AT&T "Welcomes" Idea of Spectrum Caps?

You wouldn’t normally expect any market leader to support possible new regulatory action that might actually limit the amount of spectrum, or the types of spectrum, any mobile service provider can own.

But the unexpected AT&T view of the Federal Communications Commission’s intention to review both spectrum holding limits and spectrum quality considerations--essentially “welcoming” such a review could point to an AT&T belief that uncertainty is a bigger problem than spectrum limits.

Also, AT&T could be betting that other competitors will suffer more than it will if new limits on spectrum ownership were to emerge.

Or, some might argue, AT&T simply has decided that confrontation with the FCC has limited utility, at least in this case, the reason being that AT&T itself has a number of important spectrum purchases lined up for FCC approval.

AT&T is attempting to buy about $2.6 billion worth of spectrum to catch up with Verizon Wireless. AT&T has proposed at least 24 deals in the past four months for the rights to spectrum.

Verizon already has won U.S. approval to buy airwave rights from Comcast Corp. and three other cable companies for $3.9 billion.
Many AT&T users might agree that AT&T needs more spectrum, just as Sprint customers using that firm’s 4G network (WiMAX) might complain that performance is slower than it used to be.

AT&T’s plans would boost its most important spectrum holdings by 62 percent in the biggest 100 U.S. markets, according to John Hodulik, a UBS AG analyst.

There’s no question bandwidth demand is growing. The issue is really “how fast?” and “what can be done” to better use existing spectrum resources.

Still, under normal circumstances, one would expect a market leader to oppose the notion that there should be caps on the amount of spectrum any single provider can own. What therefore needs “explanation” is why AT&T would essentially say it welcomes the possibility of such caps.

Many, after all, would argue that control of spectrum is essential for market control. If new competitors cannot get spectrum, they can’t be in the business. On the other hand, such limits are commonplace. U.S. cable operators work under the assumption that no single provider will ever be allowed to gain control of more than 30 percent of U.S. video entertainment customers.

So how does Comcast grow? Comcast sells many other services to a finite number of customers, and then gets into another business, namely programming.

Whether AT&T’s thinking is “merely” tactical (do nothing to impair approval of its immediate spectrum buys) or more long term (sooner or later we will face spectrum caps, but those caps also will affect its major competitors, and there are other sources of business advantage), the apparent lack of resistance to the notion of spectrum caps is unusual.

John Legere Named as CEO of T-Mobile USA

Deutsche Telekom has named John Legere, a 32-year veteran of the U.S. and global telecommunications and technology industries, Chief Executive Officer of its T-Mobile USA business unit, effective September 22, 2012, 

Some might find the T-Mobile choice a bit puzzling, given Legere's prior stewardship of Global Crossing. Some might have expected an executive with deeper experience in mobility, for example. 

Others might note that Legere has experience with enterprise and computing device aspects of the business. Some might point to experience with mergers and acquisitions, in a business rife with competition, as well. 

If you share the opinion that the top end of the U.S. mobile business simply has too many competitors, then both T-Mobile USA and Sprint must be counted as among firms that "must" merge or sell, ultimately. 

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Amazon, eBay, Google, Yahoo, Others Form Internet Association

Amazon.com, AOL, eBay, Expedia, Facebook, Google, IAC, LinkedIn, Monster Worldwide, Rackspace, salesforce.com, TripAdvisor, Yahoo and Zynga have formed The Internet Association, a trade association representing the interests of the application providers.

The organization says it is "dedicated to strengthening and protecting a free and innovative Internet," along with its decentralized architecture. 

Australian National Broadband Plan Doesn't Have Much Room for Error

The latest update of the Australian National Broadband Plan might suggest the financial risks fiber to the home networks represent, even in a scenario where there is a monopoly national wholesale network that sells capacity to all the country’s retail service providers. The plan now envisions a seven percent internal rate of return. 

In other words, it is worth doing, if the underlying assumptions are correct, and IRR winds up being a positive integer, not a negative number. In principle, one might ask whether the opportunity cost is too high (would a higher return be possible from an alternative investment), but that is another issue. 

The obvious danger would arise if the underlying assumptions are mistaken, such as costs being underestimated, or revenue overestimated, and by what magnitude. 

