Markets Have Changed; Regulatory Tasks Must Follow, FCC Says

Predictably, the Federal Communications Commission's decision to remove some mandatory reporting by some leading telcos (AT&T, Verizon, Qwest, Frontier and Embarq) is seen by some public policy advocates as a blow to consumer welfare. Under new rules, and after a two-year phase-in, those carriers can stop reporting network reliability, customer satisfaction and infrastructure investment data. 

AT&T, Verizon and Qwest will continue to file price, revenue, and total cost information necessary to achieve the goals of price cap regulation, though. But the FCC argues that some data, used in a monopoly environment to monitor customer welfare, are not needed in competitive markets, especially when the rules are not applied universally, on cable operators, for example. 

Though one can disagree about the thesis that competition itself forces contestants to maintain and improve the quality of their offerings and the quality of their customer service, market forces arguably already have forced all contestants to ramp up the quality of their service. Consumers have choice, and are exercising their freedom to abandon providers and choose others. 

That is not to say markets now are perfectly competitive. Nor can one argue that markets always will remain robustly competitive. The outcome of competitive markets is that winners get stronger and losers go out of business. Over time, the inevitable logic of competition is therefore less competition. So the need for oversight does not disappear. 

But it does not make sense to burden competitors with reporting requirements that have real costs, when monopoly markets no longer exist, and the abuses that the rules originally were intended to prevent, are prevented by consumers with choice.

Reporting imposes real costs on businesses. Many smaller firms, with no market power, report that their annual reporting costs for Sarbanes-Oxley compliance alone cost between three quarters of a million and a million dollars a year. That isn't to say Sarbanes-Oxely was anything but a well-intentioned attempt to prevent abuses. Still, burdening companies with compliance costs is not an unalloyed good thing. It raises costs of doing business at a time when costs are a major concern in the communications business, precisely because of intense competition. 

U.S. Government Now on IPv6

Lots of entities, despite the inevitability, have incentives to drag their feet on a transition to Internet Protocol version six (IPv6) as long as possible, the simple reason being the need to replace virtually 100 percent of their existing router infrastructure. At the beginning of June 2008, all U.S. government networks were required to migrate to IPv6, however. 

Many observers have expected U.S. government conversion to prime the pump for U.S. adoption of the new standard, which provides virtually unlimited address space, compared to the IPv4 standard now in widespread use. 

Created by the Internet Engineering Task Force in 1998, IPv6 replaces IPv4, which supports 4.3 billion individually addressed devices on the network. Under a White House policy directive issued in August 2005, all federal agencies had to demonstrate the

ability to pass IPv6 packets across their backbone networks by the June 30 deadline.

It wouldn't be the first time the U.S. government has primed the pump for the Internet. Without the U.S. government, there might not have been an Internet, it can be argued. 

Ouch! "DSL is the New Dial Up"

Ouch! "We are starting to see DSL become the new dial up," say analysts at Strategy Analytics. "The telcos' core DSL offerings are unable to compete effectively with cable; they must step up their already frenetic fiber roll out to stay in the game, says Ben Piper, Strategy Analytics director.

That might be overstating the case, but there is no doubt that a dismal second quarter broadband access performance is very troubling for the major DSL providers in the U.S. market. It was not an easy quarter, by any means, but new broadband accounts have been decelerating for at least a year, as the market starts to saturate. 

Broadband access providers collectibvely added only one million net additional subscriptions in the second quarter, compared to over two million in the first quarter, says Piper.

"The dramatic downturn in the quarter is largely attributable to a slowdown of `new connects,' as well as consumer migration from DSL to cable," says John Lee, Strategy Analytics analyst. "As users become more accustomed to high speeds at the office or elsewhere, they are less willing to tolerate slow performance in the home."

If it turns out that is the case, it would be very bad news for the major telcos indeed. But I doubt that is the case. One doesn't typically see a major shift in demand (an order of magnitude shift) in a single quarter. That suggests to me something other than a demand shift has occurred. Marketing inattention, or inadquate attention to the value proposition seem more likely culprits. I could very well be quite wrong about this, of course. 

Maybe something I've never seen before has happened. Maybe a radical, sudden shift in end user demand has occurred. It just doesn't seem like the most-likely explanation, and I'll stick with Occam's Razor: "All other things being equal, the simplest solution is the best."

And the simplest solution is that marketing staffs took their eye off the ball. 

3 of 4 Presidential or VP Candidates Generate Twitter Traffic

It is a commonplace and probably largely accurate observation that younger users avail themselves of Twitter more than older users. Most people might therefore make the assumption that backers of Barack Obama twitter more than backers of John McCain. 

That probably is true as well. But if an analysis of Twitter messages during the recent Democratic and Republican conventions is correct, there must have been lots of younger viewers.

Except for when Joe Biden was speaking, John McCain, Sarah Palin and Barack Obama generated fairly high and comparable levels of activity, according to Twitter. 

That implies nothing about "support" or anything else, simply interest (or "outrage" or whatever you want to imply about what you think people were saying). 

Forecast Error is a Fact of Life

Having spent some time doing market research and making forecasts about how much money is going to be spent, on what, in the future, one learns humility. Sometimes forecasters underestimate a growth trend, but that is fairly rare. The biggest misses I can recall in my professional career were in the early days of the Internet, where I think it is fair to say nearly everybody underestimated growth, usage and revenue potential. 

