Flat Rate Pricing is the Foundation of ISP Access Capex

“All you can eat” retail pricing policies (flat rates for unlimited usage) are a major reason connectivity provider business models are so challenged. On the other hand, wholesale transit prices--which are metered--also keep dropping, on a cost per bit basis. 

That is a major pricing model change from the economics of the voice era, when most usage was on a metered basis: use more, pay more. 

Internet service providers might complain that they “cannot” charge by usage, for any number of reasons. Still, that is a business choice that brings with it the perpetual need to upgrade facilities while retail revenue remains relatively flat. 

So, in a real sense, internet access providers are faced with capital investment choices partly of their own making; partly imposed by competitive market conditions and partly driven by a major shift of entertainment video preferences by consumers. 

By 2020, web and file sharing accounted for only about 14 percent of global IP traffic, for example. Some 82 percent of total traffic was entertainment video traffic. 

source: Cisco, Vox, Recode 

It might be largely uncontrollable that video entertainment has moved from “broadcast” (“multicast”) and “packaged media” delivery to unicast and network delivery. But that alone has huge capital investment and pricing implications.

Unicast and two-way networks cost more than multicast or broadcast networks. The reason is the ability to deliver one copy of something to millions of consumers all at the same time. Uncast now essentially means delivering millions of copies at different times. 

If one copy of an item requires X bandwidth, then a multicast delivery requires X bandwidth. Unicast delivery of that same object to one million viewers requires one million X bandwidth. 

So the shift of video consumption to unicast drives huge changes in network investment. Perhaps nobody envisioned that the largely character-based early internet would evolve into the multimedia platform it now has become, with former multicast traffic increasingly being delivered in unicast formats. 

That alone would require ever-increasing access bandwidth as unicast video consumption (streaming and downloading) increases. 

In other words, flat rate pricing for virtually unlimited usage does not match the requirements of delivering entertainment video. 

It might be quite difficult for any single ISP to use pricing that matches consumption with cost. But flat rate pricing for virtually unlimited usage  is the primary driver of ever-growing access provider capital investment.

Intel Gets Brookfield Investment for Chip Fabrication Expansion

Chip fabs are the latest form of digital infrastructure investment. Intel Corp and Canada's Brookfield Asset Management agreed to jointly fund up to $30 billion for Intel’s chip factories in Arizona.

As frequently is the driver for other co-funding ventures in the digital infrastructure space, Intel will limit its own capital investment in return for giving up part of the future revenue from the investment.

Brookfield  will invest up to $15 billion for a 49-percent stake in the project.  Intel will retain majority ownership and operating control of the two chip factories.

More FTTH Co-Investment

Investment firm Meridiam is co-investing in fiber-to-home infrastructure with T-Mobile in Austria, each firm investing about a billion euros to construct facilities reaching 650,000 homes in rural areas and small towns. 

The firm began investing in digital infrastructure in 2000, and has made prior FTTH  investments in Germany and Canada. 

The deal essentially solves a problem for Magenta Telekom, namely the high cost of wiring rural and lower-density homes. 

Liberty Global, Telefonica and InfraVia Capital Partners have created a joint venture on a larger scale, aiming to build FTTH past seven million U.K. homes. 

Such moves represent a change in thinking on the part of fixed network internet service providers, who historically have favored fully-owned access infrastructure. But high capital requirements and heightened risk seem to be encouraging fresh thinking. 

Better to share financial returns and risk, the new thinking suggests. But such thinking also should raise the issue of the value of fixed network access assets. Access networks traditionally have been viewed as assets with high moats, in large part because of the high capital investment required to create them. 

But competitive local access markets also raise the issue of stranded assets as well. In markets with two facilities-based contestants, equally skilled, stranded assets (facilities generating no revenue) might represent up to 60 percent of deployed assets. 

Co-investment and wholesale business models represent a way to both lower capital investment, reduce risk and the danger of stranded assets. 

At the same time, institutional investors now view digital infrastructure as an alternative investment quite similar to the real estate and other infrastructure investments they have traditionally made: long-lived assets producing steady income and offering business moats (protection from additional competition). 

But there also are other strategic drivers. Profit margins on internet access services are harder to sustain and capital intensity seems to be increasing as well. 

All of that increases incentives to trade some revenue upside for reduced risk.

Should Universal Service Funding Burden Be Broadened?

The shift in telecom service provider business models has obvious implications for all other parts of the ecosystem, including mechanisms for funding universal service. That will be obvious in coming debates about how universal service should be funded.

