Only 1 More Broadband Stimulus Round

As expected, the U.S. Department of Agriculture’s Rural Utilities Service and the Commerce Department’s National Telecommunications and Information Administration say they are streamlining the American Recovery and Reinvestment Act’s broadband grant and loan programs by awarding the remaining funding in just one more round, instead of two rounds.

The agencies expect to begin announcing funding awards for the first round in December 2009. The original plan had been for three rounds of funding, and observers noted that this would be valuable for applicants as they would have a chance to see what got funded, what did not, and then tweak their subsequent proposals accordingly.

Now they will get one chance to do so, not two chances. But “stakeholders will have the opportunity to provide us with well-informed feedback on how the first round worked for applicants, the agencies will be able to make improvements to the process, and potential applicants will gain more time to form partnerships and create stronger project proposals, the two agencies say.

In a Request for Information released today, the agencies are seeking feedback on procedural and policy aspects of BIP and BTOP. While inviting general input on the programs, the agencies identified specific areas for comment.

In terms of procedural matters, for example, the RFI seeks input on ways to streamline the application process. The RFI also asks whether the agencies can better balance the public’s interest in transparency and openness with stakeholders’ legitimate interest in maintaining the confidentiality of proprietary data.

The RFI also seeks comment on how to best target the remaining funds. Commenters proposing a more targeted approach are asked to quantify the impact of their proposal based on metrics such as the number of end users or community anchor institutions connecting to service, the number of new jobs created, and the projected increase in broadband adoption rates.

The RFI asks whether to focus second round funding on projects that create “comprehensive communities” by installing high capacity middle mile facilities between anchor institutions that bring essential health, medical, and educational services to citizens.

The RFI also invites input on various other issues, including whether the definition of “remote area,” which is used to determine grant eligibility under BIP, is too restrictive, how the agencies can best ensure that investments are cost effective, and ways the programs might impact regional economic development and stability.

RUS and NTIA will utilize the feedback received in response to the RFI to set the rules for the second funding round, which the agencies expect to announce through a Notice of Funds Availability early next year.

The American Recovery and Reinvestment Act provided a total of $7.2 billion to NTIA and RUS to fund projects that will expand access to and adoption of broadband services. Of that funding, NTIA will utilize $4.7 billion for grants to deploy broadband infrastructure in unserved and underserved areas in the United States, expand public computer center capacity, and encourage sustainable adoption of broadband service. RUS will use $2.5 billion in budget authority to support grants and loans to facilitate broadband deployment in primarily rural communities.

Quantifying the Carrier Wi-Fi Hotspot Business Model

Customer retention--not direct customer fees--might be the biggest part of the carrier public hotspot busimess model, says Stephen Rayment, CTO, BelAir Networks.

"Churn reduction is where lots of the value is," is Rayment. Assume churn per month of two percent a month, which means a typical customer provides 50 months of revenue, he says.

Adding metro hotspot access can provide a 10 percent churn reduction, he adds. Assume the 10 percent churn benefit on a typical subscriber relationship of 50 months, meaning the typical account now remains active for 55 months. Assume a typical customer average revenue per user of $130 a month.

That suggests an extra $650 of subscriber revenue over the length of a relationship. For a service provider with 100,000 subscribers that works out to $65 million in extra revenue.

If the average customer value is $2,000 per customer, and that service provider can use public hotspot service to reduce churn 10 percent, it adds about $200 per subscriber in terms of equity value.

For a service provider with one million subscribers, that's $200 million in incremental equity revenue.

For a service provider with one million subs, making an investment of $40 million to cover all the high-traffic spots, there is a five-to-one return on investment.

There arguably could be other revenue contributors as well, though none likely approaches the value of enhanced retention. There might be an opportunity for a small amount of additional revenue. Some customers will be willing to be stand-alone hotspot subscriptions.

Service providers might make some money from other carriers by offering hotspot access to customers roaming into the local area. There could be some advertising upside or some commercial upside from providing services to public utilities or public safety organizations, he says.

Some service providers also might look at public Wi-Fi as a way to add some mobility features to their landline service.

Mobile providers also likely will find public hotspots a useful way to offload traffic from the 3G and 4G networks to the fixed network, Rayment says.

"The networks are just choking" because of heavy new smartphone traffic, says Rayment. "People really did not see this until the iPhone, but 3 in the U.K. market also saw skyrocketing demand when it started selling the iPhone," says Rayment.

