AT&T Sets Sales Record For iPhone 5

AT&T says it set a sales record with iPhone 5 over the weekend of Sept. 15 and 16, 2012, making it the fastest-selling iPhone the company has ever offered. Customers ordered more iPhones from AT&T than any previous model both on its first day of pre-orders and over the weekend.

That probably won't surprise very many people. But at least some observers have argued that the iPhone 5 would not break sales records in the U.S. market, however well it might do elsewhere. 

"The iPhone 5," NPD Group analyst Stephen Baker has argued, will launch into a U.S. smart phone market that is increasingly mature. A recent analysis by NPD estimated total growth in the U.S. market was just nine percent in the second quarter, and all that growth was the result of the increased prevalence of prepaid devices in the market.

Others might note that the NPD Group measures only U.S. retail sales, while Apple sells all over the world. In fact, of the 37 million iPhones it sold in the December quarter last year -- the first that included the iPhone 4S -- nearly half (17 million) were purchased outside the United States. 

In other words, NPD might be right about U.S. sales, but wrong globally. 

Service Providers Becoming "Irrelevant?"

Matthew Key, CEO of Telefónica’s Digital division, has argued that mobile operators must invest in innovation, because they are becoming “commoditized” and their relevance to customers is “decreasing.” That is an uncontroversial statement, these days. 

Still, it is more unusual to hear an industry executive argue that service providers face becoming "irrelevant" to consumers. 

Key said mobile operators must “change the business model” otherwise they will soon become “irrelevant” as customers increasingly use services such as Skype, BlackBerry Messenger and WhatsApp, which allow them to communicate without spending money on texts or voice calls.

“The ecosystem is changing, our relevance to customers is decreasing, we have to admit that," he said. 

Of course, that's precisely why Telefónica, which owns mobile operator O2, set up the new "Digital" division in September 2011, to develop new products and services that create new customer value.

That is not to say access providers are becoming "unnecessary." To the contrary, access to the Internet now has become a virtual requirement. 

The danger is that one access provider's service is indistinguishable from any other access provider's service. Virtually everybody needs access, but it doesn't make very much difference which specific service is purchased or used. 

So almost all the thinking has to be about other ways to create value, around applications and services that include a need for network features and services. But big questions remain, namely which opportunities are big enough, and realistic enough, to be grasped by service providers. 

When starting a new business, a good bit of advice is to choose a business that offers a large opportunity, rather than a small opportunity. All other things being equal, a similar investment of effort will produce larger returns if the market opportunity is larger. 

That is one reason tier-one service providers around the world, taking a look at growth opportunities, are looking at advertising, banking and machine-to-machine initiatives. Some might include cloud computing businesses among the top possible new areas as well. 

The small list results because there are relatively few new lines of business a large service provider can enter that will provide sufficiently-large revenues to justify the effort. You might also note that all those efforts rely extensively on mobile networks and devices, with the possible and partial exception of cloud computing. 

One reason there now is growing activity around retail payments, loyalty, advertising and marketing is that the opportunity is so large. 

John Donahoe, eBay CEO,  points out that e-commerce is a $325 billion market, while retail is a $10 trillion business. That means virtually every function and business that supports retail commerce is an order of magnitude bigger than the e-commerce equivalent. 

The key these days is that the line between shopping online and shopping in-store is blurring, with the mobile device at the center of the change. 

Some customers will begin their shopping experience online by researching a product, while other customers will simply enter the store and look up products on the spot via their mobile phones, but these two separate actions are merely pieces of the shopping experience, Donahoe argues. 

“In over half of all retail transactions today, the consumer accesses the web at some point in the shopping cycle," either to conduct product research, buy it or pay for it," says John Donahoe, eBay CEO.

“What we see happening in the world of shopping and payments is someone analgous to what has happened to digital media,” said Donahoe. “Consumers are driving enormous change in how they shop and pay.”

eBay chief executive John Donahoe said that the line is blurring between offline and online shopping and his company plans to serve consumers as they move back and forth between them.

