Why Service Providers "Love" International Mobile Roaming

If there is anything constant in the communications business, it is that very-high prices will create incentives for new entrants to offer lower prices, and for regulators to act to lower prices. 

That is happening in the international roaming area, with respect both to voice calls and use of data networks, and for good reason: prices really are quite high. In Europe, wholesale rates for data roaming are dropping by regulatory action. 

Xigo illustrates the issue. 

Eurotariff maximum roaming charge per minute in Euros (without VAT)

Eurotariff maximum price while abroad	Making a call	Receiving a call	Sending an SMS	Receiving an SMS	Mobile Internet
Summer 2009	43 cents	19 cents	11 cents	free	-
Summer 2010	39 cents	15 cents	11 cents	free	-
Summer 2011	35 cents	11 cents	11 cents	free	-
Summer 2012	29 cents	8 cents	9 cents	free	70 cents/MB*

by NowSourcing. Check out our data visualization blog.

Sprint Buys Clearwire

Sprint Nextel Corp. has acquired the remainder of Clearwire Corp. it did not currently own for $2.97 a share.

Clearwire's board of directors has approved the deal, and Sprint has gotten commitments from Comcast, Intel Corp. and Bright House Networks in support of the deal, as well.

The $2.2 billion purchase values Clearwire at $10 billion, including net debt and spectrum lease obligations of $5.5 billion.

The deal removes one national mobile service provider from the U.S. market, and gives Sprint the full management control of Clearwire it will need if, as expected, Sprint launches some sort of new attack on industry pricing and packaging, something Softbank has indicated it will do in the U.S. market, as it has done in the Japanese market.

Data services are likely to be the focal point for any such effort, for obvious reasons. Voice and messaging services are a declining source of revenue for most providers, and Softbank attacked the Japanese market by disrupting data service plans. Softbank Japan already earns perhaps 66 percent of its revenue from data services.

Softbank does not view the U.S. market as saturated, in that respect. Aside from rapidly growing data service revenues, there is the possibility of enticing consumers to buy subscriptions for tablets and other devices.

That is the thinking behind claims that mobile data penetration of three hundred to five hundred percent is conceivable, a claim Verizon Wireless itself made years ago, referring to machine-to-machine services as an example.

In 2006, when Softbank decided to buy Vodafone KK assets, it likewise was criticized in some quarters for undertaking a risky gambit.

Some will argue Softbank is taking another huge risk by entering a country where iit has no previous operating experience, and by assuming a huge new debt load, after only recently shedding a similar debt load.

Softbank argues it is a reasonable risk, and that its prior experience taking on NTT Docomo and KDDI show it can compete in a market dominated by larger service providers.

Softbank, many believe, will use the same strategy it used in Japan, which some would describe as providing a large number of complementary features or services to create a “sticky” relationship with the end user.

Others will point to the pricing strategy. In Japan, Softbank’s 2006 acquisition of the Vodafone unit was not universally considered wise.

But in just one year, Softbank managed to boost its subscriber base from 700,000 in fiscal 2006 to 2.7 million. By the beginning of 2008, Softbank had grabbed 44 percent of Japan’s new mobile subscribers, well ahead of KDDI’s 35 percent and NTT-DoCoMo’s 11 percent.

Some think Softbank will be willing to launch a price war, as well.

In Japan, Softbank was willing to sacrifice voice average revenue per unit to make market share gains.Back in the 2006 to 2008 period, Softbank was willing to accept a $13 a month ARPU decline to build market share.

Spectrum will among the assets Softbank will be able to leverage. Hence the presumed need for full control of Clearwire.

It already is clear that Softbank has vaulted into the top ranks of global mobile service providers,measured either by subscribers or revenue.

There are growing signs that the U.S. mobile service provider market is unstable, in terms of market structure, though it remains unclear precisely which segments might fare the worst.

Some would point to the whole prepaid segment as one example, while others would say the smaller regional providers are most at risk. Some might argue it is the other national carriers most at risk, should Sprint succeed in attacking market pricing.

"What is clear for now, in our view, is that the current strategy, indeed the entire current business, isn't working," said Craig Moffett, an analyst at Sanford C. Bernstein. Moffett seems to be referring to the regional U.S. wireless carriers.

Others might argue that the financial stresses resemble the earlier transition from dial-up Internet access to broadband access. In this case, the transition is from feature phone to smart phone business models.