There are big potential winners and losers. So behind all the rhetoric are perceived financial interests that will be helped or harmed. Among the coming key questions is which parts of the value chain should bear direct burdens.

Up to this point, direct customers of communication services have been the funding source, even when service providers have had the option of paying themselves (out of profits or shareholder returns) or passing such charges along to their customers.

The coming debate might challenge that notion, adding other stakeholders to the formal contribution base. But make no mistake: such changes are favored because they help sonme parts of the value chain and harm others.

But make no mistake: ISPs argue their costs are climbing, and somebody has to pay.

The only issue, they argue, is "who" should be directly funding universal service. Up to this point, it has been service providers held responsible in a formal sense, even if service provider customers have been the actual payers, ISPs and telcos acting only as collectors of a "fee" that is more akin to a tax.

(Yes, regulators, lawmakers and ISPs will insist universal service payments are fees, not taxes. Such payments are taxes in practice, no matter what the form suggests.)

What helps ISPs will necessarily harm others: customers, citizens, consumers, other participants in the internet value chain. It cannot be avoided.

Perhaps ironically, taxes on long distance voice usage remains the foundation for funding high cost or rural networks. And the problem with that mechanism is that “fees” (taxes, essentially) have to keep rising as the   contribution base  keeps shrinking. 

Logically, the shift to broadband access as the key product also means broadband has to be the funding source and the destination of funds, over the longer term. 

And that means changing the rules, which always means potential winners and losers if the rules are changed. And there is at least a possibility--however slight--of a revolution of sorts in funding mechanisms. 

In the European Union, regulators and policymakers are considering levying fees directly on app and content providers, not just direct customers of access networks. The U.S. Federal Communications Commission says it will look at such approaches as part of its review of the funding mechanism for universal service. 

In the United States, additional funding for rural area networks comes from the Rural Utilities Service and the National Telecommunications and Information Administration as well. But so far, the FCC has not moved to make “mobile service” a universal service objective, though support is available for mobile voice and internet as an alternative to fixed network service.

As always, support mechanisms are a highly-political matter, as any proposed changes will produce winners and losers. 

And that is where perceived financial interests emerge. Though some might argue that shifting support mechanisms (taxes, essentially) from declining voice to broadband access is logical, there are reasons internet service providers oppose such moves. 

The obvious stated reason is that doing so raises the effective cost of home broadband. Since higher prices reduce demand, basing universal service support mechanisms on broadband access has the effect of damping down broadband take rates, which is the point of universal service. 

But ISPs also argue that taxing broadband instead of voice is only a temporary measure, as the reasonable amounts any such tax can raise are insufficient for long-term support. And that is why there is more vocal support for taxing some hyperscale app or content providers, for the first time shifting support mechanisms beyond service providers or access customers. 

“A diverse and wide-ranging group of commenters supported a second idea related to USF contributions: further broadening the USF contribution base to include entities including “edge providers” such as streaming video providers, digital advertising firms, and cloud services companies rather than relying solely on the end users—or consumers and enterprises—that have historically paid the line item fees passed through by providers,” the FCC notes. 

Whether such an approach would be adopted might hinge on whether it can be adopted. “The Commission has never analyzed its authority to regulate edge providers, which broadly defined, encompass a wide variety of different entities that provide Internet content, applications, and services,” the FCC says. “Before the Commission could require contributions under its permissive authority for any type of edge provider, it would need to conduct a rulemaking proceeding and establish a record that analyzed and applied the definition of “telecommunications” to edge providers and demonstrated that the public interest supports requiring contributions.”

There also is some belief that a specific charge from the U.S. Congress would be needed. “A wide variety of commenters called for legislation to expand the Commission’s authority so it could assess contributions on the broadest range of service revenues, including from digital 

advertising and other online edge services that benefit from broadband networks,” the FCC says. 

The FCC believes “there is significant ambiguity in the record regarding the scope of the 

Commission’s existing authority to broaden the base of contributors.” 

So the FCC recommends “Congress provide the Commission with the legislative tools needed to make changes to the contributions methodology and base in order to reduce the financial burden on consumers, to provide additional certainty for entities that will be required to make contributions, and to sustain the Fund and its programs over the long term.”

In the end, no matter how the funding issue is resolved, consumers and customers will wind up paying. In the final analysis, customers always wind up paying for all entity costs of doing business. 

The coming battle will simply pit value chain participants against each other to shift the burden someplace else, in a direct sense. 

In the end, though, no matter where the formal burden is placed within the value chain, customers and end users scattered along the value chain will wind up paying, as the higher costs of doing business will simply be passed along to direct customers at every stage of the value chain. 

