Uh Oh. Verizon Sues Cox Communications

Verizon Communications has sued Cox Communications Inc., claiming infringement of eight patents for providing telephone services on a data network. So far, only Vonage has had to face lawsuits over VoIP intellectual property. What isn't clear is what happens if Verizon wins the lawsuit, either outright or through a negotiated settlement.

After Vonage was found to infringe patents Verizon, Sprint, Nortel and at&t, many of us have wondered whether lots of other service providers might be found to infringe the same patents. Many independent VoIP providers and even some technology suppliers apparently have wondered the same thing, even if they won't say so in public.

Apparently we might find out relatively soon. The wider implications are pretty clear: it is not clear what Cox might be doing that any other cable company affiliated with Cable Television Laboratories is not doing. So the damage conceivably would not be limited to independent providers of VoIP services but possibly every leading cable company operating in the U.S. market.

And since Cox does not create its own technology but buys it from the same suppliers thouse other cable operators are using, one has to wonder whether there might not be exposure even on the supplier side of the business, though it is extremely unlikely Verizon or other telcos would bother their own suppliers.

Granted, any damage would be annoying, not a grave danger to any leading U.S. cable company. It isn't so clear what the damage might be at a smaller cable company, though arguably the potential size of the infringing revenues wouldn't be that great, so the penalties would be commensurate.

Atlanta-based Cox, the third-largest U.S. cable TV company, should be ordered to pay cash compensation for using the inventions, Verizon says in a complaint filed in federal court in Norfolk, Va.

Vonage's troubles, it appears, might not be confined there alone.

Google 700 MHz Auction: "Bid to Lose"?

Perhaps nobody outside Google really knows how serious the search giant will be in the auction for C block spectrum in the 700 MHz range. There remains some thinking that Google's primary objectives--getting more openness in wireless networks--are well on the way to being satisfied.

Using that line of thinking, Google will submit the minimum required bid, but nothing more, essentially "bidding to lose."

But one never knows. Given the current economic climate, and the failure of any takers for a smaller segment of spectrum that carried a requirement for public service services, the final auction price might not be as high as some had forecast just a year ago. If it appears prices might be low enough, even Google might decide it is worthwhile to play a while longer.

The 700 MHz spectrum is attractive for any number of reasons. It is the last chunk of spectrum likely to be made available for mobile use. And it's nice spectrum, with greater range than the 2.5 GHz spectrum used for much of today's mobile service. The signals also have greater ability to penetrate walls and buildings, a big advantage, as anybody who uses a mobile phone inside a building can attest.

Those signal propagation characteristics also might mean lower costs to construct the network. True, it can be argued that Google doesn't need to own that, or any other spectrum, to accomplish its mobile Web and mobile advertising objectives. But you never know. The auction might not require as much capital as many had thought just a short while ago. An opportunistic buy always is possible.

Fuzzy Thinking on Network Neutrality

With the caveat that "network neutrality" means different things to different people, it is striking that some observers think bandwidth caps for excessive use have anything whatsoever to do with network neutrality.

That's a little like arguing bigger or smaller buckets of mobile voice or text usage constitute some sort of "neutrality" issue. It's a business issue, nothing more.

The discussion is sparked by news that Time Warner is testing usage-based pricing for broadband access in a few markets, for new customers. The idea undoubtedly is that the new plans will be price neutral for 95 percent of customers, and affect only "extreme" downloaders or really-heavy peer to peer customers.

Once the test starts, new customers will be offered a choice of four plans that allow them to download set amounts each month--5, 10, 20 or 40 gigabytes. The typical user now consumes something on the order of three gigabytes a month.

Grande in Play

Grande Communications appears to be in play. Its board of directors has authorized management to "explore strategic alternatives to enhance shareholder value." That's a "for sale" sign posted by one of the largest "overbuilders" in the U.S. market.

Grande has retained Waller Capital to assist the board and management in exploring strategic alternatives.

Grande is in the process of building a deep-fiber broadband network to homes and businesses in portions of Austin, Corpus Christi, suburban northwest Dallas, Midland, Odessa, San Antonio, San Marcos and Waco. The San Marcos-based company offers high-speed Internet, local and long-distance telephone and digital cable.

Sprint Shares Whacked on Downgrade

Sprint shares lost about 25 percent of their value Jan. 18 as Fitch Ratings lowered its credit rating. The Fitch downgrades reflect the ongoing concerns over Sprint Nextel's financial and operating results and the lack of visibility as to the company's performance going forward.

Fitch now believes credit metrics will experience greater near-term deterioration with leverage worsening. Sprint's difficulties with stabilizing its core operations and improving the company's competitive position were cited as evidence for the downgrade.

