Do UTOPIA Failures Mean Anything for Google Fiber?

It isn't easy to build a wholesale or retail fiber access business when competing with entrenched cable and telco competitors, as Google Fiber will do in Kansas City, Mo. and Kansas City, Kan. But Google Fiber at least has a couple of advantages.


Its symmetrical 1-Gbps access speed, plus free 5-Mbps service, can be differentiated from what cable and telco providers offer in the Kansas City markets. Where rival service providers cannot do that, they sometimes run into trouble. UTOPIA provides a possible case in point.


The Utah Telecommunication Open Infrastructure Agency  (UTOPIA) is building a wholesale fiber-optic network that offers its users access to high-speed video, data, and phone services. Operational mistakes aside, UTOPIA might have made a fundamental mistake, namely building a network that, although pitched as a "faster" alternative at the time, has fallen behind as cable and telco competitors have boosted their access speeds, in response. 


To be sure, UTOPIA says it offers a symmetrical 50 Mbps service costing $35 a month, far less than the 50 Mbps service offered by Comcast in Salt Lake City, for example. Still, some would argue that differentiation is less the issue than the degree of difference. At that level, UTOPIA access prices are an order of magnitude better than offered by Comcast.


All venture capitalists are familiar with the problem, namely that a new contestant challenging market leaders has to offer user experience benefits that are perhaps 10 times better than what currently is available. Those benefits can include pricing or performance improvements, but the point is that an order of magnitude better experience is necessary for an upstart to have a chance of unseating a market leader.


In part, the reason is that incumbents, faced with significant new competition, typically will boost their offers, slicing the advantage the new upstart offers, before the upstart has a chance to gain critical mass. That might be the case for Utah's UTOPIA effort.
A new audit shows the agency was unable to complete construction of the network as quickly as
planned. UTOPIA originally planned to build a broadband network in three years and to achieve a positive cash flow in five years.

“However, it has not met that schedule,” the audit says. “Instead, the cost of financing and operating the network increased before UTOPIA could provide a substantial number of
customers with service.”

As a result, revenues have not been sufficient to cover its costs. Year after year, as operating deficits have accrued and the agency has developed a large negative asset balance.

UTOPIA has issued $185 million in bonds to pay the cost of building its network, “but most of the bond proceeds have been invested in poorly utilized and partially completed sections of network,” the report says.

“As a result, the network is not generating sufficient revenue for the agency to cover its annual debt service and operating costs,” the report notes.

Worse, UTOPIA has had to use a large portion of its  bond proceeds to cover operating deficits and debt service costs. “The use of debt to cover the cost of operations and debt service is
symptomatic of an organization facing serious financial challenges,” the audit says.

Since 2003, when UTOPIA began work, only one third of the network has been  completed. Buit that might not even be the biggest problem. “One underlying challenge is that UTOPIA’s infrastructure investment is not producing sufficient revenue,” the study notes. “In most areas where construction has been completed, UTOPIA has insufficient subscribers
to cover the cost of building and operating the infrastructure.”

Though backers had expected to get adoption (penetration) rates of about 35 percent, so far the network has gotten penetration of only about 16 percent.

That has huge implications. A competitive network, facing both entrenched cable and telco suppliers, has economics that are hugely dependent on penetration rate. At 16 percent penetration, UTOPIA is getting half the revenue it had projected, and manhy would argue, as a rule of thumb, that penetration in the 20 percent to 30 percent range is probably requires for long term success, in the absence of additional revenues from voice or video entertainment services.

Among other problems, UTOPIA has used a wholesale model, and therefore has been highly dependent on its retail partners for sales success. And it turns out that many of its retail customers have defaulted on owed payments, which further puts pressure on UTOPIA revenues.

As a direct result, UTOPIA now also has switched to selling retail services directly.

Though the audit attributes much of the difficulty to management failures, and though that likely is an issue, the larger issue might simply be that customer demand for UTOPIA services is simply not as strong as expected, when there are other suppliers with a vested interest in meeting existing demand for high-speed access.

That might not be quite as big an issue for Google Fiber in Kansas City, Kan. and Kansas City, Mo., given the huge difference in access speed Google fiber is able to offer.

UTOPIA uses a “fiber to curb” network architecture that offers speeds similar to AT&T’s U-verse, but arguably less than what cable operators can offer, using DOCSIS and bonded channels.

Some might argue that UTOPIA’s market offer is not “better” than telco or cable offers, in terms of speed and experience. Venture capitalists are familiar with that problem. UTOPIA did not offer an order of magnitude better experience, when it started.


Google Fiber, on the other hand, does have that advantage, clearly, in terms of "speed," and arguably in terms of price, as well. That means Google Fiber might have a better chance of taking 30 percent share, than UTOPIA has been able to do, at least so far.

