Smart Phone Sales Soar, Feature Phones Narrow Gap

Feature phone sales fell five percentage points to 72 percent of new handset sales in the second quarter of 2009, while sales of new smartphones reached 28 percent of overall consumer purchases, a 47 percent increase in the category’s share since last year, according to The NPD Group.

Lower prices appear to be the reason. “Despite their ties to pricey data plans, the rich Internet access capabilities of smart phones are attracting consumers wooed by lower device prices,” says Ross Rubin, NPD Group director of industry analysis.

Overall handset sales volume in the U.S. grew 14 percent year over year in the second quarter, as sales revenue increased 18 percent.

The average selling price of all mobile phones increased four percent year over year, reaching $87.

Wi-Fi capability increased three-fold since last year, with 20 percent of all new handsets equipped with this capability. Touch screens on both feature phones and smartphones grew to 26 percent of all new handsets purchased in the quarter.

QWERTY keyboards were available in 35 percent of handsets sold.

In some ways, the differences between feature phones and smart phones are decreasing, NPD Group says.

“Feature phones are taking on more of the physical characteristics of smartphones, and often offer greater exposure to carrier services,” Rubin says. “Although their user interfaces continue to improve, the depth of their applications generally lags behind those of smartphones. With the price gap between smartphones and feature phones narrowing, to remain competitive feature phones need to develop a better Web experience, drive utility via widgets, and sidestep the applications arms race.”

VoIP Pioneer Elon Ganor Starts New Firm

Former VocalTec CEO Elon Ganor has started a new company, Nucleix, in the life sciences area. You might say it is a case of an entrepreneur doing wht entrepreneurs do: start new companies.

Though anecdotal, you might also conclude something else: venture capital is looking at life sciences more than VoIP, and entrepreneurs are responding to what they see as higher-growth, more-lucrative fields.

It's anecdotal, but possibly telling. Lots of others are focusing on micro-blogging or wireless, especially mobility applications.

Rural Broadband Penetration Close to 100% of Internet Users?

Use of broadbnd in rural areas now is close to 100 percent of Internet users, new data from comScore suggests. In 2007 the U.S. Department of Agriculture Economic Research Service estimated that 63 percent of all rural households had at least one member access the Internet.

If rural broadband penetration now is up to 75 percent, as comScore indicates, that would imply that Internet usage is at least that high, allowing for some households that continue to use dial-up access.

That would seem to have implications both for setting of national broadband policy and policy in rural areas. For starters, the new data suggest that rural broadband is growing robustly, without any additional government activity.

Some might argue that broadband usage remains lower in rural areas than in metro areas, and that remains true. Metro broadband penetration is at 89 percent. But virtually every study has shown that Internet usage also is lower in rural areas.

Broadband pentration in U.S. rural areas increased 16 percent from 2007 to 2009, while metro area broadband penetration grew 11 percent, according to comScore.

In part, that is because rural markets have more room to grow. The analogy is wireless voice growth, which is highest in places such as India, China and Africa, where penetration is lowest.

“With low-speed DSL priced at about the same level as dial-up in many areas, there is little incentive for households to remain on dial-up,” says Brian urutka, comScore VP.

Rural markets with a population less than 10,000 grew broadband penetration by 16 percentage points. Areas with population between 10,000-50,000 grew penetration 14 percentage points while metropolitan areas with populations of 50,000 or more grew penetration by 11 percentage points.

Critics sometimes say that even if access is not a problem, access speeds are, and that is an argument that makes more sense. The issue there, though, quite often is the "middle mile" trunking between major points of presence and the actual rural communities.

Basically, the problem is not the Internet backbones, and not even so much the local access networks, as it is the trunking network to backhaul traffic to the Internet PoPs. Many rural ISPs find, for example, that they have access to a T1 or two T1s in the middle milde. That makes it tough to deliver faster broadband access to customers on the local access networks, for obvious reasons.

The Internet backbone is a firehouse. So are the access networks, for the most part. But the middle mile is a straw.

That isn't to say there are no communities or isolated locations without broadband access availability from at least one terrestrial provider, and two satellite providers. It is to point out that the "problems" often have more to do with trunking facilities than local access, and that any gaps between urban and rural use of the Internet and broadband are rapidly closing.

Cost to Acquire, Sustain, Retain Customers Rising, Execs Say

There is fairly broad agreement among chief marketing officers at global telco, cable, wireless, satellite, Internet service provider and long distance carrier firms that competition is having a huge effect on customer retention, acquisition and broad company strategies, primarily affecting product pricing and customer retention.

Over 84 percent of respondents to a survey conducted by the CMO Council report increases in the cost of acquiring and sustaining customer relationships and, not surprisingly, 63 percent are seeing higher rates of customer churn and attrition.

The new global study by the Customer Experience Board of the Chief Marketing Officer Council also shows that price competition, for example, now is a chief issue. According to 55 percent of respondents, emerging competitors and market disrupters are undercutting or discounting prices, with an additional 37 percent indicating these contenders often target the most lucrative customers.

So there's a new focus on customer experience, as satisfying and retaining current customers is three to 10 times cheaper than acquiring new customers, and a typical company receives around 65 percent of its business from existing customers.

A five percent reduction in the customer defection rate can increase profits by 25 to 80

percent, McKinsey analysts say.

Also, seven out of 10 customers who switch to a competitor do so because of poor

service, McKinsey says. And the small number of customers a firm normally hears from are typically just the tip of the iceberg.

