Should Telcos Have Gotten into IPTV?

With the news from comScore that U.S. Internet users viewed 11.5 billion online videos in March 2008, a 13-percent gain versus February and a 64-percent gain from March 2007, it probably is inevitable that some observers will question the commitment telephone companies are making to multichannel video entertainment.

In March, 135 million Internet users spent an average of 204 minutes viewing online video. That represents more than 40 percent of the U.S. population. So given the clear trend to more consumption of "over the top" video, it is perhaps inevitable that a reexamination of the video business case should occur logical to some observers.

To put matters simply, some might argue that telcos should not have gotten into entertainment video, much less IPTV, at all.

As someone who has argued that most telcos will not make much profit--if any--directly from video services, but who nevertheless sees no way for telcos to avoid getting into the linear, multichannel video business, here's the rebuttal to the "over the top" video is the way to go argument.

One might--and executives have--similarly debated the wisdom of replacing copper access infrastructure with optical fiber access as well. And the logic is quite similar.

In the access services market, telcos and cable will for some time essentially trade market share. Cable will gain voice share while telcos gain video share. Those are huge markets and the revenue attached to them likewise is huge.

To really take significant share, telcos will have to replace the copper drops with some form of optical access, whatever the "last 100-feet" or "last 5,000 feet" technology happens to be. The decision is a strategic one; not driven by the sheer "return on investment" thesis for the one new service.

In its most-basic form, the argument is just this simple: fiber investments will allow telcos to take enough video share from cable operators to offset voice line losses. It's a strategic answer to one question: "do you want to be in business in 15 years?"

The argument for most telcos (AT&T and Verizon have enough scale to support a different business case) is simply that without fiber access, incumbent telcos will not be able to trade share effectively.

Fiber also creates the foundation for better competitiveness in the broadband access business as well, as speeds continue to increase. But again, that is an "invest to support a business I already have" argument, not an "invest to create a new business" logic.

So back to IPTV. Telcos could have chosen some other delivery platform than IP to support their initial multichannel video efforts. Verizon did. But Verizon also has an optical access network supporting three distinct wavelengths already. So devoting one wavelength for linear video just makes sense.

Other providers have decided that two wavelengths makes more sense (at least for the moment). In that case, on the assumption that an all-digital, all-IP platform is used, IPTV simply becomes one more IP application in a two-wavelength network.

Of course, "IPTV" can mean lots of things. In the sense we have been discussing it, it is just a transmission protocol. Over time, the "IP" platform is important for supporting interactive applications as well, but we are some distance away from the point where "interactive" television features represent material revenue opportunities.

The exception, of course, is targeted advertising. That arguably is a greater opportunity for cable operators than for telcos, at the moment.

Still, should telcos have avoided the fiber investments that make IPTV possible, or should they simply have plumbed for some way to monetize "over the top" video? That's an even less compelling argument.

The most-recent comScore found that 80 percent of online video viewers spent fewer than three minutes viewing video per day. Compare that to the average of more than four hours of U.S. daily TV viewing per person.

And usage is not the big issue. Usage does not necessarily mean revenue for a network access provider, even if it does represent an advertising or subscription opportunity for Web-based content packagers. One might argue that telcos could have invested in their own "over the top" content efforts, but that still rests on the assumption that big pipes exist to deliver that content.

Whatever telcos decide to do in the "over the top" area, they still could not have avoided investing in optical access for other reasons, primarily because virtually all of the new service or application revenues are based on broadband connectivity.

Given that imperative, the payback for optical access in the near term rests heavily on new linear video revenues.

The multichannel video business represents well over $100 billion in annual service provider revenues, exclusive of advertising revenue. All over the top providers together do not likely make more than several hundreds of millions in current revenue.

The other rationale for offering linear video is that the payback from optical access does not rest entirely on revenue gains. Part of the return comes from avoided customer churn and partly from reduced operating costs.

The argument that telcos should never have invested in linear multichannel video can be made. It just isn't clear the revenue upside supports the case. That doesn't mean over the top video isn't a growing opportunity of some type. It simply remains the case, however, that the amount of revenue all other emerging forms of video can generate pale before what is possible by taking some share of the existing $100 billion-plus multichannel video share.

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Mobile Data Market Segments

Aside from text messaging, which continues to grow, many observers would say that sales of PC cards are the second most important new mobile data revenue stream, increasing use of smart phone data plans notwithstanding.

Within the smart phone segment, "almost all of the evidence I've seen to date shows that the market is deeply divided into two groups," says Michael Mace, Rubicon Consulting principal.

When surveyed, most people in the United States and Europe say they will not pay anything extra for mobile device features other than voice and SMS, Mace argues.

"They'll use those features if you give them away for free, but as soon as you ask them to pay, about 65 percent of the population drops out," he says.

