Why OTT "Zero Billion Dollar" Markets are Rational

What has the Internet done to markets over the last 20 years, including telecommunications markets?

Impact has been most pronounced in industries or processes whose output or character is “intangible,” rather than “tangible.”

Voice services and text messaging are examples of such intangible products, including other products susceptible to digital delivery, especially all content products. Though we might disagree about the degree of displacement, OTT voice and messaging products increasingly are substitutes for carrier voice and messaging products.

source: Ovum

To be sure, "usage" is not the same as "revenue." Increased use of OTT messaging does not mean a linear reduction in carrier messaging, just as increased use of Skype does not translate linearly to less use of carrier voice. 

On the other hand, in addition to spurring more use of messaging and calling overall, OTT arguably does lead fairly directly to lower profit margins for operator voice and messaging services. 

source: Analysys Mason

As a rule, any industry touched by Internet distribution tends to see a trimming of supplier profit margins. In fact, that is an important strategy for digital disruptors, where the strategy literally is to destroy profit margins in a traditional business, gaining share and then dominating the new business, with permanently lower profit margins, and possible lower gross revenues.

source: Telco 2.0

That is the theory that underpins the pursuit of “zero billion dollar markets.” One sense of the word is that big markets get created when whole new industries are founded. But one other use is more ominous for incumbents.

That is reliance on marginal cost pricing to literally “destroy” the pricing regime in an existing market, allowing a new competitor with radically lower cost structure to displace the current leaders. That is the essence of the phrase “analog dollars, digital dimes and mobile pennies.”

It is a rational strategy for a new provider to attack a market with much-lower prices, shrinking markets but gaining leadership in the process.

Also, there is a third meaning of the term: any market not large enough for a provider to maintain a direct sales force. Paradoxically, opportunities for channel partners could grow as product categories contract, though that trend will conflict with the effort to market using mass market channels.

Overall, over the top apps--one clear manifestation of the Internet impact--boost usage, but attack profit margins. Telcos sell more data capacity, but lose value and revenue in their traditional revenue streams.

Internet has Become the Next Generation Network

There was a time, early in the 21st century, when there were serious debates about whether the Internet would emerge as the global "next generation network," or whether some other "telecom" network would assume that role.

That we no longer debate the matter seems to be a reflection of the fact that the argument is settled. Even as new managed services networks are created (LTE, 5G), much of the global business does now, in fact, rely upon Internet Protocol and the Internet as the "network."

One can see that in the shift of revenue shares within the mobile and other ecosystems.

Looking only at the mobile business, about 39 percent of ecosystem revenue is earned by mobile operators, and about 34 percent by third party app providers. Nearly 20 percent of revenue is earned by device suppliers and others supporting use of devices.

Among the many contextual issues surrounding the telecom business are:

• overall price, revenue per account, profit margin trends in the communications business
• Marginal cost pricing (near zero pricing, in some cases)
• Exhaustion of legacy product growth
• Value shifts within the ecosystem (OTT, devices)

Taken altogether, the “telecommunications” industry now is part of a larger Internet ecosystem. Managed services and managed networks will continue to exist. But the Internet has become, in many tangible ways, the next generation network.

source: BCG

Are U.S. Businesses Spending More, or Less, on Communications?

source: Gartner

Are U.S. businesses spending more, or less, on “telecommunications” services, and what does that mean for various market participants?

Arriving at a clear answer is harder than you might think, for all sorts of reasons.

Gone are the days when just a handful of companies accounted for most such spending. So any full accounting would have to include lots of smaller private firms whose actual sales cannot be verified.

Also gone are the days when everybody agreed on what “communications” spending includes. These days, mobile devices are a significant portion of “mobile” spending, but the “incidence” (which participants actually make the money) might vary.

Some products (hosted products, for example) can include bandwidth charges within the cost of buying a service. And which entity sells a particular product can vary: a cloud storage contract might be in a “communications” or an “IT” bucket for reporting purposes.

