Who Wins From Big Data?

History often offers useful lessons about the development of new markets. Ask yourself what happened in the enterprise software business for a glimpse of what is going to happen in the "big data" business.

A couple of decades ago, there were perhaps 200 companies creating and marketing enterprise resources planning software to automate business processes.

What were the odds an investor would have picked SAP or Oracle as the eventual market leaders? Less than half a percent. Similarly, what are the odds an investor can pick the eventual leaders of the "Big Data" business?

However, if an investor had purchased stock in the 30 components of the Dow in 1990 that were all deploying ERP, that investor would have benefited from a 35 percent decline in overhead costs as a percentage of revenues, a 500-percent increase in revenues as automation enabled massive scale, and an almost 800-percent increase in market cap, say analysts Peter Goldmacher and Joe del Callar of the Cowen Group. 

"We believe the biggest winners in the Big Data world aren’t the Big Data technology vendors, but rather the companies that will leverage Big Data technology to create entirely new businesses or disrupt legacy businesses," they say. 

Big Data, in that sense, is a bit like broadband access. Investors probably will make more money betting on the enhanced fortunes of businesses that use broadband, rather than the suppliers of broadband. That isn't a criticism of the fortunes of broadband access suppliers; just a recognition that the value of all businesses supported by electricity is far greater than the value of firms that produce and deliver energy. 

"Fourth Wave" of Mobile Industry Revenue Models Will be Challenging

Some believe the way forward for mobile service providers in the next era is to embrace and own over the top apps and services. There is little doubt that there is risk. 

The logic is simple enough: in the future most apps will be used by consumers in an "over the top" manner. It also is not surprising that at least some providers of over the top, particularly those with a "partner" business strategy, make that argument.

But "over the top" parallels existing industry practices in crucial respects. First, assume that it is the carrier which "owns" the application. In principle, that is no different than a carrier owning voice, video entertainment or messaging services. Quite often, carriers are resistant to OTT apps in large part because they are not "carrier owned," an therefore generate no revenue. 

But there are some strategic issues. If you look at the mobile industry as having been through three distinct waves of revenue leadership, it was voice, then messaging, then data access. 

But it already is clear that, at some point, the era of revenue driven by data access is going to end, as well. That leaves open what the next era will feature as a lead revenue driver. 

Aside from that, there are profit margin issues. Voice and messaging have had high profit margins, but that is changing with the increasing competition from over the top services. Broadband access margins still are reasonable, but the concern is what happens as customers start to consume more data, if retail packaging does not shift from "unlimited" plans, something that largely already is characteristic of most mobile service plans in the U.S. market. 



Consider telco IPTV. Gross margin of 30 percent would not be unreasonable. But that is not "net" revenue, as the service provider has to share those proceeds with the content suppliers. 

For the sake of argument, assume that programming costs represent as much as 50 percent of distributor revenue. That means net profit margin for a distributor could be as little as 15 percent.  Some might make 20 percent margins, while the largest U.S. cable operators, with the greatest volume could earn more. 

It still is not clear what particular apps and services will arise, after mobile data has reached saturation. 

But it is possible that many such services will not have profit margins as high as carrier-originated services have had in the past, if only because some of the margin and revenue has to be shared with partners. The entertainment video example shows why. 

2/3 of Kenyans Use Mobile Money, So Government will Tax It

Some estimate that in Kenya, more than 66 percent of all people send money to each other using their mobile devices.

By such standards, mobile Internet access, though growing, is not as life changing as the simple ability to use a mobile phone as a way to send and receive money, in a nation where banking is not so easy as elsewhere. 

Unfortunately, it now appears that the Kenyan government is going to institute a 10-percent tax on the mobile money transaction fees, a move that logically will slow use of the innovation, as the imposition of a tax normally raises the cost of a product, and therefore leads to less consumption. 

It's a good thing that Kenyans can use mobiles to send and receive money: it makes banking services a reality for them. But governments had get in the way. Making such transactions 10 percent more expensive is one such way. 

Over the past couple of decades, government policies have helped, in part, by "getting out of the way" (deregulating) and "enabling competition." It worked. 

Many are too young to remember a time when policy makers and advocates had to grapple with the question of how to enable voice services for a third to a half of humans who had "never made a phone call."

These days, it is question with an answer. By International Telecommunications Union estimates, at least 87 percent of all people used mobile phones in 2011. 

Some might argue, with reason, that the actual number is lower, since some users have multiple phone identities (subscriber information modules).

Adjusting for that fact, the GSM Association estimates that mobile penetration actually is closer to 68 percent in 2012. 

The urge to levy new taxes is everywhere understandable. But lawmakers often seem to forget that a vibrant economy typically is a better way to increase tax revenue than essentially penalizing a growth driver. 

"Zero Sum" is Not a Viable Long Term Strategy

A threatened French law that would require Google and other search engine providers to pay content owners for snippets of content shown in search engines actually illustrates a growing issue in many new and changing industries, namely that new revenue relationships have to be built n something other than a "zero sum" basis.

