Economy Not Responsible for All Revenue Shortfalls

The temptation these days is to blame the "economy" for every slowing or decline in sales of communication products. We have to resist that temptation. At least so far, more companies reported robust third quarter growth in broadband, mobile and video sales than slowing. And there always are market share shifts to account for, a trend that should be in play for at least a year.

The content delivery business, for example, has to be judged a disappointment for Internap Network Services Corp., which saw sales in its contend delivery network segment decline for the third straight quarter.

Internap reported third-quarter revenues up eight percent to $65.4 million. But CDN sales in the quarter dropped to $5 million, down from $5.4 million in the second quarter and $5.6 million in the third quarter 2007.

We may well see economic effects in the fourth quarter or in 2009. But not all the negative impact will be a direct result of economic factors. In many cases, simple shifts of market share will be the driver.

Cbeyond: No Evidence of Slowing

If one wanted to point to a highly-successful provider of small business VoIP service, it would be hard to pick any single company doing better than Cbeyond. Third quarter revenue growth of $90.2 million represents 24.6 percent over the third quarter of 2007. 

Total adjusted earnings before interest, taxes and amortization of $16.9 million during the third quarter of 2008 was an increase of 25.5 percent from the third quarter of 2007. 

Cbeyond  had net customer additions of 1,993 in the quarter, to reach 40,569 in total.

The company also had average monthly revenue per customer location of $760 during the third quarter of 2008, compared to $754 in the second quarter of 2008 and $749 in the third quarter of 2007. 

Monthly customer churn of 1.3 percent in the third quarter of 2008 was stable compared to 1.3 percent in the second quarter of 2008. That is significant as Cbeyond experienced a temporary increase in churn several quarters back when it tightened credit polices. 

Windstream Results Point to Possible Shift

Windstream Communications third quarter results, like those at Charter Communications, do not yet support the theory that economic stress is changing basic consumer habits in the video entertainment and communications areas. 

Also, Windstream might finally be approaching a time when its voice lines stop shrinking. So there might be something to the argument that if executives think "lines will keep shrinking," they will.  Conversely, a belief that line losses are not inevitable might lead to efforts that in fact produce that result. 

Keep in mind that both Charter and Windstream operate in more-rural areas, so it may be that "big city" and "rural" patterns are diverging. 

Beyond that, neither company seems to be seeing any real slowdown in growth for broadband or video products, as some might expect in the face of the economic slowdown. 

Windstream added 28,000 new high-speed internet customers in the quarter, bringing its total broadband customer base to roughly 963,000, an increase of almost 16 percent year-over-year, and Windstream executives believe there still is room for additional growth. 

Windstream also added nearly 21,000 digital TV customers in the quarter. Long distance service revenue also increased five percent year-over-year.

To be sure, traditional voice lines declined by approximately 38,000, but that was an improvement in absolute lines lost of more than 8,000 units  year-over-year. In total, Windstream access lines declined by 4.8 percent year-over-year. But note: Windstream thinks it might finally have turned the corner on landline losses. 

Though competition has increased, Brent Whittington, EVP, thinks the company might have "turned the corner" in the third quarter, in terms of landline losses. That would be a significant development indeed.

Though some probably reflexively think telcos will keep losing voice lines forever, logic suggests the losses will stabilize at some point. Keep in mind the example of broadband access. Aggressive cable operator marketing of high-speed access went virtually unchallenged by telcos for some time. Then telcos decided they simply could not ignore getting into the business, despite some qualms about cannibalization of existing special access services.

As it turns out, the cannibalization fear was overblown. T1 lines in service increased even as cable modem and digital subscriber lines proliferated. Something along those same lines will happen once telcos decide it is time to market VoIP and IP telephony aggressively. As a byproduct, the shrinkage of voice lines will slow, then halt. 

Maybe Windstream is getting close to that point, even in advance of a major technology shift to IP-based voice.

Broadband Prices Drop 20%

Global broadband access prices have dropped about 20 percent, on average, in the first three quarters of 2008, say researchers at Point Topic. Digital subscriber line prices have dropped from $66.75 in the first quarter to $53.32 in the third quarter. Average subscription prices for cable are down just over 12 percent and fiber-to-customer prices declined by 6.5 percent.

