Bloggers Jon Arnold and Daniel Berninger want to know why Verizon went after Vonage on the patent front. Why not some other company? The answer is that the dominant telcos want some competition, but not effective competition. The reason is simple enough. It is quite beneficial to show regulators that there is effective competition in their markets. But what happens is that there's a threshold. Below a certain level of success, we leave you alone. Cross the line, and we have to deal with you.
That's why some competitive local exchange carriers actually were encouraged to take share away from certain large tier one incumbent telcos. Helped, actually. All to demonstrate that there is effective competition in the market. Not every CLEC got that sort of material help. And not every CLEC found itself so favored once the legislative and regulatory battles requiring proof of effective competition drew to an end.
Vonage gets attacked because it frankly doesn't help to attack SunRocket or Packet8. Vonage is the one company that crossed the threshold, as all the leading cable companies have done. And that is my take on "why Vonage?".
Vonage says its quarterly results for the period ended March 31, 2007 will show $195 million revenue, 332,000 gross customer adds and 166,000 net adds. That would bring Vonage in flat with net adds for the fourth quarter of 2006, when it added 166,000 net customers.
Marketing cost for each gross customer addition, though, backed down to $275, towards the more historic range of $239 in the second quarter of 2006, $306 in the fourth quarter 2006, $254 in the third quarter and $239 in the second quarter last year.
Quarterly revenue of $195 million was stronger than the $180 million Vonage reported for the fourth quarter 2006. Monthly ARPU was $28.17.
But Vonage also expects to boost operating results by cutting $110 million in marketing expense, possibly a quarter of what it originally though it would spend this year. Vonage now expects to spend $310 million for 2007 marketing, instead of $400 million to $425 million.
A 10 percent force reduction also will slash SG&A costs of about $20 million in 2007. Planned cuts in other SG&A expenses are expected to generate an additional $10 million in savings.
Collectively, the moves will get Vonage very close to positive operating income, though not profitability.
I wasn't the only one at the Voice Peering Forum recently who was struck by the sudden lead some European telcos have taken in their transformation efforts. BT actually is growing customer counts and revenue in its tough mass markets segment, for example. To be sure, some of the progress is born of necessity. As Carlos Dasilva, France Telecom Americas region marketing director notes, "we had to move aggressively because the regulators are killing our business." And though she didn't specifically make the same point, BT has had to strike out on some very innovative paths precisely because it was forced to do so. But a significant turn in the direction of flexibility (an internal requirement, perhaps) and openness (more important for third party application providers) is going to pay dividends for end users, who "aren’t waiting" for regulators to set rules and service providers to start giving them what they want, Anna Boukovskaia, BT head of market development, said.
Which isn't to say regulatory action is inconsequential. Quite to the contrary, regulatory ground rules always always always create the preconditions for all revenue generating activities in the public and private network spaces. Deutsche Telekom and Telstra, for example, find regulatory demands so onerous they simply have refused to build new optical networks, because they aren't sure they will earn a return on the investments. Credit aggressive wholesale requirements for the concern.
Paradoxically, hammering by regulators is largely responsible for the innovation now being shown by the likes of BT and France Telecom (Orange). But the changes come at a serious price. France Telecom is laying off 20,000 people. If you know France, you know how unusual that is, and how powerful the need for change therefore is. Keep in mind there are multiple forces at work here.
Regulators, technology and capital markets normally work in tandem to create markets. They also can work in tandem to change them. What less often occurs is that end users change the markets. But that is precisely what is happening now.
To be sure, the legacy markets were going to change, in any case, because of regulatory shifts, technology advances and capital availability. What is highly unusual is the impact actual consumer preferences now are having. Text messaging was an accidental success. Nobody really claims to have "always believed" that short message service would be such a big revenue driver. Carriers and service providers did not create this market: end users did. So Boukovskaia flatly says "we don't know what the next killer app is going to be."
Notable is BT’s commitment to take all voice and data services at the edge and deal with everything as IP and Ethernet. Every voice line is converted to VoIP right where the copper pair is terminated. All 30 million of them. DSL services are provided from the same linecard. There’s no separate DSLAM, POTS termination, SONET/SDH Add Drop Mux.
Fractional TDM based Frame Relay and IP services are packetized and bundled right at the POP. If it isn’t TDM leased line (E1 or bigger), it gets packetized and sent through the core using MPLS.
A dramatically simplified network results.
Going forward, TDM as an enterprise access technology is over in the United Kingdom, at least as far as BT is concerned. BT embeds the VoIP functionality as close to the customer as possible. This has the effect of reducing network elements.
If you have used an iPod shuffle or a Bose audio system recently, you might notice something: these are mimalist devices. The shuffle has no screen. You can turn it on or off, play songs in order or randomly shuffle, raise or lower the volume, go forward or back one song. Out of the box, the shuffle doesn't even have a transformer. You recharge by using a PC's USB port.