Donahoe said his company has set up an open commerce platform so that eBay can essentially become the operating system for commerce

Smart Phone Data Consumption is an Issue, Not a Crisis

At a global level, Analysys Mason predicts that mobile data will grow at a 41 percent compound annual growth rate. That would be quite a slower rate than had been the case in 2011, for example, when growth was about 90 percent, on average, in the U.S. market. 

According to a 2011 Nielsen monthly analysis of cellphone bills for 65,000 lines, smart phone owners, especially those with iPhones and Android devices, were consuming about 435 megabytes in the first quarter of 2011, up from about 230 Mbytes in the first quarter of 2010. 

Data usage for the top 10 percent of smartphone users was up 109 percent, as you would expect. The top one percent of users increased their usage by 155 percent from 1.8 GBytes in the first quarter of 2010 to over 4.6 GBytes in the first quarter of 2011, Nielsen said. 

Still, though growth is occurring across the board, at the 80th percentile and below, users consumed 500 Mbytes or less each month. In the 60th percentile, users consumed 250 Mbytes or less each month.

The point is that bandwidth consumption on mobile networks remains a key issue, but maybe is not a crisis. It is no simple matter to cope with 40 percent annual bandwidth consumption increases. 

The good news is that most users don't really consume all that much data, and users already are learning to offload most of their consumption, especially the bandwidth-intensive video viewing operations, to home Wi-Fi networks. 

One would assume that trend could become even more important in the future. The other issue is the matter of sheer spectrum availability, though. Many observers say there are many ways to make more intensive use of existing spectrum, so that new allotments are unnecessary.

"Squatting" is the main problem with spectrum, not a looming shortage, say a pair of analysts at Citigroup. 

“Too much spectrum is controlled by companies that are not planning on rolling out services or face business and financial challenges,” wrote Jason Bazinet and Michael Rollins. “We do not believe the U.S. faces a spectrum shortage.”

Of course, by that assertion, they mean that spectrum now being used by 2G and 3G networks that would be more efficient if converted to 4G networks. 

Also, much of the fallow currently licensed spectrum the analysts cite is held by Clearwire, which is having trouble getting customers for the spectrum it has activated, and which is still building its network. The so-called unused spectrum is unused for reason: customers cannot be found, yet. 

The Federal Communications Commission is using the specter of a looming shortage to push through the re-designation of 120 MHz of broadcast spectrum for wireless broadband, the analysts. Even so, existing spectrum remains undeveloped, Bazinet and Rollins said. 

“Today, U.S. carriers have 538 MHz of spectrum, and an additional 300 MHz of additional spectrum waiting in the wings. But only 192 MHz is in use today,” they said.

A majority of that spectrum is devoted to legacy service not likely to deliver more than 1 Mbps during usage peaks, compared to 5 Mbps for 4G, the latest data network technology, they argue.

Bazinet and Rollins said if the full 538 MHz was converted to  4G, it could support 5 Mbps at 10 percent simultaneous usage.

Access Remains the Foundation for all Access Provider Revenue Opportunities

About half of revenue growth over the next several years will come from new lines of business, telco executives believe. But most of that opportunity still consists of line extensions built on current capabilities. That should not come as a surprise. 

What fundamental, unique and irreplaceable role do access providers play in the Internet ecosystem? Access. Service providers also provide applications (historically voice and messaging, more recently video entertainment). But the irreducible long-term role is "access" to the Internet. 

Unless a service provider wants to get out of the business entirely, the great bulk of revenue opportunities must hinge on access services. That suggests that the long term, most fruitful new lines of business will involve use of the network and its features, in some way, to add more value to "access."

Existing core services might provide upside up to about nine percent, STL Partners has reported. Vertical industry services have potential to provide as much as 10 percent of revenue growth. 

Infrastructure services (wholesale services, essentially) might provide eight percent of growth. 

Allowing third parties to embed communications features into their apps might drive 10 percent of growth. Providing other services to third party app providers could represent as much as 12 percent of revenue growth over the next three years. 

Telcos providing their own "over the top" apps might provide five percent of revenue growth.

The takeaway is not so much that half of potential new revenue will come from new lines of business, but more that each opportunity builds logically from what service providers already provide.