Up to this point, aircards and dongles used for mobile PC connections have been driving new bandwidth demand on the 3G and WiMAX networks. But that is changing. "Dongles drove the initial demand, but will be overtaken by the smartphone," he says.

The point is that the business model for public hotspot networks frequently is indirect.

Mobile is Not "Too Big to Fail"

Some people set up straw men that are easy to knock down, such as the big, rich telcos and mobile providers. Reality is more complex. They still are big, but they also are businesses facing cannibalization of their core revenue stream, voice, and will have to replace most of that revenue with something else.

We as a nation have made this sort of mistake before, trying to bring more competition to the landline voice business precisely as that business was entering a serious period of decline. Mobile providers now are in the same predicament. No matter how big they are, their base business is going to go away, for the the most part, meaning every single cent of revenue they now earn will have to be replaced.

If you think the telecom business is in great shape you don't work in the business. Granted U.S. wireless data revenues grew five percent quarter over quarter in the third quarter of 2009 and 27 percent year over year, to reach $11.3 billion by the end of the third quarter of 2009, according to analyst Chetan Sharma.

But overall service provider average revenue per user decreased by 14 cents during the third quarter. Average voice ARPU declined by 57 cents per user while the average data ARPU grew by 43 cents.

The point is simply that the communications business already is in the midst of a necessary transition from its traditional revenue models to new models, none of which are assured. It is going to take a great deal of very-hard work to pull this off and while consumer displeasure with such providers is understandable at times, they are not "too big to fail."

Most of that gain in data revenue was realized by Verizon and AT&T, which between them accounted for 80 percent of the increase in data revenues in the third quarter. AT&T and Verizon also now account for 68 percent of the market data services revenues and 61.5 percent of the subscriber base, Sharma says.

AT&T experienced the most growth with a six-percent increase quarter over quarter,  followed by Verizon and Sprint with five percent revenue growth each.

Overall mobile service provider revenue grew about two percent year over year. On an annualized basis, data represents about 28 percent of total mobile service provider revenues.

Analyst Chetan Sharma estimates that by end of 2009, U.S. mobile data traffic is likely to exceed 400 petabytes, up 193 percent from 2008.

Smartphones also now represent 25 percent of U.S. devices in service, says Sharma, while mobile penetration stands at about 91 percent.

The average number of text messages used in the U.S. market now averages almost 568 messages per subscriber per month.

How the Global Telecom Business has Changed Since 2000

A few statistics will illustrate just how much has changed in the global telecom business since 2000. Prior to the turn of the century, most lines in service used wires and carried voice.

By 2007, 74 percent of all lines in service used wireless access or carried data, says the Organization for Economic Cooperation and Development.

Mobile alone in 2007 accounted for 61 percent of all subscriptions while standard phone lines have dropped to 26 percent. And the change has come swiftly: in just seven years.

Mobile revenues now account for nearly half of all telecommunication revenues—41 percent in 2007—up from 22 percent 10 years earlier. (click chart for larger view)

Along with the change in access methods and applications is the sheer number of connections. The total number of fixed, mobile and broadband subscriptions in the member nations of the Organization for Economic Cooperation and Development grew to 1.6 billion in 2007, compared to a population within the OECD nations of just over one billion inhabitants.

To put that in perspective, consider that there were seven access paths in use in 2007 for every access path in use in 1980. That includes broadband, wireless and voice connections.

To put those figures in even greater perspective, consider that the percentage of household budgets devoted to communication expenses has climbed only slightly over the last 10 years. In most OECD countries, households generally spend about 2.2 percent and 2.5 percent of household income on communications, year in and year out, though one can note a slow rise since 1998.

The big exception is Japan, where household spending on communications is close to seven percent of household income. That might be something to keep in mind when making cross-national comparisons. It is true that Japan has very-fast broadband and has pioneered any number of mobile application innovations.

But Japanese households spend very close to three times as much as U.S. households on their overall communications. That’s worth keeping in mind. It always is difficult to make meaningful comparisons between nations.

Japan has very-fast broadband. But Japanese consumers also pay nearly three times as much as U.S. households do for their communications services.

Generally speaking, though, OECD consumers have added seven new connections for every existing connection in 1980, while spending about the same percentage of their incomes on those services. That’s an obvious example of an explosion of productivity.

