Fixed Network Business is in "Terminal Decline," EIU Says

Terminal decline is the phrase the Economist Intelligence Unit uses to describe the fixed network telecom business. Harsh words, perhaps, but instructive if one honestly has to assess the direction of public policy about fixed telecom networks.

The most fundamental observation: it does not make sense to add more regulation for an industry “in terminal decline.” If an industry really is dying, regulation that further distresses the business model is not needed, and ultimately does not matter.

Competitors often continue to argue that incumbent fixed network suppliers must be heavily regulated, because they have such overwhelming market power. But it is hard to square that position with the actual trends in the business.

If there are exceptions to the broad theme, it is the Internet access business, as well as mobility.

As the rollout of 3G and 4G connections proceeds rapidly, widening access to mobile broadband in developing markets, in 2016 Internet penetration is forecast to surpass 50 users per 100 people for the first time, the EIU says.

The other notable trend in mobility, aside from Internet access, is the role of content services.  Generally, “operators are likely to be less focused on acquiring new customers in 2016 than in coming up with plans to deliver more sophisticated and enticing content,” EIU argues.

The main point, though, is the prognosis: “terminal decline.” All strategy in the fixed network business has to be based around that one main trend.

source: Economist Intelligence Unit

Cost Structure Really Does Matter

British Internet service provider Gigaclear has gotten a €25 million (£19 million, $27.3 million) loan from the European Investment Bank, a move it reckons will help boost its rural broadband network for perhaps 40,000 homes.

Rough math: including overhead and debt service, that implies the cost of rural U.K. fiber to the home of no more than $682 per location. That appears breathtakingly low, and far less than BT costs to deploy fiber to the home.

With estimated average cost in excess of £2000, with a variable distance charge, an abandoned plan for fiber to home might imply BT transport and drop minimum costs of $2880, before the applied variable distance cost.

At an “average” distance of 1,000 meters to 1499 meters, that adds an extra £2500, for a total cost of £4880, or about $7,028 per location. Costs such as those explain why BT abandoned that particular plan.

source: BT

But those cost differences also explain why, in some cases, ISP with dramatically-lower embedded costs can build gigabit fiber facilities when a tier-one telco cannot. Cost structure matters.

Business Impact of E-SIMs: Friend or Foe, and Where?

Dynamic embedded subscriber information modules--something Apple introduced in 2014 for its iPad devices--are among the possible enhancers of competition in mobile markets.

The Apple SIM made it possible for iPad owners in the United States and United Kingdom to pick and choose a mobile connectivity provider, directly from the device (assuming multiple providers were willing to support the feature).

As Internet of Things devices and applications proliferate, the same basic concept--allowing an programmable electronic SIM to select from a number of potential mobile connections--could emerge on a wider scale, argue McKinsey and Company consultants Markus Meukel, Markus Schwarz, and Matthias Winter.

As you might imagine, mobile service providers were not keen on enabling that level of competition. But there is new thinking about IoT requirements, especially the ability to remotely activate IoT devices. And that requires use of an e-SIM.

So the difference in industry reception between the Apple SIM and e-SIMs is the role in supporting a big new revenue stream and business model. Where Apple SIM was a threat to existing business models, e-SIMs are a support for new and different business models.

The GSMA expects to finalize a technical architecture 2016.

In principle, widespread e-SIM capabilities could have marketing implications for wearables. Targeting new clients through promotional activities may be as easy as having them sign up by scanning the barcode of a print advertisement and activating the service immediately.

On the other hand, the ease of use and ease of operator switching has the potential to weaken the network operator’s position in the mobile value chain.

Customer touchpoints also could change. The e-SIM eliminates the need for customers to go to a store and acquire a SIM card when signing up for service. That might negatively affect the amount of upselling.

Churn and loyalty also could be affected, since customer may be able to switch operators and offers more easily. Churn could increase.

Prepaid versus contract markets. E-SIM’s impact may be greater in markets with more prepaid customers, as well.

There could be changes at the wholesale level. As Google’s Fi essentially has pioneered, wholesale service providers might buy capacity dynamically from multiple capacity and access providers. That could happen on price or quality or both dimensions.

High prices for global roaming might be just as important, allowing travelers to locally provision service when traveling internationally.

You can make your own estimates of possible advantages and disadvantages, for core mobile services sold to people and IoT devices.

Gigabit Internet Connections to Grow by 10X in 2016

Deloitte also predicts an order of magnitude increase in gigabit Internet, 70 percent of which will come from residential connections.

The number of gigabit Internet access connections will surge to 10 million by the end of 2016. 

By 2020, some 600 million subscribers may be on networks that offer a gigabit tariff, representing the majority of connected homes in the world.