Keep in mind that the Point Topic analysis is based on stand-alone tariffs. Customers might be paying less if they are buying their broadband access as part of a bundle.

DSL prices have declined the most in 2008, though Point Topic researchers say it still is the most-expensive broadband option, on a price-per-megabit basis.

In the Middle East and Africa, for example, consumers are paying over $46 per megabits per second basis, compared to $6.23 per Mbps in Western Europe.

Prices in the MEA region have dropped by seven percent on average in the year and speeds are up 13 percent. In part, the price declines for DSL reflect the greater degree of competition in that segment, compared to cable or fiber-to-customer alternatives.

In North America, cable modem price-per-megabit metrics are close to Western European levels. Western Europe prices of $4.80 per Mbps are close to North American prices of $4.89 per Mbps.

In Eastern Europe, cable modem prices declined about 25 percent.

Will Consumer Electronics Hold Up?

With the current economic slump, this holiday season is expected to be a tough one for most retail sectors, but will consumer electronics be one of them? 

Maybe not. A recent study by the Consumer Electronics Association found that although consumers may be spending less overall this season, they are planning to spend more on electronics. 

Some even argue that that the weak economy will make home entertainment products, like video games, even more popular this year, as some will see it as an affordable alternative to spending on concerts, movies and other events. 

So far, Compete.com data shows a normal pattern for the year. But people are right to be worried. 

According to the ICSC-Goldman Sachs index, retailers had their weakest October performance since the index's inception in 1969. 

Charter: Countervailing Evidence About Consumer Behavior

The problem with isolating economic from other drivers of consumer behavior and provider success is obvious enough when looking at Charter Communications third quarter 2008 results. You can't complain about the results.

For the third quarter of 2008, total revenue was $1 billion $636 million, an increase of eight percent over the third quarter of 2007. Phone and high speed internet, Charter's highest margin services, accounted for about 65 percent of Charter's revenue growth in the quarter. Telephone revenues totaled $144 million for the third quarter continuing as Charter's largest revenue growth driver with 55 percent year-over-year growth.

For the third quarter our commercial business revenues climbed 16 percent to $100 million driven by the expansion of commercial telephone product in the business bundle.

One of the broader assumptions about times of economic stringency is that consumers will be cautious about upgrading service to higher tiers. But that doesn't seem to be the case at Charter.

Demand for high definition continued in the third quarter with HD customers increasing nearly 50 percent year-over-year. Orders for on-demand content increased 57 percent and the number of users climbed nearly 30 percent over the year ago period. Orders for the DVR feature was up 33 percent.

Charter added 71,000 high speed customers during the quarter, more than 30 percent greater than net ads for the same quarter of 2007. And though you might expect customers to signing up for lower speed, less-expensive services, Charter says that wasn't the case. The majority of net gains came from higher speed products, company executives say.

Charter also added about 100,000 telephone customers in the quarter, consistent with year ago net ads, while voice customers increased nearly 60 percent year-over-year.

Early indications so far for the fourth quarter suggest that the economy may be having a "modest impact."  New connects were down year-over-year.

In the first two quarters of 2008 Charter did see losses in the broadcast basic tier, but the trend did not continue in the third quarter.

Charter made rate adjustments that might have lead customers to disconnect or possibly upgrade service in the first two quarters.

Third quarter customer retention and bad debt were generally in line to favorable with year ago levels, the company says.

Charter also increased its marketing spend in the third quarter, spending something like 4.8 percent of revenue on marketing, where Charter typically spends about four percent.

So there's some countervailing evidence about the impact of a recession on consumer spending for video, voice and data. Whatever else executives at other companies might think will happen, so far, Charter Communications has not seen anything yet that supports the theory that consumers are downgrading or postponing buying of higher-priced Internet access or video services.

14% Telco IPTV Share by 2013

Telco IPTV will grow from three percent overall share of the multi-channel TV business to 14 perent share in 2013 at the expense of cable TV, which will decline from 76 percent penetration to 61 percent between 2008 and 2013, say researchers at Pyramid Research. 

If that seems unremarkable, consider that virtually all of that gain will come from just two telcos, AT&T and Verizon. There are, of course, many small and independent telcos offering IPTV services. But their subscriber gains will be a small percentage of overall U.S. IPTV subscriber counts. 

