Peak PC in 2011, Peak Fixed Network Connections in 2000 or 2001

Fixed network connections in the United States peaked around 2000. It now appears that sales of PCs peaked in 2011.

In Access Business, Demand Won't Change Very Much; Supply Will. You Know What That Means

In addition to the possible issues (lower value, commodity status) caused by business model inversion, telco service providers also face further disruption on a range of other fronts.

We can assume high levels of competition for all current and future products and services that drive revenue, from traditional sources (other service providers) and new contestants (over the top app substitutes).

What comes next is likely additional forms of competition from non-traditional places, something that arguably can be seen in recent and expected developments in areas ranging from fifth generation (5G) standards to use of millimeter wave frequencies, use of unlicensed and shared spectrum, as well as moves to create more open source access platforms (Facebook OpenCellular, unmanned aerial vehicles, Google Project Loon).

Where in the past it was fairly easy to figure out “who the competition is,” it will be less easy to categorize in the future. Developments such as “network slicing,” for example, will allow app and service providers to buy attributes of networks that are optimized for the particular applications and business models those providers wish to offer.

In a functional sense, network slicing is a form of “wholesale access” to network features. It allows any enterprise or app provider to bundle network access and features with services and apps that drive the revenue model.

Spectrum sharing and unlicensed spectrum, plus new access platforms likewise represent new ways for all sorts of business models combining apps, services and then network access.

As all disputes over spectrum policy are rooted in perceived business advantage, so too are debates over shared spectrum and unlicensed spectrum.

That is normal. What is atypical is the vast potential amount of new spectrum to be made available in many markets, plus the unprecedented effort to create open source models and therefore costs across data center and now access platforms.

To some extent, all ISPs and access providers will benefit from lower platform costs. But that’s the rub: the same shift to lower costs that helps incumbents also enables new potential roles for attackers.

“Dumb pipe” poses the same sort of contradictory implications. On one hand, dumb pipe Internet access now drives revenue growth for mobile and fixed service providers alike, as traditional revenues earned from voice and messaging fall.

On the other hand, such commoditized access does not necessarily drive the same level of profits as the former managed services once did (though there is room for true argument on that score, at least for the moment).

The longer-term strategic issue is simply that there will be so much new spectrum, available at potentially lower costs, plus advances in access network platforms, that new competitors are expected. Adding more supply, in any market, has clear impact on demand. Just as clearly, lots of new supply has predictable impact on profits.

It is hard to see how the access business can avoid further commoditization.

Telco Business Models are Inverting

Telco, mobile and cable TV business models are becoming inverted. Traditionally, revenue was earned by consumers using apps and services, though there always has been some “access to the network” revenue as well.

The inversion has everything to do with “dumb pipe” business models.

Perhaps transfer payments to support rural access are the purest forms of “access to the network” revenues (flat fee providing ability to use the network for local calling, for example), while international or other long distance services traditionally were the purest form of “use the application” revenues (usage).

Traditionally, cable and satellite TV providers have earned zero revenue from access, bundling the cost of network assets and operation into the overall price of a content subscription.

In business customer markets, data services have been a mix of apps and access, as frame relay, ATM and MPLS for example, arguably are services, while a T1 or DS3 line might have been an access service.

But all that started to change with the advent of Internet access as a driving, and arguably dominant driver of entity revenues.

That is, after all, the primary meaning of network neutrality: consumer Internet access is defined as a “dumb pipe” service, with no class of service differentiation and no value add from quality of service assurances.

Where providers earned most of their money when users bought and used “voice minutes,” or sent text messages, the future will be based on customers consuming Internet access gigabytes.

But note the key differences. Voice and texting, plus MPLS, frame relay and ATM, are “services” using the network. Simple consumer connections to the Internet represent “network access,” with no assumptions or bundling of apps using that access. You get access to third party apps you want to use; all you are buying from the Internet service provider is the access to the Internet and its resources.

So the business issue is clear enough. App providers represent the value of the Internet. ISPs provide the means to get to, and use, those apps. When network neutrality rules are in place, the ISP, legally, is a “dumb pipe,” by design.

That explains, simply enough, why access providers are working to create new owned value-added services using their networks. Doing so creates application revenue, in addition to access revenues.

The issue is not “vertical integration” on a wide scale, as that simply is not possible. What might be possible is creation and ownership of a few applications owned by the access provider. That model is akin to cable TV providers owning programming networks: you own some of the content you deliver to customers.

