of argument was made about AT&T’s acquisition of DirecTV.

source: Marketing Charts

But actions by other actors, such as Google Fiber, show that the business case for a fiber to home network is dramatically improved when an ISP can sell both high speed access and entertainment video. In other words, selling two or three services boosts average revenue per account.

Also, adoption of streaming services will slow, sharply, soon, some predict. Combined with slowish erosion of linear subscription behavior, that suggests a rather longish period where linear remains a key source of revenue and cash flow for any fixed network service provider.

High speed access might still be the anchor, as voice revenue dwindles. But linear video remains significant.

source: Telco 2.0

Compression technology might have quite a lot to do with the business model.  Frontier says its high definition TV signals will consume just 2.5 Mbps per channel.

So a household with four HDTVs active at once will only require 10 Mbps.

Frontier also says the incremental capital investment to enable 1.3 million households for video will require less than $150 million spread over several years.

source: Activate

Maybe Service Providers Need to Follow Banks

It is too bad that service providers have to send bills to consumers every month. Such processes, and the questions they generate, are one reason customer service chores sometimes are onerous, and why consumer ill will is garnered.

Some banks have found that mobile phone transactions can offload as much as 90 percent of the transactions that once required a JPMorgan teller.

In 2015, about 65 percent of new JPMorgan customers used mobile capabilities within six months of opening an account, up from 53 percent.

Customers say they are happier, and JPMorgan cuts its operating costs and churn.

JPMorgan estimates that each teller transaction costs $2 to $3, compared with 10 cents for the same service using an automated teller machine and just a few cents via a mobile device.

Mobile devices are helping with customer retention as well.

People who use their bank's smartphone app frequently are 40 percnet less likely to switch banks than those who do so only rarely, according to a study JPMorgan conducted.

Some service providers have processes that are easier to use, more pleasant and can be “self provisioned.” Some service providers literally force customers to interact with a call center.

But most service providers would do well to emulate at least some of the processes banks have found customers like, use and that also lower operating costs.

source: JPMorgan Chase

source: JPMorgan Chase

Top U.S. Linear Video Providers Lose Subs in 2015 for First Time Since 2006

For the first time since Verizon and AT&T launched their TV services in 2006, the six largest U.S. linear video subscription providers lost subscribers for a full year, despite gains in the seasonally-strong fourth quarter, says Ooyala.

There possibly should be an asterisk, however. Some of those firms now include streaming accounts in their subscriber totals. That is akin to a mobile operator including prepaid accounts as well as postpaid accounts in the subscriber totals, mixing higher revenue, higher value net adds with lower value, lower revenue gains.

In the fourth quarter of 2015, DirecTV, AT&T, Time Warner, Comcast, Dish Network and Verizon gained a net 125,000 subscribers.

DirecTV (owned by AT&T) gained 214,000 subscribers in the U.S. market, but AT&T’s  U-verse also lost 240,000 for the quarter.

source: Business Insider

It was AT&T’s third consecutive quarter losing accounts, the only three quarters AT&T has failed to gain linear video accounts since 2006.

For the year, AT&T was lost a net 355,000 subs and DirecTV lost a net 568,000, Ooyala says.

Comcast added a net 89,000 accounts for the quarter. For the year, Comcast was down 36,000 accounts.

But Comcast now seems to be including streaming customers to its linear video totals.

Dish Network lost 12,000 subs in the quarter and 81,000 over the year. Notably, Dish Network definitely now includes Sling TV customers in its account totals.

According to MoffettNathanson, Dish might actually have lost 141,000 linear subs in the quarter.

Time Warner Cable added 54,000 video customers in the last quarter and 32,000 over the year,

Verizon adding 20,000 FiOS television customers in the quarter, its lowest level of net additions  since 2006.

For the year, the six firms lost 781,000 accounts.

In 2014, the companies added 472,000 accounts. In 2013, they added 500,000 accounts.

Nobody will be particularly surprised by the findings. Virtually everyone considers the linear video subscription business a declining legacy business.

Google Fiber to Use Existing Fiber to Serve MDU Customers in San Francisco

Google Fiber plans to use existing fiber infrastructure in San Francisco to connect potential customers to Google Fiber. The approach is not dissimilar to the way Comparative local exchange carriers traditionally have wired high-rise buildings apartment buildings and condos.

It is not clear how many potential customer locations Google Fiber can reach using this method.

Still, the initiative shows Google Fiber continues to experiment with ways to accelerate connecting customers to its gigabit internet access networks.

Mobile Operator Messaging Relevance Now Arguably Hinges on Google

Two developments illustrate a principle, where it comes to developing over the top messaging apps that have at least some carrier involvement. First, Google, which owns Jibe Mobile, appears to want to use rich communications services (RCS) as a messaging standard for Android devices.

So Google has joined wireless standards group GSMA and a host of global operators to launch an initiative to accelerate the adoption of RCS.

Operators including América Móvil, Bharti Airtel, Deutsche Telekom, Globe Telecom, Millicom, Orange, Sprint, Telenor Group, TeliaSonera, Telstra, Turkcell and Vodafone have agreed to transition to a single RCS standard, which will be supported by Android.

Google also will provide a universal RCS client based on Jibe for all the GSMA carriers.

Separately, the Joyn initiative started by GSMA, has gone nowhere. One example: alhough SK Telecom continues to push forward, KT and LG Uplus have ended their support for Joyn.

In fact, some might argue that Joyn--the GSMA effort to create a market-viable Rich Communications Suite (RCS) ecosystem--already is “dead.”

