Tracking Service Provider Capex

People who track telecom service provider capex are going to have to account for some likely shifts in the composition of that capital investment. For telcos providing IPTV, a significant percentage of ongoing capex is related to providing customers with relatively-costly in-home decoders. Comcast, which has built its business on the use of such terminals, is about as efficient as any provider can be, and gets the absolute best volume pricing on its gear. Yet it still devotes at least 18 percent of overall capex to the purchase of such boxes.

Telcos, who likely are not yet getting volume discounts as large as Comcast's may find as much as a fifth of their overall capex now devoted to customer premises equipment. That is going to shift thinking in the direction of variable CPE investment rather than the network transmission categories that traditionally have dominated spending. 

The other change is that IP-based gear in most cases costs less than legacy equivalents, so any given dollar of capex spending buys more capabilities than used to be the case. The clear implication is that less gross capex might be needed for any given unit of derived revenue. 

The other long-term change is that more of the value of capital comes from software investments rather than hardware. So telcos will be spending more capex on software, and less, proportionally, on hardware, or transmission hardware. More of the hardware spend is going to be premises based. 

One probably can see that in the case of Ethernet, DSL, video, telepresence or virtual private network services, for example. 

Where's the Competence?

Financial markets hate uncertainty. Right now, all we've got is massive uncertainty. Where's the governmental competence?

U.S. Tops Global List of Broadband Countries

If one measures the value of broadband not by simply "organizations that can buy broadband" (availability) or "homes buying broadband," (demand), but rather as a the ability a nation has to harness broadband to drive economic growth, the United States ranks first in the world, says Leonard Waverman, Fellow of the London Business School and Dean and Professor at the Haskayne School of Business at the University of Calgary. 

The United States has seen more clear-cut productivity gains than has Europe, and a major source of this U.S. productivity advantage is broadband usage by businesses that are not themselves producers and providers of broadband services, Waverman says. 

The concept of “useful connectivity” is based on the notion that the economic value generated by connectivity depends not just on conventional measures such as broadband lines or computers

connected, but also on who is using those lines—businesses or consumers—and how

well they are able to use the lines, says Waverman. 

"The notion of connectivity should be expanded to include also the complementary assets (software) and skills — embodied in people, governments and businesses — that determine just how productively the hardware and infrastructure are used.

"We use the term 'connectivity' to refer to the totality of interaction between a nation’s telecommunications infrastructure, hardware, software, networks, and users

of these networks, hardware and software," he notes.

Thus broadband lines, PCs, advanced corporate data networks and advanced use of wireless data services are certainly measures of connectivity, but so are human skills relevant to the usage of these

infrastructures, technologies and networks.

Consider the case of Korea, which has a very advanced fiber to the home capability. However, Korea is also a very heavily business-driven economy in that the levels of business investment and intermediate consumption  are very high compared to the level of consumption by the consumer sector.

On measures such as business spending on enterprise telephony and data services, Korea’s performance might be termed “lackluster,” Waverman says. By way of contrast, U.S. businesses are leaders in use of IP telephony and other broadband-based technologies, as well as the more subjective ability to use technologies as sources of business advantage, and drive innovation.

As with all such cross-nation "rankings," there is some element of subjectivity. Still, the point is well taken: broadband economic benefits cannot be measured by simple reliance on penetration or availability data. Human, cultural and institutional capital play a big role. 

Apple, Acer, Asus, Schumpeter

"Schumpeterian" times of "creative destruction" seem to be upon us. Note a recent ChangeWave poll on PC purchasing. You wouldn't be surprised to learn that Apple ranks number one in customer satisfaction. 

You might be shocked to learn that Asus and Acer rank second and third, above Sony. As satisfaction rankings are about value and price, something is going on here. 

Apple doesn't win because of its price. Asus and Acer play there, but I think something more profound is going on. 

