Enterprise Users Get their iPhone

Starting in June, Apple iPhones will be able to receive push email, calendar and contact information from Microsoft Corp.'s Exchange server. Apple has licensed Exchange ActiveSync from Microsoft and is building it right into the iPhone, so that iPhone will connect out-of-the-box to Microsoft Exchange Servers 2003 and 2007 for secure over-the-air push email, contacts, calendars and global address lists.

The iPhone 2.0 software provides a configuration utility that allows IT administrators to easily and quickly set up many iPhones, including password policies, VPN setting, installing certificates, email server settings and more.

Once the configuration is defined it can be easily and securely delivered via web link or email to the user. To install, all the user has to do is authenticate with a user ID or password, download the configuration and tap install. Once installed, the user will have access to all their corporate IT services.

Built-in Exchange ActiveSync support also enables security features such as remote wipe, password policies and auto-discovery.

The iPhone 2.0 software supports Cisco IPsec VPN to ensure the highest level of IP-based encryption, as well as the ability to authenticate using digital certificates or password-based, multi-factor authentication.

The addition of WPA2 Enterprise with 802.1x authentication enables enterprise customers to deploy iPhone and iPod touch with the latest standards for protection of Wi-Fi networks.

Those are features most enterprise information technology managers require before a device is approved for widespread use, and represent a huge potential opportunity for Apple to penetrate enterprise accounts.

Some even think the iPhone is about to become an envied thing: a "platform."

“Think about it," says venture capitalist John Doerr, who has launched a $100 million fund to back iPhone-related application companies. "In your pocket, you have something that's broadband and connected all the time. It's personal. It knows who you are and where you are. That's a big deal. A really big deal. It's bigger than the personal computer."

Why the Line Loss Pattern?

The top four incumbent telcos in the U.S. market, AT&T, Verizon, Qwest and Embarq, will lose around 2.3 to 2.6 million local access lines per quarter, according to IP Democracy.

These four service providers lost a combined 2.53 million local access lines during the fourth quarter of 2007, compared to 2.55 million in the third quarter, 2.64 million in the second quarter, 2.28 million in the first quarter. So the question is, why the steady pattern?

The consistent rate of loss might suggest a couple of things. Some share is shifting to cable voice providers, but the losses tend now to follow a pattern. When a new area is opened to marketing, the biggest losses occur in the first couple of quarters, and then some sort of "normalcy" occurs. That will tend to produce a linear rate of change, rather than a disruptive rate, over time.

And since the largest operators are now well into their deployment patterns, we probably are past the stage where a large amount of share shifts rapidly.

The other major sources of loss are fairly steady as well. There's some intentional churn caused by telcos shifting dial-up customers to broadband, which often means an access line is lost. But again, we are past the peak surge in broadband net additions. Every year, another couple of million dial-up accounts switch to broadband. But again, the rate of change is relatively stable.

Wireless substitution also continues, but that sort of line loss has never shown any "spikey" pattern. Some percentage of users simply decide, every quarter, to go wireless only, but with no noticeable change in attrition rate.

The other issue is that consumer customers once served by competitive providers are slowly churning back to the incumbents. So as competitive inroads are made on one hand, lines are being won back on the other.

On the other hand, telcos themselves increasingly are venturing out of region, and typically are competing for business lines. Rates of change are bounded by the size of sales forces, the rate at which existing contracts come up for renewal, the aging of phone equipment and other "change" factors that are fairly predictable.

In any given year, only a percentage of contracts are up for renewal; only a percentage of phone systems; only a percentage of new businesses or locations launched or closed.

Also, consumer VoIP adoption rates are flattening as well, again showing a sort of linear pattern, and contributing to the linear loss rate for legacy access lines.

The other thing is that incumbents, as a matter of policy, are not yet at the point where they are willing to make massive changes in pricing, technology or packaging to match VoIP competitors. What that means is that, as a matter of deliberate policy, executives will let the losses continue, at a controllable rate, until the point where it makes more business sense to respond with competitive efforts.

