T-Mobile US "Unlimited" Offers (Not)

T-Mobile US, touting the end of all usage plans (data buckets) with its new  T-Mobile One plan, has emphasized that the new plan offers unlimited data, text, and calls starting at $70 per month for the first line, $50 for the second line, and $20 for the third up to eight lines.

What that plan does not support is high-definition video streaming or tethering at any speed faster than 2G. Customers seem to have objected to both those limitation, so T-Mobile US has now introduced a One Plus plan that, for an incremental $25 per line, per month, supports unlimited video streaming in high-definition format,  along with tethering at 3G speeds of 512 kbps.

The move shows that execs now are willing to alter new mobile offers as soon as consumer irritation emerges, a possibility most would agree is due to social media, which allows dissatisfaction to be expressed fast.

The new offer also shows how subtle the crafting of new offers has become, as well. Though some might see the new “unlimited” offers as strategically damaging in the long term, the actual details show some important limitations of potential stress.

One concern some observers have with “unlimited” plans is that they potentially limit mobile operator ability to tie consumption to revenue, at least broadly. But the way T-Mobile US has constructed its plans (limiting One image quality to standard definition, while limiting tethering speed to 128 kbps), limits the potential impact.

High-definition quality generally consumes about four times as much bandwidth as standard definition video. In addition, streaming  on 4G rather than 3G networks likewise boosts data consumption (some would argue by as much as an order of magnitude).

Tethering likewise boosts data consumption, by as much as an order of magnitude per unit of time.

source: GigaOm

And some of us who tether quite often might consider 2G tethering unacceptably slow, and 3G highly bothersome.

Limiting tethering to 2G or 3G speeds effectively discourages such usage. So T-Mobile US has limited its exposure to dramatically-higher data consumption driven by the end of usage limits.

The new One Plus plan will likely apply mostly to users who want to watch significant amounts of HD video on their mobile devices. Most likely, few consumers who really need to tether are going to be much happier with 512 kbps access.

The point is that the new “unlimited” offer actually is constructed in such a way that some highly-intensive apps (tethering and high-definition streaming) are limited.

For consumers who want HD video, the premium plan costs an extra 25 percent for the first line, 33 percent more for the second line and a premium of 56 percent for the third and subsequent lines.

Many consumers are going to find that image quality on a smartphone screen at standard definition actually is good enough, compared to high definition quality. The implication is that incremental usage, and therefore stress on the network, will be limited.

Some of us would find it unlikely that a customer who really wants to tether on a significant or “mission critical” basis would even consider a tethering limit to 512 kbps.

The bottom line is that the T-Mobile US unlimited offers have been constructed in ways that limit the potential network stress that could result from too many customers actually watching more video or tethering.

Why Markets Consolidate

Source: Marketing Science Institute

Over time, markets tend to consolidate, and they tend to consolidate because market share is related fairly directly to profitability. One rule of thumb some of us use is that the profits earned by a contestant with 40-percent market share is at least double that of a provider with 20-percent share.

And profits earned by a contestant with 20--percent share are at least double the profits of a contestant with 10-percent market share.

That is why one of the main determinants of business profitability is market share. Generally, entities that have high share are much more profitable than their smaller-share rivals.

And that is likely to be especially true for business products that are not purchased frequently, or are hard to understand, such as business communication products and services.

Source: Marketing Science Institute

For infrequently purchased products, the return on investment of the average market leader is about 28 percentage points greater than the ROI of the average small-share business.

For frequently purchased products (those typically bought at least once a month), the correspondingly ROI differential is approximately 10 points.

There are reasons for that differential.

Infrequently purchased products tend to be durable, higher unit-cost items such as capital goods, equipment, and consumer durables, which are often complex and difficult for buyers to evaluate.

One might argue that communications services also are products buyers generally find complex to understand and hard to evaluate on metrics other than recurring cost or upfront investment.

Since there is a bigger risk inherent in a wrong choice, the purchaser is often willing to pay a premium for assured quality.

Frequently purchased products are generally low unit-value items where risk in buying from a lesser-known, small-share supplier is less crucial.

Source: Marketing Science Institute

Such differentials also occur when buyers are fragmented, and no small group of consumers accounts for a significant proportion of total sales.

In such cases,  the ROI differential is 27 percentage points for the average market leader.

