TA 96, Digital One Rate: Which was More Important?

Though the subscriber stats don't paint the picture quite so clearly, wireless minutes of use exploded after 1998, when AT&T Wireless Services introduced "Digital One Rate," a new plan that eliminated the difference between local and long distance services, and used a "bucket" of minutes packaging approach.

U.S. competitive local exchange carrier lines in service, on the other other hand, ramped up through about 2004, and then began to decline, even as more telephone and cable companies themselves became "CLECs" for purposes of providing services outside their historic service territories.

In 1998, when Digital One Rate was introduced, mobile subscribers numbered about 69 million. By the middle of 2007, mobile subscribers numbered more than 243 million. At this point, the time is long past when wired lines exceeded wireless lines. These days, wireless accounts far outnumber wired accounts.

In many respects, and without belittling the Telecommunications Act of 1996, Digital One Rate has had far more impact than anything that has happened on the wired side of the business.

VoIP Markets: Is Europe the Future?

Though those of us in the U.S. community tend to overlook the fact at times, the consumer VoIP market in Europe is quite different. In Western Europe there were 21.7 million VoIP customers at mid-year 2007, up from 15.6 million only six months earlier.

TeleGeography estimates that the ranks of European VoIP subscribers had grown to 28.9 million by year-end 2007.

While VoIP is often associated with competitive carriers and cable companies, many European incumbents have counterattacked by launching their own VoIP services. France Telecom has emerged as by far the largest consumer VoIP provider in Europe, while BT, Telecom Italia, and KPN all rank among the top ten European VoIP operators.

The European consumer VoIP market remains fragmented and highly diverse, featuring a wide range of provider types and business models, says Stephan Beckert, Telegeography analyst.

In some countries, incumbents dominate. In others, competitive carriers have gained the advantage. VoIP adoption also differs widely across nations. For example, 34 percent of all French households subscribe to VoIP, compared to only 11 percent in Germany.

At some point, the U.S. markets are going to start resembling the European market. At some point incumbent carriers are going to start pushing VoIP services actively. Recall the pattern set by Digital Subscriber Line services. The technology was available for quite some time. But telcos didn't have a business driver to deploy it aggressively (they feared cannibalization of T1 lines) until the cable operators forced their hand by launching rival cable modem services.

To be sure, an argument can be made that revenue is better managed by allowing traditional phone line sales to shrink gradually, rather than massively converting to VoIP, with the attendant cost and reduced revenue across the board. At some logical point, the benefits will be close to the costs, and the switch will happen.

Verizon Has 0.5 Percent Exposure to Unlimited Calling Plan Downgrades

Verizon Communications has 305,000 single-line Nationwide Unlimited Anytime customers with monthly voice price plans in excess of $99.99 per month. That's important as the investment community now is nervous the introduction of new plans costs about $100 a month will cause those sorts of customers, paying $125 to $135 a month, will downgrade to the $100 a month plan.

Keep in mind that customers paying more than $100 a month for a single line represent just 0.5 percent of Verizon's customer base.

Verizon believes that the reduced revenue from the $100+ customers will be more than offset by other customers on lower-priced plans moving up to the $100 a month plans. The exposure to the downside isn't that high--possibly $109 million or so.

On the other hand, assume just 300,000 customers upgrade their plans to the unlimited plan, out of the base of total 65.7 million users, and that the incremental revenue is $30 a month.

Despite some momentary imbalance, it seems more logical that the upgraders outnumber the downgraders by as much as two orders of magnitude.

Dan Hesse, Digital One Rate

Dan Hesse, Sprint Nextel CEO, was CEO of AT&T Wireless Services back in 1998, not many will recall. That was the month Hesse was able to act on a vision he had strenuously to sell to his superiors: that wireline minutes of use could be shifted to wireless, saving at&t money on access fees by doing so.

The Digital One Rate Plan was not primarily aimed against other wireless carriers at all, but rather at reducing a significant cost of doing business on the AT&T long distance side of the house.

At the time, Hesse pointed out that "we're taking a chunk out of revenue usually going to our competitors," meaning by that the Regional Bell Operating Companies that at&t had to pay access fees to.

The point is that major packaging initiatives can have unanticipated consequences. Digital One Rate was just a way to save AT&T long distance operations money on terminating traffic charges paid out to local carriers.