Globally, 27 percent of consumers currently receive some form of value added service from their mobile operator, a study conducted by KAE on behalf of Nokia suggests.  

Such services include over the top messaging services,  streaming content, security services, cloud storage, handset insurance, or offers of free or discounted services (cinema tickets, music or video subscriptions).

Value-added services are more prominent in transition markets 34 percent of consumers in transition markets currently receive value-added services, the study suggests.

The growing provision of value-added services is largely driven by markets such as Turkey and Mexico, where 43 percent and 42 percent of consumers respectively claim to receive them.

In comparison, just 25 percent of consumers in mature markets receive value-added services. This trend is driven by markets such as the UK and Japan, where only 18 percent of consumers receive value-added services.

Business model inversion (app to access) already is happening. What remains unknown is the degree to which the process can be reversed. To what extent can primacy of access revenue revert to the older model (access to app)?

That is what Verizon is attempting with its mobile advertising and content efforts (AOL), what AT&T has done with DirecTV, and what both are attempting with Internet of Things or connected car services.

But here’s the strategic issue: under what conditions might the revenue model flip, with “access” services  less than half of total revenue?

Ironically, as mobile or fixed network operator revenues move from reliance on voice, messaging and content to “Internet access,” they also invert their business models, moving from being application providers to becoming access providers.

In India, where voice still drives 80 percent of total revenue, most of that process remains ahead, as mobile Internet access revenues will drive revenue growth.

But that’s the conundrum: to grow revenues means to emphasize the dumb pipe access role, not the former applications-lead revenue model.

What do App Developers Need to Know about Working with ISPs?

Shrinith V, consultant and Google Developer Expert

Telecom now is part of the computing industry, and that the computing industry increasingly is about apps and services, not hardware. Also, since “access” and “apps” are structurally separated, access providers are providers of dumb pipe services (that is what network neutrality is all about).

That means applications and services can be developed by anyone, and any company, without owning access pipes and facilities.

Just as clearly, that means most service providers now realize they must “move up the stack,” in some way, and own at least some of the applications delivered over their access facilities.

Not every app provider will want to partner with telcos or ISPs. There is no inherent reason why that must be done. Some app and service developers will want to partner, for their own commercial reasons.

But how does an app developer create a service that will get traction, and also be valuable to an ISP partner? How is the “go to market” strategy shaped and conditioned by the partnership strategy.

And what should developers know about working with ISPs? Those are some of the major issues to be discussed by speakers at Spectrum Futures.

Shrinath V, consultant and Google Developer Expert is among speakers at Spectrum Futures who will address the way app developers get commercial traction and “go to market.” The event will be held 19-21 October, 2016 in Singapore.

We Are All Part of the Computing Industry Now

By now, we all are familiar with a set of key business model transitions. Products are becoming services while services are becoming apps.

Jay Fajardo, venture capitalist, Philippines

Manufacturing companies selling elevators or jet engines can move from selling those products once to providing ongoing service, said Chuck Robbins, Cisco CEO. That is an example of the “products become services” trend.

Over the top voice, messaging, audio, video and most other content is an example of the latter “services become apps” trend. Those trends have clear implications for service providers.

In fact, one can say that telecom now is part of the computing industry, and that the computing industry increasingly is about apps and services, not hardware.

Just as clearly, people want Internet access only because they want to use the apps that Internet access enables.

And with big new markets developing in consumer and business domains, just about every stakeholder--from government to service providers to app developers and infrastructure suppliers--is looking for the next big thing.

Right now, the Internet of Things, broadly defined, holds the most promise for app development of interest to ISPs and service providers, just as investors continually look for the next big wave of money-making apps consumers will embrace.

For that reason, for the first time, venture capitalists will speak at Spectrum Futures, to be held 19-21 October, 2016 in Singapore.

Why IoT Matters for Rural Internet Access

Narendra Saini, TEC

Ubiquitous communication networks--including Internet access networks--always have multiple revenue segments, including consumers, small businesses and enterprises. Also, profit margins and revenue potential differ by geography, as well.

Most fixed and mobile operators earn a disproportionate share of revenue and profit from a relatively small number of locations and cell sites, for example.

The top 10 percent of total sites contribute over 30 percent of total revenue, whereas the bottom 50 percent of sites contribute under 10 percent of revenue, a Vodafone report says.

Of the top sites, just 10 percent are in rural areas.