Nor have the largest carriers, for the most part, gone out of their way to emphasize wireless substitution. Quite to the contrary, bundling has provided incentives to keep a landline at very small incremental cost.

This might now begin to change a bit, with the advent of unlimited calling plans. Sprint or T-Mobile, who have no access lines to lose, might be expected to emphasize wireless substitution a bit more.

For some users, such plans create a new buying context. Assume a user with a landline and a wireless plan, plus a text messaging plan that collectively costs about $100 a month, living alone or in housing with unrelated people. That user now can spend about the same amount of money as at present, and shift all traffic to one device, with unlimited texting in some cases. If a Sprint plan is bought, the user will get unlimited Web browsing, music and video services as well.

The other thing is that consumer access lines, as opposed to business lines, are a lesser percentage of overall revenue than used to be the case. Major telcos fairly rapidly are getting to the point where consumer voice revenue is less important every year.

And since the foundation service for the future is a broadband access line, that is where telcos can be expected to fight hard for every point of share.

Maybe there are other explanations as well. But the gradual, steady erosion is not different from the pattern we saw with long distance revenue, which declined at a fairly steady rate for years.

Cincinnati Bell Eyes Expansion

Cincinnati Bell is looking at out-of-territory expansion, possibly in Indiana and likely in Indianapolis, should that prove to be the case. The possible expansion mirrors a trend most incumbent telephone companies now face: growth is a tall order in their traditional service areas, and most are seeing out-of-territory moves as the surest way to gain new customers and revenues.

The implication is that, over time, the percentage of revenue from business customers will increase, as a percentage of total, as such expansions almost always are aimed at business customers.

CEO Jack Cassidy says that while Cincinnati Bell’s incumbent local exchange carrier operations are showing flat revenue and falling voice line counts, the picture was different in its out-of-region operations.

That operation, which now includes the northeastern suburbs of Cincinnati as well as parts of Dayton and eastern Indiana, saw revenue jump 45 percent year-over-year from $6.6 million in the fourth quarter 2006 to $9.6 million. And access lines actually grew, from 50,000 lines in the fourth quarter 2006 to 62,000 at the end of the fourth quarter 2007.

Likewise, the DSL customer base grew from 4,000 at the end of 2006 to 9,000 at the end of 2007. Inside its tradtional territory, Cincinnati Bell lost 7.7 percent of its access lines and also sees slowing DSL growth.

That strategy holds for larger service providers as well, ranging from European telcos and wireless providers to smaller U.S. telcos such as SureWest Communications, to independent U.S. CLECs such as Paetec and metro access providers such as Zayo Bandwidth that continue to amass bigger footprints.

Teens Abanding CD Format

The amount of music that consumers acquired in the U.S. increased by six percent in 2007, say researchers at the NPD Group. But there are key format changes. Legal downloads now account for 10 percent of the music acquired in the US. market.

At the same time, there was a continued decline in CD sales, which resulted in a net 10 percent decline in music spending from $44 to $40 per capita among Internet users.

NPD estimates that one million consumers dropped out of the CD buyer market in 2007, a flight led by younger consumers. In fact, 48 percent of U.S. teens did not purchase a single CD in 2007, compared to 38 percent in 2006.

The percent of the Internet population in the U.S. who engaged in peer-to-peer file sharing reached a plateau of 19 percent last year; however the number of files each user downloaded increased, and P2P music sharing continued to grow aggressively among teens.

Twenty-nine million consumers acquired digital music legally using pay-to-download sites last year, an increase of five million over the previous year.

But note: sales growth was driven by consumers between the ages of 36 and 50, reflecting an aggressive adoption rate of digital music-players by users in this age bracket in 2007.

Reflecting the growth in that sector of the market, Apple’s iTunes Music Store became the second-largest music retailer in the U.S. after Wal-Mart, based on the amount of music sold during 2007 (based on a 12-track CD equivalency for music track downloads).

Consumer Spending Still Dropping

ChangeWave's latest consumer survey shows a continued deterioration in U.S. consumer spending trends with no signs yet of any bottom.

