Eventually, Service Providers Will Price by Value

There are some very-practical implications to the notion that telecommunications now is a multi-product business.

Profit margins (net income divided by revenue), varies widely by industry. Grocery stores have margins in the six-percent range, while banks have margins as thin as two percent to three percent.

Many would note that profit margins for text messaging are quite high, in fact, almost arbitrarily high. One reason is that text messaging is a feature made possible by the out of band signaling digital voice services require. In other words, short message service actually is possible because it is part of the other signaling activities the voice network has to support, anyway.

That means it is mostly an accounting exercise to determine what text messaging profit margin actually is.

One issue is that it matters how people pay for use of text messaging. Many have flat fee plans for an unlimited number of messages, so profit margin arguably could depend on the number of messages sent, though messaging cost is relatively insensitive to volume.

You might argue that a user on a per-message plan, paying 20 cents to send a message up to 160 characters in length, is paying, for the use of bandwidth, at about 100,000 times more than the per-byte rate of a typical consumer access plan, by some estimates.

That isn’t really the point, though. Few products are absolute commodities, and few products are priced strictly according to cost of production. In fact, one characteristic of highly-branded luxury products is that retail pricing is set more on intangible factors (demand) than the cost of production.

Also, any multi-product retailer typically sells products with varying profit margins. That increasingly is true for communications service providers as well.

By some estimates, though gross profit margins averaged 86.51 percent for the telecommunications industry in 2010, net margin was only about 10.99 percent, on average.

Assuming industry-average expenses, a reasonable profit margin would be anything between 10 and 15 percent.

Of course, little in the telecom business is “average.” Without various subsidies, small rural telcos would consistently lose money, overall.

Also, profit margins vary dramatically by product. Text messaging margins are almost arbitrary, and can in principle feature margins of 80 percent, though margin is dropping.

As communications now is a multi-product business, including mobile voice, texting, mobile broadband, machine-to-machine services, fixed network broadband, voice, video entertainment and business services, with important new lines of business being built in other areas, executives and managers must contend with many lines of business, each with a different gross revenue contribution and profit margin margin.

In part, communications service providers actually do sell “raw bandwidth,” in the case of consumer high-speed access, where government regulations do not permit any packet prioritization or other quality of service measures.

But service providers also sell applications and features. Assuming it eventually recognized that consumer welfare, service provider health and investment require revenue that is matched to cost and value, we should see the development of retail pricing that sometimes is paid by the end user, sometimes is paid by a third party advertiser or app provider, or sometimes is paid by a combination of advertising, end user fees and third party payments.

Tablets Boosting Online Sales

Tablets are emerging as an effective and key online retailing channel, a new study sponsored by shop.org has found, though one might be tempted to argue that tablets might be less a “showrooming” threat for retailers whose own online sales channels are well developed, and whose products are specialized, though.

At eBags, combined smart phone and tablet purchases now represent 17 percent of traffic overall, and a little north of 12 percent of sales,”  Chris Wilson, eBags CMO says. Traditionally, online shopping has been conducted by people using PCs.

The number of smart phone using their mobiles to visit online retail sites is growing 76 percent year-over-year, the study suggests.

Amazon reports seeing a 117 percent increase in the number of site visitors from mobile phones between Feb. 2011 and Feb. 2012, Walmart a 238 percent increase and JCPenney a 332 percent increase.

Some  64 percent of consumers have used their smart phone for some shopping research activity while 74 percent of tablet owners have done so.

Tablet owners are also more active purchasers, with 34 percent having made at least one purchase from their tablet during the three-month period ended March 2012, while only 17 percent of smart phone owners had done the same.

The report also shows 43 percent of smart phone owners having used their mobile device while in a store for a shopping purpose. About 35 percent of tablet owners have done so, as well.

The study also found that average site conversion rate now is one percent on smart phones and 2.4 percent on tablet devices. As most anecdotal evidence suggests that larger screens, such as PCs, generate more activity, that finding likely will not surprise you.

The majority of retailers surveyed reported that their site conversion rate and the average order value are lower for sales placed using smart phones, compared to sales made using the desktop website. That might be related to the “snacking” way tablets often are used.

However, almost half also reported seeing higher AOV for sales made by tablet devices than on the desktop website.

Just how big the order value “delta” is might vary by retailer. The average order value for an eBags tablet purchase is $159.28, compared to  $134.37 on smart phones.

Mobile usage in stores helps  multichannel retailers, Jeff Klonowski, Recreational Equipment executive believes.“We view the stores as a tremendous opportunity for mobile, both from the employee perspective and the customer perspective.”

For employees, REI has rolled out a mobile version of the store point of sale  using iPod Touch devices, so that store associates can help customers check out.

Over the longer term, REI plans to build out functionality for the store associate to help the customer access store inventory, product reviews and product specifications.

Wilson said that, while they have no direct information, there is “some circumstantial evidence” that eBags is getting traffic from customers who are standing in a store.  

“Entries on a product detail page as a percentage of total are much, much higher on a smart phone than either of the other devices, so it seems to be very targeted and we assume that a certain percentage of that is happening in stores,” Wilson says.


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Why is Salesforce Buying Social Media Marketing Company Buddy Media?

At first glance, it might seem at least a little "different" that Salesforce, considered the poster child for cloud-based software and sales force automation, is buying Buddy Media,  a social media marketing platform. 


Granted, Salesforce's business is related to marketing. But marketing and sales are different functions, as anybody familiar with both will attest. 


You can debate whether social media marketing is a new adjacency for salesforce, representing revenue growth outside its traditional core business. That's probably the best way to view the move. 