One might argue the logical approach is simply to base universal service obligations on buyers of broadband access services. It is simple, transparent and logical. But ISPs will fight that suggestion, by and large. The last thing they want is for their customer demand to be exposed to new challenges. 

From an ISP point of view, the better solution is to shift the blame elsewhere, by making some other entity collect the fees (taxes) in their own retail prices. That still passes the payment burden onto consumers or customers, but hides the pain by disbursing it. 

As always, for every valid public purpose there are private interests. And we are about to see those private interests go to battle over a very public purpose.

Low Take Rates for Subsidized Home Broadband?

Apparently just over one percent of U.K. households take advantage of a home broadband for low-income residents program. Such programs seem to be widely available, but take rates are quite low. 

 In the United States, up to 45 percent of California households appear to qualify for subsidized home broadband programs and 27 percent of those households do so. In Colorado some 20 percent of eligible households appear to take advantage. 

But some observers believe the current program will expire before reaching take rates of 68 percent nationally. 

It is not clear whether participants were “unconnected” before or were already buying internet access. Supporters sometimes count all the participants as having not had internet access prior to joining the program, and that is not likely. The program provides a $30 discount off any published plan. 

Existing ISP programs had routinely offered low-cost access at speeds lower than 100 Mbps. The Affordable Connectivity Plan offers subsidies for 100-Mbps at no cost to qualifying households.  

But there are many reasons why some households choose not to purchase  internet access because they do not want to use the internet or do not need home broadband because they use the internet in other ways, such as by mobile phone, or get access at other locations. 

Mobile Data Traffic is Correlated with GDP

Analysys Mason estimates that a 100 percent increase in mobile data traffic translates into a 0.98 percent impact on gross domestic product. That is a correlation, not necessarily causation, as always is the case for economic impact studies. 

But that is the problem with all efforts to quantify the economic impact of any particular innovation, product or industry. We might estimate impact, but we cannot prove the causal relationship of any single input when results (economic growth, for example) is caused by multiple inputs.

Consider that, in addition to the volume of mobile data traffic, the capacity of undersea cables, home broadband adoption, use of information technology,  transportation systems, energy supplies, broadband speed, educational attainment, household wealth, housing density, business activity levels, ethnicity and age can be correlated with gross domestic product as well. 

It is impossible to clearly separate the impact of each input when determining countrywide economic output. During the Covid pandemic, we discovered correlations between risk factors and deaths. But correlation is not causation. 

One might argue for a correlation between electricity consumption and GDP, for example. 

Among OECD member countries, for example, gross domestic product increases by 1.7 percent per year. Electricity use increased by 0.9 percent per year between 2015 and 2040. In non-OECD countries, GDP increases by 3.8 percent per year, and electricity use increases by two percent  per year over the same period, according to the U.S. Energy Information Administration. 

The point is that there is a correlation between electricity usage and GDP. 

source: Our World in Data 

Higher GDP is associated with higher energy consumption. 

source: EIA 

The other problem is that if one were to try and add up all the claimed economic benefits caused by each input or industry, the results would not comport with reality. The claimed output would vastly exceed reality. 

“We find that a 10 percent increase in the fraction of the population ages 60+ decreases the growth rate of GDP per capita by 5.5 percent,” the RAND Corp. has found. “Two-thirds of the reduction is due to slower growth in the labor productivity of workers across the age distribution, while one-third arises from slower labor force growth.”

Transportation might be correlated with about five percent of GDP as well.  

The point is that better communications and connectivity always are assumed to correlate with better GDP outcomes. We can disagree about the magnitude of such correlations while assuming there is a correlation. 

But neither can we accurately measure the specific causation of any single input.

More Streaming Bundles?

Streaming service bundling was probably inevitable, as bundling of products has been a staple of the consumer content and communications business for some decades. Lower marketing costs, higher perceived value, lower churn and perceived distinctiveness are some of the advantages. 

Bundling also makes price comparisons more difficult, as the retail price for the bundle obscures the actual “price” for any single bundle component. That becomes more obvious as disparate services or products are added to any bundle. 

Some decades ago bundling sometimes was described as having value because it simplified the customer billing interaction. Most of us would have a hard time identifying that as a value which is relevant to most--if not all--buyers. 

In almost all cases, price discounts are the attraction of a bundle. 

For some content owners, discounted offers for purchases of multiple owned steaming services is something of a no-brainer. 