“Pyramid Research estimates that IPTV will drive a global total of nine million net subscriber additions in 2008, 40 percent of which will come from markets in the Asia-Pacific region," says  Özgür Aytar, Pyramid Research senior research manager.

18 Mbps for New U-verse Access Service

AT&T has launched a new U-verse offer, boosting downstream speeds up to 18 Mbps. The new service can be purchased as part of an AT&T U-verse TV bundle. The new service replaces AT&T's 10 Mbps offer, and costs $65 a month as part of a TV bundle. The new service includes free Wi-Fi hot spot access. 

Professional installation is included for new U-verse TV customers, and existing U-verse Internet customers can upgrade their package at any time without additional installation costs or appointments, AT&T says. 

Time Warner Cable Lowers Forecast

Cable is generally considered to be recession-proof, but Time Warner Cable President and CEO Glenn Britt says its "naïve" to think that way now, and Time Warner Cable is reducing its 2008 earnings outlook. Still, the pattern of loss suggests nothing out of the ordinary. For the most part, it is service upgrades that are slowing, with a single exception.

"As we moved into the fourth quarter, we saw a significant slowdown in subscriber growth compared to last year, particularly for our video and voice services," Britt notes. The operator signed on 124,000 new digital video subs, just under the 128,000 it added a year ago. 

Time Warner Cable also warned that it has seen orders for premium video services, including pay-per-view, video on demand, and digital video recorders slow down. The MSO added 150,000 DVR subs in the period, off from a year-ago gain of 211,000. One would expect to see that, in a downturn. 

On the voice front, the MSO signed on 207,000 subs, 25 percent less than a year ago and about 15 percent lower than analyst expectations. It isn't clear whether this reflects economic conditions or a natural slowing of voice segment growth for an operator with fairly high voice penetration already. 

The MSO lost 31,000 basic video subs, better than the 83,000 basics it lost in the year-ago quarter, ending the quarter with 13.3 million total. Most of the video losses, though, come from the "antenna basic" tier, not the mainstay of a cable operator's video revenue. About 70 percent of the video subscription losses came from the antenna basic package, which runs about $13 per month. 

So far, video behavior is as one would predict for a downturn: less demand for premium services, but stability for basic subscriptions. The sharp increase in antenna basic disconnects, though, is noteworthy. 

Cable voice services are new enough that there isn't a baseline for behavior. Still, slower net addtions would not be unexpected. Had Time Warner reported negative voice growth, that would have been more worrisome. 

Comcast Corp also has reported a sharp fall in basic video subscribers. Comcast's basic video subscribers fell by 147,000 to 24.4 million in the third quarter, a sharper decline than the year-ago period's 56,000 drop. 

CEO Brian Roberts says the issue is not churn or disconnects but a slowing rate of new additions, caused by the weak economy, competition with phone companies and hurricane impact, which reduced new home construction as well as usability of existing housing. 

The hurricane impact accounted for 15,000 of the basic video losses in the quarter.

U.K. Broadband Growth Slips 20%

For those of you looking for signs of how a possibly-significant recession will affect sales of consumer broadband, the United Kingdom might offer a glimpse of what can happen.

The growth rate for U.K. broadband access subscriptions fell 20 percent in the third quarter, say analysts at Point Topic. To keep pace with net additions earlier in the year, the United Kingdom needed to add 390,000 broadband lines in the third quarter. Point Topic estimates that the actual number was only 313,000.

Local loop unbundling is the main driver of continuing growth in broadband, and represented gross 323,000 lines added in the quarter. Point Topic estimates that Virgin Media may have added another 60,000 cable modem customers while BT and smaller players actually lost about 70,000 net subscribers.

As a result, Point Topic is now forecasting that only 620,000 broadband lines will be added in the second half of 2008. The forecast for 2009 as a whole is 1.1 million, 200,000 down on the earlier forecast. By the end of 2009 there should be about 18.4 million broadband lines in Britain, 300,000 short of what was expected six months ago.

T-Mobile Wants to Jump From HSPA Straight to LTE

Reflecting the sort of thinking that parallels discussions of whether to upgrade from 10-Gbps Ethernet to 40-Gbps, or simply go straight to 100-Gbps, T-Mobile International AG indicates it now wants to upgrade directly from high-speed packet access (HSPA) to the 4G Long-Term Evolution standard.