In other words, when legacy suppliers see their revenue threatened by new contestants, the natural tendency is to fight back by getting the new applications, devices or services barred by legal means, when possible. 

If you think about the ways some countries have banned the use of VoIP, cable companies were barred from importing distant TV signals or the way the media deals with search engine, streaming or downloaded versions of their products, you get the idea. 


But that sort of zero sum approach winds up harming both legacy and new contestants. 

In this case, Google would likely stop indexing French media properties. How that is beneficial to the affected media is unclear. But Google's business also suffers, as it loses completeness, and is exposed to rivals who might be willing to pay such fees. 

Media economics have changed since the Internet arrived, as have the economics of communications and retailing. It's disruptive, to be sure. But the shift from physical to online consumption changes more than distribution, as disruptive as that is for "distributors."

In the shift from physical or legacy to online, overall consumption often can fall. That means less volume. But unit prices also tend to fall, and that dramatically changes profit margins for every unit sold, as total sales can fall. 

But zero sum approaches to industry revenue will fail, over time. The rational assumption has to be that products have life cycles.


Like it or not, fixed network voice, mobile voice, messaging, video entertainment services, newspapers and music on compact discs are products with a life cycle. Fighting over what is going to decline is understandable, but destined to fail. 
A common problem is that what once was scarce becomes abundant, with predictable effect on unit prices and profit margin for suppliers. 

So everything hinges on creating new products, revenue sources and industries. 

Sparring over revenue streams is understandable. But a zero sum approach is going to fail. 

How Much Does Rural Fiber Really Cost?

George L. Fendler, owner of Central Coast Internet in Hollister, Calif., has a problem. He wants to illustrate the “cost differences between fixed wireless and fiber installations in a rural environment.”

The problem is that “I don't really know what the cost per mile is for a fiber installation,” says Fendler. Lots of people would say that’s a very good question. 

How much does it really cost a local telco to build fiber to home plant in rural areas? The answer, of course, is “it depends.” But a 2011 study of rural telco costs for fiber to home build shows that cost is directly related to potential customer density, measured as “locations per plant mile.”

Broadly speaking, when a telco can pass five to 65 locations for every mile of outside plant, the cost per home cost per home  ranges between $4,000 and $5,000 per location. When the number of locations drops below five passings per plant mile, costs escalate quickly, up to $19,000 a location. 

How Much Substitution Will LTE Drive?

Long Term Evolution might be a "future" strategy in most markets. But it is starting to look as though LTE already has become a marketing platform in the U.S. market. Every major mobile operator already is deploying, or trying to figure out how to deploy LTE.

Beyond that, some have been waiting for evidence that fourth generation mobile networks are fast enough to displace some amount of fixed broadband access. Up to this point, the actual amount of such product substitution has been fairly limited, though consumers in Austria have been enthusiastic about relying only on mobile for broadband access. 

In Austria, 19 percent of households say they use only mobile broadband, and have no fixed broadband access. In Italy, about 14 percent say they have "cut the cord."

In the United Kingdom, about five percent say they now use only mobile broadband, while six percent report using only mobile broadband in the U.S. market. But those figures probably will jump as fourth generation LTE networks reach ubiquity in some markets. 

The reason is that LTE should should in some cases offer users about an order of magnitude faster access than 3G. 

And that will entice at least some users to evaluate LTE as a reasonable substitute for fixed broadband, especially lighter users who do not watch lots of streaming video, that do not share a single fixed connection for more than one or two light users, and who might conclude that the cost of a single mobile subscription with LTE offers a reasonable savings compared to buying both mobile service and a fixed network connection.


Verizon Wireless, for example,  now plans to complete its LTE rollout by the middle of 2013, two quarters ahead of its previous goal to blanket its 3G footprint with LTE by the end of 2013. 

AT&T now appears to be accelerating its own LTE build as well. AT&T and Verizon both have indicated they believe LTE can be a viable "next generation" broadband access network for many users in rural areas, for example. 

In that sense, both AT&T and Verizon will themselves try to drive LTE cannibalization of fixed broadband access. So watch for new signs LTE is driving more substitution for fixed broadband service. 

Mobile Revenue Still Start Declining In Central, Eastern Europe in 2015

Mobile service providers in Central and Eastern Europe will hit a peak sometime about 2015, and then start declining, according to analysts at Analysys Mason. 

Between 2007 and 2011, operators in Central and Eastern Europe had seen revenue growth of about 4.7 percent on a compound annual basis. 

But Analysys Mason now projects that growth has slowed to about a one percent compound annual growth rate. Starting in 2015, revenue will slow at about a negative 0.6 percent CAGR.  

Mobile service revenue at constant (2011) exchange rate  [Source: Analysys Mason, 2012]

In Western Europe, revenue has been declining for some time.