In that earlier transition from dial-up to broadband access, many suppliers found they no longer could compete in the broadband business. The reason was that dial-up Internet access was an “app” using the subscriber’s existing phone line. That meant suppliers did not have to pay to use the line.

With the advent of broadband, customers had to buy the new access service, and dial-up economics ceased to be viable, as would-be broadband suppliers had to lease wholesale lines, or build their own networks,  to provide the retail service.

Now, in mobile, it appears that the cost of supporting handset subsidies is pinching operating revenue, while the cost of building fourth generation networks likewise will hit earnings.

The immediate stress is heavy for the regional mobile providers, often using prepaid models, since the cost of handset subsidies now becomes a major operating expense.

Regional or prepaid service providers clearly have had a tougher 2012 than had been the case in the mid-2000s, for example. Leap hasn't been profitable since 2005, for example. MetroPCS profits dropped 63 percent during the first quarter of 2012.

A study undertaken by Tellabs suggests that mobile service provider profitability could become extremely challenging for some mobile operators within three years, with costs surpass revenues for many operators.

In North America that could happen by the fourth quarter of 2013 or as early as Q1 2013. Developed Asia Pacific service providers could see problems by the third quarter of 2014. In some cases this could happen as early as Q3 2013, Tellabs said.

Service providers in Western Europe could run into trouble by the first quarter of 2015. In some cases this could happen as early as the first quarter of 2014.

On the other hand, new supply is poised to come to market, including Dish Network’s proposed new Long Term Evolution network, and possible new networks from Globalstar or LightSquared, which could provide more support for mobile virtual network operators.

The point is that the U.S. mobile market is entering a period of greater instability and potential disruption.

What If They Hold a 4G Auction and Nobody Bids?

Australia's minimum prices for new spectrum to be auctioned are too high, and some bidders already are saying they won't be bidding bidding.

The Australian Communications and Media Authority has set the reserve price for 700 MHz spectrum at $1.36 per megahertz (MHz) per population. 

Vodafone and Telstra say they won't bid at those prices. Optus says the minimum price is too high.
3G
Auctions held recently in the Netherlands saw prices higher than anticipated, which as service providers worried a ruinous bidding war could result. That was a near-disaster when the same thing happened during 3G auctions.  

European mobile phone companies spent $129 billion six years ago to buy 3G licenses  that were expected to trigger new revenue-generating services. As recently as 2006, though, that had not proven to be the case. 

Service providers cannot afford to make that mistake again. 

The 3% Rule for Pricing Broadband Access Services, Anywhere

Why are broadband access prices so different, around the world? There's a simple answer, actually: retail prices are directly related to cost of construction in each market, and also substantially directly related to median household income.

You might think "things cost what they cost," and that is true, but what things cost varies from place to place

Recent studies published by ITU reveal that broadband penetration is directly related to its cost,  relative to an average family income, as well as to the availability of products and services that accommodate the general population’s purchasing ability.

That also explains why high speed access costs vary rather broadly from country to country. Areas where it costs more to create the infrastructure will tend to be more expensive, at the retail level. Areas where it costs less to create networks will correlate with lower retail costs.

For example, as the annual cost of broadband drops below three percent of a family’s annual income, broadband usage begins to increase dramatically.

For developed countries, this relative cost has already been achieved, but for at least 34 countries worldwide, the cost of broadband remains higher than the average annual family income, the ITU says.

But that’s an important bit of retail pricing advice for would-be ISPs in developing regions: set monthly prices no higher than three percent of median household income.

And prices are falling, globally.Between 2008 and 2009, 125 countries saw reductions in access prices, some by as much as 80 percent, the ITU says.  Between 2009 and 2011, for example, prices for fixed broadband have dropped by 52.2 percent on average and mobile broadband prices by 22 percent, globally.

Affordable broadband programs are starting to emerge in countries such as Sri Lanka and India, with service providers offering connectivity solutions starting as low as US$2 per month.

And while it is natural for a seller to want higher prices, for Internet access providers, less is more, in the sense of keeping at or below the “three percent of median household income” rule for retail pricing.

The trade-off is lower average revenue per user, but many more users. So where median high speed access costs in developed regions might run about $30 a month, in the BRIC+TIM areas costs might be $18 a month.

Somewhere between $2 and $9 a month would reach another billion or so households in a number of regions and countries. In the poorest nations, prepaid plans costing less than $2 a month will be needed.

Brazil, Russia, India, China, Turkey, Indonesia, and Mexico (BRIC+TIM countries), for example, could grow their available market by 860 million people by reducing the cost of entry for broadband by about 50 percent..

