MetroPCS: More Evidence Voice is Not a Commodity

MetroPCS provides more evidence that even mass market mobile phone service is not a commodity, in the strict sense. MetroPCS offers flat rate local and domestic U.S. calling in Miami, Tampa, Sarasota, Atlanta, San Francisco, Dallas, Detroit and the Sacramento metropolitan areas to more than three million customers at the moment.

It might be said to specialize in a several market segments: people who want flat rate wireline pricing plus mobility; people who have problems qualifying for prepaid plans; immigrant communities; people who don't like contracts; people who don't like credit checks or deposits; younger users and first time users.

MetroPCS offers a $30 per month service plan offering unlimited calling. For an additional $5 to $20 per month, ssubscribers can add nationwide long distance calling, unlimited text messaging (domestic and international), voicemail, caller ID, call waiting, picture and multimedia messaging, mobile Internet browsing, push e-mail, data and other a la carte options on a prepaid basis.

The company's most-popular service plans are the unlimited $40 and $45 rate plans which offer unlimited local and long distance calling, text and picture messaging, enhanced voice mail, caller ID, call waiting and 3-way calling. Those plans are purchased by more than 85 percent of MetroPCS customers.

On February 22, 2007 the company introduced a new $50 service plan which includes unlimited mobile Internet browsing and push e-mail in addition to the services included in our $45 service plan.

MetroPCS customers in all metropolitan areas averaged approximately 2,000 minutes of use per month, compared to approximately 875 minutes per month for customers of the national wireless carriers. Average usage at thsoe levels suggests that a substantial number of customers use MetroPCS as their primary telecommunications service. Approximately 65 percent are first time wireless users.

Though cable and tier one telecom providers clearly have bet their futures on triple and quadruple play strategies, MetroPCS (and Leap Wireless) show that a targeted wireless pure play is possible, if a provider is willing to segment. And note that the company's average revenue per user does not appear to different than that of the market leading companies.

Talking, generally considered to be a commodity, does not appear to be such a thing if one looks at the matter closely.

Satellite Gains at Cable's Expense?

According to a survey taken early to mid March, there's evidence some households are about to make a move to satellite TV, especially DirecTV. While Comcast remains the current leader among U.S. and Canadian TV service providers, DirecTV shows the most market share momentum, says the Changewave Alliance, after a survey of nearly 3700 members.

And though customer satisfaction does not reliably translate into loyalty, it appears that satellite video services rank well on that score. Satellite customers say they are much more satisfied than cable customers. "Moreover, Satellite satisfaction ratings have improved four points since our previous survey, while cable satisfaction rates have declined two points, Changewave says.

DirecTV now is the industry leader in terms of customer satisfaction and has also experienced the biggest improvement since November. Comcast has experienced the biggest decline.

Most significantly, satellite s about to gain at cable's expense, Changewave says. "A total of 13 percent of our survey respondents say they plan to switch providers in the next six months and nearly half of these (48 percent) say they’ll switch to satellite.

Amazon: Compute in the Cloud

Amazon's Simple Storage Service (S3) and Elastic Compute Cloud (EC2) appear to be getting traction. The whole idea is to provide easy to use computing and storage "in the cloud." S3 recently had a peak day with 921 million requests, says Jeff Bezos, CEO of Amazon. At the peak second for the service, there were 16,600 requests. A year ago Amazon had 800,000 "objects" on the service. Now there are over five billion. S3 and EC2 are just a couple of reasons why the pace of Web application development has gotten so blistering.

Time Warner Cable Heading for the Doors?

When a major player in the content business starts thinking that maybe it doesn't need to control distribution to the extent it once did, watch out. It is an indication that the strategic value of distribution networks could be changing. That might be just what is happening at Time Warner, which has generated significant profits from its cable system ownership. The latest thinking is but the latest iteration of a constant theme in the video entertainment business: the relative strategic value of distribution and content assets. Though the mantra of late has been that "content is king," distribution always plays an important role. Sometimes it is the key role. Satellite radio wouldn't be much without the creation of new distribution networks. But movie studios are barred by law from owning theater chains.

Once upon a time a company had to build an operate its own network to deliver voice services. And cable TV wouldn't exist without the cable network. And the same might have been said for the terrestrial TV and radio businesses as well. But there are other media models that show how content businesses can flourish without any ownership of distribution networks. Newspapers and magazines provide a prime example. Grocery stores, kiosks and the postal service provide distribution.

Senior executives at Time Warner are considering whether the media company should substantially reduce its cable holdings over time, says Wall Street Journal reporter Matthew Karnitschnig.

Cable has been a core part of the company and its precursors for decades and is now the biggest contributor to profits. But the long-term future of cable, as the Internet emerges as a viable venue for watching TV, is murky, says Kartnitschnig. Some within Time Warner wonder whether the company wouldn't be better off if it were to get out of cable and double down on the Web, where it already owns AOL.