Also impossible to capture metric is “value,” as most IT products now cost less per unit of performance.

Also, some spending might now be avoided because consumers use their own tools and apps, and such spending is not captured in business accounts, or applications have no retail price (consumer versions of Google Docs, Sheets or Slides, for example).

The other issue is that it is easier to quantify large “enterprise” spending than small business spending, since much small business spending is virtually indistinguishable from “consumer” spending.”

All that noted, Gartner forecasts suggest that U.S. businesses are spending less money on telecommunications than they used to, or perhaps, will spend less in the future than they do today.

According to Gartner, less money will be spent in 2019 than was spent in 2013, for example, on a global basis. But that is not granular enough to highlight “U.S. spending.”

Consultants at Deloitte, though, working from tier one service provider annual reports, estimate that U.S. business spending on telecommunications services sold by the tier-one service providers actually is dropping substantially.

That is not the whole story, though, as some business spending on telecommunications, or on services that could be provided by telecom service providers, is shifting to newer and non-traditional suppliers such as Amazon Web Services and Google, Zayo and others.

The other issues are price declines and profit margin compression. In most markets, legacy products such as T1 lines and D-3 lines arguably have dropped substantially in price, because of competition and product substitution (Ethernet access).

source: US Telecom

That said, customers are buying more “next generation” products.

source: US Telecom

Still, it remains unclear whether the shift to buying of new products grows or shrinks demand.

Though it is not completely clear, it is possible that a shift of business and consumer computing to “cloud” delivery cuts spending on information technology for a mid-sized business.

BCG analysts suggest a medium-size retailer, for example,  could reduce baseline IT costs by 47 percent after replicating its existing IT stack in the cloud.

source: BCG

The bottom line is that it remains difficult to ascertain whether U.S businesses actually are spending more on telecommunications than they used to, or what the trend might be in the future.

Curious, in a way, is it not?

As Orange Bid Collapses, France Mobile Market Will Not Consolidate From 4 to 3

For the moment, the French mobile market will continue to be lead by four companies, as the

proposed Orange acquisition of Bouygues has been abandoned, apparently because the government and Bouygues could not agree on all terms and conditions.

The collapse of the proposed 10 billion euro ($11.4 billion) deal probably means the difficult (for mobile operators) retail pricing environment will continue.

Regulators globally disagree about the minimum number of suppliers required to maintain vigorous competition in any mobile market. French regulators traditionally have emphasized “competition,” but seem to have shifted views, now arguing that consolidation would be better, long term, as it would enable more investment in next generation networks.

French regulators seem to be comfortable with three providers. European Commission regulators seem to prefer four.

In a direct sense, those views lean one way or the other on a key question: what is better, lower prices for consumers or stronger firms able to invest more?

French regulators seem to believe investment now is the bigger issue, so three providers is better, as fewer competitors likely means higher prices, and therefore more ability to invest in next-generation networks.

EC regulators seem more focused on the traditional concern, namely lower prices for consumers, at the risk of less investment.

FCC Revises "Lifleline" Program to Stimulate High Speed Access

The Federal Communications Commission has refocused its “Lifeline” program to emphasize support for high speed Internet access.

For the first time, the Lifeline program will support stand-alone broadband service as well as bundled voice and data service packages.

The revised program provides support for stand-alone mobile or fixed broadband Internet access service, as well as bundles including fixed or mobile voice and broadband.

Citizens and residents in rural areas already have been opting for mobile Internet access at significant rates.

The top five mobile-only household states are Arkansas (35.2 percent), Mississippi (35.1 percent), Texas (32.5 percent), North Dakota (32.3 percent) and Idaho (31.7 percent of households are wireless broadband only).

All of states are largely rural.

The bottom five mobile-only household states are New Hampshire (16.0 percent), South Dakota (15.6 percent), Connecticut (13.6 percent), New Jersey (12.8 percent) and Rhode Island (12.0 percent), states that are mostly urban.