However, when buyers are concentrated, the leaders’ average advantage in ROI is reduced to only 19 percentage points greater than that of the average small-share business.

When buyers are fragmented, they cannot bargain for the unit cost advantage that concentrated buyers receive.

And that tends to be true even for highly-fragmented markets or sub-markets. So it is that six regional master agencies (sales organizations for telecom and cloud services)  have teamed up to form Technology Solutions Exchange (TSX).

The stated goals include broadening their footprints, improving negotiating power with suppliers and growing revenue. All of those motivations are consistent with the general principle that market share matters.

TSX members include P2 Telecom, TDM Inc., Connectivity Source, CTG3, Netstar Inc. and Telcorp International.

The entity is lead by Bill Patchett, founder and CEO of P2 Telecom, and Robert Bowling, president of TDM, who were elected as co-chairs.  

The formation of TSX illustrates the business advantage of market share.

source: Glen Berg

Value is What the Customer Says It Is

Value, in the end, is what a customer says it is.

With all of the marketing hype now underway in the U.S. mobile market, you might think any of the four largest U.S. mobile service providers have a lead on some metric deemed important to customers.

And with the caveat that end user perception of value includes both performance (or “quality” proxies of various types) and price, plus other terms and conditions (bundle offers, discounts, contracts, usage limits, exemptions from usage charges for entertainment video, device availability), customers keep saying that Verizon has the best network, while other networks have less consistent performance.

All marketing hype aside, Verizon customers across the United States consistently say they have fewer network problems, according to J.D. Power.

Performance by other tier-one providers varies by region.

In the Northeast and West regions, AT&T scores worse than all the others. In the Mid-Atlantic, Southeast, North Central and Southwest regions, T-Mobile US scores the worse. Sprint is not at the top, or at the bottom, in any region.

But Sprint finished number two in the Southwest and West regions.

Customers, rightly or wrongly, keep saying Verizon has the best network.

Ignore Marketing Hype About Network Quality: Here is What Customers Say

All marketing hype aside, Verizon customers across the United States consistently say they have fewer network problems. Performance by other tier-one providers varies by region, according to J.D. Power surveys.

In the Northeast and West regions, AT&T scores worse than all the others. In the Mid-Atlantic, Southeast, North Central and Southwest regions, T-Mobile US scores the worse. Sprint is not at the top, or at the bottom, in any region.

But Sprint finished number two in the Southwest and West regions.

As big a problem as rural mobile coverage might be, most people--and the most demanding customers--live in urban areas. For that reason, the sheer volume of coverage or capacity problems will happen in urban areas.

That explains both moves to “densify” mobile networks, use of distributed antenna systems, use of small cells and moves to release new spectrum, share spectrum and make better use of unlicensed spectrum.

Customers living in urban areas experience the highest number of overall network problems, at 15 problems per 100 connections (PP100), compared to 12 PP100 among those living in rural areas and 10 PP100 among those living in suburban areas.

Customers living in urban areas experience more calling problems than those living in rural or suburban areas (19 PP100 compared to 13 PP100, respectively); messaging problems (eight PP100 compared to five PP100); and data problems (20 PP100 in urban areas, 15 PP100 in rural areas).

Urban areas have a much higher proportion of younger mobile subscribers who are heavier users.

The overall number of network quality problems is 17 PP100 among customers 18 to 34 years old compared to 10 PP100 among those 35 years and older.

J.S. Power looked  at 10 problem areas, including dropped calls; calls not connected; audio issues; failed/late voicemails; lost calls; text transmission failures; late text message notifications; Web/app connection errors; slow downloads/apps; and email connection errors.

Marketing, Not End User Demand, Drives Gigabit Internet Access

Competitive dynamics, and not actual end user demand, frequently drive investment and marketing decisions in the telecom business. The gigabit Internet access trend provides an example.

Gary Bolton, Adtran VP says that two years ago, service providers told him that the biggest reason for deploying gigabit service was to satisfy future customer demand.

That's still a big reason today, but now the threat of competition is an even bigger one, with close to 70 percent of respondents surveyed by Adtran indicating competition is a top reason for deploying gigabit services, up from fewer than 50 percent in 2014.

In other words, gigabit Internet access is necessary for competitive reasons--to match other market offers--instead of being driven by actual end user demand.