In 2011, the price of fixed broadband access cost less than two percent of average monthly income in 49 economies in the world, mostly in the industrialized world.

Meanwhile, broadband access cost more than half of average national income in 30 economies.  In 19 of the lesser developed countries, the price of broadband exceeds average monthly income.

By 2011, there were 48 developing economies where entry-level broadband access cost less than five percent of average monthly income, up from just 35 countries the year before.

To take the example of Kenya, family income levels mean that only about seven percent of the population can afford a service that offers uncapped monthly broadband access for US$20 per month. A prepaid broadband access service capped at 200 MB of data for US$5, however, could be within the reach of more than 60 percent of the Kenyan population.

Safaricom, the largest Internet service provider in Kenya, launched a segmented prepaid broadband offer in the end of 2009 targeted at different income levels.


There were 589 million fixed broadband subscriptions by the end of 2011 (most of which were located in the developed world), but nearly twice as many mobile broadband subscriptions at 1.09 billion, the ITU says.

Beyond that, since trenches, ducts and dark fiber represent as much as 70 percent of total cost to build a broadband network, the wisdom of using wireless is obvious. Wireless attacks that part of the effort consuming up to 70 percent of capital investment.

How Many Voice Lines in Use by 2018?

The Federal Communications Commission Technology Advisory Council thinks U.S. time division multiplex fixed consumer access lines could dip to perhaps 20 million units by about 2018.

Others, such as Kent Larsen, CHR Solutions SVP, think lines overall could dip to about 50 million over the next five years, then to about 40 million on a long term and somewhat stable basis.

The TAC forecast might be tempered by its omission of business lines or perhaps voice lines provided over broadband connections. But the general direction, if not magnitude, are hard to argue with.

Access lines in use are declining. A peak seems to have occurred sometime between 1999 and 2001, in the U.S. market. Mobile lines grabbed leadership, in terms of lines in use, shortly thereafter. 

Even if You Want To, Can You Price Apps by Gigabyte?

It seems a virtual certainty that investors will change the way they evaluate telecom access provider assets in the future, as they have done in the past. The reason is that the older metrics provide less value in assessing service provider prospects.

Once upon a time, access lines were a predictable indicator of telco performance, globally. With no competition and set prices, the primary variable was the number of access lines in service.

Once upon a time, basic video subscriptions likewise were a reliable indicator of how well a cable TV provider was doing or was expected to do.

That began to change with the advent of IP-based services, competition and multiple product lines. Because of competition, no provider formerly used to having 70 percent to 95 percent take rates could make those assumptions any longer. Instead, business plans had to be based on take rates as low as 20 percent to 30 percent, for any single product.

Also, with multiple products being sold, revenue per unit, or revenue per account, became more relevant than sheer numbers of accounts in service. Overall, “lines” or “subscribers” have become less meaningful measures.

At some point, especially as the IP transition continues, it is likely that newer metrics will start to emerge. Specific services, such as voice or messaging, might, or might not, be “revenue” sources in the same way.

When “bandwidth” begins to be an underpinning for all the other applications and services, it might be desirable, or necessary, to devise new metrics that correlate use of the network with revenue.

Some might argue that is a mere application of value based pricing to communications products, where retail prices are set based on customer perception of the value, not the cost of creating the products or the historical prices paid for those products.

Value-based pricing is predicated upon an understanding of customer value, a concept that will not be especially common for telecom executives, who for legacy reasons have set prices based on “cost.” In the monopoly period of industry operations, carriers made profits based on a cost-plus basis, so that made sense.

These days, matters are more complex. “Today, everything is about pricing, not cost,” says CHR Solutions SVP Kent Larsen. What he means is that “customer experience” now underpins the ability to price and sell products. One reason triple play offers work is that consumers rightly consider that they are getting a discount.

In other cases, offering free features is an obvious way to boost perceived value, even if, in fact, there is full cost recovery overall. But costs are an issue.

Here’s a really scary way of looking at how mobile and fixed network operating metrics might have to change: “costs per gigabyte must decrease by 90 percent every three to four years” just to keep service provider revenues and costs in the same relationship as they are now, according to Norman Fekrat, former IBM Global Business Services partner and VP.

And the bad news, says Fekrat, is that, at the moment, service provider costs are “increasing when it needs to decrease.”

“The cost structures need to be reduced significantly,” not incrementally, he says. And that will not be easy, Fekrat argues.