Echoing that line of reasoning, some would argue that telecom operators shouldn't bother trying to build an exhaustive suite of cloud services in an effort to compete with the likes of Amazon.com, Microsoft Corp. and Salesforce.com, says Sean Bergin, head of global telecom markets for Southeast Asia at BT Global Services. That will likely strike most of you as eminently sensible advice. 

Instead, access providers should strive to enhance the cloud services ecosystem, Bergin says.  "competing head-to-head" with cloud services specialists is pointless," Bergin said. If you think about the matter for only a very short time, that will make total sense. 

There's a reason all software these days is built using an open systems interconnect model that allows different functions to become virtual objects, so developers can innovate within a layer without needing to disturb all the other layers of functionality, Bergin argues. 

But that very model also means "network access" is a separate object from "applications." The fundamental skill sets, forms of organization and points of view are going to vary between software layer "objects."

Telcos, while able to develop and offer certain services themselves, such as virtual data centers, managed SIP-based communications and videoconferencing offerings, should look at aggregation models that play to their infrastructure strengths. 

Bergin wasn't saying "be a dumb pipe," but he was saying telcos need to stick to what they do best. 

4 Fundamental Telco Business Models

Just four fundamental business models lie ahead for global communications service providers, say researchers at Booz and Company. Half the models essentially are wholesale in orientation; one requires global operations and one is the traditional model, but with operators moving further up the value chain.

The "Network Guarantor" model has network infrastructure providers operating in a wholesale mode, providing other retail providers network services. 

The "Business Enabler" is a mixed model, including both retail broadband services as well as wholesale broadband, managed services, transaction and billing support, and platforms such as hosting and cloud computing. 

The "Experience Creator" is closest to the current retail model used by most service providers globally. Experience creators will look to move up the telecom value chain and provide end-users, both consumers and business customers, with the ubiquitous connectivity they demand, with targeted applications, fresh content, and a distinctive experience, and with the ability to create and distribute their own content.

The "Global Multimarketer" model is a retail model, but requires global operations and scale beyond a single nation.  Already, more than 75 percent of telecom subscribers in regions such as Europe and the Middle East are owned by global operators,” Booz & Co. says. 

There are challenges for service providers in all four scenarios. The "wholesale only, Network Guarantor" model offers a trade off. There is less sales, marketing and customer service cost, since the products are wholesale, sold only to retailers, not to actual end users. On the other hand, gross revenues likely are smaller, and profit margins also will tend to be lower than is typical for retail operations. 

To the extent that executives are worried about being reduced to the role of "low margin dumb pipe providers," this model guarantees it. In this scenario, service providers supply connectivity and other network services to all other retail entities, who have the actual relationship with end users. Also, companies that want to "own the customer relationship" will find this model unattractive, since it abdicates that role. 

The "Business Enabler" model has a mix of advanages and disadvantages. It retains the retail role, implying both higher sales, marketing and customer support costs, but also higher gross revenue potential and higher margins for those retail services. But this model also includes sale of infrastructure services to third parties, on a wholesale basis. 

That means there is inherently a possibility of channel conflict, as the service provider essentially competes with its wholesale customers in the retail market. 

The Experience Creator model is the closest to today's model, where a service provider sells retail services to end users. It offers the least dramatic changes to the current model, but arguably also offers the smallest chance of dramatic changes in overhead and operating costs. Also, to the extent that there is risk in moving into new roles within the application space, there is the danger of failure. This model virtually requires a more-active role in content and applications delivery, a terrain not historically favorable for telcos. 

The Global Multimarketer role is most logical for larger, well-capitalized firms with some ability to leverage a strong brand in additional markets. This strategy probably is not viable for small national firms with weak brand name assets and small market capitalization. This strategy also is likely to prove attractive only for firms with the ability to provide mobile services. 

In many ways the Global Multimarketer and Experience Creator models are mutually exclusive. Operators too small to operate globally are likely confined to their internal national markets. Likewise, the Experience Creator and Network Guarantor models are mutually exclusive. Only the Business Enabler strategy might be used by large and small service providers operating locally or globally. 

What has Changed in Telecom Since 2010?