These days we have the more-typical problem, which is overestimating growth. Most of the time, forecasters are wrong about the magnitude of change, even when the basic trend is correct. Sometimes we get the trend wrong, as well, but the big variances normally are on the "magnitude of change" dimension. 

There are lots of reasons for this apparent built-in bias. In economics, a discipline too few of us pay serious attention to, statements are formally or implicitly made "ceteris paribus" (all other things being equal). In the real world, almost nothing is every really going to remain equal. 

Forecasters cannot account for the timing of economic expansions and slowdowns, wars, oil shocks, technological or business breakthroughs and other exogenous variables that shape real-world trends. And as basic as our spreadsheets have become, we can't really model more than two dimensions of change. 

I have long suspected that there is another bias working, though. Some people fund and buy research because they really want to know what might, or will, happen. It tends to be my experience, though, that many research buyers spend money for other reasons. Sometimes a forecast is a useful way of "covering your ---" when a decision already has been made. 

Often, it is an argument for pursing one avenue of investment versus others that have competing stakeholders. In such cases, more robust numbers are better. The sets of stakeholders will look for validation that their approach offers the bigger financial return. 

In some cases, robust growth statistics are needed to attract or retain capital investments. Small number do not help in that case. I'm not saying numbers routinely are "cooked." But when a client clearly wants to hear good news, one always can make reasonable assumptions at the upper end of reasonable bounds, rather than the lowest or median reasonable assumptions.

The other issue is that most forecasts cannot take into account other competing demands on resources. A given product or service could reasonably be expected to grow at certain rates if it proves popular with buyers. What cannot typically be modeled is the impact of alternate products or services that real-world buyers spend money on. 

Appetites are infinite. Budgets are not. If all growth forecasts for all products and services are tallied at one time, the result typically is that projected demand that far outstrips reality. Not all the goods and services everyone models can be bought at the predicted levels because there isn't that much aggregate demand in the whole economy. 

About all one can say is that, providing these competing claimants for spending do not "suck up all the oxygen in the room," demand for a particular product, over a specific time frame, could reach certain levels.

It appears a garden variety "ceteris paribus" explanation is at work with Internet advertising forecasts that researchers now are suddenly revising in a lower direction. Without explaining why, researchers at SNL Kagan recently downgraded U.S. cable industry advertising growth rates for 2009, but then assume growth at the former rates after 2010. 

Likewise, JP Morgan analyst Imran Khan now sees domestic online display advertising growing only 14 percent to $8.2 billion in 2008 (compared with his prior forecast of 20 percent growth to $8.6 billion), and growing 16 percent to $10 billion in 2009. Search ad spending also will grow at a slower 27 percent rate, down from an originally forecast 32 percent. International online ad-spending rates also have been similarly lowered.

Nobody can adequately incorporate macroeconomic variables, or demand shifts, into forecasts. Should forecasters permanently lower uptake expectations? No. The shift will continue, away from legacy formats and towards "targeted" and quantifiable online subsitututes. But one cannot adequately take into account unplanned real-world events, especially of the growth-stunting sort. It's simply a hazard of the business.

What is Google, These Days?

Sometimes there is no good way to describe a company except by long clumsy strings of words. How does one discriminate between service providers who own facilities from those who do not; who own different kinds or amounts of facilities; who operate in different customer segments. Worse, how does one describe companies whose business ambitions and scope defy simple explanation, or operate in multiple categories, some of which do not seem to have widely-understood names, yet?

In other cases, shorter tags can be used, but are imprecise. Gvien that all the growth in the cable TV business is in voice and data, plus small business and even, in some cases, in enterprise services, does calling them "cable" companies, referrring to their use of physical access media, or "cable TV" companies, referring to their legacy business, make sense?

Google causes us those sorts of problems. Journalists and bloggers often use shorthand such as "search giant." But Google already operates in more important segments and businesses than that. Now it's into browsers, cloud computing infrastructure, mobile phone operating systems, advertising placement systems, video, wikis, email, blogging, software as a service, messaging and other applications including collaboration. 

It's part media company, part advertising services provider, part software company, part computing utility. And to say it is a "software" company belies the customer segments and types of software it creates. If you are somebody who thinks the most-valuable asset is knowledge about what people are doing--right now--and what they are interested in, that's one way of describing what Google does, in its totality. It creates software for people to use at least partly to create knowledge about what they do, who they know and what they are doing now. 

That then creates the ad-based revenue streams that so far have been the foundation for its business model. So in a broad sense, Google creates software people really like to harvest the analytics and monetize that capability. But that's hard to capture in a simple adjective. Harder still is to figure out what Google is, so the search for an appropriate adjective can begin. 

iPhone Shopper Demographics Changing

There is no doubt that Apple iPhone users are atypical of most mobile phone users. They are younger, more technologically savvy and richer. In July 2008, people checking out the iPhone on AT&T's Web site were about 40 percent more likely to have an income of $100,000 or more, compared to the typical wireless shopper. 

At annual income levels below $59,000, iPhone shoppers were about 25 percent less likely to be looking. In the $60,000 to $100,000 annual income bracket, iPhone inquires were just about the same as the "average" mobile phone inquirer.

That suggests the next big surge of usage will be concentrated in the ranks of users with incomes in that $60,000 to $100,000 range. It is not yet a truly "mass market" device, yet. But there are some signs of change.