That doesn't necessarily mean all 600 million will buy gigabit connedtions; only that they could.

OTT Could Claim 39% of U.S. Telecom Ecosystem Revenue by 2020; 21% in China; 12% in India

Over the top applications are going to keep taking a greater share of telecom ecosystem revenue, between now and 2020. That will be true in the United States, China and India, for example.

In the U.S. market, for example, OTT revenue might hit 39 percent of total ecosystem revenues by 2020, with telecom services representing 40 percent of ecosystem revenues, while device revenues (sold through all channels) account for 22 percent of ecosystem revenues.

In China, OTT revenues might represent 21 percent of ecosystem revenues by 2017, while service provider recurring revenues represent 60 percent of ecosystem revenues.

In India, by 2020, OTT will claim 12 percent of ecosystem revenues, while service provider revenues might contribute 66 percent of ecosystem revenues.

source: S. Saravanan

source: S. Saravanan

source: S. Saravanan

Between 2003 and 2015, Revenue Per Sub for 15 Biggest Telcos Dropped 69%

Globally, average revenue per subscriber for the largest 15 service providers has declined since 2003 to 2013 by about 69 percent, according to IBM.

Globally, average profit margins for the largest 15 service providers--operating in at least 10 countries each--has declined by four percent in the 2003 to 2013 period. For single-country operators, margin has declined 22 percent.

source: IBM

source: IBM

Telecom 2020:Preparing for a very different tomorrow from Rob Van Den Dam

Mobile Data Could Represent 57% of Total U.S. Service Provider "Service" Revenue

If total U.S. telecom service revenue is about $309 billion in 2019, and mobile data is $176 billion, then mobile data will represent fully 57 percent of total industry revenue.

It might be worth noting that over the top revenues might be as much as $292 billion in 2019, by some estimates.

If so, then OTT revenue might represent 38 percent of total ecosystem revenues, with service provider revenues amounting to about 40 percent of total ecosystem revenues. Device revenue might be about 21 percent of total.

source: S. Saravanan

source: S. Saravanan

Is Asymmetric Regulation "Unfair?"

Asymmetric regulation of like services, provided by competing industries or segments,  tends to cause problems, sooner or later, as different rules applied to different providers is “unfair.”

Think only of the arguments some make about “network neutrality” and you get the picture: “all bits and apps and providers should be treated the same.”

Leaving aside for the moment the issue of whether that makes sense, or is possible or desirable, the principle of “like treatment” for apps, services and providers is, at some important level, a “desirable” principle, in terms of fairness.

The problem is that industries with entirely-different regulatory frameworks now find themselves competing head to head, and some industries are far less regulated than others.

At least in the U.S. market, the traditional frameworks have varied from “no regulation” (magazines and newspapers) to “some regulation” (TV and radio broadcasting), “a bit more regulation than broadcast” (cable TV) and common carrier regulation (telcos). In addition, “dominant” telco providers have obligations small providers do not.

The situation screams for “harmonization,” some would argue. That always is more difficult than might be thought to be the case, as participants often will fiercely resist reclassification and new rules, especially when the new rules are deemed harmful to the basic business model.

Beyond that, policymakers face another fundamental choice: ease regulations on the more-regulated industry, or tighten regulations on the less-regulated industry. Recently, the U.S. Federal Communications Commission has chosen the latter path.

Others might argue the better path is to lessen regulations on the more-regulated industry, especially if “dominance” has eroded, and competing industries have grown both more powerful and influential, while “value” shifts away from the regulated industries and towards the unregulated industries.

To make the basic argument, value and profitability have shifted towards app providers and cable TV companies, and away from telcos. That can be seen in the dramatic changes in market share for high speed Internet access, arguably now the foundation service for any fixed network.

In 2015, for example, cable TV companies not only continued to add more net accounts than telcos, in several quarters cable TV had more than 100 percent of net additions.

source: American Consumer Institute

Also, from 2009 to 2015, telco share of high speed access lines has steadily dropped from more than 90 percent share to less than 40 percent share.

source: American Consumer Institute

One might argue "equal treatment of like services and providers," which is supposed to be a good thing where it comes to apps, might also be thought to be a good thing were it comes to access providers that most certainly are treated unequally.

U.S. Mobile Payment Suppliers Shift Focus

In one sense, “mobile payment” always was about using mobile devices as a substitute for credit and debit cards. But after several years of experimentation, at least in the U.S. market, it seems as though much of the adoption has shifted to “online” payment using mobile devices.

The size of the opportunity explains why that is happening.

The number of consumers who have used Apple Pay, Google Wallet or Samsung Pay remains relatively small.