Fitch believes Sprint will experience difficulties in increasing its mix of prime subscribers given the high industry penetration rates, the low postpaid churn rates of its national competitors, the slowing economy and its competitive position. Of course, Sprint has had a churn problem for a couple of years now.

On the other hand, Sprint's continues to hold a good liquidity position and balance sheet. Cash was $2.2 billion at the end of the third quarter of 2007. Free cash flow (FCF) for the last twelve months was $2.2 billion.

The problem is that Fitch expects material free cash flow erosion during 2008.

Still, Fitch sees no issue with ability to service debt obligations. With manageable maturities over the next two years of $1.3 billion coming due in November 2008 and $600 million in May 2009, Sprint Nextel has more than sufficient liquidity through its cash position and bank lines to finance its current maturities and current commercial paper levels.

Considering Sprint Nextel's other strategic initiatives such as and including the share repurchase program and WiMAX deployment, Fitch expects Sprint Nextel to conserve liquidity and conservatively finance those initiatives.

Fitch's negative outlook is an indicator of weaker operating trends and the potential that further erosion could occur to Sprint's operations if the company remains unsuccessful in stabilizing its business.

Mobile Web: Falling Walls

The Internet has proven problematic for communications providers in any number of ways. Aside from mobility, the Internet and private IP services provide the foundation for most growth initiatives. Without it, there would be no demand for broadband access services, music downloads, video downloads and streaming, videoconferencing or Web services.

On the other hand, IP-based services also allow creation of services outside the traditional service provider walled gardens, creating competition for captive provider services. As a rule, IP also lowers the cost, and therefore the retail price, of just about any communications, content or information service.

So it is no surprise that wireless providers have mixed feelings about wider use of mobile instant messaging services that compete, at least in part, with lucrative text messaging services.

By the end of 2013, as many as 24 percent of mobile consumers will be using mobile IM services, say researchers at Forrester Research. That likely will cannibalize some amount of text messaging and shift brand awareness towards the IM providers (Microsoft, Google, Yahoo, AOL) rather than mobile carriers.

Sweden to Separate Networks

It looks like Sweden will join the ranks of countries believing that creating a separate wholesale broadband access entity will spur innovation in domestic telecom markets. A law giving Sweden’s telecoms regulator, the PTA, powers to impose a separation of network operations and retail services on TeliaSonera or any other infrastructure-based telco deemed to have significant market power now is under review.

But TeliaSonera has seen the writing on the wall and preempatively launched a wholesale unit on its own. TeliaSonera Skanova Access now offers equal wholesale terms to rivals and its own retail operations.

If approved, the new law will emulate BT’s "functional" separation. Swedish regulators say they will wait to adopt the new rules when the EU has formalized its own rules on functional separation.

There's a key challenge for North American regulators here. The grave potential danger of such structural or functional separation moves is that it will scare off investors who must provide the investment capital to build robust new optical access networks. As the trend continues to grow, not simply in Europe but in the Asia-Pacific region as well, we will accumulate a track record demonstrating whether, in fact, a capital strike is a realistic fear.

If functional separation can be made to work, if it continues to provide an attractive basis for investing capital in networks, pressure might mount on North American regulators to make similar moves. That will be especially true if market abuse were perceived to be occurring under the current "inter-modal" competitive regime that now prevails, under which competition between cable companies and telcos is expected to provide competitive benefits.

Sprint Loses Customers

It's not wonder Sprint is axing 4,000 employees, closing stores and halting distribution agreements with some partners. In the fourth quarter Sprint Nextel reported yet another quarter in which it lost more customers than it gained.

True, Sprint reported a "net gain" of 500,000 subscribers through wholesale channels, growth of 256,000 Boost Unlimited users and net additions of 20,000 subscribers within affiliate channels.

Bu those gains were offset by "net losses" of 683,000 post-paid subscribers and 202,000 traditional pre-paid users. In other words, Sprint lost 885,000 customers in the quarter and gained 776,000.

In other words, Sprint had a net loss of 109,000 customers.

In the churn area, where Sprint has arguably its single greatest challenge, post-paid churn (customers billed monthly) was 2.3 percent, slightly better performance than the previous quarter, and within striking distance of the slightly less than two percent range Verizon and at&t now have.

Unfortunately, Sprint Nextel's rate of involuntary churn, where it has to cut off service to a customer, rose over the prior quarter.

At the end of 2007, Sprint Nextel served a total subscriber base of 53.8 million subscribers including 40.8 million post-paid, 4.1 million traditional pre-paid, 500,000 Boost Unlimited, 7.7 million wholesale and 850,000 subscribers through affiliates.

As this chart from Bear Stearns shows, churn creates a couple problems. First, it directly reduces the number of revenue-generating units a company has. Secondly, it almost always raises the cost of acquiring new customers as well. The former hits revenue, the latter costs.