You might argue that Google Fiber was the immediate catalyst for a change in marketing context in the U.S. market. But it now is Comcast, rolling out gigabit services to all of its consumer locations, that is the biggest competitive driver, given that Comcast is the biggest supplier of Internet access in the United States.

We sometimes also forget that among the other changes, the new gigabit push shows the importance of “non-traditional” or new platforms. Comcast, of course, bases its attack on hybrid fiber coax, a different platform from that used by telcos globally.

And other options are coming.

Starry is but one of the service providers attempting to prove that modern, fixed wireless networks are a better way to deliver gigabit Internet access to consumers and businesses, without necessarily building fiber to home networks.

Both Facebook and Google are developing or investigation use of platforms based on use of fixed wireless. AT&T has told the U.S. Federal Communications Commission that it is going to deploy many millions of fixed wireless access paths, while Verizon also has said it is looking at fixed wireless, especially as a result of its early 5G network deployment.

That said, there still are many--mostly smaller--service providers basing their gigabit networks on fiber. Cable TV hybrid fiber coax networks soon will be the main U.S. suppliers of gigabit services.

Consumer Satisfaction Seems Directly Related to Consumer Demand

You might not be surprised if told people who are most enthusiastic about a particular product are most satisfied with their purchases, while people who are less involved with that same product will report they are less satisfied.

That essentially is what a J.D. Power video entertainment satisfaction survey suggests.

Overall satisfaction with paid streaming video service is highest among cord stackers—customers who subscribe to a traditional cable/satellite service in addition to streaming video service—according to J.D. Power, and lowest among consumers who have abandoned linear video subscriptions, or people who never have bought a linear video subscription.

Conversely, overall satisfaction is lowest among cord cutters (802), followed closely by cord nevers (807), while satisfaction is highest among cord stackers (826) and cord shavers (822).

Satisfaction in all measures is lower among customers who do not have cable/satellite TV than among those who do, J.D. Power reports.

In other words, people who buy the most entertainment video tend to be more happy with streaming video, while people who buy the least are less satisfied.

In common sense terms, people who value video entertainment buy more of it, while people who value it less buy less. People who value entertainment video also seem more satisfied. Those who value entertainment video less seem less satisfied with streaming video.

But that might simply reflect appetite for the product: car enthusiasts are likely more satisfied with any number of vehicles. People with little interest in car ownership likely are less satisfied with any number of vehicle choices.

TDM Network Operating Costs Rise, as Stranded Assets Grow

source: CenturyLink

With the caveat that carrier costs include lots of allocated expense that some would note is discretionary, CenturyLink makes the argument that operating costs per access line are climbing steadily, which is what one would expect for any network with growing stranded assets.

Simply, fixed costs are borne by a smaller number of customers over time. That does not necessarily mean that operating costs for each special access line are going up by the same amount, or at the same rate, but the principle should hold.

CenturyLink’ says its operating expense per access line increased by more than 50 percent from 2007 to 2015, from approximately $650 to nearly $1,000.

source: CenturyLink

CenturyLink’s ILEC operating expense per business data service (BDS) circuit also has increased, from $18,831 to $20,832, just from 2011 to 2015.

That should not come as a surprise. TDM service demand is falling, for all U.S. tier-one service providers in the "telco" segment.

source: Telco 2.0

For its part, AT&T has been reporting for some years distinctly different growth trajectories for “strategic business services” and legacy services based on time division multiplex.

Verizon has a bigger problem. Its business segment revenue is declining, period. In the second quarter of 2016, global enterprise revenue dipped 3.3 percent, year over year, for example.

The larger point is that business data services are a legacy service, delivered on a legacy network that will be completely decommissioned at some point in the not-too-distant future. As demand shifts to the next-generation networks, the stranded asset problem gets worse.

source: Telco 2.0

Verizon, AT&T are Top-Ranked Business Telecom Providers, Says J.D. Power

source: J.D. Power

Verizon is the top-ranked telecom services provider in the large enterprise segment, while AT&T leads in the small and medium-sized business segment, according to J.D. Power.

In the large enterprise segment, Verizon is the highest-ranked provider, with an overall score of 827 out of 1,000.

AT&T is the highest-ranked service provider in the small/medium business segment, with a score of 803 out of 1,000.

source: J.D. Power

Cable companies--with the exception of Cox--rank lower in all segments.