Android Pay has been more focused on enabling e-commerce than retail checkout.

Even PayPal, long a leader in online payments, has shifted a bit.  “Already for many people, it is sometimes difficult to see clear lines between online, in-app or in-store experiences,” said Dan Schulman, PayPal CEO. “As we help create this new world in which all commerce is digital commerce, our opportunity will be the entire $25 trillion universe of global retail spending, an addressable market that is 10 times larger than the one we have traditionally targeted.”

MasterCard now talks about the “MasterPass” ecosystem, not so much a “wallet.” Visa, for its part, launched Checkout in July 2014, replacing V.me, Visa’s mobile. As does MasterCard, Visa now focuses on creating an ecosystem for e-commerce.

Chase Pay, which was built on the Merchant Customer Exchange (MCX), might need to refocus on that MCX itself seems to be foundering, as founding member Walmart now is creating its own branded mobile wallet, with Target, another MCX founder, also said to be planning its own mobile wallet.

And even the Starbucks card now focused on “Mobile Order and Pay,” not just mobile payment.

The shifts are not so surprising, as retail mobile payments remain a work in progress, causing contestants to look for roles that can grow faster.

Compared to retail checkout e-commerce growing four times as fast, while mobile commerce is growing at eight times the rate of traditional commerce.

Starbucks, Walgreens, NFL Shop, HSN and Match are among the latest merchants to sign up for Visa Checkout, while Walmart.com will do so as well.

According to new research from comScore, Visa Checkout is more effective than other checkout options at driving conversion, which means that shoppers who start a checkout process are more likely to complete it, when using Visa Checkout.

The December 2015 comScore survey found that enrolled Visa Checkout customers completed 86 percent of transactions from the online shopping cart, with a 51 percent higher conversion rate when compared to customers using a merchant’s traditional online checkout.

Some 45 percent of Visa Checkout shoppers used a smartphone, tablet, or other mobile device in making an online purchase during the 2015 holiday period, up from about 33 percent a year earlier.

Between July and November, the share of Visa Checkout customers using a mobile device grew by 10 percent.

The ability to use a mobile device as a payment mechanism remains. But many suppliers have shifted their efforts from retail payment to platform or ecosystem; to online in addition to retail; or online almost in place of retail.

Cox Communications Finds CDN Improves Page Loading 9 to 15 Percent, on Average

As more of the value of the Internet shifts to apps with video content, content delivery networks become more important for end user experience and content provider revenues.

Amazon has estimated that a 100-millisecond increase in webpage load time can decrease sales by one percent.

Google has found that faster-loading pages mean more ad inventory can be displayed. When the average page load time increases from 400 ms to 900 ms, reduced traffic has meant ad revenue lower by 20 percent.

Linkedin, for its part, argues that a one-second increase in median latency causes a 15 percent engagement drop and a five-percent bounce rate increase.

Facebook pages that are 500-ms slower result in a three-percent drop-off in traffic, and a delay of one second causes a six percent drop-off in user activity.

A SamKnows study of EdgeConneX connections designed to reduce latency was conducted in Norfolk, Virginia and San Diego, California.

In Norfolk, Cox Communications, established connectivity with a leading content provider in early February 2015, supported by a CDN service, and resulted in page load time for a major search engine improved by an average of 15.4 percent.

Some users saw page load time improvements of more than 40 percent.

In San Diego, Cox moved to an Akamai CDN service and saw a 9.2 percent improvement in page load time.

Extrapolated to the entire base of website requests, performance improvements could be as high as 65 percent.

How Video Changes Peering and Transit Demand

Consumers ultimately drive demand for all communication and content services, it goes without saying. The corollary is that a relatively limited number of “content stores” will aggregate and deliver the bandwidth-intensive apps (entertainment video, largely) consumers demand.

That is not to say entertainment video is the “most important” type of app people want to use. They want to use many. But as a driver of bandwidth, video is everything.

IP video will account for 80 percent of all IP traffic by 2019, up from 67 percent in 2014, according to the Cisco Visual Networking Index.

With the caveat that IP traffic is not 100 percent of data traffic, the fact remains that IP networks will, by virtue of traffic volume, become content delivery networks.

Another corollary is that global bandwidth is driven from a relatively limited number of locations, including major video app provider data centers. If that is true, then the economics of “owning” rather than “leasing” long haul bandwidth are changed.

That is likely one reason IP transit volumes are dropping. It simply is easier for bandwidth-dependent content stores to create their own facilities. That, in turn, is one reason why peering represents more of the total amount of global network interconnections.

source: TeleGeography

source: TeleGeography

For Mobile Operators, Remittances Yes, Retail Payments, Not so Much

At least so far, it is safe to say that mobile operator value in the “payments” ecosystem has been most clear for remittances and other retail payments in developing regions and least successful in retail mobile payments.