Orange iPhone Sales Stronger than Expected

Apple's iPhone is selling better than mobile carrier Orange (France Telecom) expected, Didier Lombard, Orange CEO, says. Orange expected sales to slow after the start of the new year, but that hasn't happened, Associated Press reports.

Orange had sold 30,000 iPhones in the five days after it went on sale in France, and planned to sell a total of 100,000 of the handsets by the end of 2007.

It doesn't appear too many customers are anxious to buy the unlocked iPhone, sold without a service contract and therefore for a significantly higher price.

Orange has sold "very, very few" iPhones without a contract, Lombard says.

Carphone Warehouse Now Major DSL Channel

The Carphone Warehouse Group (U.K. market), which might formerly have been thought of as an electronics retailer, now points out how much communications service distribution channels can change.

Carphone Warehouse now has 2.6 million Digital Subscriber Line customers. It is by no means certain that mass market retailers in other markets will do as well, but both Best Buy, Office Depot and Circuit City, for example, are distribution channels in the U.S. market, with differing degrees of active involvement in the integration and broadband access businesses. In the U.S. market, Best Buy has taken the boldest steps by buying Speakeasy, a national provider of DSL connections.

Brazil, Russia, India and China Driving Growth

In 2007, Hewlett Packard earned 67 percent of its total revenue outside the U.S. market. In the fourth quarter along, Asia-Pacific grew by 20 percent, Europe, Middle East and Africa by 19 percent and the Americas region was up by 10 percent. The Brazil, Russia, India and China group grew 37 percent year over year in the fourth quarter. Growth rates of that sort are one reason new submarine cables are being laid between North America and the Far East, and being planned or talked about between Europe and India. Add mobile phones to the growth of PC and associated electronics and it is clear Asia, the Middle East and Africa is where the growth is, at least in terms of mobile and other sorts of communications.

Of course, there are other reasons for laying additional cables across the Pacific. Earthquakes are capable of taking out multiple cables and routes in an instant, so carriers logically want more redundancy on trans-Pacific routes than has been the case up to this point.

Ads: $5 Million a Day Shifts to Online

One way to look at current trends in where advertising is being bought is to note that "ad dollars are leaving the cable, broadcast TV and the newspaper business at a rate of roughly $5 million per day, says Paul Woidke, Comcast Spotlight VP.

Time of Day Pricing

As exemplified by this chart showing how utilities price usage by time to day to discourage use during periods of peak load, one theoretically could price broadband access, voice or virtually any other communications good based on time of day or day of week. Long distance pricing used to do so, in fact.

Of course, what we now know is that users vastly prefer flat rates, often because it is a way to avoid steep "overage" charges, and even when the actual price for usage is much higher than one might think. Based on what one did in a single billing period, for example, average prices for wireless calling might range from two cents a minute to eight cents or more. When one is on vacation, per-minute pricing might be as high as 20 to 25 cents a minute for the actual minutes used.

Most U.S. consumers probably don't worry about "per minute" pricing for domestic calling. They pay a flat rate for a certain number of minutes in a bucket, and that's about as far as one normally thinks about the matter.

Not so long ago, though, wireless calling and wired network calling routinely used time of day pricing. In principle, broadband access could be priced the same way. It is doubtful the potential benefits are worth the effort. Customers clearly prefer buckets and flat rate pricing. Also, there are costs associated with tracking usage so closely, so in most cases it might not be worth the effort.

The other issue is that pricing by the value of an application makes more sense than tracking raw bandwidth usage. The value of a text message or voice bit is quite high on a price-per-bit basis. On the other hand, the value of high-quality video video or audio bits is not determined so much by price-per-bit as by quality of the streams.

One movie might be "worth" the $3 or $4 a user pays for the stream. But the value will be determined by the quality of the delivered images. Two hours of continuous talking might be valued just as highly, even if the perceived price is $2.40 (two cents a minute for 120 minutes).

Time of day pricing also arguably makes less sense for broadband because network load tends to balance out, if one includes business broadband and consumer broadband load. Business load is high from 8 a.m. until perhaps 4 p.m. while consumer usage peaks in the evening. Average load therefore tends to balance on any given network from 8 a.m. to 11 p.m. local time, though usage obviously is lighter from midnight to 6 a.m.

Usage-Based Pricing Not Unusual

At some point, as more Internet service providers begin to adopt "buckets" of use as the dominant subscription model, there will be outcries about whether this is fair, since most users in the U.S. market have come to expect flat fee pricing for "unlimited" use.

That has not been the dominant model in Europe, for example, and though there might be some incremental impact in usage patterns, I don't think anybody would argue that metered usage is terribly and inherently unfriendly.

It also is highly unlikely to the point of implausibility that ISPs in the U.S. market will move to a strict metered usage regime. The reason is simply that the objective--matching consumption to the cost of providing access--can be addressed more simply and palatably by using the "bucket" model, much as mobile calling or texting plans can be purchased based on expected usage.