Data revenues also represent a much greater proportion of revenue at the highest earning cell sites than at the lowest earning sites; the top 1,000 sites contribute 37 percent of total data revenues, whereas the bottom 2,000 sites contribute less than one percent of total data revenues.

That illustrates the importance of lower-cost infrastructure to supply communications and Internet access in rural areas. Also key: revenues and profits earned from some customers and areas that effectively subsidize users in other areas.

As always is the case for ubiquitous networks, more-profitable customers and portions of the network subsidize the less-profitable customers and portions of the network. Analysis of individual cell site revenues and costs suggests that around 30 percent of Vodacom’s cell sites would not be profitable on a standalone basis, for example.

That also suggests the importance of potentially big new revenue sources such as Internet of Things. Mobile and other network platforms will require the profit such services provider to business and enterprise customers to generate the surplus that allows more support of rural access facilities that will not generate much net revenue or profit.

Narendra Saini, of the Telecommunication Engineering Center (TEC) India, is among the speakers who will address smart city initiatives and the Internet of Things across South Asia and Southeast Asia at Spectrum Futures, to be held 19-21 October, 2016 in Singapore.

Google Fiber Launches Three Small Business Plans

Google Fiber now offers three classes of service for business customers, with speeds set at 100 Mbps for $70 a month; 250 Mbps for $100 a month and a gigabit for $250 a month, each offering up to 13 static IP addresses, and support teams available 24 hours a day, seven days a week.

Compared to a consumer symmetrical gigabit connection costing $70 a month, the business plans seem priced to support the additional customer service required for customers who might rather routinely be running servers on such connections.

source: Google Fiber

IoT Developers Grow 34% Year over Year

The number of developers currently working on IoT applications has increased 34 percent since 2015 to just over 6.2 million in 2016, according to Evans Data Corp.

In addition, the increase of development for mobile devices, up 14 percent since last year, has led to smartphones being the most commonly connected IoT platform.

For the general developer population, estimates and projections for growth to 2021 show Asia leading--especially in China and India-- with nine hundred thousand more developers than Europe, the Middle East and Africa.

The worldwide  developer population will reach 25 million by 2021 Evans Data also predicts.

The number of developers currently creating mobile applications is estimated at 11.9 million, while the number of developers who target Android first is 5.9 milliion, with 2.8 million developing for  iOS as a first platform.

In Asia, 2.2 million developers target Android first, while in North America iOS is targeted first.

How Competitive is the U.S. Special Access Market?

How competitive is the U.S. special access market? Apparently, more competitive than previously thought. Four of the largest cable providers now report they have 22 times more Ethernet-capable locations than the data on which the Federal Communications Commission based its May 2 further notice of proposed rulemaking.

A Comcast executive, for example, recently argued that the U.S. special access market is “healthy and competitive and the entry of cable companies shows that competition is growing," said David Cohen, Comcast senior EVP. "The government should step back and regulate less.”

Wi-Fi Value is High, Direct Revenue is Not

Even if roughly 70 percent of U.S. mobile consumers say they are interested in Wi-Fi-only data plans, there remains scant evidence that Wi-Fi-only is a big and present segment of the mobility market. Cablevision Systems Corp., for example, launched such a service in its territory, but appears to have found only modest interest.

Wi-Fi carries around 80 percent of mobile data traffic, says Mobile Experts Principal Analyst Joe Madden. He predicts that 90 percent of mobile data will be carried over Wi-Fi and other unlicensed spectrum by 2020.

Such statistics show the nuances of value in the access services space. One might be tempted to suggest that, with that much traffic offloaded to Wi-Fi, much more access revenue “ought” to accrue to Wi-Fi hotspot networks, or the fixed line Internet access services, than to the mobile network.

But, as so often is the case in telecommunications, usage and revenue are different matters. It often happens that usage is indirectly related to revenue. There is a connection, though. The business model impacts, for suppliers of mobile devices, fixed and mobile access services, are quite significant.

For many years, the primary value of a public Wi-Fi hotspot network was the incremental value generated for fixed Internet access services. Likewise, the ability to offload data consumption, as well as the ability to tether a mobile device to Wi-Fi, have been important contributors to the value of specific mobile service plans and devices.

That remains the case. The new issue is how much additional value can be wrung from Wi-Fi, as an access method supporting or replacing mobile access. Wi-Fi-only services have been quite rare. Cablevision Systems Corp. tried that, and will be shutting down its service.