"Fortunately, the other 35 percent of the U.S. and European population is willing to pay extra for mobile data features," Mace says.

The issue is that at least four distinct market segments can be identified. There are PC card users, then three smart phone segments, including users focused on entertainment, communications and information. Different features are important to each user segment.

So there probably is no single device design that wins in all segments.

4G Initially is Cellular with More Bandwidth

I've learned over the years that when assessing trends, it's always safer to watch what people and organizations do, rather than what they say. Because people and organizations often say one thing and then do another.

Consider IPTV. It gets sold to investors on the value of enhanced applications. It gets bought by real-world consumers largely as a substitute for cable TV. IP telephony is touted for its enhanced features. It mostly gets bought as a substitute for plain old telephone service.

Now fourth generation networks are touted as a platform for machine-to-machine applications that will result in mobile penetration as high as 400 percent or more.

So watch what people spend their money on.

Sprint Nextel executives have been touting new machine-to-machine applications and mobile broadband, saying WiMAX will not simply be 3G with more bandwidth. WiMAX supporters, in fact, often talk about the "mobile Internet" as the way WiMAX will be different from 3G and upcoming LTE networks.

So it is instructive that Clearwire CEO Ben Wolff now is saying Clearwire will focus on "residential broadband, residential voice, mobile broadband and mobile voice" going forward.

Whatever may develop in the future, the near term business plan is fairly simple. Despite what its backers say, 4G networks are, in fact, simply going to take market share from other providers of existing services.

Is Tip Jar a Business Model?

Piper Jaffray analyst Gene Munster chatted with 20 Apple developers recently and found as many as 71 percent of new iPhone apps might be offered to users for free.

To be sure, people sometimes write apps for no reason other than the recognition. But is there a business model here?

One might ask whether the tip jar is a business model. For street musicians, it is, if not a terribly good business model.

So is the "freemium" model any better? " Should developers give away an app or service for free, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing and then offer premium priced value added services or an enhanced version of your service to your customer base? Lots of people have, and will continue to try.

The typical business model for a "freemium" approach is ad support for the "free" services and then subscriptions for the enhanced services. The eternal issue is perhaps how much to offer free and how much to offer for fee. And to the objection that users might be put off when advertising finally is possible, that's just a risk that must be taken. One has to create a user base before advertising is possible.

Of course, it is conceivable that most iPhone apps developers are working on are widgets of some sort. So it is entirely possible no direct business model is envisioned, other than reputation enhancement that ultimately could have some commercial benefit. We'll have to wait and see.

So far, subscriptions and advertising are the direct ways to create a business model. I suppose donations have to be included in the direct model as well. "Enhance your reputation so you can sell something else" is the leading indirect model.

2% Android Handset Penetration by December 2008?

Strategy Analytics analysts predict that Android, backed by an alliance of more than 30 mobile phone operators, handset makers, software firms and component manufacturers, will be installed on two per cent of smart phones by December 2008.

That might be an aggressive forecast. At mid-year, it is overstating matters to say even a trickle of devices even are being shown in prototype form.

British chipmaker ARM, for example, has unveiled a prototype mobile phone that will use the operating system Android, launched by Google in November 2007.

The prototype features a Web browser, map software, multimedia applications, text messaging, calendar functions, email and other mobile phone functions.

Designed, obviously, to rival Apple's iPhone, ARM's prototype uses Google as its Web browser home page, Google Mail as its email application, and Google Maps for navigation.

Although the Android project is at a relatively early stage, the first Android-based mobile phones are expected to be launched in the market later this year, reports the Telegraph.

It's hard to see how two percent penetration is possible with such a late launch, even considering the Christmas holiday push that might be possible.

59% Willing to Cut the Cord?

A new poll conducted by Los Angeles Business found 59 percent saying it was indeed an option.

The other 41 percent said that it was not an option, and might be considered "hard core" wireless substitution resisters.

That's not especially good news for providers of landline voice service, if respondents are at all serious.

Verizon Introducing Wireless-Broadband, Wireless-TV Bundles

Verizon Communications is introducing new dual-play packages based on wireless and broadband service, or wireless plus TV service. If a customer is eligible for FiOS TV, a triple play package can be built.

The Flex Double Play bundle will provide discounts ranging from $8 to $12 a month for those who combine a Verizon Wireless plan with broadband or FiOS TV. Adding FiOS TV, Verizon's cable-TV service, on top of wireless and broadband yields another $8 a month in savings.

The move is a step beyond the old requirement that customers buy a landline voice line to get the best price on a DSL service.

The discount applies to DSL service with downloads at 3 Mbps or 20 Mbps FiOS service.
The package is not available for the 7 Mbps DSL or the 50 Mbps FiOS services, though.