Exclusivity Not a Problem, Time Limits Might Be, Sprint CEO Says

Sprint Chief Executive Dan Hesse says it is fair for the U.S. government to ask whether handset exclusivity deals should have time limits. But he insists that exclusive carrier deals with handset vendors are important for promoting innovation in the industry, according to Reuters.

"The legitimate question is how long the exclusivity periods need to be," Hesse says.It's a fair question."

Salvatore Tirabassi, a partner at M/C Venture Partners, agrees. Exclusivity does not harm consumers, he argues. "A lot of innovative handsets wouldn't exist without strong carrier partnerships," he argues.

There is a lot of risk for manufacturers when new handsets are introduced and the result is that preferential relationships with carrier partners are needed, he says.

Also, larger carriers get devices before smaller carriers for logical reasons. "Vendors want volume," he says. "Why do so many vendors work with Costco rather than a smaller retailer?" he rhetorically asks.

"If you want to argue that a small carrier in a rural market hasn't benefitted because of iPhone exclusivity, because they can't get it, you have to peel the onion," Tirabassi says. "There are alternatives."

Also, for practical reasons, a longer ramp is needed to recover marketing dollars, for either carrier or handset providers, he argues. Exclusivity provides time to recover marketing investments.

"Apple, for example, does not want a half committed partner," Tirabassi says.

FCC to Launch Net Neutrality Rulemaking

Federal Communications Commission Chairman Julius Genachowski is expected to announce next Monday (Sept. 21, 2009) a proceeding on new "network neutrality" rules that will prevent Internet service providers--both mobile and fixed--from selectively blocking or slowing Web traffic, according to the Wall Street Journal.

The FCC currently has four net neutrality principles, which call on ISPs to treat all legal Internet applications equally. That so far has been interpreted to mean no blocking or slowing of traffic based on business considerations such as the origin of the traffic, with some exceptions.

ISPs are allowed to filter for spam and viruses, for example. Where matters always have been tricky is where traffic shaping in general is used to maintain reasonable network performance at times of peak congestion.

The biggest impact likely will be on wireless networks, which for a variety of reasons have more constraints than wired networks. Initial reporting by the Wall Street Journal, though, suggests the FCC will take those constraints into account.

As the rulemaking unfolds, there will be fierce debate over how to further refine the "non-discrimination" rules while still allowing ISPs to manage peak loads on their networks. The shape of final rules will determine how much change might occur for buyers of Internet access services.

Prices might rise, new quality-of-service tiers might be introduced, or new packages based on type of dominant applications used might be thinkable where they have not generally been used before.

Verizon and other ISPs with fiber-to-home networks might find they have new marketing opportunities, since the networks with the most bandwidth will best be able to avoid any new rules.

All we can say for sure is that a new rulemaking appears to be certain. What rules emerge will depend on how well service providers can demonstrate legitmate network management tasks. Voice networks, for example, do use "busy hour blocking" algorithms.

It appears the FCC does not want any use of blocking as a technique to manage traffic. If so, other mechanisms that either entice users to self regulate, or force them to, will have to be specified.

Look for fireworks.

Has Verizon Finally Reached a Key Voice Inflection Point?

Verizon Communications might have reached a key inflection point: the time when coping with declining voice lines no longer is among the top sales challenges facing Verizon executives.

In fact, Verizon CEO Ivan Seidenberg says he no longer is looking for the inflection point, the New York Times reports. “I don't care about that any more," he says. "I am going to focus on driving FiOS penetration and taking costs out.”

In fact, in a statement that might still have the power to shock some observers, Seidenberg says video, not voice, will be the core product bought over the FiOS fiber to the home network.

Randall Stephenson, AT&T CEO, and Ed Mueller, Qwest Communications CEO, also now are emphasizing that there is a point where landline losses would stop.

That doesn't mean, in Verizon's case, that there will be no more line losses from this point forward. In fact, that actual inflection point is nearing, but has not yet been reached.

The inflection point now is one of business philosophy and focus, the realization that more is to be gained by growing new businesses aggressively, and using the new platform to reduce legacy costs, rather than focusing on wired voice losses.

But neither would it be correct simply to dismiss the notion that there is a time coming when traditional telcos will stop losing voice lines.

To be sure, it is a huge change in mindset for a business which has seen voice line losses for nine straight years, beginning in 2000. But it always has been clear those losses would stabilize and then possibly even reverse as competitors reached some natural limit.

Nobody with any industry experience ever has argued that cable companies, for example, would take more than a fraction, though a sizable fraction of wired voice lines, for example.

And as ultimately most lines in service will be broadband lines, the notion of what a wired access line is, always has been expected to change as well. To the extent that broadband access is the replacement service for wireline voice, while VoIP is an application running over those lines, "voice line loss" will stop in a literal--as well as figurative--sense.

The "line" will be the broadband connection. On top of that will run many revenue-generating services, voice and video among them.

Given the right balance of features and price, consumers will continue to buy wired voice services, new surveys are starting to suggest.

Harris Interactive, for example, recently found that up to 70 percent of consumers would keep using their landline voice services if integrated with their mobiles in some ways. Users very much want the ability to start a mobile conversation using their in-home Wi-Fi networks and keep the connection when leaving the house, and keeping a conversation going--but switching to the Wi-Fi network, when entering the house.

Seidenberg says that with TV, the PC and the Internet converging, the carrier’s future would be in selling video services, such as interactive TV, bundled with wireless voice. And Seidenberg's vision of the future clearly includes content services to "all three screens": television, PC and mobile device.

Like leading cable companies, which "cluster" in major markets, Verizon also has made a strategic decision to concentrate on higher-density urban and suburban markets, spinning off or selling rural systems without the density to support fiber to the home networks.