In fact, mobile remittances might be just at the beginning of their growth curve. Already, the volume of existing mobile banking transactions for remittances is an order of magnitude higher than any other application, according to the GSMA.

source: GSMA

The reason many are optimistic is that remittances by any means represent over $1 trillion in value annually, and only about $5 billion is transferred annually in the United States, for example, using a mobile phone.   

For mobile operators in some markets, revenue contributed by M-Pesa, the mobile payments system, already is greater than revenue earned from mobile data, for example. Some 18 percent of mobile operators polled by GSMA in 2014 reported that mobile money revenues represented more than 10 percent of total revenue, for example.

M-PESA represented just under 20 percent of total revenues for Safaricom in 2014, for example.

MTN Uganda’s mobile money services generated about 15 percent of total revenue in mid-2014.

Tanzania’s M-Pesa service represented 21.3 percent of the operator’s total service revenue in 2014.

source: GSMA

source: GSMA

By 2014, 255 mobile money services operated in 89 countries and is now available in 61 percent of developing markets.

source: Maris Strategies

source: GSMA

source: GSMA

Retail mobile payments in developed markets have, to this point, been another story. Though In 2015 mobile payments might have represented $8.71 billion in mobile retail transaction volume, very little of that activity flowed through mobile operator services.

The SoftCard initiative lead by AT&T, Verizon and T-Mobile US was quietly folded into Google Wallet, not that Google Wallet has fared better.

The space has been tough for many others, as well. The Merchant Customer Exchange, branded as CurrentC, and representing major mass market retailers, faces a splintering.

Walmart was a lead backer of MCX, but now plans to introduce its own mobile payments service, Walmart Pay. Target, another early MCX supporter, appears to be mulling its own payments system as well.

It remains to be seen whether retail mobile payments will, in the future, be a significant revenue driver for mobile service providers.

Internet Access: Moore's Law Not Fast Enough for You?

Author Samuel Clemens once quipped that there are “Lies, damn lies and statistics.” Psychologists know a Rashomon” effect exists, where people have distinctly different impressions of the same event.

So it always seems to be with understanding of how much progress any nation or service provider is making in the area of Internet service quality.

Improvements nearly at Moore's Law rates seems to be a “problem.”

The Federal Communications Commission takes one view; some take the other.

“Broadband deployment in the United States--especially in rural areas--is failing to keep pace with today’s advanced, high-quality voice, data, graphics and video offerings, according to the 2015 Broadband Progress Report adopted today by the Federal Communications Commission,” the FCC says.

The FCC observation about rural areas is correct, and likely always will be, for many of the reasons that hipster bars and restaurants never will be as plentiful in rural areas as they are in urban areas.

Density is required for some businesses to exist, or be sustainable.

The FCC notes that “55 million Americans--17 percent of the population--lack access to advanced broadband,” defined as 25 Mbps in the downstream and 3 Mbps in the upstream.

At the same time, firms such as Comcast, Google Fiber, AT&T, CenturyLink and many others are actively deploying gigabit access networks, where demand will sustain those services.

More important, Comcast and AT&T continue to demonstrate they can scale Internet access bandwidth nearly at Moore’s Law rates.

To the extent the FCC sees itself--and to the extent that it is--the protector of citizen and consumer rights, it is understandable that the agency can say we are not making enough progress.

But that does not mean we are not making progress. We clearly are, unless you think Moore’s Law rates of improvement are not fast enough.

The other observation is that, to a large extent, we will never experience, in rural areas, the same amenities we see in urban areas.

In that sense, “lack of progress” will always  be a problem. That does not mean we are not “solving” the problem, generally.

Nine Years Since the iPhone Introduction

Steve Jobs unveiled the iPhone nine years ago, on Dec. 9, 2007. It might not have immediately changed the world, but it set in motion a huge change in the way mobile devices are developed and commercialized, loosening mobile service provider control.

Some of us would argue the iPhone was the first device to capture end user imagination in a matter similar to the way people have emotional identifications with their clothing, perfumes, autos, shoes, favorite vacation destinations or sports teams.

In other words, for the first time, there was a physical product that embodied the value of "bandwidth" or "network access."

Intangible services (legal or financial services, for example) are hard to market, since the buyer has no tangible way to judge the quality of the product until after the product has been purchased and consumed.

Internet access and voice service, for example, are intangible. The iPhone was a breakthrough. It personified the value of mobile data access. We already knew the value of a "mobile phone" for voice or messaging. But iPhone personified the value of mobile Internet access.