Two years isn't a long time in the telecom business. But it's long enough for Google to become a smart phone manufacturer, average U.S. broadband speeds to increase about 30 percent a year, long enough for Long Term Evolution to become a commercial service offered by three of the four top U.S. mobile service providers, long enough for tablet suppliers to prove they operate in a sustainable new business.

Two years is long enough for Sprint and Clearwire to make a decisive turn to embrace LTE in place of WiMax, Apple to launch two versions of its iPhone, Samsung to emerge as the world's second most important smart phone supplier (by sales volume and profit), long enough for Research in Motion and Nokia to wobble badly and for Microsoft to prepare for what some believe will be its last effort to become relevant in smart phones, and others believe will be its move into the top ranks of mobile operating system market share. 

Two years is long enough for "network neutrality" rules to become law, but not long enough for all the practical ramifications to become clear. 

Two years is long enough for Verizon Wireless and AT&T Mobility to make a fundamental shift in pricing of mobile services, where domestic voice and messaging essentially are unlimited use, flat fee services and broadband Internet access is the variable element in the revenue model. 

What has not been substantially accomplished is the fundamental strategic challenges, among them the transformation from revenue models based on minutes of voice usage to bytes consumed. What has not changed is the degree of certitude service provider executives have about future business models.

It remains very much a work in progress for service providers to figure out how to create new, widely-adopted services network users want to use and pay for, which presupposes clear understanding of the value proposition an access provider delivers in an "application and device driven" era. 

Some of that sense of underlying challenges is as relevant in 2012 as in 2010, when Metaswitch Networks conducted a survey of 165 service provider executives. 

In that survey, service provider executives said uncertainty about new services and revenues, plus competition, remain the top concerns over the next decade. That has been true for most of the past decade, and the survey results confirm that the search for new revenue sources and the pressure of competition remain dominant facts of life in competitive and changing marketplaces.

The significant new difference is that telecom regulators—and what they might do—appeared  among the top three concerns. 

Asked to rank the level of threat, with a "1" being the "greatest" threat, and a "7" being the "least threatening," about 34 percent of survey respondents indicated regulators were the single biggest threat they face, but competition from other cable companies or telcos also are top concerns.

And in a sign of where new threats are perceived, Google is seen as a challenge as big as competition from “other telcos,” the 165-company survey found. 

About 27 percent of respondents indicated cable companies were the single biggest threat. Some 20 percent of respondents indicated “other telcos” were the second-biggest threat. 

But Google was not far behind cable or telco competition as a perceived threat for all contestants, the Metaswitch survey of service provider executives found. Some 17 percent of respondents said Google posed the single greatest threat to business success over the next decade. 

Apple and Microsoft were viewed as the least threatening of seven potential sources of competition, while Skype and other telcos are seen as mid-level threats. 

The sobering findings indicate that executives now correctly understand that regulatory risk must be added to the list of top commercial risks for the next decade, even though the search for new revenues, the business models that underlie new services, and staying abreast of competitors remain top issues. 

New service creation, especially uncertainty about potential demand, was cited as a huge issue. Some 45 percent of respondents indicated such uncertainty was the greatest of five challenges they face, vastly greater than ability to innovate, regulatory impact, risk of technology failure or brand exposure. 

“Do Not Track” Unintended Consequences

If "Do Not Track" becomes law, consumers would be able to opt out of behavioral advertising. That would significantly disrupt advertising revenue for a wide range of applications, rendering the Facebook Exchange virtually useless, for example, argues Eric Wheeler, 33Across CEO.

The Facebook Exchange needs anonymous cookie data about consumers who browse off Facebook in order to target them with relevant ads on Facebook, Wheeler notes.

Advertisers also require the ability to measure the online ads they run on Facebook in the same way they measure performance on other sites. Doing so requires use of anonymous third-party cookies that "Do Not Track" could block.

Paradoxically, a measure that aims to protect user privacy, arguably a good thing, also will undermine the revenue model for many applications users find valuable, thus causing unexpected harm. It's an example of how well-meaning laws to benefit consumers can have unintended consequences that actually harm consumer welfare in other ways.