The results suggest that rural households appear to value wireless access more highly than urban areas. Across the United States, about 25 percent of households use only mobile  broadband.

source: websiteoptimization.com

The new rules set a minimum of 10 Mbps downloads/1 Mbps uploads. Minimum monthly fixed broadband usage starts at 150 GB.

The new rules phase in minimum standards for mobile broadband service, starting at 500 MB per month of 3G data by Dec. 1, 2016, 1 GB by Dec. 1, 2017, and increasing to 2 GB per month by the end of 2018  

Mobile voice monthly standards are set at 500 min/mo., beginning on Dec. 1, 2016; 750 min/mo. on Dec. 1, 2017; and 1,000 min/mo., starting on Dec. 1, 2018.  

Vizio Eliminates Tuners in Some of its TVs: What That Tells You

Sometimes, apparently little changes reflect on the ground reality. Consider the design of television displays.

In times past, TV manufacturers were loathe to eliminate TV tuners from their TV sets, as that would imply the screens were “dumb monitors.” That argument should sound familiar to telecom industry executives.

There are some obvious arguments in favor of “dumb monitors,” however. Any consumer buying entertainment video service from a cable TV company, telco, satellite provider or Internet service provider is forced to use a decoder supplied by the service provider, making the TV’s own tuner superfluous.

And since, in many markets, more than 90 percent of TV consumers actually buy a service from a linear video provider, the TV tuner provides no value. It simply is not used.

source: TV by the Numbers

Even if the fundamental difference between a computer monitor and a TV is the presence of the tuner and some differences in ports and audio output,  TV manufacturers in the past have resisted selling the equivalent of monitors.

Vizio, though, is breaking with past convention, building and selling tunerless TVs for some of its sets, especially the 4K big screen models. Consumers who buy linear TV service will lose zero functionality.

In fact, the only consumers not well served by such a device are those who watch over the air TV broadcasts, and do not buy linear video service.

For Vizio, eliminating tuners allows the company to shave cost from their TVs, while allowing perhaps 90 percent of buyers to use the displays with no loss of functionality.

Vizio is the first TV set manufacturer to finally acknowledge that built-in tuners are superfluous for most potential buyers.

Vizio is the first manufacturer to act in accordance with reality for possibly 90 percent of TV viewers, who no longer need a tuner to watch linear television.

Vodafone India Buys Fixed Assets for Mobile Offload

A deal rumored to be in the works has been completed.: Vodafone India has purchased the fixed network assets of YOU Broadband, which operates cable TV networks across 12 cities in India.

Unlike some other moves happening in the India telecommunications market, which features consolidation and mergers among mobile operators, the Vodafone purchase of YOU Broadband gives the mobile operator fixed assets.

Vodafone’s acquisition of fixed network access assets in India follows similar efforts in other Vodafone markets, part of a strategy to bolster mobile network performance by enabling offload of mobile data demand to owned fixed networks.

Most descriptions of YOU Broadband emphasize its ownership of 1900 miles of backhaul fiber and 3700 miles of access facilities, serving consumers, smaller businesses and enterprises with triple play services and Internet access up to 100 Mbps.

Most descriptions of the company suggest it is a “small Internet service provider,” which partially explains why Vodafone emphasizes the network mileage, not customer revenue or customer accounts in its justifications for the buy.

Oddly enough, the strategic rationale for fixed network assets increasingly is that it provides offload for mobile device traffic. That has become a more-important consideration as 4G and coming 5G networks are required to support an order of magnitude or more data consumption per user and account.

source: Broadband in India

Google Fiber Adds Voice Services

Google Fiber customers now have the ability to buy phone service for an incremental $10 a month. In the past, Google has maintained that voice service was a rather low priority for its Google Fiber service, with video entertainment a more-logical and important companion service.