The 2016 U.S. Business Wireline Satisfaction Study is based on responses from 3,324 business customers of data and voice services at very small businesses (companies with between one and 19 employees, with a corporate service plan); small/medium businesses (companies with between 20 and 499 employees); and large enterprise businesses (companies with 500 or more employees) in the United States.

Small Business Spending Less on Telecom; Enterprises Spending More

Small business customers are spending less than they did in 2015, J.D. Power says. The average monthly amount spent on data service has declined from 2015 in the small/medium business segment (-$147).

But very-small businesses increased spending slightly, while large enterprise businesses boosted spending about $390 a month.

The top reason businesses chose their current telecom services provider is network quality and network speed (35 percent).

The core reasons for switching providers include obtaining better pricing (68 percent); better/more reliable service performance (28 percent); and favorable pricing options (24 percent).

The main reason businesses contact customer care is network-related: report an outage, service disruption/disconnected or poor/bad reception (26 percent). The next-highest contact reason is to inquire about a product or service (14 percent).   

Value-Added Services Double the Typical Business Customer Monthly Billing

Value-added services generate business customer monthly spending twice the average customer account size, according to J.D. Power. Security services and videoconferencing are among the services that increase customer recurring spending the most.

Value-added services increase the industry average customer bill of $322 to $582 among subscribers to cloud computing services; to $766 among subscribers to security solutions; and to $792 among subscribers to videoconferencing applications.

Service providers offering value-added services achieve higher overall satisfaction scores than do providers not offering such services, J.D. Powers reports.

For example, overall satisfaction among business customers who subscribe to videoconferencing applications is 816, which is 75 index points higher than the overall industry average score of 741.

Offering security solutions to protect against corporate hacking (812) and cloud computing (794) are other advanced technology services that lead to higher overall satisfaction, according to J.D. Powers.

Google Fiber Costs Do Not Appear to Have Been Materially Better than Any Other Telco

One key issue since the advent of Google Fiber, as well as market entry by any number of other independent Internet service providers, is whether Google Fiber had uncovered some cost advantage over all other leading providers that would allow it to make a profit selling gigabit Internet access connections at $70 a month, when other major ISPs were selling services operating at far lower speeds, at comparable prices.

To be sure, getting streamlined permitting processes from cities arguably helped a bit. Building networks neighborhood by neighborhood was an important innovation municipal regulators decided to allow.

But it never was clear that Google Fiber had material advantages in construction costs that represent perhaps two thirds of the total cost of building a new fiber to home network.

A decade has passed since the first FTTH network deployments, yet the cost of building
a network remains the primary obstacle to ubiquitous fiber connectivity for every household,” says Commscope.

From 2005 to 2015, the cost per home passed dropped from $1,021 to just under $700, Commscope notes. Those costs likely are fairly standard, no matter how big or small a firm might be.

The problem is that most of the cost of building a fiber-to-home network comes from civil engineering, not network elements.

Construction, civil works engineering, obtaining permits and right-of-ways account for roughly 67 percent of total cost, while the equipment accounts for about 33 percent.

So while GPON and fiber equipment costs have indeed fallen, skilled labor rates have risen.

In other words, a fiber-to-home network mostly represents construction costs, not network element cost.

My simple way of explaining this is that most of FTTH cost comes from “digging holes, then closing the holes back up.”

If so, then the cost of FTTH cannot be reduced too much more.

That rather suggests that Google Fiber has no particular business advantage in construction costs.

Consider that Dycom Industries, whose main business is network construction for tier-one telecommunications providers, counts AT&T, Comcast, CenturyLink, Verizon and a “customer who has chosen to remain anonymous” among its top-five customers.

Most everyone believes the unnamed customer is Alphabet (Google Fiber).

If so, it is unlikely Google Fiber has material advantages in either network elements or construction cost. It might have some marginal advantages in permitting and other sorts of make-ready work, but those are not the primary cost elements.

Perhaps Google Fiber has saved a bit by making its own set-top boxes for video, as well as network interfaces for Internet access services. But not necessarily. At low volumes, Google Fiber might well have spent as much, or more, than it would have spent buying gear off the shelf.

Nor is there any particular reason to believe Google Fiber has gotten network element prices very different from what AT&T, Comcast or Verizon might pay. In fact, if volume discounts apply, then Google Fiber might be paying higher prices than AT&T, Comcast and Verizon.