In that regard, it might be helpful to recall that consumer pricing has used any number of models. Pay-as-you-go had been the dominant packaging and pricing model for all long distance plans, mobile and fixed, until at&t introduced "Digital One Rate." Local calling, on the other hand, has used a "fixed fee, all you can eat" model.

Cable TV has used a mixed model: essentially "flat fee, all you can eat" for ad-supported video and movie channels, but usage-based pricing for on-demand pricing.

The model used for Internet access started at the other end of the continuum: unlimited use (subject to some acceptable use policies) for a flat fee. Only recently have some voice providers moved to that model.

Of late, though, there has been a bigger move to "buckets" that match usage to price. There's no particular reason to believe a move in that direction will affect the vast majority of users. Most customers have usage patterns that fall within a reasonable zone, and won't, in practice, notice anything different even if usage-based pricing becomes more prevalent.

Providers obviously will want to minimize disruption, and there's no question but that lower prices have driven high demand. Nobody will want to jeopardize their market share by raising prices for most customers other than the small percentage who consume a disproportionate share of bandwidth.

Over time, more attention will have to be paid to the relationship between retail pricing and usage as video starts to change usage patterns, though.

Apple, Netflix ramp up Online Video Efforts

There are many reasons lots of people ought to be paying attention to streaming and downloaded video. Lots of people work for companies making a living delivering video products and everybody watches video in its various forms. Lots of companies are making expensive bets about what people want to watch, how and where they want to watch, what features are required and how much they will watch. The two mid-January developments in the area of particular note are the Netflix "unlimited online viewing" offer and Apple's launch of a video download service.

Up to this point Netflix has allowed its subscribers to watch online movies on a limited basis, corresponding to their monthly plans. Basically, hours of online viewing roughly correlated to the monthly subscription price. The big change is that Netflix now allows users on unlimited rental plans starting at $8.99 a month to stream as many movies and TV episodes as they want on their PCs, choosing from a library of over 6,000 familiar movies and TV episodes.


Now, subscribers on unlimited plans can stream as many movies and TV episodes as they want from the smaller instant watching library, unconstrained by any hourly limits. The move widely is viewed as a preemptive response to Apple's launching of its own video download service, using a rental model rather than "download to own" approach. Up to this point Apple has seen modest success with an approach based on Apple TV hardware and content from two studios, Disney and Paramount.

All major Hollywood studios have agreed to make their content available as part of the new Apple service. They include Paramount, Universal, Walt Disney, Warner Bros, Sony Pictures, Metro-Goldwyn-Mayer, Lionsgate, New Line and News Corp's Fox.

Using Apple's iTunes online store, US consumers will be able to hire new-release movies at $3.99 for 30 days. Older titles are priced at $2.99 for the same duration.

These movies can be viewed on iPhones, iPods and television. One can debate the impact of Apple's more-aggressive move into online downloads and streaming. In fact, one can argue that the streaming business is a different segment from the "download to own" market or the "rent by downloading" segment.

One also can debate who wins and loses in the video rental business: Netflix, Blockbuster, Amazon.com, Joost, iTunes or others. Even the impact on Netflix is debatable. If consumer use of the streaming feature increases, Netflix will pay more money in licensing fees to the studios who own the content. It also will incur more bandwidth charges. On the other hand, Netflix might spend less money on postal charges, shipping and handling of physical DVDs.

Probably more important is the strategic impact: Netflix's ability to retain existing market share as new competitors enter the market.

The other issue is which market is affected. To some extent the "view on PC" segment is where Apple, Netflix and others compete head to head. There are other segments, such as the "watch on my iPod" market, where Netflix and others delivering to the PC do not play.


Also, one might debate whether a subscription service is different from a pay-per-view model. Heavier users arguably will prefer a subscription model. Lighter users might well prefer the "pay as you go" model. Also, there is little question but that mobile, iPod, PC and TV viewing segments will emerge as full-fledged markets at some point, irrespective of the payment model.

Business motivations also are different. Apple sells content at prices as low as possible so it can create a market for its devices. Its market is rNetazors (devices) not razor blades (recurring revenue). Netflix has the opposite business model: it only cares about devices as platforms to sell content on a recurring basis.

To some extent, then, Netflix and iTunes ultimately compete with telco, wireless and cable on-demand programming offerings, in addition to competing with each other to some extent. Netflix and iTunes now are in the video on demand business, not the "DVD rental" business.

Telcos and cable companies investing heavily in broadband access networks play in the linear TV space as well as the on-demand video space. They compete directly with each other and satellite providers. But over time each of the three main linear programming providers also competes in the on-demand entertainment market, especially as such viewing can be supported on TV screens at some point.