Both firms have created a new value position in the market with their hot-selling netbooks. Prior to that, both firms had staked out positions in the value-priced notebook segment as well. But it is probably the netbook that will have the greatest implications for Asus and Acer over the next couple of years as each attempts to establish a retail brand. 

It isn't simply that their netbooks sell at retail for a bit less than $300. It also is that the value of a netbook might be higher than the notebooks it is intended to "complement or replace."

That's disruptive, at least for PC retailers. What isn't clear yet is whether netbooks will be disruptive in other ways. It is clear that lower-end PCs and higher-end mobile phones are heading for each other.  In fact, Acer already has unveiled a line of smart phones. 

Content, Distribution, Attention: What is King?

Many years ago, as a graduate student in managment, Herbert Simon was taught to us as a theorist with a lot to say about the way human beings in organizations behave. These days, he returns anew as a theorist whose work informs us about the logic of digital media. 

"What information consumes is rather obvious: it consumes the attention of its recipients," Simon once said. "Hence a wealth of information creates a poverty of attention, and a need to allocate that attention efficiently among the overabundance of information sources that might consume it."

In a world where so much content exists, the key problem now is "getting noticed." That tends to mean "distribution" is less important than in the past. Think of a past world with limited outlets for radio, TV or print content, so unlike our present world where there is almost no physical distribution barrier, while the true barriers essentially amount to affirmation by audiences. To use the overworked phrase, "users rule."

One doesn't sell, one invites. One doesn't push, one pulls.  "Attention" scarcity also puts a new perspective on the old debate about whether "content" or "distribution" is king of the value chain. "Both" or "neither" are equally good answers in a world of content abundance where the objective simply is "attention."

Across consumer markets, attention is becoming the scarcest, and so most strategically vital, resource in the value chain. Hence marketing now becomes both tougher, and more necessary, and more attention now is shifting to "inbound" rather than "outbound" marketing, pull rather than push. 

Since the business foundation for much of media is marketing, media are bound to change. So are lots of other things. If you think about it, Google's page ranking mechanisms continue to emphasize "linking," which is seen as a proxy for "attention." 

It's interesting how a theorist you once "met" in one context now seems so relevant in an entirely-different context. 

Use Enterprise Sales to Drive Consumer Web Apps?

It might sound counter-intuitive, but at some observers think Web-based software products not only can span enterprise and consumer user segments, but can leverage enterprise deployments to spur consumer penetration.  Some even think Web apps specifically seen as consumer tools can be sold directly to enterprises with little or no modification. 

That is roughly the reverse of what has tended to happen in recent years as the normal technology transmission belt has been inverted.  But the process would be something of a return to past adoption patterns, in roughly the same way that "software as a service" and cloud computing now "returns" us to an earlier era with some resemblance to a mainframe or centralized model of computing.

In the past, software and hardware innovations tended to be "discovered" in the universities then commercialized first in the enterprise buyer segment. Over time the price and feature set would be "de-tuned" for the mid-market, with adoption then spilling over into the small business market and then sometimes even in the consumer market. 

Now some observers say targeting the enterprise "edge" can stimulate buying in the broader consumer market. 

What is different, and might enable this to work, is that Web apps are much easier to adopt in an enterprise environment. Less customization is needed. Also, the user interface, designed for consumer use, tends to require less training, again reducing the hassle factor for adopting in an enterprise environment.

Volume Discounts Wrong for Social Software?

Volume-discount pricing structures are the norm in the computer and most other businesses. 

But Julien le Nestour, an adviser, investor, and manager at Schlumberger, argues that for some "products" such as social networking, value grows as users grow ("network effects"), making the value of an application with 70-percent use much more valuable than an application with 10-percent usage.

But under typical volume-pricing practices, buyers pay more for the less-efficient than for the highly-efficient "product." So pricing should invert. Discounts should be offered for low-penetration use, and rising prices for high-penetration use. 

If customers extract more value (higher returns) per user as the number of users increases, yet pay an ever-decreasing price per user (which is VD pricing), value and price have diverged.