FTTH is inevitable

No matter what posturing now occurs, cable operators and at&t someday will switch access platforms and adopt fiber-to-home as the standard wired access approach. For the sake of pleasing investors, who seem to hate investments in FTTH that are the only long-term hope for any wired access provider, lots of companies insist they do not presently need to do so, and they arguably are correct.

Other small independent providers in very-rural areas likewise will insist they cannot afford FTTH. That ultimately will be resolved either by new forms of rural or high-cost area subsidies, or by some new hybrid delivery platform using fixed wireless as the tail circuit.

None of that is relevant. Demand continues to increase, and at some point, the only sane choice for a fixed network that has to deliver a minimum of 100 Mbps worth of data bandwidth, not to mention video, is FTTH.

We might be four to eight years away from that point. The precise timing, though, isn't so important. No matter what executives may now believe, they ultimately will have to scrap hybrid fiber coax and fiber to the node, for competitive reasons. When wireless broadband starts to offer anything close to that sort of bandwidth, no wired network is going to be able to avoid upgrading.

That doesn't mean it is sound business practice to deploy platforms of such bandwidth today, in the mass market. The ramp up frankly is best handled on a gradual basis, as local competitive conditions dictate, to conserve capital for a time when the move is unavoidable, under conditions where there is little incremental revenue to be gotten.

But that won't always be the case. One way or another, service providers are going to discover and then create funding mechanisms that make FTTH a rational choice. Just because we can't predict in precise detail what those mechanisms will be is not the issue. Neither could cable industry executives have rationally explained in detail what all the new demand for video choices would be if capacity were upgraded.

Nor could wireless executives, 10 years ago, have presented a clear and compelling line of argument about why text messaging, email or ringtones or music would be generating significant or growing amounts of revenue.

Though there now is an investor revulsion to financing "build it and they will come schemes," in fact that precisely is the history of innovation in the communications and entertainment business. When given choices, developers have responded and consumers have bought.

That doesn't mean every new application, or even most, are going to succeed in the mass market. The point is that we never are very good at figuring out what developers will dream up, and what consumers will flock to.

It is clear that supply creates its own demand, ultimately.

Nearly-Ubiquitous Broadband

Nearly 33 million US households will have broadband services with speeds of 10 Mbps or higher by 2012, up from 5.7 million at the end of 2007, according to Parks Associates. That's not the most important prediction, though.

Parks Associates also forecasts that 32.5 million U.S. consumers will have at least 10 Mbps broadband access service by 2012. Even that is not the most important prediction Parks makes.

No, the most significant prediction is that 75 percent of U.S. households will subscribe to broadband services by 2012. And that is significant because it will make broadband a fundamental service purchased by U.S. households, on the order of cable TV or the place once held by wired voice services.

It is worth noting that very few services ever have reached that level of penetration. Cable TV, mobile phones and wired phones alone could have claimed such distinction. By 2012, if Parks Associates is correct, only for the fourth time in history will any service have achieved such near-ubiquitous penetration.

Some day, and probably not by 2012, we might be able to make a similar claim about wireless broadband as well. For the moment, though, it is noteworthy that broadband seems destined to reach such broad penetration. Lots of services exist, or have existed, without ever getting nearly universal acceptance.

Compared to that level of acceptance, the subsidiary question--how fast is fast enough--while not trivial, is not fundamental. Access speeds have been increasing on a fairly steady basis, much as storage capacity on PCs, mobile devices and other devices has been increasing, and much as cable TV or satellite networks steadily have increased capacity and channels over time.

The average download speed of a US broadband connection is currently 3.8 Mbps, while the average upload speed is 980 Kbps, according to In-Stat researchers. But there was a time when a typical cable TV network delivered just three channels. Then capacity went to 12 channels; then to 25; 40; 60; then 66; then more than 80; then 115; then, with digital, hundreds of channels. Ad-free formats, then pay-per-view, then on-demand programming developed. Music services also were introduced in the 1980s, though not to notable success.

Over time, mobile services have added text, Web access, email, audio and video services. And there have been continual improvements on the value side as well, as costs for calling have dropped dramatically. Even legacy wired voice services have been upgraded in important ways.

Party lines were replaced by private lines, and enhanced services expanded particularly when digital switches were substituted for analog switches. Now, using VoIP, all sorts of enhancements beyond what are known as CLASS features are possible.

The point is that penetration matters. Given high penetration, continual evolution of features and value almost are inevitable.

