What is the Best Way for AT&T or Verizon to Generate Billions of New Revenue?

What is the best way for a tier-one carrier to generate an extra $1 billion in annual revenue?

Long term, you might argue carriers will need to explore a range of potential new businesses. That’s why you hear all the movement around home security, mobile payments, mobile wallet, machine-to-machine applications, health care applications, content delivery networks, over the top apps and so forth.

In the near term, Verizon Wireless and AT&T might wring even greater returns simply by reducing original equipment manufacturer device subsidies, without taking what some might say are the “drastic” steps T-Mobile USA is undertaking to end all retail device subsidies.

Oppenheimer analysts think that AT&T and Verizon Wireless, for example, will be able to cut payments to device manufacturers by significant amounts.

AT&T’s subsidies could drop from 15 percent per phone to five percent over time, Oppenheimer predicts.

With more than 100 million phones being sold every year, Oppenheimer thinks the carriers could save up to as much as $100 per phone, or $10 billion dollars in annual savings. That’s a lot more new revenue than AT&T or Verizon Wireless are likely to generate from the other new initiatives.

Beyond that, Oppenheimer analysts even think there is a chance AT&T and Verizon Wireless could recapture some of the influence they used to have before the advent of loosely-coupled networks.

There is at least a possibility that carriers could host, invest in and own applications provided in a carrier context, with the greater importance both of mobility and cloud computing. Some might find that thesis a bit optimistic.

But there is little question AT&T and Verizon Wireless are in a different strategic position than their counterparts in other regions such as Western Europe.

Globally, telecom revenue is growing. But not in Western Europe, it appears. The mobile industry’s combined revenues from voice, messaging and data services in the EU5 economies (United Kingdom, France, Germany, Spain and Italy) will drop by nearly 20 billion Euros, or four percent a year, in the next five years, and by 30 billion Euros by 2020, according to STL Partners.

The obvious implication is that mobile service providers in the United Kingdom, France, Germany, Spain and Italy will have to create new revenue streams worth 30 billion Euros, just to stay where they are, by 2020.

T-Mobile USA to End Device Subsidies

T-Mobile USA says it plans to end all device subsidies in 2013, after finding that perhaps 80 percent of its customers choose a "bring your own device" or "buy your own phone" plan anyway.

To ease the "sticker shock," T-Mobile USA probably will offer installment plans that involve an upfront $100 payment and then monthly payments for as long as 20 months. 

T-Mobile USA also apparently will get the right to sell unspecified "Apple" devices in 2013. To be sure, the "value" approach fits T-Mobile USA's approach to the market. But there is risk.

In Spain, mobile service providers have had very mixed experience with ending device subsidies. But Vodafone Spain and Telefonica lost customers after they stopped subsidizing devices. 

In fact, Vodafone Spain lost a half million subscribers in a single quarter. Vodafone Spain later reversed course and restored the subsidies. T-Mobile USA will find out soon enough if different results can be obtained in the U.S. market. 

Taxes and Billing Issues Kept Google From Offering Voice in Kansas City

Google considered offering voice as part of its 1-Gbps service in Kansas City, Kan. and Kansas City, Mo., but the cost and challenge of billing for taxes was enough of a hassle to cause Google to drop those plans. 

Milo Medin, vice president of Google Access Services says the actual operating costs would have been trivial. Billing for taxes would not have been so easy.

“The cost of actually delivering telephone services is almost nothing,” Medin said. “However, in the United States, there are all of these special rules that apply.” Google would not be the first company to encounter the complexities of billing, and how that can affect a business case.

Retailers engaged in e-commerce, either throughout the United States or globally, know exactly what Medin means. 

People Spending Twice As Much Time with Apps as Web

Between December 2011 and December 2012, the average time spent inside mobile apps by a U.S. consumer grew 35 percent, from 94 minutes to 127 minutes, according to Flurry. 

By comparison, the average time spent on the web declined 2.4%, from 72 minutes to 70 minutes.  By our measurement, U.S. consumers are spending 1.8 times more time in apps than on the web.  

The study does not indicate that people are substituting interaction with mobile apps as a substitute for either web browsing or watching TV, since engagement with thoses activities seem to be stable. 

But end user time is finite. When users spend more time with mobile apps, while reported time watching TV and using the Web remain level, that time must either come from some other pursuit, or users are multitasking, most likely using more apps while doing something else. 

Why 1 Gbps Isn't Presently a Big Deal

You've probably read at least one story about Google Fiber, the 1-Gbps symmetrical fiber to the home network in Kansas City, Mo. and Kansas City, Kan.

I have not been recently in Kansas City, but have had a chance to work on a 1-Gbps connection. It did not change my life. It did not even seem to materially affect my normal use of the Web. As always is true, your local connection is but one element of end-to-end application performance.

What happens in between you and a remote server, and the set-up of the remote server's local connection, obviously controls the amount of data that actually can flow between two communicating computing devices.

Until most of the rest of all servers you interact with can match a local 1-Gbps connection on your end, one doesn't really see much difference, on a local gigabit per second connection, compared to using a much lower speed connection.