"Millennials" Now are Global, Mobile

“Millennials” now represent a mobile-oriented demographic on a global scale, not a specifically U.S. generation, says Troy Brown, one50one founder and president. “Millennials globally are nearly identical in their thoughts, habits and values, worldwide.”

The Internet, and mobile, largely are responsible for a growing “psychographic” similarity, worldwide, for “working class” youth, especially in the 21 to 29 age range, he says.

All of that puts a new “spin” on “multicultural” marketing. In the mobile realm, when dealing with Millennials anywhere in the world. Whatever their specific circumstances, “multicultural mobile users generally over-index their use of SMS, mobile web, and mobile advertising, as well as smartphone adoption, says Brown.

“We have identified three market dynamics that will impact multicultural mobile targeting in the next 18 to 24 months,” Brown says.

Two of the trends are directly related to mobile services. Brown says 4G services and devices that can use 4G, location-based services and the need for brands to “blend” all digital, social and mobile campaign elements to drive a personalized experience, are the key trends.

4G networks represent higher speeds, and will drive usage among multicultural demographics in one primary area: video sharing and streaming.

Despite the generality that global Millennials over-index in the use of their mobile devices, each individual accesses the Internet in his or her own personalized way, says Brown. Thus, brands and marketers need to cover all the bases across digital, social, and mobile domains.

AT&T Stores to get an Apple Style Feel

AT&T is planning to drastically change the way its stores look starting in the year 2013, replacing fixed point of sale terminals with use of smart phones and tablets. 


In large part, AT&T wants to create a retail experience more akin to the Apple Stores, and one has to wonder how many other retailers will decide the more-informal, check out without standing in line experience is workable as well. 


That could lead to rather large changes in the design of retail locations, some would argue, showing one more unexpected change from the shift to mobile payments technology. 

Telstra, the Australian communications services provider, also is considering a similar change in retail store format. 


After a successful test project in a Washington supermarket, Qthru is officially launching its mobile platform allowing shoppers to scan items with their smart phone as they shop to facilitate a more efficient checkout using their phone. The Qthru approach retains the traditional POS terminal locations, but speeds checkout because the scanning of products already has been done. 

"Given recent advancements in technology, consumers are realizing there is a better way to check out of a retail store without standing in a long line," Aaron Roberts, founder and CEO of QThru, says. 

Google Wallet Makes Big Change of Mobile Payments Strategy

Google has changed iits digital wallet strategy in a significant way, one might argue. In the past, Google Wallet has stayed out of the “interchange fees” part of the revenue stream, in favor of an exclusive reliance on loyalty, advertising, offers and other marketing and advertising functions.

But with the decision to support virtually all the major branded cards inside Google Wallet, a shift of revenue strategy could occur. A new cloud storage strategy does a couple of things. First, all major card brands can be accomodated, even if the resident application on a Google Wallet device is the prepaid MasterCard account.

The new approach is closer to that of PayPal than was the case for Google Wallet’s initial positioning, says Zilvinas Bareisis, Celent consultant. And the change makes Google Wallet a venture that makes money from transactions, something the older Google Wallet did not attempt to do.

The cloud-based credentials still require use of the MasterCard PayPass terminals and software loaded on each Google Wallet device. But since the MasterCard prepaid account is linked (in the cloud) to MasterCard, Visa, Amex and Discover accounts, Google Wallet users can use the wallet in much the same way as PayPal.

That would be a fundamental shift of strategy. Before, Google Wallet was not a transaction processor in the same way as PayPal functions. Now, Google Wallet will, in effect, become a transaction processor, in an indirect way.

More accurately, it has become a merchant of record. Google sits in the middle of its Wallet transactions, rather than just passing through plastic credentials to an NFC enabled smartphone.

The new approach also bypasses the need to cooperate with mobile service providers, and allows Google Wallet to be provided “over the top,” without using the mobile service provider secure elements. Card issuers might like that angle, since it means they are relieved of the obligation of paying fees to any mobile service providers who want to get a slice of transaction processing revenues.

Google Wallet becomes as a “merchant of record” for transactions. True, they won’t have to incur the extra costs of provisioning their card credentials on to secure element, but that would also rule them out from participating in other NFC ventures, such as Isis.

Now, from the merchant point of view, they are accepting a prepaid MasterCard, while it might an Amex card that actually funds the transaction. PayPal deals with it by having direct acquiring relationships with its merchants and offering them a discount rate which represents an expected blend of funding transactions, says Bareisis.

Does it also mean that Google Wallet will have to establish relationships with the acquirers to re-coup from merchants any potential differences in transaction costs? Or will it have to charge the end user for “loading” their wallet, something that other prepaid card providers do for card-based re-load transactions?