What salesforce says about the deal will explain it. “Salesforce.com now has the number one players in social listening and marketing," says Marc Benioff, Saleforce.com chairman and CEO. “With CMOs surpassing CIOs in spend on technology within the next five years, our marketing cloud leadership will allow us to capitalize on this massive opportunity.”

“We are doubling down on the 'salesforce marketing cloud' to provide CMOs with the ability to manage the entire social marketing lifecycle, says Marcel LeBrun, SVP of salesforce Radian6.


By combining Buddy Media, considered to be the world’s leading social media marketing platform, with Salesforce Radian6, the world’s leading social media listening platform, salesforce.com hopes to deliver the first comprehensive cloud-based platform allowing its  customers to listen, engage, gain insight, publish, advertise and measure social marketing programs. 

How Well Will Communications Fare in Next Recession?

The communications business might be more resistant to economic downturns that many other more-cyclical industries, but it is not by any means immune. 


During and after the Great Recession of 2008, it appears consumers shifted their spending on video and communications, with some of the biggest reductions occurring in the purchase of "premium" video channels such as HBO and fixed network voice lines. But even the "hot" mobile business saw reversals. 


Figures compiled by Informa Telecoms & Media suggested the number of net new mobile phone subscribers fell sharply in the fourth quarter of 2008 and growth of mobile data revenue stalled for the first time. 


Figures from Informa Telecoms also sugested that the total number of new users for mobile phone services fell by 15 percent to 162 million in the fourth quarter of  2008. 


So it is not necessarily reassuring that, as Europe apparently heads toward another recession, service provider revenues generally were hit in the first quarter of 2012. That might be an early indicator. 


It isn't clear whether the U.S. market already is in recession, or is headed there. But there are enough serious warning signs to wonder whether another period of consumer stringency is coming. 


The Bloomberg Consumer Comfort Index, for example, has dramatically retraced ground from its April 15 high point of minus 31.4. In just a short period of a month's time, it has consistently deteriorated, reaching negative 43.6 in the just reported week ending May 13. That may in fact be offering an early signal of recession.


If so, neither telecom, mobile or video service providers will escape some damage. 


Some of the issues are structural, though. USA Inc. provides a good overview of the structural issues. 


A few decades ago, some smart economists argued that federal deficits "didn't matter." Of course, those statements were made under vastly-different economic conditions. Deficits were far smaller and financing was largely internal, not external.


To put the matter bluntly, when U.S. citizens were funding the deficits, a default on those obligations would have been an internal matter. Today, with sovereign debt being the way those deficits are funded, default would be vastly more dangerous. 


In other words, we might default on obligations "we owe to ourselves." It is quite a different matter to default on "obligations we owe lenders in other sovereign nations." These days, deficits most assuredly matter. 


The other problem, aside from the structural deficits, is anemic job creation. Labor force participation rates, the percentage of people of working age who actually are working, is at dreadful levels.

3G Infrastructure is Where Mobile Operators Spend Capex Now, But LTE is Coming

The global 2G, 3G, and 4G mobile network equipment market dropped 14 percent to just under $10 billion in the first quarter of 2012, following an eight percent increase the previous quarter, Infonetics Research says. 


Most seasoned observers would caution that a sharp quarter-to-quarter change, especially where unusually high fourth-quarter spending is followed by lower first-quarter spending, often is caused by an acceleration of orders in one quarter that is followed by lower spending the following quarter because planned expenditures were accelerated in the prior quarter.


Also, given the high amount of growth coming from China's operators, a sharp drop on the part of China Mobile can have significant impact on global spending. 


“The overall mobile infrastructure market took a beating in the first quarter of 2012,” notes Stéphane Téral, principal analyst for mobile infrastructure and carrier economics at Infonetics Research. “We saw weak 2G and 3G activity across the board, exacerbated by China Mobile’s dramatic GSM pause on the heels of extraordinary shipment levels in the previous quarter. 


Long Term Evolution (LTE) and WIMAX equipment revenue also declined sequentially. But LTE spending is up 128 percent from the 2011 first quarter. 


The LTE equipment market to grow to $17.5 billion in 2016.


Some 319 mobile operators have committed to LTE, and 72 LTE operators have launched commercial services in 37 countries, according to the Global Mobile Suppliers Association, That naturally will drive the increase in LTE infrastructure spending.

Can Any Incumbent Reverse Legacy Product Trends?

Comcast Chairman and CEO Brian Roberts is trying to do something few telco executives have formally attempted, namely reversing the declines in the key legacy revenue stream. 


Telco voice revenues, which historically have driven revenue in the business, are under pressure as much as cable TV operators face losses in their once-core basic video subscription business. But Roberts is trying to do something novel.


Comcast says it is on a "mission" to reverse the trend of declining video subscriber accounts.
Comcast has in fact lost fewer video subscribers in each of the past six straight quarters. 


At least up to this point, telco executives have been more focused on growing new revenue streams, a task made easier by strong growth in wireless services. 


In some key ways, Comcast is trying to change the market share dynamics for a legacy product, hoping that it also can manage the larger transition to a future where today's distribution methods might not be quite so important. 


Telco executives seem to have concluded that the "future" version of their legacy product already exists--wireless voice--and have secured a commanding lead in that business. 

AT&T Expects Toll-Free Data Plans in a Year

AT&T CEO Randall Stephenson says "toll free" data plans, which would exclude certain types of content from counting toward a customer's monthly data allotment, likely will catch fire in the next 12 months. 


In fact, he says content providers already are asking about whether they can partner with AT&T to do so. "I think you'd be stunned if we weren't getting those phone calls," Stephenson says.  "The content guys are asking for it."


Amazon pioneered that basic concept when it got deals to buy download bandwidth on behalf of customers buying book content for their Kindles. 


And given the extreme bandwidth consumed by video, expected to the application which drives bandwidth consumption the most, that is a likely development.