Launched in 2008, what became Joyn was launched by Nokia, Ericsson, Orange, NTT DoCoMo, SK Telecom, Telefónica, and TeliaSonera, with the intent of creating a vibrant ecosystem for rich communications experiences based on IMS (IP multimedia subsystem).

Joyn was supposed to be the carrier answer to Skype, Viber, WhatsApp, and all the other OTT messaging and voice apps.

It simply hasn’t worked. And one might argue that lack of effort or skill is not “why” Joyn arguably has failed. Carriers simply were too late, competing against apps with high value and much more traction.

The takeaway might well be that carriers--working alone or collectively--are not in a position to lead messaging, without key leadership by app or operating system partners.

One Way "Technology" Reduces Churn in the U.S. Mobile Business

One reason the U.S. mobile services market arguably is less competitive, or “more sticky” than some other markets has nothing to do with regulatory policy, bandwidth, financial assets, brand equity, differentiated services or even network coverage or other measures of “quality.”

For historical reasons, half the market has a legacy “GSM” air interface, while the other half has a legacy “CDMA” air interface for third generation platforms that remain significant, even for users of fourth generation Long Term Evolution services.

The reason is that voice and Internet access “fallback” are to the 3G networks. That has implications for customer retention and ability to switch carriers. Those same barriers provide the explanation for today’s carrier offers to subsidize switching costs (phone installment payments or service contract early terminations).

Verizon and Sprint, which use CDMA, represent 50 percent of the installed base. AT&T and T-Mobile US represent 49 percent of the installed base. What that means, in practice, is that every customer moving from a CDMA platform to a GSM platform, or a GSM platform to CDMA, necessarily must buy new devices.

With top of the line smartphones routinely costing $600 and up, that is a significant barrier to switching behavior. That, in turn, might explain why churn rates  in the U.S. mobile services business are relatively low, despite all the competitive offers.

Verizon and AT&T have churn rates that often are below one percent a month, a rate that is low for a consumer subscription service, historically.

T-Mobile US and Sprint have higher churn rates, but rates are dropping for those carriers as well. T-Mobile US has seen postpaid churn in the range of 1.5 percent recently. Sprint’s postpaid churn rates likewise now are in the 1.5 percent a month range.

To be sure, there are other forces at work. The large number of accounts connected on shared accounts is substantial. So the cost of changing a single account entails potential replacement of numerous devices.

AT&T, for example, has said that 70 percent of all its customers are on shared accounts.

Still, the fundamental divide--GSM versus CDMA--likely remains a barrier to full switching ability across the air interface barrier. And that is just one more reason why customer churn is relatively low in the U.S. mobile market.

source: Statista

Netflix, Facebook, Google Drive Bandwidth Consumption in Americas

“Network traffic in the Americas seems to be getting increasingly concentrated,” said Dave Caputo, CEO, Sandvine. Although most will not be surprised that Netflix is the single application representing the greatest bandwidth consumption, and continues to rise as a percent of North American fixed network traffic, Facebook apps come in second.

In Latin America, Facebook (Facebook, Instagram, WhatsApp) and Google (YouTube, Google Play) represent more than 60 percent of mobile network traffic, Sandvine says.

source: Sandvine

What Will it Take for Carriers to Win When Creating OTT Apps?

Uber is analogous to fring, offering a better user experience and more choice, Genband CEO David Walsh has argued, part of Genband’s focus on development of over the top applications and business models carriers might be able to create.

“We believe that the power of community and the economics of exchanges, changes everything,” Walsh has said. Many would agree with that position.

The issue, so far, is whether carriers actually can do so.

At issue is less “capability” than sheer scale and the growing “winner take all” OTT market dynamics.

Recently, instead of “leaders” in any category of OTT apps or services, markets have tended to evolve towards a “dominant” supplier, with little room, or revenue, for second place or third place.

One might argue that unless any carrier federation is a “first mover” in a new category, leadership is unlikely to happen. That is not to denigrate intent, effort or skill, only to point out that “first to market with the best experience” also has to be matched with high word of mouth (social) adoption.

Success in the OTT app business hinges on network effects--huge scale--for success and monetization models. Carriers, especially federated carrier efforts, can achieve scale.

What is not yet clear is whether carrier apps can achieve scale in the new way: not by leveraging an existing base of customers, but by capturing the loyalty of an even bigger audience of non-customers.

Consider experience so far with Joyn, the carrier-focused platform for unified and rich communications. Though SK Telecom continues to push forward, KT and LG Uplus have ended their support.

In fact, some might argue that Joyn--the GSMA effort to create a market-viable Rich Communications Suite (RCS) ecosystem--already is “dead.”

Launched in 2008, what became Joyn was launched by Nokia, Ericsson, Orange, NTT DoCoMo, SK Telecom, Telefónica, and TeliaSonera, with the intent of creating a vibrant ecosystem for rich communications experiences based on IMS (IP multimedia subsystem).

Joyn was supposed to be the carrier answer to Skype, Viber, WhatsApp, and all the other OTT messaging and voice apps.

It simply hasn’t worked. And one might argue that lack of effort or skill is not “why” Joyn arguably has failed. Carriers simply were too late, competing against apps with high value and much more traction.

Genband is right that innovation is needed. Many of us would argue OTT is simply the way apps get created these days. But we still do not have a good example of a carrier-developed or carrier-backed OTT app that has achieved leadership in its category.

That is not to say such a result is impossible, only to note that, so far, it has not happened.

One reason is that some strategies--including all approaches other than “first to market”--risk losing in markets that tend to have a  “winner take all” structure.

It remains true for all contestants in any ecosystem: moving up the stack is much harder than moving down the stack.