The Bose docking station, which provides amplification for iPods, allows you just a couple functions. You can turn the unit on or off. You can raise or lower the volume. If you use the remote, you can move forwards or backwards in your song menu. You can mute the audio. Though it initially is jarring, the Bose doesn not even have bass and treble controls, because it senses the acoustical properties of the room and adjusts all that for you.
So in a world where we assume the customer wants choice, how does that make sense? The flip side to choice is that too much choice is a problem. Too many options actually decrease satisfaction.
The obvious implication is that service providers habe choices to make. They have to identify the key things users want, then simplify features enough to satisfy them, while minimizing the total number of features available to users.
As much as many of us stress open platforms, because it leads to innovation, innovation also has to be harnessed to simplicity. Apple gets it. Almost nobody else ever does.
In his book The Paradox Of Choice, professor Barry Schwartz notes that a supermarket offers 285 varieties of cookies, 85 flavors and brands of juices, and 95 varieties of chips, 230 soup offerings, 120 different pasta sauces, 275 varieties of cereal, and 175 types of tea bags. Supermarkets today carry more than 30,000 items, and 20,000 new products are introduced each year.
You get the point, despite all that choice, few of us do much more than return, over and over, to our trusted brands. So there is no alternative but for service providers to continue to be gatekeepers of sorts, simplifying the experience of services and products in ways that give people what they want, but shield them from making all kinds of decisions that aren't central to the core experience.
Service and experience providers will make, and must make, decisions on behalf of their customers, to improve the value of the experience. Ironically, that means limiting absolute freedom to a great extent, even as some will urge openness to an extreme. Apple isn't open. It nevertheless produces products and services users love. So the issue is how well any particular provider really understands what people want.
In some real sense, the attitude of openness to innovation, which is a good thing, also covers a fundamental lack of understanding about what users really do want. Providers don't know. So openness is a good thing. But once needs are discovered, serious pruning has to be done.
It's a paradox, but that is what Apple does so well.
Well over a decade ago, as part of an exercise to determine the actual incremental cost of terminating a minute of voice usage, I calculated that incremental cost could not be less than three cents a minute. The reason? Any service provider terminating a minute of long distance traffic, for example, would have to pay an access fee, and then there's the cost of the billing infrastructure to send a bill or comply with government regulations, which would add some fraction of a cent per minute.
It doesn't appear those costs have changed much, at least for most rural telephone companies. The cost to originate, by the way, seems to remain at about one cent a minute, with the actual usage of a switch costing about 4/10 of a cent, one analyst who continues to run cost studies reports.
Embarq SVP Bill Blessing, additionly, says that the cost of operating a soft switch is in fact not less than operating a legacy Class 5 device. Transport, access and plain old overhead continue to be where the cost drivers remain, not switches.
IDC research, there were 236 million U.S. wireless subscribers by the end of 2006. U.S. wireless data revenue totaled $4.8 billion for the fourth quarter of 2006, representing roughly 13.5 percent of mobile provider average revenue per unit, or $6.74 per subscriber per month.
Of the total data revenue, 48.8 percent came from messaging, 13 percent from content and simple application downloads and 38.2 percent from other business- and consumer-oriented services and content.
"Our research shows that in terms of blended data ARPU, Sprint Nextel, at $8.32, regained its lead over Verizon, now at $7.91, although Verizon remains the leader in terms of total wireless data revenue and data percentage of ARPU among the U.S. national carriers," says Julien Blin, IDC research analyst.
One way to look at the data is that basic communications remain the driver, though content sales are growing.
Bad news for fixed mobile supporters: In March 2007, Deutsche Telekom cancelled T-One, its dual-mode WiFi-GSM service in Germany, which it had launched in August 2006. Whatever else the shutdown might mean, it certainly indicates that service providers cannot simply put the service out there, make pricing and handset mistakes, and expect customers to go wild over it.
That’s especially true if there is competent competition. T-One was up against the cheaper T-Mobile home zone services, for one thing. Home zone services are based on tarriffs that encourage use of fixed network connections rather than mobility network when a user is within range of their identified home zone transmitter.
So why did DT’s T-One fail? It failed because it never managed to get enough customers. At the point the service was closed, DT had garnered far fewer than 10,000 customers. In fact, just 2,000 was the final figure, says TeleGeography.
The more important questions are why it failed to stir much customer interest. Observers point to high prices, really limited handset availability, competition from T-Mobile and basic lack of a compelling value relationship. Orange seems to be faring better, but results from other markets suggest the fixed mobile convergence value proposition still isn't broadly embraced.
Maybe all people want is cheaper calling and better reception when inside the home. Service providers can satisfy the first desire by a simple change of billing. The second requires some degree of technology integration. Beyond better reception and cheaper calling, it isn't so clear that lots of people want to converge phone numbers, features and services, beyond directory services.
Maybe all most people want is simply to use their mobile service more places, with acceptable quality, than they now can. Lower prices might also be an issue, but one might suggest users would prefer better coverage even to better prices.
