In Internet of Things Business, Dumb Pipe Will be a Small Revenue Driver

There is a very good reason why access providers are so intrigued by Internet of Things applications and services. Of the access connections expected to be in use by 2020, perhaps 60 percent will support Internet of Things devices and apps, according to Cisco.

That noted, relatively little total ecosystem revenue will be directly earned by supplying Internet access. Devices, installation of devices, applications and systems integration likely will represent most of the revenue.

Perhaps that is one more example of why “dumb pipe” revenue issues are so important to access providers. Even if “access” is the unique role of an access provider, access revenue is but a small part of total ecosystem revenue.

That provides incentives for access providers to find and create additional roles elsewhere in the ecosystem, as access providers once bundled “access” with the “voice” application.

source: Cisco

source: Machina Research

It has been clear for some time that as app development has moved to open and third party sources, economic value and firm revenues in the “Internet” ecosystem have shifted to those third parties, and away from traditional access providers.

In the European Community, for example, access providers in 2013 earned between 30 percent and 46 percent of ecosystem revenues. App provider revenues ranged from about 20 percent of ecosystem revenues up to about 51 percent of revenues, according to BCG.

In 2015, the equity value of the leading app providers grew much faster than the equity value of leading telcos, for example. In 2015, Amazon’s equity value was higher by 118 percent. Google’s equity value grew “just” 44 percent. Facebook’s equity value was higher by 32 percent over the last year.

By way of contrast, Verizon was lower by one percent, AT&T up just two percent, Sprint down 13 percent, and just T-Mobile US up by 45 percent. CenturyLink dropped by 36 percent; Frontier Communications dipped 30 percent.

source: BCG

In a 2012 survey, many U.S. mobile industry executives believed that app providers will “dominate” the industry “within five years,” a survey by Deloitte found at the time. And for all the talk about avoiding “dumb pipe” status, 89 percent of surveyed mobile industry executives believe carriers will be limited to that role.

source: Deloitte

source: Deloitte

Nearly half (49 percent) of respondents say app providers, rather than access providers or handset makers, will dominate mobile in five years.

source: Deloitte

Moreover, 89 percent believes the role of carriers will be limited to delivering data access anywhere, anytime.

Fully 70 percent agreed that firms such as Google and Apple would dominate the business.

Some 31 percent of the service provider executives thought “commoditization of carriers” would increase, while 90 percent agree that “walled gardens” would not work in the future.

What Drives App Revenue?

Over the last half decade, mobile app revenue sources have changed. In 2011, most revenue was earned by the sale of apps in mobile app stores. By 2015, in-app purchases had  become more important. By 2017, according to Gartner, in-app purchases will be the largest revenue contributor.

Games have become the single-biggest revenue source, as well, representing perhaps 72 percent of app revenue in 2013, according to Digi-Capital.

0.19 percent of all freemium game players contribute 48 percent of revenue, according to Swrve.

Of paying customers, 64 percent make one purchase, while only 6.5 percent of players make five or more purchases.

The average monthly spend per payer was $24.33 (up from $22 in 2014).

The typical paying player makes 1.8 purchases, averaging $13.82 per purchase.

source: Localytics

source: Digi-Capital

About 2.5 percent of all purchases are now over $50 in value, and these purchases contribute over 17 percent of all mobile game revenue.

\Swrve also found that a full 64 percent of players who spend money in games only do so once in the month (up from 49 percent in the original study last year). But it’s not all bad news for publishers. Total volume of spending per month increased by nearly $3 per player to $24.66.

http://landingpage.swrve.com/rs/swrve/images/swrve-mobile-app-report-0914.pdf?mkt_tok=3RkMMJWWfF9wsRoku6nIZKXonjHpfsX56%2BQrX6K%2BlMI%2F0ER3fOvrPUfGjI4DTMtrI%2BSLDwEYGJlv6SgFTrPHMat50LgJUxE%3D

In September 2014, Swrve found that freemium game users spent an “average” (mean) of  $24.93. The mean number of in-game purchases per month was three, with an average value of $8.34.

source: Deloitte

source: inMobi

"Dumb Pipe" Will Anchor Access Provider Value, and Execs Know That

It has been clear for some time that as app development has moved to open and third party sources, economic value and firm revenues in the “Internet” ecosystem have shifted to those third parties, and away from traditional access providers.