The February 18-25 survey of 3,773 consumers focused on spending patterns going forward.

Nearly 39 percent say they'll spend less over the next 90 days than they did a year ago.

Sprint to Spin off Nextel?

The Notable Calls blog reports a "curious" rumor that Sprint Nextel Corp. has hired Morgan Stanley and initiated director Ralph V. Whitworth's plan to spin-off Nextel, with a formal announcement possibly coming in two to four weeks. Some undoubtedly will say this is a mistake.

Others, including me, will argue that if the choice is to ditch Nextel or the Xohm WiMAX network, Nextel has to go. Sprint already has taken the hit and essentially written off the entire value of the Nextel acquisition.

If it spins off Nextel, Sprint reduces the complexity of running two separate networks, with two sets of consumer devices and support operations to support, as it builds yet a third network.

Once upon a time Nextel boasted the highed average revenue per user in the business. That isn't much of an argument these days as the ARPU difference now has narrowed almost to the point of insignificance.

True, Nextel's customer base always was weighted more heavily towards business users, which is valuable, but Sprint's churn problems are disproportionately related to Nextel, these days. In the right hands, with a management unburdened by the other distractions Sprint has, something can be done about Nextel.

But it won't be easy. Nextel is the only carrier running the iDEN air interface, and Motorola is a key handset supplier. The former issue means handset scale isn't going to be there, so device costs won't be easy to manage. And Motorola itself wants to get out of the handset business, but so far seems to be finding few takers.

Potential WiMAX suppliers, on the other hand, are potentially much larger, and Google is among the firms active in supporting Sprint's Xohm initiative. Sprint already has taken the accounting charge related to the Nextel acquisition.

Spinning Nextel off also will simplify the previously-announced plan to finally consolidate headquarters operations in Kansas City, instead of maintaining two separate headquarters operations, one in Reston, Va. and one in Kansas City.

It's only a rumor at this point. But Sprint has to take drastic steps. It cannot incrementally creep back to health.

Blockbuster, Netflix, Movie Gallery: Diverging Paths

On-demand video will be a bigger part of overall television and movie viewing, no doubt. But that hasn't--so far--prevented Netflix from growing. In fact, Netflix recently raised its guidance for 2008 sales. The same can't be said for the retail store format, a business that awaits either reinvention or extinction.

For the first quarter, Netflix now sees revenues of $324 million to $328 million, up from $323 million to $328 million, with net income of $10 million to $14 million, up from $9 million to $14 million and ending subscribers of 8.16 million to 8.26 million, up from 7.85 million to 8.05 million.

For the full year, the company now sees revenues of $1.345 billion to $1.385 billion, up from $1.3 billion to $1.35 billion.

Netflix also sees year subs of 8.9 million to 9.5 million, up from 8.4 million to 8.9 million.

Blockbuster and Movie Gallery, it almost goes without saying, still face issues with their retail store formats. In its most recent quarter, Blockbuster DVD rentals continued to grow in global markets, though domestic U.S. sales fell slightly. Movie Gallery is operating under Chapter 11 bankruptcy protection.

Blockbuster worldwide same-store and by-mail revenues increased 7.4 percent from the same period last year. Domestic same-store revenues, excluding by-mail subscription revenues, decreased 0.9 percent, an improvement from fourth quarter 2006 performance, but not keeping pace with Netflix.

Movie Gallery, which owns the Hollywood Video chain, also is shuttering some 920 stores our of 4,491 existing stores located in all 50 U.S. states and Canada. Movie Gallery's May 2007 quarterly report, the most recent, showed declining sales.

Ultimately, the video distribution business will learn what other retailers have learned. There still is some element of "physical browsing" that provides value to consumer. If not, nobody would go to shopping malls or other retail outlets.

What requires some thought is whether a physical browsing capability still adds value, beyond the value of online recommendations and order fulfillment. Retail kiosks are a partial answer to distribution. So far, kiosks don't seem to replace the retail browsing experience.