New Net Neutrality Rule Impact: Good and Bad

More use of network-delivered applications (software and applications as a service), more over-the-top VoIP, more mobile VoIP, more over-the-top video services, higher prices and more-stringent usage caps are among the likely new trends if the Federal Communications Commission extends wireline network neutrality rules to wireless companies as well, a move that seems nearly certain as the FCC begins a rulemaking on further network neutrality rules.

If traffic-shaping mechanisms cannot be used to manage congestion by selectively slowing some applications on either wired or wireline networks (the FCC already bars this practice on wired networks), service providers might have few tools to regulate use except by raising prices to discourage bandwidth-intensive use.

That likely would include a mix of new usage caps and higher prices for users who really want to use video and other bandwidth-intensive applications heavily.

What remains unclear is whether any new rules would also restrict the ability to create enhanced tiers of service that a customer wants to buy. For example, a user might want a service that prioritizes his or her own video or voice services over software upgrades or Web surfing. Business users, for example, often can buy services or appliances that allow setting of business priorities.

Sometimes those priorities include setting priority for voice traffic from desktop phones instead of Skype, for example. It isn't clear whether "positive" innovations (additional things users can do) will be prohibited by any new rules, as "negative" regulation ("thous shalt not") is put into place.

In any case, it is likely that providers of over-the-top applications in the voice, conferencing and multimedia communications areas, not to mention other forms of "software as a service," will be better placed to sell their wares.

The issues are quite tricky, though. Though the FCC rules ostensibly are aimed only at ensuring that users have access to all lawful applications, the rules also step over into the realm of business models and permissible marketing innovations.

It is not clear that network neutrality allows creation of enhanced services that work by prioritizing applications of any sort, even when that is what the consumer wants, and the service provider wishes to sell.

Most observers would agree that it is a proper regulatory effort to allow competing applications and services to have a chance to compete fairly with service and applications owned by the IPS itself.

The unknown danger is that laudable efforts to ensure competiton then overstep and retard competition and innovation by prohibiting positive innovation (new things people have the right to do) by prohibiting all forms of application acceleration.

About 1-2% of Text Messages Marketing Messages?

Some 25 percent of U.S. firms involved in interactive marketing also are using one form or another of mobile techniques, says Neil Strother, Forrester Research analyst. In 2009, about half those firms will have increased their mobile marketing spend.

Text messaging likely is a key part of most programs, in part because it reaches nearly every mobile phone. VeriSign, for example, says that in the second quarter of 2009, it delivered a total of 94.8 billion messages across its combined mobile messaging platforms for an overall growth of more than 82 percent from the second quarter of 2008.

VeriSign delivered 178.8 billion messages worldwide in the first half of 2009. To put this volume into perspective, it translates to 26 messages for every person in the world (roughly 6.7 billion).

The daily average number of messages enabled by VeriSign's combined mobile messaging platforms broke the one billion mark with approximately 1.04 billion messages per day, on average. This represents a 12 percent increase from the previous quarter and an 83 percent rise from the second quarter of 2008.

In total, VeriSign delivered 93 billion person-to-person and 1.8 billion application-to-person messages in the second quarter of 2009. As a rough calculation, if one assumes half those messages were "marketing" messages of some sort, while perhaps the other half were "informational" messages not strictly of a marketing nature, then about one percent of all text messages were of the "marketing" sort.

If one assumes all the application-to-person messages are business messages--content delivery, reminders, notices and so forth--then a bit less than two percent of all text messages had some direct business purpose.

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.