In the European Community, for example, access providers in 2013 earned between 30 percent and 46 percent of ecosystem revenues. App provider revenues ranged from about 20 percent of ecosystem revenues up to about 51 percent of revenues, according to BCG.

In 2015, the equity value of the leading app providers grew much faster than the equity value of leading telcos, for example. In 2015, Amazon’s equity value was higher by 118 percent. Google’s equity value grew “just” 44 percent. Facebook’s equity value was higher by 32 percent over the last year.

By way of contrast, Verizon was lower by one percent, AT&T up just two percent, Sprint down 13 percent, and just T-Mobile US up by 45 percent. CenturyLink dropped by 36 percent; Frontier Communications dipped 30 percent.

source: BCG

In a 2012 survey, many U.S. mobile industry executives believed that app providers will “dominate” the industry “within five years,” a survey by Deloitte found at the time. And for all the talk about avoiding “dumb pipe” status, 89 percent of surveyed mobile industry executives believe carriers will be limited to that role.

source: Deloitte

source: Deloitte

Nearly half (49 percent) of respondents say app providers, rather than access providers or handset makers, will dominate mobile in five years.

source: Deloitte

Moreover, 89 percent believes the role of carriers will be limited to delivering data access anywhere, anytime.

Fully 70 percent agreed that firms such as Google and Apple would dominate the business.

Some 31 percent of the service provider executives thought “commoditization of carriers” would increase, while 90 percent agree that “walled gardens” would not work in the future.

Amazon a New Sales Channel for Comcast

Virtualization is one of the key byproducts of a shift to Internet apps and processes. Virtualization is a key objective of coming next-generation networks and app ecosystems.

Virtualization has affected sales and fulfillment channels, especially for digital or content products, as well as transaction processes.

And virtualization might be embracing more aspects of retailing. Comcast now will allow customers to order services from Comcast directly from Amazon. And though fulfillment still will require physical operations on the part of Comcast, customer service apparently also will be possible directly from Amazon.

The issue now is how far that interface can be pushed. To the extent that small businesses actually order and use Comcaste products in ways similar to those of Comcast consumer accounts, does some amount of small business sales shift to Amazon?

Over time, can additional business class services likewise be shifted to Amazon for transaction support? And, if so, can products sold to mid-sized businesses be packaged in ways that allow them to be sold directly by Amazon?

China Mobile, True, StarHub Mobile Partner for IoT

Some existing revenue opportunities for mobile service providers and access providers require scale. Content apps and entertainment video services provide examples.

That also will be the case for developing new businesses with high potential revenue impact, such as Internet of Things applications and services, which require heavy investment and promotion. Such investment requires substantial markets to recover the investment costs.

In many cases, IoT opportunities will be based in specific verticals (industries), requiring cross-border or international sales and operations, as well as specific development of systems that cannot be easily replicated in other industries. That will be costly.

For that reason, partnerships between large tier-one carriers and smaller carriers will emerge as a key means by which smaller carriers can get into the application and platform parts of the IoT business.

So it is that Thailand’s TrueMove and Singapore’s StarHub Mobile have joined China Mobile to support research, roaming and other resources in the IoT space.

Content Frequently is Blocked for Contract Reasons, EC Study Finds

Geographic blocking of content is rather common on the Internet, the result of licensing agreements between content owners and distributors.

That also is the case across the European Union countries as well. The point is simply that there are any number of reasons why Internet apps or content are restricted, among them that access is not lawful in particular countries.

That can be the result of government policy or contract clauses.

The same sorts of issues exist on the other end of the policy continuum, where access terms and conditions sometimes cannot be made more generous to consumers. That is the case in countries where zero rating is unlawful, for example.

Some opponents of zero rating oppose the practice, in part, because it is said to create “walled gardens.” Proponents might argue that is not the point, and that zero rating does not foreclose competition.

A free-to-use “walled garden” does not force any consumer to use the service, any more than any consumer “must” use any service or app provided at no incremental cost, any product offered for no incremental cost on a promotional basis, or at a discount.

Legitimate antitrust issues can arise in any market, eventually. But potential antitrust issues are not the same thing as unequal supplier “market power,” in any particular instance or industry.

All contestants, in all markets, have “unequal” access to resources, that might, or might not, create market power that is used in an anticompetitive manner violating law. The existence of “unequalness” does not automatically imply illegal behavior.

The textbook definition of discrimination is a difference in price for similar or identical products that is not justified by differences in product quality or cost.