Bundling of streaming services with other products such as a mobile subscription also has become common. The point has been to create differentiation in a crowded marketplace by adding value beyond content access. 

source: Axios 

The other new trend in the U.S. streaming business is multi-sided revenue models, particularly using advertising in addition to subscription fees paid by end users. By effectively lowering price points, demand is stimulated. 

As linear content services always have been about bundles, now streaming will do the same, perhaps eventually creating bundles of bundles. The trade off, as always, will be higher volume at the cost of lower profit margins per unit.

T-Mobile may be prepping the sale of Sprint's wireline business | Light Reading

For those with long memories, it might be shocking that the former Sprint wide area network books just $1 billion annual revenue. http://dlvr.it/SWXWpj
http://dlvr.it/SWXWpj

Digital Transformation is Hard

If you have been around information technology investments long enough, you know that outcomes often are negative: the hoped-for benefits do not emerge at all, or prove to be less than expected. Possibly 30 percent of major IT investments actually produce the expected results. 

The same continues to be true of digital transformation efforts and investments. A new survey of IT professionals suggests DX has the same outcomes. 

source: Walkme 

The study also had respondents estimating that, of all IT projects, fully 41 percent failed to meet objectives, in the form of key performance indicators. And the larger the organization, the more likely it is that DX or any other IT initiative will fail. Larger enterprise respondents reported failure rates at six times the rate of small entities. 

source: Walkme 

To be sure, the more-important KPIs deal with financial performance: productivity, equity value growth, higher income or lower costs. 

Such “failures” are not hard to understand. Most large enterprises rely significantly on third-party integrators to attempt complex initiatives. That means lots of organizational complexity. And the number of persons who must not only agree to support, but actively ande usefully support such initiatives is therefore quite high. 

source: Walkme 

And that runs squarely up against an immutable law: the more permissions one requires to get anything done, the lower the chances of success. Consider any project with a number of key influencers. Assume that at each stage, the chances of getting a “yes” are 50 percent.

If only one “yes” is required, odds of success are 50 percent. If two “yes” hurdles are required, success rates drop to 25 percent. If three “yes” hurdles exist, odds drop to 13 percent. Each successive hurdle reduces success rates further. 

As you can see, even a small number of hurdles, each with a 50-50 chance of success, quickly reduces odds of success to an impossible level. After seven hurdles, odds of success are one in 100. 

Obviously, any complex IT project has many more gates than seven. With sufficiently vigorous top-level support, the odds of success at each gate are likely higher than 50 percent. But there are so many more hurdles or gates that odds of success are low; odds of failure high. 

The conventional wisdom is that about 30 percent of big IT projects actually succeed as expected.

Is Sustainable Advantage from "Digital Transformation" Illusory?

Competitive advantage from “digital transformation” will be as transitory as all earlier applications of computing and information technology, one might conclude from a Gartner assessment. 

In other words, sustainable competitive advantage will not be possible. 

As digital networks, “always on” connectivity, and smart devices become ubiquitous and commonplace, computing will simply fade into the background, becoming as unobtrusive as the dumb thermostat or light switch, says Ed Gung, Gartner Research Board managing VP.

As digital technology becomes embedded into the way all parts of the business operate, “digital” will cease to be a useful modifier, he also notes. In the end, digital technology will become just one more dimension on which companies compete. 

Distribution networks, capital assets, exploration rights, customer relationships and content are other levers companies can pull. But sustainable advantage will be difficult to maintain in those realms as well.

Can We Actually Measure Knowledge Worker Productivity, In Office or Remote?

The debate about the productivity of remote work will likely never be fully settled, in large part because it is so difficult, perhaps impossible, to measure knowledge worker or office worker productivity. 

Whether knowledge worker productivity is up, down or flat is almost impossible to say, despite claims one way or the other. Much of the debate rests on subjective reports by remote workers themselves, not “more-objective” measures, assuming one could devise such measures. 

Measuring intangible output is inherently more challenging than measuring output of physical goods. And some “test effect” occurs, at least temporarily. The output of workers who know they are being tested tends to rise during the period of the test. 

There will always be room to contest managerial effectiveness at managing remote workers; the ability of workers to perform as well remotely as “in the office” and differences between workers (motivation and actual output). 

There also will be room to contest the impact of heavy remote work on company culture; collaboration and other “soft” outcomes at levels beyond individual effort and output. Do work groups actually perform as well, or better, in remote work settings? Do companies benefit in other ways that are measurable and offset any potential costs?

And beyond all that, productivity arguably is an issue affecting broad swaths of the U.S economy, no matter what the form of work setting. 