With rumors that Google Fiber has fallen quite short of its subscriber forecasts, and might be getting ready to cut its workforce in half, it might be reasonable to assume that whatever else might be the case, Google Fiber did not uncover some new cost-saving way of building a fiber to home network.

One might have hoped for lower overhead costs, something that seems key to success for small, independent ISPs. But Google Fiber probably did not have overhead costs materially better than Verizon or AT&T, and perhaps had overhead higher than that of Comcast.

Even if Google Fiber had some marginal cost advantages in a few areas, it does not appear that the cost side of the network build was materially different from any other bigger providers.

Google Fiber Falling Short of Expectations?

Google Fiber does not seem to be achieving as much success--measured by subscriber growth--as it originally expected. Though nobody outside Google can say for certain, many believe accounts now number only in the couple of hundred thousand range, not the five million many had hoped would be signed up by now.

Google Fiber also seems to be planning major staff cuts.

Oddly enough, Google Fiber clear has succeeded in one goal everyone agreed was an objective: spurring other Internet service providers to dramatically boost access speeds.

Many speculate that new interest in fixed wireless is partly driven by expected lower infrastructure costs. But that does not directly speak to the issue of less-than-anticipated account growth.

Perhaps Google Fiber’s marketing efforts have been less than required to make serious inroads into cable TV or telco customer bases.

Perhaps the incumbents have showed they still have the moxy to fend off even stout challengers, using price promotions and bundling, as well as unexpected consumer inertia, to fight off the challenge.

In markets where Google Fiber clearly was a superior offer (in terms of speed), one might have expected Google Fiber to get 20 percent to 25 percent adoption relatively quickly, growing to as much as 40 percent over three or four years.

Verizon FiOS, for example, was able to achieve numbers in that range, for its high speed Internet access offer.

Ting, the gigabit fixed network service run by Tucows, expects 20-percent take rates in the first year, growing to 50 percent within five years, for example.

But maybe three-provider markets really are that much more difficult than two-provider markets, even when the latest challenger has a disruptive offer. Maybe market selection really does make a difference.

Perhaps it really is harder for a third major ISP to get traction in a tier-two market, compared to smaller tier-three towns. Some of us cannot understand why Google Fiber would not have done about as well as Ting expected, in the first year of active marketing in any of its markets.

Perhaps the marketing effort has been flawed.

But maybe customers themselves are not yet clearly convinced that a symmetrical gigabit service for $70 a month really is “better” (in terms of the value proposition) than a $50 a month service offering 100 Mbps, symmetrical.

Perhaps consumers are proving once again that a “good enough” product, offered at a reasonable price, is preferable to a “best in class” product offered at a significantly higher price.

It’s curious.

Gigabit Internet Access Now Drives Telecom Network Construction

In a strategic sense, one might argue that the value of a fixed telecom network (cable TV, telco,  ISP, metro fiber specialist) is backhaul for mobile traffic. That obviously is most true for consumer apps and customers, less true for enterprise apps and customers.

One anecdotal way of illustrating that concept: “There are some industry experts who have said that for a 4G LTE network, about 90 percent of the communication path is wired, and for a 5G millimeter-wave communication path, it could be 95 percent or more of the path is actually wired,” said Steven Nielsen, Dycom CEO.

Still, any changes in access platform choices (use of fixed wireless instead of fiber to home; small cell architectures) should materially affect Dycom’s prospects.

Dycom's main business is contracting services (network construction, principally) for telecommunications providers and enterprises.

The company's five largest customers are AT&T, Comcast, CenturyLink, Verizon and a “customer who has chosen to remain anonymous.” Most everyone believes this customer is Alphabet (Google Fiber).

AT&T represents 28.1 percent of total revenue or $221.6 million. Revenue from Comcast was $112.7 million or 14.3 percent of revenue.

Revenue from CenturyLink was $110.7 million or 14 percent of revenues.

Verizon was Dycom's fourth-largest customer for the quarter at 12 percent of revenue or $95.1 million. Revenue from Windstream was $43.5 million, or 5.5 percent of revenue.

Charter Communications was sixth largest,  at 4.8 percent of revenue. Customer seven (believed to be Google Fiber) drove 3.6 percent of revenue.

Frontier Communications was the eighth-largest customer  at 1.4 percent of revenue.

Without question, gigabit Internet access services are driving current business activity.