The NBN will build a single national wholesale fiber to the home network between now and 2020, allowing all retail service providers to buy wholesale broadband and voice services.

The latest version of the business plan does suggest that the actual direct financial return from a fiber to home access network, built on a continental scale, is relatively small, at about a seven percent internal rate of return, despite its societal and economic importance.

A reasonable observer might simply note that there is little room for error where it comes to the base assumptions. Lower takes rates, lower average revenue per user or unexpectedly higher operating costs are some of the dangers embodied in the three decade assumptions.

“Pipe” Services Will “Always” Drive Most Service Provider Revenue

Communications service providers dislike the phrase “dumb pipe” for obvious reasons, since it implies–often falsely–that a telecom supplier is “just” a provider of low-value, commodity access services. The notion is partly accurate, but has nothing to do with profit margin on “dumb pipe” services. 

What, after all, is “best effort” Internet access but a “dumb pipe” service? The access is one thing, while nearly all the content and services are provided by third party suppliers. But profit margins on U.S. high-speed access are in the 40-percent range, hardly a low-margin, commodity service.

There are potential issues in the future, if prices and consumption are not better aligned, but service providers already are moving on that front.

Nor are service providers "just" providers of "dumb pipe" access; they also make most of their money on "services" or "applications" delivered over those pipes. In the best example, they use the network and the access to create "voice" service or video entertainment services or messaging. 

And that always will remain the key way to create yet other applications and services that use the network, and access to the network. 

New Wave of Internet Arbitrage Coming?

The International Telecommunication Union (ITU) plans to hold a treaty conference, the World Conference on International Telecommunications, in December 2012, which will revise a 1988 treaty, the International Telecommunication Regulations (ITR). At stake are the ways communication network owners compensate each other for terminating international voice calls through the payment of settlements.

But there are wider implications. The ITU proposes to change the way the Internet is governed, in ways that will harm the Internet by raising the cost and complexity of exchanging traffic, Analysys Mason researchers argue. Basically, the ITU wants to create a new Internet traffic “settlements regime” modeled on voice precedents that will be difficult to administer and raise overhead costs.

But there could be other significant effects. First, operators might be induced to maintain their customers‘ websites abroad. One of the significant benefits of establishing an internet exchange point is to make it attractive for domestic websites to be hosted at home, in order to increase their performance and lower costs, Analysys Mason notes.

However, given that foreign websites will generate a source of incoming settlements, the incentive to keep them abroad would increase.

At the same time, foreign operators, in order to compensate for the settlements, would likely raise the price of hosting websites serving countries with high settlement rates, which might lead websites to develop less content targeted at a particular country in order to limit their costs.

While this could be seen to increase the incentives to locate content in the target country in order to avoid settlements, that is often not efficient, particularly for small or undeveloped markets from which access to a regional server may be sufficient, Analysys Mason argues.

In addition, it is likely that infrastructure investment decisions would be affected, as providers would be reluctant to invest in providing infrastructure to a particular country to which it is expensive to deliver traffic. In other words, there will be financial reasons not to build more undersea links to certain countries, for example.

Also, huge volumes of Internet traffic could be artificially generated in order to arbitrage a rate-regulated model, to generate inbound payments, alter traffic balances, or otherwise unfairly leverage any accounting rate regime that may be applied to the Internet.

Entities that believe they would be net recipients of settlements, based on current projections of traffic flows, might find themselves net payers as a result of the manipulation of traffic flows by other players.

In summary, aside from the intrinsic difficulties of successfully imposing regulations on international flows of Internet traffic, there could be unintended consequences that would harm the internet if such a system were imposed.

If history, human nature and self interest  is any guide, some service providers to try and lower settlement payments, while others will attempt to grow their share of settlement payments.

Consider the flows of traffic. The notion of settlements is that a carrier that terminates traffic incurs costs to deliver that traffic. So a sending carrier pays the terminating carrier. In many cases, the traffic flows should largely balance each other, so the net payments are relatively small in magnitude.

But there are scenarios where traffic is unbalanced, and that causes problems. In the voice settlement regime, carriers that accept more traffic than they send wind up paying money. Carriers that send more traffic than they receive make money.