Getting rid of a big chunk of its cable holdings would transform the nature of Time Warner, making it more reliant on its role as a provider of filmed entertainment and print and Web content. For years, Time Warner has believed in wedding its movies and television programs to powerful distribution networks, primarily its cable operation, as a way to ensure that their content wouldn't be blocked by rivals. But with the Internet increasingly serving as a home for TV and film offerings, content companies may feel they no longer need to control old-style distribution networks such as cable or satellite TV.

The issue will be put before the board at a meeting next month, part of an annual strategic review, say people familiar with the situation. Time Warner management will present several alternatives for future ownership of Time Warner Cable.

The fact that Time Warner is even willing to think about a major reduction of its cable holdings is a sign of how much attitudes toward the cable industry are shifting. Despite cable's recent streak on Wall Street and its success in attracting customers to its bundled offering of Internet, telephone and television service, this is a business some analysts believe will become increasingly commoditized, squeezing profit margins.

News Corp. already has sold its stake in DirecTV Group Inc. to Liberty Media Corp., which continues to believe in the value of distribution networks.

The obvious issue for telecommunications companies active in the access market is precisely this issue of the strategic value of video entertainment, and the effort and expense that requires. One might argue that telcos are getting into a mature business just as key players are getting out. On the other hand, one might also argue that telcos will share immediately in a signficant chunk of the walled garden video business, but would have to create a new role in the as yet unproven Web video market, where control of distribution, by definition, isn't a key strategic imperative.

What Else Would Vonage Say?

Vonage says it has no "workaround" in hand to sidestep Verizon's patented Internet phone technology. That would simply stand to reason. It obviously would take time to circumvent a broad patent covering interconnection of public and IP networks.

This is precisely what one would argue if angling for a permanent stay of an order that would shut one's company down, while an appeal winds its way through the courts.

More to the point, though, Vonage says isn't sure that such a plan is even "feasible," given the expansiveness of Verizon's patents, which set out methods for passing calls between the Web and conventional phone networks. Friday the 13th, indeed.

A federal court recently ruled that Vonage had infringed on Verizon's patented technology. As punishment, Vonage was barred from using the disputed technology to support new customers. Vonage has gotten a temporary stay, but has petitioned for a permanent stay until the appeals process is finished.

Vonage told investors and customers not to worry because a "workaround" was in development. That does not necessarily contradict the fact that "Vonage currently has no workarounds that moot the need for a stay."

"While Vonage has studied methods for designing around the patents, removal of the allegedly infringing technology, if even feasible, could take many months to fully study and implement," Vonage has said in a document filed with a federal court, USA Today reporter Leslie Cauley says.

We wouldn't think the filing necessarily reveals much, other than the strongest-possible argument to a judge that a permanent stay is urgently needed.

IPTV: Tough Going in Western Europe

It's a good thing U.S. consumers like television quite a lot. Because IPTV results so far from Western Europe are sobering. While 11 Western European incumbent telcos have launched IPTV services, Forrester Research’s says consumer interest remains low, and revenue potential remains modest. Forrester predicts 25 percent of European xDSL/fiber broadband subscribers will have IPTV within 10 years. In the U.K. market Forrester expects 13 percent penetration in a decade. In France, Forrester expects 33 percent penetration in year 10.

Lars Godell, Forrester Research principal analyst says “Europeans are generally unwilling to pay much for TV content, and a discount scheme is needed to entice them to buy triple play."

In a mature TV market, this means incumbents will need to price IPTV below competing cable and satellite TV services. Assuming the typical provider gets a third of the market, annual IPTV revenue will work out to about €11.24 in net annual IPTV revenues. Remember that 50 percent or more of the actual gross retail value has to be given directly to the content owners and packagers.

At the end of June 2006, Belgacom, FT, and Telefónica had only achieved 1.7 percent, 1.2 percent and 1.8 percent IPTV household penetration, respectively. Telefónica has been the most successful in tapping into its retail broadband subscriber base, with 8.3 percent IPTV penetration among broadband customers.

DT wants to get to one million IPTV subscribers, representing 2.5 percent of German households, by the end of 2007.

Forrester estimates that IPTV investments will generate a cumulative €3,742 in losses for an average broadband subscriber over a 10-year period.

That is not to say telcos should nix the construction of fiber deep access networks or entering the video entertainment market. It is simply to point out that such efforts are fundamentally strategic matters, not revenue generators per se.

4G Has to be Taken Into Consideration....

One thing about the access business. It isn't as though the cable and telco contestants can rivet their attention on each other, and ignore everybody else. 4G wireless, for example, sometimes is defined as an access featuring 1 Gbps for stationary users and 100 Mbps to mobile users. The cable industry's DOCSIS 3.0 specification, for example, will bond channels to provide downstream speeds up to 120 Mbps and upstream bandwidth in the neighborhood of 80 Mpbs, at least in the lab. In the real world, physical impairments of various types and the need to share that bandwidth across a base of users will, in practice, reduce the actual bandwidth any single user might be able to pay for. We would note that at least one U.S. telco, SureWest Communications, offers a 50 Mbps symmetrical bandwidth service today for any customer that will purchase SureWest's most-expensive bundle, including every video service, wireless, fixed line voice and Internet access.