Much has changed in the Internet access realm as well. Broadband is now the dominant fixed access method in all OECD countries. In 2005, dial-up connections still accounted for 40 percent of fixed Internet connections but just two years later that percentage had fallen to 10 percent.

Also, while many criticize the industry for retarding innovation and behaving as “nasty monopolists,” prices have tended to fall for virtually all communication services on all platforms, the OECD says.

“Over the previous 18 years, residential users saw the real price of residential fixed-line
phone service fall roughly one percent per year while business prices fell 2.5 percent per year,” the OECD says.

Mobile subscribers also benefitted from declining prices between 2006 and 2008. The average price of OECD “mobile baskets,” representing a number of calls and messages per year that normalizes features and prices, fell by 21 percent for low usage, 28 percent for medium usage and 32 percent for the heaviest users over the two-year period.

User voice behavior also has changed. The number of minutes of communication per mobile phone is increasing while the minutes on fixed networks are decreasing. In other words, the mobile is becoming for most people the primary voice device while the landline is a backup.

Some might argue that ultimately has implications for pricing. In some real ways, the mobile is the “premium” device and a landline represents a supplemental service. That probably means the value is such that consumers ultimately will think it should be priced as a backup service.

Data between 2005 and 2007 suggest people are making fewer domestic calls on the fixed network in most countries, OECD says. When people do use fixed networks they are increasingly making calls to users of mobile phones.

This trend is well highlighted by Austria where the introduction of flat-rate voice telephony on mobile networks has shifted calls away from the fixed-line network. Voice traffic on Telekom Austria’s fixed network fell 13.3 percent in 2007 as a result of the shift to mobile communications.

There was an OECD monthly average of 272 minutes of outgoing calls on fixed line telephones in 2007. This is down 32 minutes per month from 2005.

But there was an interesting landline rebound trend appearing recently in a number of OECD countries.

The number of PSTN minutes per line declined until 2005 when the numbers started rising again. For example, French minutes per PSTN line fell until 2004 when they started to increase.

One explanation is the shift in France to flat-rate national calls offered by a number of carriers. That suggests U.S. landline voice providers might stem some of the traffic erosion by offering aggressive, flat-rate, all-distance services within the domestic market, as VoIP providers generally do.

On the mobile side, the OECD average number of outgoing minutes of completed calls on mobile networks was 220 minutes per month in 2007, up 56 percent from 2005.

Subscribers in the United States make far more outgoing calls on mobile phones each month than any other country in the OECD. The average number of minutes per mobile subscription was 443 in 2007, more than double the OECD average. One might argue that is because of the reasonable cost of calling great distances. In Europe, many calls that would be domestic in the United States are international calls.

Broadband prices have fallen as well over the same time. OECD broadband prices declined significantly over the previous three years. Prices declined an average of 14 percent per year for DSL and 15 percent for cable between 2005 and 2008.

The average price of a low-speed connection (2 megabits per second or less downstream) was $32 per month in September 2008. At the other end of the scale, broadband connections with download speeds advertised as faster than 30 megabits per second averaged $45 per month.

Despite the falling price-per-unit trends, telecommunications services, about a trillion dollar market in the OECD, continues to grow at about a six-percent annual rate. That remains to be tested as we finish 2009, but there is reasonable historic precedent for continued growth, though perhaps not at a six-percent rate.

Regarding voice and new mobile and data services, we might as well note that landline voice appears to be a product like any other. That is to say, like any other product, it has a product life cycle.

To be specific, wireline voice looks like a product in its declining phase. Optical fiber-based broadband looks like a product earlier in its cycle, with 56 percent compound annual growth since 2005.

Digital subscriber line and cable modem services likely are further along their curves. DSL grew at a compounded rate of 21 percent per year while cable modem service grew at 18 percent rates between 2005 and 2007.

Mobile voice markets grew by 10 percent each year since 2005 but may be nearing saturation levels in a number of OECD markets. Mobile broadband clearly is early in its product life cycle.

Analog lines, used for voice, facsimile and dial-up Internet access, also seem to be in decline. The number of analog subscribers fell by 34 million between 2005 and 2007.

The decline of Internet dial-up services also means that many households no longer need a second analog line. The same might be true for in-home fax machines. And many additional lines once used by teenagers now have been replaced by mobiles.

Finally, the number of “mobile-only” subscribers has increased as well.

The penetration rate for fixed telephone lines (analog and ISDN) in 2007 was 41 subscribers per 100 inhabitants, which was less than the penetration rate ten years earlier.