So make no mistake: Hesse is used to launching unusual packaging programs for non-intuitive reasons. But not even Hesse was able to fathom that Digital One Rate would change the way the entire industry packaged its basic product.

If Sprint does launch some sort of "nuclear" strategy to try and shake things up, you can bet Hesse isn't going to choose some sort of simple copycat unlimited calling plan.

Dan Hesse is the guy who got the whole "buckets of minutes" train rolling, and wiped out the difference between local and long distance calling in the U.S. domestic market.

He's the guy who triggered an explosion of mobile adoption and a sharp increase in usage of mobile minutes.

Financial analysts seem to be riveted on what a $60 unlimited calling plan might mean for the fortunes of all leading wireless providers. I don't think that is what they ought to be focusing on. Digital One Rate was about moving "long distance" minutes from the landline network to the wireless network.

That's what "unlimited" mobile calling plans do. That's why Sprint is testing femtocell technology in Denver: figuring out the operational and marketing issues around small in-home transmitters that improve wireless signal quality and also create a marketing opportunity for "home zone" services where a wireless handset can replace a landline handset and service.

Nobody should be surprised if Sprint Nextel comes out with a program of its own in the "unlimited" calling area. But nobody should expect Hesse to confine his initiatives there. At this point, rolling out its own unlimited-calling plan is nothing more than a tactical response to prevailing market conditions on the packaging front.

It isn't the sort of industry-transforming plan Digital One Rate was. But we also need to keep in mind that industry transformation was not what AT&T had in mind in launching Digital One Rate.

Watch out for the unintended consequences.

What if Sprint "Goes Nuclear"?

There now is speculation Sprint Nextel is considering an unlimited calling plan costing as little as $60 a month. Aside from disrupting nearly all pricing plans in the U.S. mobile business, one has to wonder what that does for wireless substitution and consumer VoIP as well.

If one can get unlimited calling for that sort of price point, most people who use mobiles and also live in single person, or households of unrelated people, are going to have huge incentives just to go "wireless only."

To the extent that consumer VoIP is mostly about cheap calling, mobile is going to be hugely competitive in a new way, in the event of "nuclear" conflict.

CLEC Precedent for VoIP Companies

Birch, a competitive local exchange carrier that declared bankruptcy twice, has been sold to Access Integrated Networks. The combined company is based in Atlanta, has about 400 employees and will have revenue of $200 million to $210 million a year. The combination is but the latest in a continuing wave of consolidation in the independent CLEC segment, which like most other parts of the telecom business requires scale.

In many ways the VoIP business already has taken a path similar to that pioneered earlier by the "CLEC" business. The CLEC business was lead, in terms of market share, by just two companies: AT&T and MCI. There were lots of independent CLECs, but most had fairly small market share and sales.

Both AT&T and MCI were absorbed into SBC Corp. and Verizon, respectively, leaving the CLEC industry essentially "headless" in terms of national regulatory clout.

The experience of VoIP providers is analogous in many ways. Though the business was pioneered by independents, as was the CLEC business, it now is "lead" by U.S. cable operators, who might be seen as the AT&T and Verizon to the rest of the small independents.

Cable companies have distinct regulatory interests distinct from those of independent VoIP providers, for the most part, and compete directly with VoIP providers in a commercial sense.

One might argue that the independent VoIP providers now also will start consolidating, for VoIP also is a scale business. And some of the more interesting pairing will be of business-focused VoIP providers with business-focused CLECs.

Mobile Price War Impact?

Though the impact might be quite overblown, at least some investment analysts think the recent adoption of unlimited calling plans by three of the four largest U.S. mobile providers is going to hammer their revenues.

Credit Suisse telecom analyst Christopher Larsen, for example, has reduced his rating on at&t, Verizon, Qwest and Sprint Nextel.

He worries that unlimited calling plans will trigger “a wireless price war.”

UBS telecom analyst John Hodulik thinks the potential impact will affect Verizon and at&t, at least at this point.

Hodulik says Sprint is likely to launch an unlimited voice plan in the next few weeks is considering pricing at $60-$80 a month. If Sprint gets traction, that logically would compel Verizon and at&t to reduce their prices to match.

I am not so sure about that. Each of the carriers might see some lost "overage" revenue from heavy users. But each should gain some customers who upgrade from lower-priced plans, as well as some customers upgrading because they are substituting wireless for wireline service.

It is possible higher subscription revenue will compensate for the loss of "overage" revenue.