He thinks service providers will have to move to an alternative notion of “profit per gigabyte per service type,” where the actual cost of delivering a service is matched to the bandwidth consumed, for example.

That will be challenging. Consider the problem of pricing for consumption of video entertainment, the most bandwidth-intensive service. Though a two-hour movie might consume 3.8 Gbytes, the consumer might expect to pay about $5 for a viewing, or about $1.31 per gigabyte of revenue.

On the other hand, a month’s worth of voice might consume only hundreds of megabytes. Even if a user talks on the phone for 24 hours per day, every day for a month, using a high-quality codec, it would consume about a gigabyte each day, or perhaps 45 Mbytes for an hour.

If a user talks for an hour a day, that might represent consumption of about 1.35 Gbytes a month. On a flat rate $30 a month voice plan, that would work out to revenue of about $22 per gigabyte.

Messaging consumes almost no bandwidth, and could represent revenue of $800 a gigabyte.
That shows only one aspect of value-based pricing. Some of the applications have high value, but consume little bandwidth. Other apps consume lots of bandwidth, but have only moderate value.

Simple pricing based on bandwidth consumed will not work, in a value-based scenario. As logical as it might be to charge for apps based on "network resources consumed," that will meet huge consumer resistance, if one compares video entertainment to voice or messaging.

Economics Will Drive More Telco Consolidation

Are rural and independent telcos exempt from the “laws of economics?” If you think they are exempt, then consolidation, mergers and even bankruptcies will not happen in the U.S. independent telco business.

If, on the other hand, you believe economics and markets do matter, then it is inevitable that the structure of the U.S. rural and independent telecom business must eventually change. Some, including CHR Solutions SVP Kent Larsen, think that consolidation process will begin by 2014 or 2015.

Here’s the argument, in a nutshell. For starters, “wireless now is the preferred consumer choice” for voice and messaging, and might begin to be a more-logical choice even for broadband access. If nothing else were happening, that would put fixed network service providers at a disadvantage.

One immediate consequence is that there is less demand for fixed network voice lines and usage. The corollary is that it is hard to “grow revenues.” Simply, the historic revenue sources are dwindling and the new services (video entertainment and high-speed access) arguably are modestly profitable.

So cash flow is diminishing. That doesn’t mean many rural telcos do not have cash available. They do, says Larsen. But they can’t find suitable places to invest that cash, in the business.


source: CHR

Some will argue they should invest in upgraded networks. But the payback from such initiatives is questionable. The basic problem is that it is hard to make the case that network upgrades generate enough incremental revenue to pay for the investments.

If you wonder why AT&T and Verizon Wireless have concluded that Long Term Evolution makes sense everywhere they cannot afford to invest in fiber to the home, that’s your answer. There simply are places where fiber to the home provides a negative rate of return.

Under the best of circumstances, most rural or independent fixed network service providers would not be able to survive without government subsidies of one sort or another.

But circumstances are far from optimal.

Demography is in many ways destiny. And it simply is a fact that rural areas are losing population, says Larsen. That means fewer future customers. The customers that do remain are older than the U.S. average. That means, sooner or later, those people stop being customers.

And communications remains a highly capital intensive business. That means scale matters, since the lowest-cost provider in the market tends to win, in the end, Larsen notes.

It isn’t that smaller telcos are inefficient. In fact, they probably operate about as efficiently as they can, in terms of operating cost. But that’s part of the problem. “A 3,000-customer company can’t take out much cost,” Larsen adds.

But that is why mergers will have to happen. Unless a firm wants to go bankrupt, sooner or later, firms must combine, which will produce the operating cost advantages combinations of similar firms always provide. Overhead can be cut.

And it even is possible to predict where such mergers will happen: between companies that are in close proximity. The reason also is driven by economics: combining nearby firms will allow elimination of redundant resources. Acquisitions of far-away firms do not provide significant similar advantages.

Historically, a few firms in the independent telco industry have been acquirers. Windstream and Frontier Communications, or Fairpoint, come to mind. But those firms now are concentrating on rationalizing what they already have, so are essentially out of the market for further significant acquisitions.

That leaves only “merger of equals” opportunities on a smaller and local scale.

Nor is consolidation an issue only for rural telcos. Most independent competitive local exchange carriers and wireless ISPs sooner or later will face the same fundamental issues. It’s just the economics of a mature scale business at a time when revenue and cost pressures are rising.

Big or small, consolidation always happens in the communications business, sooner or later.