Overall, the penetration rate rose from 43 percent in 1996 to a maximum of 47 percent in 2000, only to decline again to 41 percent in 2007. The year 2000 appears to be the turning point in the technological life cycle of fixed-line telephony.

Canada had the highest fixed-line penetration in 2007 with a penetration rate of  54 subscribers for every 100 inhabitants. Sweden, Luxembourg and the United States all had penetration rates greater than 50 per 100 inhabitants. Mexico, the Slovak Republic and Poland had the lowest penetration rates in 2007.

There’s an interesting observation we can make about those figures. Nobody seems to argue that the United States has a big problem with voice service availability. In fact, availability is not the issue: consumer demand is the issue. One doesn’t hear people complaining about the lack of voice availability in Canada or Sweden. But penetration is in the 50 percent range, per capita.

Nearly all Internet users in the United States use broadband, not dial-up. And yet broadband penetration might well be higher than voice penetration, on that score. People who want the product generally buy it.

That said, there are some methodological issues here. “Per capita” measures might not make as much sense, as a comparative tool, when median household sizes vary. Adoption by households, adjusted to include people who use the Internet only at work or at public locations, or using mobiles, would be better.

Broadband adoption, by people who actually use the Internet, might make the most sense of all. Broadband is a product like any other. Not every consumer values every product to the same degree.

DSL network coverage is greater than 90 percent in 22 of the 30 OECD countries. Belgium, Korea, Luxembourg and the Netherlands report 100 percent.

Cable coverage is extensive in some countries such as the United States (96 percent) and Luxembourg (70 percent), but non-existent in others such as Greece, Iceland and Italy.

An analysis which followed the evolution of broadband plans over four years shows that speeds increased by 28 percent  for DSL and 72 percent for cable on average between 2007 and 2008.

A survey of 613 broadband offers covering all OECD countries shows the average advertised speed grew between 2007 and 2008 across all platforms except for fiber. The average advertised DSL speed increased 25 percent from 9.3 Mbps in 2007 to 11.5 Mbps in 2008.

Advertised speed of course is not user-experienced speed at all times of day. Still, it offers some measure of changes in the product.

The average fixed wireless offer in 2008 was 3 Mbps, up from 1.8 Mbps just a year earlier.

Fixed wireless speeds grew by 64 percent but remain only one-quarter of the average advertised speeds of DSL providers. The average cable offer is five times faster.

There are some insights about mobile broadband in the OECD’s analysis. The amount of data traffic carried over mobile networks remains small in relation to other broadband data networks.

For example, Telstra in Australia reported in a 2008 investor briefing that data consumption increased from 100 kilobytes per month per user in 2007 to 250 kilobytes in 2008. Compare that to the gigabytes consumed on landline connections.

Data from the Netherlands also show relatively low data traffic in the first half of 2008. Between January and June 2008, Dutch mobile broadband subscribers downloaded 358 gigabytes over mobile networks.

It is possible to calculate an estimate of mobile data traffic per 3G subscriber per month in the Netherlands by making a few assumptions. If the ratio of 3G to total mobile subscriptions in the Netherlands is equivalent to the OECD average of 18 percent, then the average amount of data traffic per 3G subscription per month in the Netherlands works out to be only 18 kilobytes per month.

Of 52 mobile broadband packages evaluated in September 2008, the average headline speed was 2.5 Mbps. Subscribers to these plans were allowed an average of 4.5 gigabytes of data traffic per month.

Much has changed in the global telecommunications business in just seven years. Landline voice might still provide the revenue mainstay, but it is a product in the declining stages of its life cycle.

Even mobile voice, DSL and cable modem service are products at something like the peak of their cycles.

Mobile broadband and optical fiber access are early in their product life cycles. Mobility is becoming the preferred way of consuming voice communications.

That’s an awful lot of change in just seven years. And we haven’t even discussed VoIP, over-the-top applications, content or video.

Elections Matter: Competitive Carriers Challenge Telco Wholesale Pricing

In the U.S. communications business, some things don't change, and among those unchanging realities is that competitive local exchange carriers believe they should have widespread rights to use access facilities owned by the former Regional Bell Operating Companies (Qwest, Verizon and AT&T), paying wholesale prices with healthy discounts.

The former RBOCs just as vociferously argue that such access should be available, but not on a mandated basis, and only at market-based rates. Those fights were particularly fierce earlier in the decade, but have been relatively muted over the past several years. But nothing is ever completely settled in the communications business.