Growing Business Social Networking

A fair number of enterprise and business users already are making use of online-based collaboration tools, says Compass Intelligence. This table shows the percentage of respondents in a recent 351-respondent survey that say they now are using one or more online collaboration tools for business in February 2008.

Respondents were most likely to say that they were not currently using these capabilities, as one possibly would suspect. But most say they are interested in using them for business purposes, if their company offered it to them.

For the time being it seems professionals are using online collaboration tools without the explicit blessing of their IT staffs.

In other words, millions of professionals and other knowledge workers that want to connect, interact and transact using business-based social Web tools.

IDT: A Company in Transition

"IDT is a company in transition," says IDT Corp. CEO Jim Courter. No kidding. Basically, IDT is harvesting the cash flow from its declining U.S. calling card business and consumer phone services division and investing in a somewhat bewildering collection of other businesses.

In fact, IDT Corporation now describes itself multinational holding company. IDT Telecom, the original company business, represents most of IDT's revenue. IDT Telecom sells prepaid and rechargeable calling cards, offers consumer local and long distance service, prepaid wireless phone services and wholesale carrier services.

IDT Energy, which operates an energy services company in New York State. IDT Carmel is a receivables portfolio management and collection businesses.

American Shale Oil Corporation is in the U.S. oil shale business.

IDT Local Media includes CTM Brochure Display, a brochure distribution company and the WMET-AM radio station in the Washington D.C. metropolitan area.

IDT Internet Mobile Group is a new media content distribution company. It includes Zedge, a Web site and platform to produce and distribute mobile content. IDW is a comics, graphic novel, and children's book publisher.

IDT Spectrum holds a significant number of Federal Communications Commission licenses for commercial fixed wireless spectrum in the United States. IDT Global Israel is a call center operation.

"IDT is in a metamorphic stage de-emphasizing some of our historical operations and investing in new businesses that if successful can greatly enhance long-term shareholder value," adds CFO Steve Brown.

At the moment, IDT is harvesting cash from its declining communications business by slashing costs at a faster rate than revenue is dropping. Compared to a year ago, costs are coming down faster than revenue is dropping.

"Gross costs per minute were down 13.7 percent in the second quarter compared with the year ago, while revenue per minute fell only 8.5 percent, a spread of over five percent, says Brown.

In its most-recent quarter, IDT Corp. revenues were $476.7 million, down seven percent year-over-year. The quarterly loss of $62.5 million was significantly higher than the net loss of $27 million one year ago.

About $386 million was generated from IDT's wholesale, prepaid and retail calling businesses.

Verizon Expands 7 Mbps DSL Service

Verizon now has activated 7 Mbps DSL service in 12 Eastern states and the District of Columbia.

The new service more than doubles the speed of Verizon's current fastest offer and costs as little as $39.99 a month when ordered with an annual service plan.

Customers in Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia, Washington, D.C., and West Virginia can get the higher speeds now.

Verizon expects the 7 Mbps service to be available to more than two million homes and small businesses in 22 states and the District of Columbia by the end of 2008.

In a bit to provide more value as well, Verizon offers an optional security suite; 4 gigabytes of online email storage; and premium tech support for routers, network cards, video cards, sound cards, CD/DVD reader-writer, hard drives, flash memory systems, printers, scanners, gaming consoles and firewalls.

Verizon also offers entertainment services from Disney Connection, as well as a 24-hour news and information channel, ABC News Now; ESPN360 and NFL Network Game Extra.

The move positions Verizon in the "sweet spot" for consumer bandwidth consumption, at least if forecasts by analysts at Ovum are correct.

Mobile Data Networks Face New Strain

Jonathan Christensen eBay Skype division general manager, says “the phone is dead," arguing that VoIP over mobiles will accelerate the trend. Agree or disagree, mobile network operators,will face issues other than loss of lucrative long distance calling revenues and bandwidth consumption, as the "VoIP over mobile" trend gathers speed.

As it turns out, says Mike Schabel, Alcatel-Lucent general manager, bandwidth consumption isn't the only problem mobile networks face, and in some ways may not be the key problem posed by IP applications.

Consider Session Initiation Protocol. As SIP applications start to represent more of any mobile user’s total usage, the problems become evident. Ignoring for a moment the revenue implications, SIP-based applications present previously-unacknowledged issues. The reason is that although SIP-based voice and communications are not a terribly big consumer of bandwidth, they are a huge consumer of radio network signaling resources. And it is radio network contention that is the gating problem, in some ways, not bandwidth consumption.