On the other hand, Wi-Fi access, as well as the ability to “roll over” unused mobile data, might be quite important, at the margin, as features attractive to potential “switchers” in the U.S. market.

That is vitally important in any saturated mobile market, as most gains are possible only by taking a customer from another provider. So churn management is more important than ever.

“U.S. operators have ramped up incentives to lure subscribers from competitors and encourage their own to stay longer—their game plans have switched gears from ARPU growth to churn management,” said said Harry Wang, Parks Associates senior director.

Will Sales Channels Shift as a Result of "Product to Service, Service to App" Transition?

Nobody should be surprised if Cisco remains consistent in its belief that business models in technology as well as the broader economy are shifting from “products to services.” Cisco has been saying that for at least a decade or two, and pushing its sales partners towards a “sell services” mentality.

If one believes that the whole “telecommunications” and Internet service provider businesses, as well as the computing business, therefore now are part of the broader Internet ecosystem, there are some important potential implications.

In a broad sense, products become services, and services become apps.

Manufacturing companies selling elevators or jet engines can move from selling those products once to providing ongoing service, said Chuck Robbins, Cisco CEO. That is an example of the “products become services” trend.

Over the top voice, messaging, audio, video and most other content is an example of the latter “services become apps” trend.

The transition from selling products to selling services is an evolution Cisco is itself making, as some 28 percent of Cisco's revenue is now from recurring sources, said Robbins.

As a purely practical matter, business and industry fortunes will hinge, in substantial part, by how well each affected industry segment adapts to either, or both, challenges. Will cloud computing, for example, allow channel partners to “sell computing as a service” to traditional clients, or will online provisioning become so simple that the “sales” function is automated, to a large extent?

How far can suppliers push the “hardware as a service” model, where enterprise or mid-sized businesses rent hardware and services, rather than buying and owning such hardware?

As always, how much incremental value can be added, creating new revenue possibilities?

The existential danger for incumbent service providers, of course, is that the “connectivity role” becomes something akin to the “PC hardware” role. Some might argue that this “dumb pipe” role will be hard to escape, and that the future belongs to access providers able to transition to additional roles within the computing and Internet ecosystem.

At the same time, new possibilities will exist for providers in other parts of the ecosystem to “vertically integrate” access, functionally displacing the incumbent access providers. That might not emerge as the main trend.

Still, the “products become services, services become apps” trends will, at the very least, result in new pressures to realign cost structures, revenue models and ecosystem roles in new ways.

So gross revenue and profit margin pressures on incumbent suppliers are bound to remain in place.

One might speculate that the same business dynamics that have made indirect sales a foundation of computing and communications sales to smaller and mid-size businesses might be extended further.

Tier one providers might retrench in the parts of the business (global and enterprise services) where they have advantages. Suppliers with large enough potential audiences might extend their “content” operations.

On the other hand, specialists might come to play a bigger role in serving the needs of rural and small market customers, much as specialists have been necessary for information technology sales to the mid-market business segments.

The shift to services, and away from products, should actually make it easier to do so, as provisioning, for example, becomes far easier. It is going to be an interesting time.

Products Become Services; Services Become Apps: Where Does it Lead?

Technology has changed, is changing and will change business models, it is safe to say Cisco believes. The implications are not always so immediately obvious, though, as the transition itself can take decades.

Many will agree that “technology will fundamentally change business models," as Cisco CEO Chuck Robbins recently said. But note the time frame: Robbins says the 1990s proved the killer app for the Internet was e-commerce. Two decades later, we still are seeing that process unfold.

One might be tempted to make another observation: products are becoming services, but products and services also are becoming apps, with the result that revenue-generating products and services become “features.”

Voice and messaging increasingly are “features” of mobile Internet access services. Look at the way leading mobile operators now price voice, messaging and Internet access. Voice and messaging are provided on a flat-fee, low price, unlimited domestic use basis, while Internet access is the variable component that drives most of the revenue.

It might be one thing for Cisco to note that the way companies make their money is changing from products (or hardware) to services (and software). It is less comforting, in some quarters, that services are becoming apps.

Optimistically, the belief that industry revenue models are changing could mean that one source is exchanged for another.

Pessimistically, revenue models are being destroyed, not merely refashioned. To say that voice and messaging are “for free” apps, rather than “for fee” services, also implies that the incumbent “service” revenue stream is effectively destroyed.

That does not prevent either incumbents or attackers from creating new revenue models in an “app” mode. But the process is far more dangerous for an incumbent.