Basically, T-Mobile says it will do what it can to wring all the efficiency it can out of HSPA and then move directly to LTE, rather than migrate in two stages to LTE, as some other mobile carriers propose to do.

The decision basically means T-Mobile will attempt to move directly from peak downlink speeds of 14.4 Mbps to LTE supporting 50 Mbps or 100 Mbps.

New Federalized EC Telecom Rules?

The European Union might on Nov. 5, 2008 get a new proposal from European Commission Telecom Commissioner Viviane Reding for creation of a pan-European telecom regulatory body that would have some measure of control over telecom rules in the EU's 27 member states, each of which is currently regulated by its own national organizations.

Those plans would create a single European regulator, along the lines of the U.S. Federal Communications Commission. The new body would not have the right to dictate regulation, but could block plans proposed by any member nation. In essence, the proposal aims to further the aim of creating a unified telecoms market thoroughout the EU, much as U.S. competitors have in the past preferred a single federal set of rules to 50 possibly-different sets of rules set by States.

Clearwire-Sprint, Verizon-Alltel Deals Approved

The Federal Communications Commission has approved the merger of Sprint-Nextel Corp. and Clearwire Corp. WiMAX assets.  The Commission also approved the Verizon Wireless merger with Alltel, on the same day it approved the unlicensed use of TV "white spaces" for broadband access and services. 

The decisions collectively mean even more competition in the broadband access space, especially in rural areas, as "white spaces"--spectrum typically used to support terrestrial broadcast television--are ideal for long-distance transmission and penetration of solid objects such as walls.  

Some work still needs to be done on the network design front, as lower-power broadband devices used by consumers and businesses will not be able to transmit as far as a TV transmitter can. That suggests network designs typically used by "cellular" operators will be needed. 

So use of the spectrum will be "free." The networks will not be.  

What Broadband Shortage? FCC Approves White Spaces

The Federal Communications Commission has unanimously voted to approve use of vacant TV broadcast spectrum on an unlicensed basis, clearing the way for development of broadband data devices and services that could be used by businesses and consumers.

The rules permit the operation of unlicensed devices in the TV white spaces on both a fixed and portable basis. Such devices generally must include a geo-location capability, the ability to access a data base of the licensed users and services and spectrum-sensing technology, all to avoid interference with licensed users and services.

Those users include full-power and low-power TV stations and cable system headends.

Wireless microphones will be protected in a variety of ways. The locations where wireless microphones are used, such as sporting venues and event and production facilities, can be registered in the data base and will be protected in the same way as other services.
The Commission also has required that devices include the ability to listen to the airwaves to sense wireless microphones as an additional measure of protection for these devices.

All white space devices are subject to equipment certification by the FCC Laboratory. The Laboratory will request samples of the devices for testing to ensure that they meet all the pertinent requirements.

The Commission also will permit certification of devices that do not include the geo-location and data base access capabilities, and instead rely solely on spectrum sensing to avoid causing harmful interference, subject to a much more rigorous approval process.

Generally speaking, initial devices are expected to operate at lower power. But device manufacturers may continue to provide additional information to the Commission to support the use of higher-power devices in adjacent channels. In addition, the Commission will explore in a separate inquiry whether higher-powered unlicensed operations might be permitted in TV white spaces in rural areas.

The proposal, approved on a five-to-zero vote, is expected to offer new opportunities for broadband data services in both urban and rural areas.

Though some conventional wisdom continues to assert that the United States has a "broadband access" problem, the FCC's decision suggests, along with other data, that broadband access is not a terribly big problem. A recent survey of about 146 rural telcos shows 100-percent availability of broadband. Fully 93 percent of those providers report there is broadband competition already, in their markets.

And now we will have "white spaces" to contend with.

More Mobile VoIP: Truphone for BlackBerry

Truphone has launched a beta version of its mobile internet telephony service, Truphone Anywhere, for BlackBerry smart phones. Truphone Anywhere works in 33 countries worldwide and provides international call costs for as little as six cents a minute.

The Truphone Anywhere application provides a prompt screen whenever a user dials an international number. If the user accepts, Truphone connects the call.by connecting to a local Truphone server, which then connects the long-distance part of the call over the Internet.

Truphone for BlackBerry smartphones is available to download for free from www.truphone.com/blackberry.