Some of you will remember, or even be able to point to, instances where revenue arbitrage was possible precisely because of such asymmetrical traffic flows. Server farms and “free conference calling services” in the United States provide examples.

In the proposed ITU framework, it is server farm traffic that could be troubling for some carriers.

Multimedia content, for example, might represent as much as 98 percent of Internet traffic. Right now, where those servers are located does not have implications for inter-carrier settlements.

For cost reasons, many of those servers are located in Africa. In 1999, 70 percent of international Internet bandwidth originating in Africa went to the United States. In  2011, less than five percent goes to the United States.  

These days, content is stored at African server farms, for distribution largely to Africa, Analysys Mason notes. In some ways, that is helpful to African consumers, for quality and cost reasons. In other ways, high cross-border charges are unhelpful.

While it is true that IXPs are emerging to facilitate local exchange of traffic in Africa, the cost of cross-border connectivity between many African countries is still quite high, and this is hindering the emergence of regional IXPs to help exchange traffic and distribute content.

The bandwidth from Latin America presents the same broad picture. Between 1999 and 2011, the percentage of bandwidth going to the United States fell from just under 90 percent to 85 percent, replaced by more intra-regional traffic.

The main similarities between Africa and Latin America are that over 80 percent of their Internet bandwidth is connected to another region (Europe and the US respectively). At the same time, little bandwidth goes between countries within the region. Intra-Latin American traffic is 15 percent of total, while intra-African traffic is two percent.

The amount of cost-increasing overhead under any new settlement regime could be significant.
A recent study by the Packet-Clearing House analyzed 142,210 peering agreements representing 86 percent of global Internet carriers and 96 countries.

Only 698 of the peering agreements were based on written contracts, representing just 0.49 percent of all the contracts.

In other words, the vast majority of current international and domestic peering agreements are not just commercially negotiated, but are not even formalized in writing. If Internet settlements mirror voice practices, overall costs will rise, even if traffic flows can be accurately captured most of the time, and some say that will be very difficult.

Analysys Mason argues market-based mechanisms work, and are a better alternative to creating a new settlement regime modeled on voice principles.

Asia-Pacific Service Provider Revenue Will be Driven by Wireless

Telecom service provider retail revenue in the Asia–Pacific region is predicted to grow at a compound annual growth rate of seven percent between 2011 and 2016, according to Analysys Mason. 

But compared to past growth patterns, that growth now is driven by mobile services.

Total telecom service revenue will grow by 29 percent from $229.7 billion in 2011 to $323.7 billion by 2016. But notice the revenue components.

The voice market in the region will continue to be heavily dominated by mobile during the forecast period, with 90 percent of the voice connections being mobile by 2016, up from 84 percent in 2011 and from 73 percent in 2008.

Overall, the number of voice connections in the region will increase by 45 percent, to 3.9 billion connections, with most of this growth coming from China and India.

But average revenue per user is clearly declining. Where ARPU was $10 per month in 2008, by 2011 it had dropped to to $7.40 in 2011, Analysys Mason says. In part, that decline is caused by wide adoption of mobile services by people who spend less than early adopters. In part, the decline is caused by users who carry and use more than a single subscriber information module. Mobile ARPU across emerging APAC markets will average $6.5 by 2016.

Perhaps the most significant implication of the Analysys Mason forecast is that revenue growth now will be driven in the Asia Pacific region by wireless and mobile services.

Over the next five years, the key drivers will be 3G and 4G services, which will account for 46 percent of mobile connections in the region by 2016 and the growing demand for Internet access, driving mobile broadband.

China and India together account for 68 percent of the region’s population, 64 percent of its active mobile SIMs and 75 percent of its total retail telecom revenue. Revenue is heavily skewed towards China, where overall telecom revenue will grow from $138 billion in 2011 to $194 billion in 2016.

Analysys Mason also predicts that active mobile penetration rates in the region will rise to 95
percent by 2016, a 32 percent increase over 2011 levels. The number of active SIMs will increase from 2.33 billion in 2011 to 3.7 billion by 2016 as well.

Mobile and fixed wireless will account for more than a third of broadband connections in the emerging APAC region in 2016, and for the vast majority of connections in rural areas where fixed-line infrastructure is unavailable.