Eight competitive communications providers and Comptel have asked the Federal Communications Commission to adopt rules that would lead to lower prices for broadband access and transport. The petition for "expedited rulemaking" will not, as its name suggests, result in anything actually happening very soon.

The request must, by law, be circulated for response, and those responses will be vigorous. The request also comes at a time when larger issues, especially the shape of a new national broadband policy, are being weighed as well.

Comptel, 360networks, Broadview Networks, Cbeyond, Covad Communications, NuVox, PAETEC, Sprint Nextel and tw telecom have asked the FCC to create new procedures that would require the former Bell Operating Companies to offer wholesale access at "going-forward rates," plus a "profit margin or markup" of about 22 percent.

The concept is arcane for anybody who is not a communications policy expert or communications attorney, but essentially boils down to a competitor belief that prices are too high, and that the changed political complexion of the FCC will allow changes more in line with CLEC thinking both on mandatory wholesale and robust discounts on wholesale facilities used by competitors.

The perhaps unstated hope is that the forthcoming national broadband plan might address terms and conditions for mandatory wholesale access to optical broadband facilities owned by the former RBOCs, something competitive providers would dearly like to win, and which existing rules do not support.

Still, the petitioners do not expect immediate action, as the request has to be circulated for public comment, and will, as usual, face heated opposition from Qwest, AT&T and Verizon.

Still, it has to be noted that elections have consequences. The new petition might not have been deemed to have a chance of upside in the previous presidential administration.

Why Droid is Important

Lots of people position the new Motorola Droid, available on the Verizon Wireless network at the moment, as the first, or the best, competitor to the Apple iPhone. We can argue about that. What seems much less contestable is the possibility that many of Verizon's 86.5 million subscribers now will begin to create a new critical mass of users for location-based marketing initiatives.

Until the total number of smartphone users on particular operating systems or devices is reached, it will be difficult to create mobile marketing campaigns with reasonable prospects of success. And make no mistake, mobile marketing has to be different than the interruption-based advertising we are used to with place-based media.

Mobile users are not likely to appreciate mobile advertising that they haven't asked for, or worse, must pay for. The difference between mobiles and TVs, radios, DVD or game players is that mobile devices are uniquely seen as "personal" devices. Peoploe use the other devices, but only the mobile is always with a user, and typically is seen as a personal and private device.

The other important angle is that mobile media typically is consumed as a byproduct of some other activity; it is not a primary destination or activity.

Virtually any mobile marketing message is, by definition, catching users in the middle of doing something else. So the value of the messages must be situational, in context, or relevant to those other activities. On the other hand, the key change is that devices such as the iPhone and Droid incorporate location information.

Potential message senders will know whether a user is at home, at some other indoor location or moving. If moving, message senders potentially will know whether a user is moving at high speed (in an auto) and should not be interrupted, or is moving at pedestrian speed, when a contextual message might be safe to send and also relevant to current location.

Presumably it will be possible (with permission) to determine whether a person is using public transportation, even when moving at high speed, and might be amenable to messages.

It will take a bit more work, and more opt-in detail, to determine whether a business person is presently trying to figure out where to get a cab, take a client to dinner, or find their way to their hotel, or whether a person might be trying to figure out what social venue to attend after work.

So why is Droid important, beyond simple creation of critical mass? Droid, as are all Android devices, are part of a larger effort by Google to tap mobile advertising potential. Google has unusual incentives to create the sort of detailed opt-in processes needed to create granular messages of high relevance to end users.

The reason this is important to end users is that if mobile network providers and the rest of the mobile ecosystem can create self-sustaining revenue streams based on mobile messaging, the providers can justify perpetual investments in the quality of the mobile networks and devices, potentially holding down end user costs as well.

News Corp. to Block Google Indexing?

The Wall Street Journal is the salient exception to the rule that users will not pay for newspaper content online. It now appears we might find out whether the Wall Street Journal also is an exception to the rule that one wants leading search engines to find and index one's content.

News Corp., which owns the Wall Street Journal, apparently is planning to block Google from indexing content from the Wall Street Journal and other web sites, unless Google pays for the right to do so.

No matter what the outcome, this is a major test. Google obviously prefers not to pay rights holders for the right to crawl and index content. But the company gradually is finding it must, or would benefit from, do so in some cases. The ability to offer popular TV or movie content through YouTube is one example.