The latest turn of events might suggest a couple of new lines of thinking. Perhaps Google now has found that gross revenue for its Google Fiber networks, even using the neighborhood approach, is simply not high enough with just two services to sell.  

Perhaps the move suggests voice now is believed to be an important service element, either to attract new customers or retain them. Possibly there are other additional values that help justify adding the new service element.

Most likely all the above are correct: the consumer access business is competitive enough that revenue from the three foundation services is required, and competition is stout enough that a triple play offer is needed to remain competitive, even when Google Fiber has an advantage with its Internet access offer.

As was the case for Google Fiber’s resetting of consumer expectations about the “right price” and “basic features” of an industry-standard Internet access service, the $10 a month price might also help reinforce expectations about what a fixed network voice service should cost.

The service also seems to build on Google Voice capabilities, to allow use of the service on PCs, tablets, smartphones as well as "phones."

One observation might also be that the U.S. consumer access business is robustly competitive. If Google Fiber believes it really has to be a triple play provider to make the consumer access business model work better, that suggests the hassle and low potential revenue of supplying voice services is necessary, despite its modest revenue contributions and not-insignificant costs.

source: Silicon Alley Insider

India Internet Access Markets are Unstable

As on 31st January, 2016, the top five fixed network Internet access providers were BSNL (9.90 million), Bharti Airtel (1.68 million), MTNL (1.12 million), Atria Convergence Technologies (0.89 million) and YOU Broadband (0.51 million).  

The top five mobile Internet access providers were Bharti Airtel (31.02 million), Vodafone (26.23 million), Idea Cellular (22.04 million), Reliance Communications Group (15.37 million) and BSNL (10.26 million).

The market for high speed access is fragmented, almost always a sign of an unstable market likely to consolidate, eventually. A theoretical stable market structure would have the leader with market share (installed base, actually) twice that of the number-two player, which, in turn, would have installed base double that of the number three provider.

Classically, a stable market would have the leading provider having up to half the installed base of customers in the market, with three top providers having 85 percent or more of the installed base.

The Internet access market, the mobile services market and the fixed network Internet access markets in India are, by such measures, unstable.

source: TRAI

source: TRAI

source: TRAI

Data-Only PLans from T-Mobile US?

In a clear sign of the times, T-Mobile US reportedly is launching data-only plans, confirming both the way many people use smartphones (lots of applications other than voice), the importance of text messaging as a mobile communications channel and the ability some users might have to rely solely on over the top VoIP for voice services.

T-Mobile US will launch “Simple Choice Data-Only” rate plans on March 30, 2016, according to TmoNews.

source: Nielsen

Plans are said to offer:

• 2GB for $20 per month
• 6GB for $35
• 10GB for $50
• 14GB for $65
• 18GB for $80
• 22GB for $95

We often note that mobile data drives revenue and revenue growth for many mobile service providers. We less frequently note that most people now “talk less” than they used to, and “text more,” but all those trends are factors making the new rumored plan viable and interesting for some users.

Mobile IS Interner Access for Half of Asia Customers

Some 90 percent of mobile subscribers in the Asia-Pacific region access the Internet using their mobile devices every day, according to a September 2015 survey of users by the Internet Society (ISOC).

For 47 percent of respondents, the mobile device is the primary means of online access. Some 52 percent of mobile device users in Southeast Asia and India primarily access the internet using a mobile device.

Some 90 percent of respondents using their mobile device to send and receive emails, while  87 percent use a smartphone both for social media and to search for information.

It will come as no surprise that a majority of respondents noted that faster connection speeds (77 percent) and lower data costs (68 percent) would encourage them to use their mobile data connection more often.

As typically is the case, developments vary from country to country.  In South Korea, Australia, Taiwan and Hong Kong,more than 100 percent of respondents use mobile data access, while in Papua New Guinea, Nepal and Timor Leste, mobile Internet adoption is less than 10 percent.