But zero rating is not price discrimination — it is price differentiation, a practice that is the essence of competition, some argue.

A proper consumer-harm test consists of two questions: Are prices higher, and is there less innovation? The question of a reduction in innovation is interesting. Critics of zero rating argue that the practice hurts  innovation, but they have to date failed to produce any real evidence of said harm, some argue.

source: European Commission

Gigabit Value Really Driven by Multi-User, Multi-Device Households, Not "Speed" or "Capacity"?

Demand for gigabit and other high-bandwidth consumer Internet connections arguably is not driven by application or device need for such bandwidth, but by multiple users sharing a single connection.

In other words, “sharing” is the driver for higher-bandwidth connections, not particular application requirements. That might change in the future, as higher-definition video formats become common.

“Today, whereas a family with two teenagers may have 10 devices connected to the Internet, in 2022 this may well grow to 50 or more devices,” a report by the Organization for Economic Cooperation and Development says.

“Across the OECD area, for example, the number of connected devices in households may rise from an estimated 1.7 billion today to 14 billion by 2022,” the report argues.

Internet of Things will provide the greatest amount of device growth.

Machine-to-machine communications related to “Internet of Things” processes will account for roughly 35 percent to 47 percent of mobile data communications by 2030, argues Michael Mandel, Progressive Policy Institute chief economic strategist and a senior fellow at Wharton’s Mack Institute for Innovation Management.

By 2030, more than 1900 MHz of spectrum in the sub-mmW bands (three times the current availability) and at least 1.2 million cell sites (four times the current level) will be necessary, Mandel argues.

Google Fiber asks, and tries to answer the question of What can you do with a gig?  For the foreseeable future, application bandwidth will not likely be the value driver. Instead, sharing bandwidth across a number of devices is the value.

As business special access value once was the ability to support multiple devices at lower costs than discrete connections, so the value of higher-bandwidth Internet seems to be the same sort of multiplexing.

Google suggests “streaming videos, movies, and TV shows” will happen with little to no delays or buffering” are among the reasons to buy a gigabit connection.  Netflix Super HD video content is cited as an example of gigabit access connection value. But that feature also can be supported by 25 Mbps connections.

Google Fiber cites value for multi-user households, but again that is not exclusive to gigabit access speeds, though clearly the key value proposition for most higher-bandwidth connections.

Video conferencing likewise is cited as an advantage. Again, that is not an advantage uniquely provided by a gigabit connection. Downloading and uploading of image content and game playing also are said to be advantages of a gigabit connection, but are not solely or uniquely provided by such connections.

In fact, some might argue the advantage has nothing to do with speed, but with the lack of a data cap. Some Internet service providers currently cap data downloads at 250 GB per month.

Even if most users never encounter any experience issues, that could be the advantage for very-heavy users, though.

The point is that high speed Internet access remains in much the same position as PC OEMs once were, focusing on “speed” as the marketing platform. The industry has not yet--but will--reach the point that most consumers understand “speed” is no longer a reason to switch providers.

Then the marketing platform will shift in ways more tangibly related to end user value.

Latency performance might already be the most-important value for some users, not speed. The problem for most ISPs is that clearly superior latency performance is hard to prove.

Beyond a certain point, latency performance advantages are hard to achieve.  As a generalization, latency is in the 75 milliseconds to 140ms range, even for sites that use a content delivery network.

The key point is that most U.S. ISPs have latency far below 75 milliseconds. So the bottleneck is the servers on the remote end of the connection, not the access links as such.

So, one way or ther other, the primary end user benefit of gigabit and other higher-bandwidth connections simply seems to be support for multiple users and multiple devices, not any single application, as such.

source: OECD

Bidders File for U.S. 600-MHz Spectrum Auction

Some 104 entities have filed full or partial applications to the U.S. Federal Communications Commission indicating the firms have intention to bid in the forward auction of 600-MHz spectrum to be held this year.

Verizon, AT&T, Dish Network, T-Mobile US, Comcast and Liberty Global are among the entities who will be in position to bid. That list also tells one much about the future direction of U.S. mobile markets, as the list is lead not only by the largest U.S. mobile firms but includes the two largest U.S. cable TV firms (assuming the merger of Charter Communications and Time Warner Cable is approved).

Much is unclear, including the amount of spectrum that might eventually be available to acquire. The reason is that the two-state auction requires TV broadcaster willingness to sell spectrum licenses, and until that auction is completed nobody will know the amount of spectrum assets to be auctioned.