A typical business only hears from four percent of its dissatisfi ed customers, while the other 96

percent leave quietly. Of that 96 percent, 68 percent never reveal their dissatisfaction

because they perceive an attitude of indiff erence in the owner, manager or employee, researchers at the University of Pennsylvania.

In a more-crowded and competitive environment, 56 percent of respondents also say they are finding the task of creating brand preference more difficult. In fact, creating a differentiated presence in the marketplace was seen as the top challenge, overall.

But 55 percent of respondents also say the need for innovation, price pressures and competition from new and adjacent competitors is among the top-five challenges.

About 47 percent of surveyed executives say the need to rapidly develop new services and applications was a top concern as well. Churn likewise was seen as a top issue by 40 percent of executives. Also, 66 percent of executives say churn rates are increasing.

One major trend of key importance for operators of wired networks is a shift to increased wireless dependence, as 36 percent of marketers see a growing shift to wireless-only households and 32 percent see a trend towards wireless dependence for life, work and community tasks.

People Would Give Up Vacations Before Broadband

Recession-hit consumers would sooner give up vacations and dining out than spend less on communications services, Ofcom, the U.K. regulator says. While 47 percent of people would cut back on eating out and 41 percent on vacations, just 19 percent would lower their mobile spending , 16 percent their TV subscriptions and 10 percent broadband.

And while customers are making adjustments, those attitudes seem to mirror what we also have seen in the U.S. market.

Those findings are roughly in line with recent surveys of U.S. consumers, which tend to find that broadband access is the single most-important service.

Does Netflix Model have Legs?

One of the enduring lessons of new technology adoption is that the transition from older patterns to newer patterns can take quite a long time. One of the other lessons is that older ways of doing things sometimes do not fall before the new.

There was a time when TCP/IP was considered a transitional signaling method that would be replaced by the open systems interconnection model promulgated by the International Organization for Standardization. That never happened.

There was a time when Integrated Services Digital Network was seen as a replacement for time division multiplexing networks, on the way to a next generation network based on B-ISDN using asynchronous transfer mode. ATM proved a modest success, but has been eclipsed by IP.

Everybody "knows" that linear video will someday soon be eclipsed, possibly replaced by, Internet-delivered video, consumed on an on-demand basis. So far, that transition is proceeding slowly, which is typical for most technology substitutions.

What is more interesting: the extent to which the Netflix "DVD by mail" channel has more legs than people suspect. Though both the Blockbuster retail model and the Netflix models have been considered "toast" for some years, Netflix keeps defying expectations, even as it readies itself for the digital delivery shift.

Kaufman Bros. analyst Aaron Kessler has raised his rating on Netflix to "buy" from "hold," based at least in part on a survey of 700 Internet users, which found that 20 percent of all respondents that aren’t currently Netflix subscribers plan to sign up for DVD by mail service in the next five years. Repeat: "five years."

Kessler argues that, over the next five years, the country as a whole could reach near 20 percent Netflix subscription penetration.

The “DVD by mail life cycle may be longer than current thinking,” he says. “While we would agree that a large percentage of the DVD rental market will move to digital in the long term, our survey indicates that the current life cycle of physical rentals may be longer than people think."

Specifically, 68 percent of respondents indicated that “the ability to watch videos on the Internet versus renting from a physical store or by mail” is not important to them.

About 26 percent said online video was "somewhat" important and only six percent said it was " "important." Ultimately, much will hinge on how broadly content owners and ISPs support Internet delivery, as well as pricing models they choose to employ.

But it is worth noting how indifferent most users say they are to Internet-delivered on-demand programming compared to retail rental or DVD by mail alternatives.

In the communications and computing business, one always has a fundamental choice: substitute local processing for remote processing, and local storage for remote storage. In other words, one always can make an engineering trade off between communications and local processing and storage.

The "DVD by mail" alternative substitutes local processing for communications (physical media is an alternative to network delivery).

Online video substitututes communications for local resources, in the same way that "broadcast" video substitututes communications for local processing and storage.

Though the conventional wisdom is that users value and want on-demand video, Kessler's survey suggests otherwise. Users don't care as much as we sometimes think. Unlike news, sports and other "real time" content, where immediacy, in fact "shared experience" is important, movie content can be time shifted, place shifted or device shifted with little apparent downside.

That suggests demand for news, sports and other "real time" content will shift to online faster than "non-real time" pre-recorded video.

All of which is a reminder that we all have to be careful about assuming we know very much about what users actually want, how much they value various delivery and consumption channels and what they are willing to pay for experiences.

Netflix might prove to have a longer-lasting future than most of us now think. But that has been true for several years.

Might the same be true for other applications and services most of us assume are "toast?"

Internet Ads Work As Well as TV Ads, says comScore

Internet advertising is just as effective, if not more effective, than traditional TV advertising, comScore has found in a recent study.

Over the course of twelve weeks, online ad campaigns with an average reach of 40 percent of their target segment successfully grew retail sales of the advertised brands by an average of nine percent, says comScore. This compares to an average lift of eight percent for TV advertising as measured by Information Resources, Inc.

About 80 percent of the Internet campaigns showed statistically-significant sales lift, compared to 36 percent of the TV campaigns, comScore says.

The comScore research was based on results from 200,000 panelists who are members of supermarket loyalty programs and whose retail buying behavior was measured through point-of-sale UPC scanners when the panelists presented their membership cards at the checkout lanes of participating supermarket stores.

Those results are for campaigns supporting consumer packaged goods. It is not clear how business-to-business campaigns might compare.