Productivity—defined as output per labor hour—has grown at a below-average rate since 2005, representing a dramatic reversal of the above-average growth of the late 1990s and early 2000s, according to the U.S. Bureau of Labor Statistics. 

source: Bureau of Labor Statistics

Assume you believe the measurements are correct, and that non-farm productivity actually can be measured. Labor productivity compares the amount of goods and services produced (output) with the number of labor hours (inputs) used to produce those goods and services. Productivity is defined mathematically as output per hour of work, and growth occurs when output increases faster than labor hours.

As always, there are caveats. Such measures are not good at capturing hedonic improvements. 

Hedonic qualIty adjustment is a method used by economists to adjust prices whenever the characteristics of the products included in the consumer price index change because of innovation. Hedonic quality adjustment also is used when older products are improved and become new products. 

Hedonically adjusted price indices for broadband internet access in the U.S. market--adjusted for quality improvements such as speed--then looks like this:

source: Bureau of Labor Statistics 

Also, the productivity of knowledge or office workers is very hard--perhaps impossible--to measure. Virtually any quantitative way of measuring “input” is only a supposed proxy for productivity itself. 

Perhaps of notable significance are changes in “multi factor” inputs beyond capital investment and labor cost. That is where information technology, managerial skill, changes in goods produced or cultural changes apply. 

The point is that the debate over “remote versus in-office work” is more about politics and emotion than economic facts. Firms can do it or not do it, but we should stop claiming we are motivated by clear economic facts.

Tech Bubble "Burst?"

With "significant" to "massive" layoffs happening at venture-funded and to some extent now at profit-making technology firms, one is reminded we saw something similar happen back in 2001 and 2008, all times of economic distress and tech bubbles.  

But layoffs are only a manifestation of a trend; a sign or symbol, not the underlying reality. Then, as now, apparently, the problem is a shutoff of the funding valve. For more-established firms, the problem is a significant increase in borrowing costs. 

Where we had been in a regime of effectively zero interest rates, we now are entering a period where borrowing has real costs. That tends to increase business risk for growing firms that cannot self finance. 

So some think we are seeing another tech deflation event, a bubble-bursting destruction of value in the technology segments of industry. 

 

source: Qontigo 

In the run up to 2001, the start-up I worked at could literally not find people to hire, as has been the case recently in 2021 and earlier in 2022. That reversed in the dot com meltdown after early 2021. It appears something similar is happening in 2022. 

Though it is not clear whether we are headed for something like the wipeout of firms in the dot com bust, some think it is possible. The difference now is that many firms yet to hit cash flow breakeven or actual profits have business models that work. Back in 2001 some firms had not yet discovered a viable business model. 

That is much less an issue in 2022. Also, firms seem to be reacting faster than they did in 2001 to a change in business dynamics. 

Still, a period of some technology firm consolidation appears to be coming, bigger than the normal consolidation that happens for fast-growing segments of the industry.

If Broadband is a "Necessity," What Does That Mean?

Some make the argument that broadband is a necessity and therefore should be a “right.” It never is clear precisely what proponents of that view mean. Is electricity or clean water a right? How about natural gas, roads, airports, food or shelter? 

One guesses that proponents of those positions probably mean that the good in question should be universally available. There is not much room for argument there. 

But we probably disagree about how to get universal availability or universal access, especially  how to pay for it. Government subsidies are the most-common means for getting to universal availability, and arguably the most-common way governments subsidize consumption of products deemed necessary. 

   or that home broadband prices are too high. 

 

source: move.org 

Most governments seem to have policies in place to subsidize consumption of necessary products by lower-income residents. That is not to say the most-effective way to subsidize consumption is to make products available “at no cost.” In the U.S. market, for example, low-income customers can buy internet access at discounted prices. 

But “free” often leads to market distortions and harms production and supply of the product so subsidized. “Tragedy of the Commons”  is the way economists describe the problem posed by “zero price” products. 

Two key problems are created by zero price products: overconsumption and disincentives to increase production. The whole point of price mechanisms is to match demand and supply. So non-zero subsidized prices arguably work better than “zero cost” approaches. 

Oddly enough, some hyperscale app providers have tried to provide some level of basic and free mobile internet access to low-income residents and have been prevented from doing so, on the grounds of “network neutrality” in a direct sense or industrial policy and antitrust issues in an indirect sense. 

Such non-governmental approaches arguably have merit, and perhaps should not have been made illegal by government action, any more than any other ad-supported application or service a private firm can create.