Asia-Pacific ‘s average cellular speed, at 10.9 Mbps, ranging from 13 Mbps or more for countries like Singapore and Japan, to an average of 3 Mbps for Bangladesh and Laos.

The average smartphone connection in Asia- Pacific now uses around 1Gb of data per month.

While an average mobile user in Singapore or Japan would consume 1.5 to 2Gb of mobile data per month, customers in China and the Philippines use about 200Mb to 300Mb.

Affordability is a big issue. Broadband access in developing economies can cost up to 18 percnt of monthly average gross national income.

While the survey points to ways to increase the coverage and affordability of mobile broadband, the preference by many for connectivity over Wi-Fi networks also presents an opportunity to develop other wireless platforms and technologies that could allow future users in Asia-Pacific to access the Internet more cheaply, reliably and securely, the ISOC argues.

Should New Internet Access Platforms be "Standards Based?" And, if So, Which Standards?

Do Internet platforms based on use of balloons, unmanned aerial vehicles or satellites need to be “standards based?”

Since standards tend to create bigger markets, and lower network element costs, sure.

But suppliers of such platforms might well argue they are standards based, just not in the way some might interpret that statement.

Cable TV networks are standards based, for example. They simply are not the standards used by global “telecom” network suppliers.

The call for “standards” by Ericsson’s CEOt is not unexpected, coming from a major global telecom manufacturer.

Standards and innovation sometimes appear, especially in the case of market-driven technologies, as potentially opposed forces.

Innovations begin as niche developments not within the framework of existing things. Such innovations are “different” and often pose the threat of disruption to the existing order of things.

And, to be sure, it is in the interest of the largest global suppliers that global standards exist, since that creates and drives the largest potential markets and lower product cost, as well.

But standards amenable to “telecom” suppliers might also be unnecessary, either near term or possibly even longer term, in the sense Ericsson could be suggesting.

The cable TV industry relies on different standards, and yet is a very-effective platform alternative to standards-based “telecom” networks.

In the same way, satellite standards, or even standards developed to support new platforms, can succeed--and arguably should be allowed to experiment--without unnecessary concern for a full embrace of “telecom” standards.

The new platforms should embrace standards in ways that enhance their value and cost parameters. They arguably already do so.

End users might ultimately benefit more if the new platforms do not worry so much about “telecom” standards compliance.

Netflix Will Offer Choice by Throttling Video

A Netflix decision to offer a voluntary, user-initiated “throttling” of Netflix video streams illustrates the value--perhaps even the wisdom--of allowing consumers to make their own choices.

Conversely, the Netflix decision also highlights what some would say is a defect of network neutrality rules, namely the outlawing of quality of service measures that actually benefit consumers.

Netflix now says it will “soon introduce a data saver feature designed for mobile apps,” according to Anne Marie Squeo, a member of the Netflix communications team.

The data saver feature will allow them to either stream more video under a smaller data plan, or increase their video quality if they have a higher data plan, Squeo says.

Choice, in other words, is what Netflix now plans to offer. But choice also includes a default “throttled” bitrate.

“Our default bitrate for viewing over mobile networks has been capped globally at 600 kilobits per second,” says Squeo. “It’s about striking a balance that ensures a good streaming experience while avoiding unplanned fines from mobile providers.”

Some would say “choice” is the heart of the matter. Consumers have the ability to lower resolution, to save on potential usage charges, or increase resolution, even if that means higher data consumption.

“This hasn’t been an issue for our members,” she notes.

To be sure, when a single company such as Netflix decides to set a lower default rate for streaming, while allowing users to set higher resolution, that raises no antitrust issues, as might be the case if access providers were able to favor their owned video streams over those of all providers.

Choice is a good thing. But some say the freedom Netflix has is more than ironic, given the prohibitions on ISP access policies. If choice is a prerogative that should belong to the end user and consumer, some might argue it should not matter “who” offers the choice (so long as the policies are not antitrust violations).