Where a typical user might place most of the bandwidth load on the radio network by using Web browsing, P2P and WAP applications (and where SIP bandwidth is negligible), the signaling load is highly disproportionate.

Where HTTP use might represent 44 percent of total bandwidth use, and consume 1.3 hours of airtime, while imposing 240 signaling events, a SIP application might chew up 3.9 hours of airtime and 2,240 signaling events despite using just 0.02 percent of total bandwidth.

Likewise, a VPN connection might represent just 2.4 percent of bandwidth consumed, but represent 20.75 hours of airtime, while imposing 5,970 signaling events.

So the problem for a mobile network provider is not simply a cannibalization of current revenue, but dramatically-more-intense pressure on the radio access network. And the issue isn't bandwidth: it is signaling overhead that chews up radio network element capacity, even when bandwidth is hardly used.

Necessity Drives Strategy at Qwest, Other Firms

Service provider strategy sometimes is dictated by necessity, and to the extent that service providers large and small now face different "necessities," there is an increasing divergence in strategy. Over time, in other words, service providers will "look" different from each other where in the past they all had resembled each other to a striking degree.

Consider Qwest, one of the three former "Baby Bells." Qwest always had a customer geography significantly more rural than the other original seven Bell Operating Companies. But when SBC gobbled up Telesis, Ameritech, AT&T and BellSouth to form at&t; while Verizon was formed from the former Bell Atlantic, NYNEX, GTE and MCI, the differences grew.

Both at&t and Verizon have the leading mobile assets and much-larger scale than any other contestants in the marketplace. Qwest is far smaller, does not own a national wireless network and faces much-larger challenges in the fiber-to-customer area because of lower density serving areas.

So where a triple play offered over owned facilities strategy makes sense for Verizon and at&t, for Qwest it does not. Qwest simply doesn't have the customer volume, density or access to capital that strategy would require. Unlike the other former Baby Bells, Qwest's fiber-to-customer strategy is not anchored by video services, but strictly by broadband data services.

Lacking a mobile network, Qwest originally tried offering services under its own brand, as a mobile virtual network operator. But it now has decided that approach has drawbacks, including some handset limitations, financial returns limited by low volume and, arguably, the lack of a popular "brand name" in wireless.

Qwest also has to maintain a balance between capital investment and shareholder return issues, such as reducing debt load, buying back shares and supporting the payment of dividends.

So Qwest's strategy will embrace partnerships in areas such as video and wireless, in ways that Verizon and at&t will not. In the process of revising its mobile strategy, Qwest also says it will rely on DirecTV for the video services component of its offerings. And where video services will be a key part of the payback for FiOS and LightSpeed, Qwest expects to get its payback strictly from new broadband services.

That's going to necessitate high penetration and new services as well. By 2011 Qwest plans to increase its broadband penetration from 23 percent to 40 percent.

Qwest will "look different" in its strategy because it has to. It doesn't have the scale or resources to become a smaller version of at&t or Verizon. Consider that at&t books about $39 billion annually while Verizon books $24 billion annually.

Qwest books about $13.8 billion a year in annual revenue. Neither does Qwest closely resemble the middle tier of independent telcos, either. Embarq, for example, books about $6.4 billion in annual revenue. Windstream books about $3.3 billion annually. But most independent telcos are far smaller than that, booking millions to hundreds of millions worth of revenue each year.

What makes Qwest different from the mid-tier of telcos such as Windstream and Embarq is that Qwest operates global backbone networks that can feed a more-robust enterprise business. The other providers might more logically be called regional "local" providers. Some competitive local exchange carriers also have a "national local" character, the difference being that such firms generally only serve the business customer segments.

In many ways, the interesting strategic paths will be among the smaller telcos rather than the tier one providers. Very-small independents typically are very interested in offering IPTV services. The middle tier of companies generally are not. The middle tier of companies may have brighter prospects in business customer segments. Very-small providers typically will not. Very-small telcos may not find out-of-region operations too compelling. The middle tier, at some point, virtually has to look at footprint expansion.

Since strategy is the result of multiple background, financial and management factors, we can expect that some of the more-differentiated approaches will be taken by those providers who are particularly challenged in some way. Inability to create the triple play or quadruple play strategy; geographic or demographic limitations or sheer borrowing power will force some managements to strike out on atypical paths from that generally seen as the tier one global provider approach.