Google and Facebook have succeeded in becoming the first big technology companies whose revenue models are based on advertising, not hardware and software sales.

We still do not know what fate awaits many big telcos as every major legacy revenue stream becomes subject to product or supplier substitution.

U.S. International Long Distance Used to Drive Industry Revenues; No More

Total international calling revenues revenues from U.S. customers decreased in 2014, compared to previous years, the U.S. Federal Communications Commission reports.

U.S. international service providers billed U.S. customers $3.87 billion in 2013. Such carriers billed U.S. customers $3.7 billion in 2014.  

Settlement payments of $2.6 billion also were recorded, for $1.0 billion worth of minutes completed on foreign fixed-line networks and $1.5 billion for minutes completed on foreign mobile networks.

So one way of looking at the business is that international long distance represents about 30 percent gross margin on a net $1.1 billion business.

Consider that Verizon’s 2015 annual revenues are about $131.6 billion. AT&T’s 2015 annual revenues were $147 billion. International consumer voice revenues now are negligible for both firms.

Calls to juste three countries accounted for about 63 percent of the outgoing international U.S.- billed minutes.

The top three routes with the highest international U.S.-billed minutes in 2014 were U.S.-India (24.8 percent), U.S.-Mexico (23.7 percent), and U.S.-Canada (14.2 percent).

Of the total 84.7 billion minutes billed in 2014, 49.4 billion minutes were completed on foreign fixed-line networks, and 35.3 billion minutes were completed on foreign mobile networks.  

The number of providers filing traffic and revenue reports increased by 30 percent. The number of providers increased from 1,457 in the previous report to 1,896 in this report, which includes, for the first time, 354 interconnected VoIP service providers.

Why 5G Might Really be Different

New revenue sources and business models have been a hoped-for by-product of 3G and 4G mobile networks, and many supporters hope the same will be true for 5G, perhaps the first next-generation mobile network being designed specifically with new Internet of Things apps and fixed network substitution in mind.

The role of millimeter wave spectrum above 6 GHz also is important, as such resources are expected to provide very high capacity in high-density areas where there is a short distance between users and the network antennas.

Also, many observers believe the initial use cases will involve targeted “add capacity” deployments, rather than a general deployment over wide geographic areas. That might involve high-traffic venues and indoor locations.

At least for the moment, some proponents believe Wi-Fi handoff will not be fully integrated and seamless.

And many believe new sorts of providers might emerge, including community-based 5G networks that will interoperate with mobile carrier 5G networks.

Low mobility and fixed service also is envisioned, to support fixed Internet of Things sensors, for example. Other possible use cases include migration of public switched network services from fixed to mobile networks.

And that is why 5G might really be different: it is the first next generation platform to be optimized for new application classes (Internet of Things and machine-to-machine communications) as well as fixed network substitution.

Why ISPs are Like PC Manufacturers

Four are the main reasons why every legacy access provider (satellite, cable TV, telco, fixed wireless, independent Internet access provider) must constantly and seriously engage in an effort to discover and create big new revenue sources.

New competitors are crossing traditional industry boundaries; policy supports more competition; technology itself enables new forms of competition; and all apps and services now essentially are part of a single “computing industry.”

First, all legacy revenue sources are diminishing, under direct and indirect product substitution (over the top apps and services) as well as changing consumer preferences (on demand services displacing linear; apps replacing carrier services).

Second, both technology and policy now allow a much-wider range of competitors to enter any market (Uber, Lyft, Airbnb, Travelocity, Netflix, Skype, Hangouts, Messenger, WhatsApp).

Third, Moore’s Law enables everything from cheaper devices to new delivery modes to use of resources that could not, in the past, be tapped.

Fourth, with the fundamental separation of apps from access, and with the rise of cloud-based app sourcing, every supplier now is, more or less, part of a bigger computing industry. That Google and Facebook--both technology companies--have business models based on advertising provides one clear example.

On that last point, consider what personal computer manufacturers have faced, namely a relative devaluing of hardware in favor of software. Computing operations now are “commoditized,” with resultant lower profit margins and gross revenue.

“Our historical industry categories obscure a bigger reality: we are all just part of a distributed computing industry,” says consultant Martin Geddes.

If access providers now are akin to hardware suppliers in the computing industry (they enable apps and computing resources to be used), then both revenue diminution and profit pressures are to be expected.

And that is why the discovery of big new replacement revenue sources is so important.