In any emerging business, it is not unusual for start-ups, even those as big as Google Wallet, to change business models in dramatic ways. Isis, the mobile service provider service, initially envisioned being a “merchant of record.” Then Isis decided to take the former Google approach, and eschew any role in transaction fees.

Google now has taken the reverse path, essentially adopting the former Isis approach. In other words, both Isis and Google Wallet now have reversed their initial positions on revenue models in the wallet space.

Verizon Will Have to Abandon Cable Marketing Deals to Get Cable Spectrum

Verizon may have to abandon its agency deals with several U.S. cable operators as a condition of gaining Department of Justice approval of $3.9 billion worth of spectrum sales by the cable operators, Reuters reports.


Those agency agreements, which allow cable operators Comcast, Time Warner Cable, Cox Communications and Bright House Networks to sell Verizon services, while Verizon can sell cable operator services, apparently are viewed as anti-competitive by DoJ lawyers, and are not, strictly speaking, a part of the deal whereby Verizon would buy mobile spectrum from the cable operators.


Sources tell Reuters that DoJ will require a halt to the agency deals wherever Verizon has network assets, essentially. That apparently would satisfy DoJ officials that neither cable nor Verizon would use the marketing deals to essentially end facilities-based competition between Verizon and cable firms. 

Justice Department officials think the marketing deal would be  amounting to an agreement "not to compete" with each other. Barring of the agency deals would require some rethinking, by the cable operators, of their wireless strategy.


Where in the past the cable operators had worked with Sprint, they had recently been hoping to work with Verizon Wireless, as part of the agency deals, to add a wireless product to their triple-play offers. If the DoJ blocks those deals, cable will have to find some other way to create a wireless strategy.

DirecTV U.S. Subscriber Base Shrinks in Second Quarter 2012

DirecTV suffered a U.S. subscriber decline for what seems to be the first time many of us can recall, raising questions about whether that result is entirely a deliberate DirecTV policy related to bad debt, or perhaps an indication that the satellite TV business has reached a peak, in terms of market share.


Net subscribers declined in the quarter "principally due to lower gross subscriber additions, partially offset by a reduction in the average monthly churn rate," DirecTV says.


But DirecTV also says the "gross additions declined mainly due to a greater focus on higher quality subscribers and stricter credit policies, as well as lower gross additions from the telco sales channel."


In other words, some of the slower net additions were the result of DirecTV refusing to sell to some potential customers, while sales activity by telco partners is waning. 


The lower churn rate was mainly driven by a greater percentage of subscribers on contracts, auto-bill pay and customers that buy advanced equipment, DirecTV reports. 


Average revenue per user increased 4.2 percent to $94.40, due mostly to price increases on programming packages, higher advanced service fees, pay-per-view revenues and penetration of premium channels, partially offset by increased promotional offers to new and existing customers, DirecTV said. 


DirecTV's 19.91 million U.S. subscribers represented an increase of two percent, year over year, though. 

Smart Phone Owners Report More Problems with Call Quality, Spam, Internet Quality

As useful and valuable as consumers find smart phones, based on their buying of the devices and services, smart phones do seem to produce higher rates of call quality issues, unwanted text messages and, obviously, Internet access experience, a study by the Pew Research Center’s Internet & American Life Project suggests. 


The findings point out an apparent contradiction: though people find relatively high instances of product failure when using either feature phones or smart phones, the value so vastly outweighs the advantages and even the defects do not deter high rates of product acceptance. 


Some of us would note that, for decades, cable TV providers faced the same issues, and in some ways still do. Consumers frequently rank their "satisfaction" relatively low, compared to other products. But that has not historically lead to product abandonment. 


In recent years there has been significant loss of market share to other providers, but even the other providers receive substantially the same complaints as do cable TV providers. 


Some would argue that subscription products generally are less favored than other goods. Whether that is because such products often are intangible, or disliked for some other reason, is hard to determine. 


But it is somewhat striking that so many consumers of mobile service experience the reported problems. Some 88 percent of all American adults have mobile phones and 72 percent of respondents experience dropped calls at least occasionally. 


Some 32 percent of mobile device owners say they encounter this problem at least a few times a week or more frequently than that. About 68 percent of cell owners receive unwanted sales or marketing calls at one time or another. 


And 25 percent of mobile phone owners encounter this problem at least a few times a week or more frequently, the study suggests. 


Of users with mobile broadband service, 77 percent of respondents said they experience slow download speeds that prevent things from loading as quickly as they would like. Of those mobile Internet users, 46 percent report slow download speeds weekly or more frequently.




Smart phone owners reported higher incidence levels of these problems, compared with feature phone owners.