Aside from allowing Verizon to execute on its new strategy, divesting rural assets also allows the company, which is nearing the end of its fiber upgrade process, to trim its capital spending.

Seidenberg also says his job now is to get Verizon Communications focused on the idea that it is going to be a video-focused company providing content and software on three screens.

Mobile Capex Not Generating Much of a Return?

Policymakers might want to be careful about changing the mobile industry's regulatory framework in ways that jeopardize the revenue any new network investment can generate.

The reason? Recent capital investment by communications service providers has proven not to generate much of a return, say analysts at the Yankee Group.

In fact, many service providers--especially in the United States--are struggling to maintain adequate return on their invested capital

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Cable Growth Shifts to SMB Segment

It is a measure of how much has changed in the U.S. cable and telephone industries that

commercial services, especially those delivered to small- and medium-sized enterprises, are an increasingly critical imperative for U.S. cable operators.

In fact, the revenue and margins delivered by these services will be the main growth engine for the U.S. cable industry over the next few years, say researchers at Pike & Fischer.

That itself is change from patterns of the last several years, when broadband access and consumer voice services have driven revenue growth.

On the other hand, though mobility revenues have underpinned revenue growth for tier one telcos, video service revenue is the fastest-growing wired service.

Separately, the most-recent J.D. Power and Associate study of consumer telephone service marks the third consecutive year that traditional cable television providers have achieved the highest rankings among phone service providers in all regions included in the study.

Are U.S. Mobile Service Plans Expensive? Or Affordable?

Are U.S. mobile users paying too much?
Some data might suggest so. The Organization for Economic Cooperation and Development, for example, suggests that U.S. prices are "high," based on a standard set of usage buckets.

But there's a problem. Most U.S. users talk about four times as much as some Europeans do.

The problem is that the OECD study uses definitions of "low," "medium" and "high" use that might describe usage in the Netherlands, but are wildly inapplicable to typical U.S. usage rates, says George Ford, Chief Economist of the Phoenix Center for Advanced Legal and Economic Public Policy Studies.

Specifically, the OECD analysis calls 44 outbound minutes a month "low," 114 outbound minutes medium and 246 minutes outbound "high" levels of usage.

The average mobile consumer in the United States uses 800 minutes a month, about four times as high as the OECD "high usage" level. Furthermore, the OECD considers 55 text messages a month to be "high use" where the typical U.S. mobile user sends or receives 400 text messages a month.

Since usage plans are directly related to usage, this is an issue that distorts the comparisons, difficult to make under the best of conditions. By definition, the "average" U.S. user is a "high usage" customer. So if U.S. users kept the same behavior patterns, but had to buy plans as the OECD baskets suggest, they would have to pay rates commensurate with very-high usage levels.

In other words, if users in a given country have low usage, and are on low usage plans, then average prices paid will tend to be "lower." In the United States, usage is vastly higher than in Europe.

Normalizing for usage volume, what one finds is that U.S. users pay modest prices for much-higher use. If users in the Netherlands had consumption patterns identical to U.S. mobile users, they would pay very-high prices.

In other words, one cannot simply compare low-usage plans in one country with high-usage plans in another, any more than one can compare low-usage plans in one country with high-usage plans in the same country. The results are not terribly meaningful.

Study Finds Frustration with Mobile Contracts

The biggest cell phone service frustration in the United States is the length of service contracts, a new study by the Brookings Institution finds. About 46 percent of those polled say contracts are among the biggest frustrations.

What is not clear is how much users are willing to pay for handsets in order to retain freedom to switch providers, though.

Roaming charges are an irritant for 20.4 percent of respondents. Other issues that rank among the biggist irritants are the cost of domestic calls, which bothers18.1 percent of respondents, while "lack of features" is an issue for 15.2 percent or those polled.

The inability to use devices on other provider networks concerns 14.8 percent of respondents while lack of interoperability is an issue for 12 percent of survey subjects.

Americans believe (correctly or not) that innovation is driven by new devices made by Apple and Nokia, and new Internet features pioneered by Google. The most popular new cell phone features are games (named by 61.6 percent), local directories (52.9 percent), music (49.8 percent), and chat and instant messaging (39.8 percent).

Consumer concerns are different in other countries where consumers also were polled.

In the United Kingdom, the biggest frustration is the cost of international calls (27.8 percent), followed by the cost of domestic calls (25 percent), the length of service contracts (22.7 percent), and roaming charges (22.3 percent).

For Spaniards, the greatest frustration is the length of service contract (41.1 percent), cost of domestic calls (40.1 percent), roaming charges (25.6 percent), inability to transfer devices (22.8 percent), and the cost of international calls (21.6 percent).

In Japan, the largest problems are the cost of domestic calls (32.3 percent), lack of features (18 percent), lack of interoperability (15.4 percent), length of service contract (14.4 percent), and the slow pace of innovation (14.4 percent).

Pollsters asked cell phone consumers in each country about their willingness to pay more money in order to control their cell phone applications. The country with the greatest willingness to pay more is Spain (50 percent), followed by the United Kingdom (35.7 percent), United States (32.9 percent), and Japan (17.2 percent).

American consumers were most likely to believe innovation came from new devices (32.7 percent), followed by new Internet-based services (28.6 percent), and new voice services (10.4 percent). Those beliefs may not completely align with the innovation process, but do illustrate the sense consumers have that new devices are key for innovation.

To the extent that rapid device turnover actually is directly related to introduction of new services, policymakers would do well to consider how any new mobile regulations might affect the rate and pace of new device propagation.

When asked what was most important to improve their use of cell phones, users named getting less expensive service from mobile carriers (55.5 percent) as their top item.