Granted, I wasn't uploading or downloading large files, using BitTorrent or watching YouTube. But you get the point. Had I not been told, I wouldn't have noticed anything special about the connection.

Google "Will Discuss" Owning a Mobile Network

From time to time, speculation arises about whether any of the four leading "Internet" firms in the U.S. market (Apple, Google, Facebook, Amazon) would seriously examine ownership of a branded mobile network. Half of those firms already are in the smart phone business, three are in the tablet business and Facebook, off and on, is rumored to be considering producing its own smart phone.

So is Google, for example, looking at owning a wireless network? "I'm sure we will discuss this," says Google Chairman Eric Schmidt. That doesn't necessarily mean Google will act.

But Google appears to believe that abundant spectrum could become a reality. If that happens, the barriers to a branded Google mobile service would seem less formidable.

"The current spectrum shortage [currently facing the mobile industry] is real, but it's an artifact of a licensing and regulatory error," said Schmidt. "New technology allows there to be lots of spectrum, far more than you could use."

NFC Pessimism Grows, and Might be a Good Thing

Juniper Research has revised its forecasts for the global near field communications market, significantly scaling back its growth estimates for the North American and Western European markets. In some ways, that might be considered a "good" thing, to the extent that it follows a common pattern of technology adoption.

What is "good" about deflated hopes is that such periods seem "always" to happen, and are just a milestone on the way to eventual adoption on a fairly wide scale. So the argument is that dashed initial hopes mean the market is moving in the way one should expect: high hopes, disillusionment, and finally adoption.
The most significant change to the Juniper Research forecast is the amount of transaction activity NFC devices will drive, as the new forecast reduced the number of NFC devices in use only slightly.

By 2017, global NFC retail transaction values are now expected to reach $110 billion in 2017, significantly below the $180 billion previously forecast. 

Such revisions are not unusual in the predictions business, especially not for a brand new market that depends on many changes in the ecosystem.

Apple’s decision to omit an NFC chipset from the iPhone 5 has reduced retailer and brand confidence in the technology, leading to reduced point of sale) rollouts, for example.
This in turn will lead to lower NFC visibility amongst consumers and fewer opportunities to make payments, threatening a cycle of “NFC indifference” in the short term, Juniper Research believes.

“While many vendors have introduced NFC-enabled smartphones, Apple’s decision is a significant blow for the technology, particularly given its previous successes in educating the wider public about new mobile services” says Dr. Windsor Holden, author of the study.

The report found that Apple’s move would impact most dramatically on markets in North America and Western Europe, where transaction values would exhibit a “two year lag” on previous forecasts as retailers delay POS investments.

Conversely, retail transactions in NFC’s heartland in Japan and Korea are likely to experience little or no impact from the Apple decision.

None of that is terribly surprising. Though the 2011 KPMG Mobile Payments Outlook, based on a survey of nearly 1,000 executives primarily in the financial services, technology, telecommunications, and retail industries globally found that 83 percent of the respondents believe that mobile payments will be mainstream by 2015, even the moset astute industry observers tend to overestimate early adoption of a major new technology, while underestimating long term impact. 



Analysts at Gartner, for example, use a model of how expectations for significant new technologies running in a predictable cycle. What the cycle suggests is that expectations nearly always (always, according to the model) run ahead of marketplace acceptance.

What the Gartner hype cycle suggests is that expectations for mobile payments using near field communications are at a point where we can expect five to 10 years to elapse until NFC actually begins to make serious inroads as an adopted mainstream technology. The emphasis probably is important to note: “begins.”

In fact, Gartner's Hype Cycle now expects it will take five to 10 years before NFC is in widespread and mainstream use. Gartner's latest expectation likewise is that cloud computing and machine-to-machine applications will not be mainstream for another five to 10 years as well.

But new technologies historically take some time to reach 10 percent, then 50 percent, then virtually ubiquitous adoption. To be sure, there has been a tendency for new technologies based on digital and electronic technology to be adopted faster. But a decade period to reach perhaps 10 to 20 percent adoption is hardly unusual.

That is not much of an issue for point solutions like computers that can be used without lots of additional change in infrastructure. That is not true for highly-complex ecosystems such as payments, though.

ATM card adoption provides one example, where "decades" is a reasonable way of describing adoption of some new technologies, even those that arguably are quite useful.

Debit cards provide another example. It can take two decades for adoption to reach half of U.S. households, for example.

If Gartner analysts are right about the near field communications "hype cycle," we should continue to see "disillusionment" expressed about near term prospects for NFC. The reason is that Gartner now sees NFC at the "top" of its hype cycle, the point at which overly-optimistic projections face the reality of an extended period of development, before something "useful" actually emerges.

Internet TV, NFC payment and private cloud computing all are at what Garner calls the "Peak of Inflated Expectations," which is always followed by a period where the hype is viewed as outrunning the actual market. That suggests NFC soon will enter a phase where expectations are more measured.