But estimates of 84 MHz up to about 100 MHz have been suggested as the amount of spectrum to be sold.

source: Hogan Lovells

T-Mobile US is expected to be a big winner in the reserve auction, which sets aside some spectrum for bidders who do not own much lower-frequency spectrum. The actual amount of the set-aside will hinge on the total amount of available spectrum.

AT&T and Verizon will not be able to bid for the set-aside spectrum, which could be as much as 30 Mhz, or little as 10 MHz, in areas where they hold licenses for more than 45 MHz of lower-band spectrum.

Contestant strategies might be more complex than is typical. Though bidders always have to weigh their spectrum needs with capital commitments. But capacity decisions are more complicated than usual.

Though the decision on where to bid, and how much to bid, will be driven by near-term requirements, the coming availability of additional assets (shared spectrum and millimeter wave spectrum), plus use of small cells and Wi-Fi, will shape thinking about what is possible, longer term.

The conventional wisdom is that, given a choice between adding new spectrum or adding more cell sites, a typical mobile service provider will spend less money acquiring spectrum than subdividing macrocell sites to increase density.

The new wrinkle is how overlaying small cells compares to the cost of buying new spectrum assets. Verizon has recently been arguing it will be cheaper, in many instances, to increase network density rather than buy new spectrum.

That would reverse conventional rules of thumb about the relative ways of adding capacity, where new spectrum typically costs less than redesigning a network for greater density, assuming the other alternatives (better air interfaces and modulation) are not immediately available.

New spectrum can take the form of buying new spectrum, or redeploying existing spectrum, as when older networks are decommissioned.

The tradeoffs are not easy to understand, as each particular scenario might depend on how well the new frequencies map with the existing network of cell sites. Buying spectrum might be more affordable, when it is possible.

But many would argue that, historically, most of the increase in mobile capacity has come from deploying more-dense networks. That works because using smaller cells allows intensive spectrum re-use.

What is not so clear is the cost of adding capacity using small cells, or buying new spectrum. It might well be the case that such choices are not possible, at the points in time when capacity must be added.

When that happens, the relative cost difference might not matter, as there is no practical alternative to sub-dividing existing macrocells.

source: Mindspeed Technologies  

Altice to Sell Gigabit Internet Access in France

Altice will supply gigabit (1 Gbps) services to customers of its SFR cable TV networks in France, pointing out one advantage of a facilities-based approach to the problem of creating and sustaining both competition and innovation in fixed Internet access networks.

The global telecom industry tends to frame the access problem in terms of fiber or copper, this fiber architecture versus the other. At a policy level, the thrust often is to ensure robust wholesale policies, allowing many competitors to use a single infrastructure.

That has worked to spur competition, but not so well to ensure innovation. In the mobile sphere, regulators in some countries might even argue that multiple facilities-based suppliers (three, for example) has failed to produce robust competition, even if investment seems not to be a crucial defect.

Cable TV networks are the wildcard. For such networks, the issue rarely (business services are the exception) is a matter of the amount of fiber in the network but the modulation method and the spectrum allocation.

Cable TV networks essentially use over the air frequencies and radio frequency transmission, but confined within a waveguide, so all the normal principles of frequency division apply.

One might argue the new way to frame fixed network next generation network issues does not evolve around choice of media, but simply any method to boost bandwidth into the hundreds of megabits per second up to gigabit range, with retail prices people are willing to pay.

Cable’s advantages, in that sense, are stunning. In the U.S. market, cable TV firms have been adding Internet access customers at a higher rate than telcos since 2008, and the rate of gains has escalated over time. In 2015, for the first time, cable TV added accounts and telco accounts actually shrank.

The numbers are nuanced to the extent that telcos are losing all-copper accounts while still adding fiber-based access accounts. But, on a net basis, the copper-based losses now are greater than the fiber-based gains.

Some believe the trend now will gain momentum.

The point is that, at least in the U.S. market, access media is no longer the key issue, in one sense. Cable TV firms are able to boost speeds into the gigabit range without abandoning the hybrid fiber coax access architecture.

Other fixed network providers--telcos, Google Fiber and other independent Internet service providers--have used fiber to the premises.

At some point, that is likely to be augmented by wireless access, as the heavy fixed costs of fiber to premises tend not to work so well in highly-competitive markets, especially markets where one of the networks (hybrid fiber coax) has clear capital cost advantages.

source: BTIG