Few Consumers Like Data Caps; But They Dislike "Usage-Based" Pricing Even Less

Some observers argue that data caps, especially on wireline networks, are hardly a necessity. "Rather, they are motivated by a desire to further increase revenues from existing subscribers and protect legacy services such as cable television from competing Internet services," argues NewAmerica.net.

Although traffic on U.S. broadband networks is increasing at a steady rate, the costs to provide broadband service are also declining, including the cost of Internet connectivity or IP transit as well as equipment and other operational costs.

Whether one agrees with that point of view or not, most might also agree that charging users strictly on the basis of consumption (cents per megabyte, for example), on a fully metered basis, is even less palatable.

That has been the industry consensus since America Online shifted from a usage-based charging model to a flat fee model, back in the days of dial-up access. 

That 1996 pricing lead to an explosion of usage of the Internet. The other leading dial-up access providers also had announced a move to flat rate pricing. 

Whether causal or merely correlated, many observers would suggest that flat rate pricing lead to dramatically higher use of the Internet. Of course, ISPs legitimately worry about the business case for flat rate charging as bandwidth-consumptive video has grown to represent most Internet bandwidth demand. Internet video is now 40 percent of consumer Internet traffic, and will reach 62 percent by the end of 2015, according to Cisco's Visual Networking Indexing Forecast. 

But use of usage caps, or buckets of usage, are a compromise, connecting usage of the network and retail pricing, without reverting to actual metered usage that consumers are not fond of, as a charging mechanism, and prefer predictable flat rates.  

Nor is communications the only service or product consumers generally prefer to buy on a flat fee  basis. 

Mobile internet users across the United Kingdom and United States prefer flat-rate pricing, a new survey by YouGovhas found. That finding should surprise nobody in the U.S. market, given the development of the whole Internet access business since AOL dropped metered billing and went to flat rate packaging.

Unsurprisingly, respondents said they would use the mobile Web more if flat rate access is available. That does not necessarily suggest consumers would reject flat-rate plans that are tiered for usage, even if any rational consumer would say they prefer a low flat rate for unlimited usage.

Smartphone users might be used to low rate, unlimited access, but users of mobile PC dongles and cards are well accustomed to the idea that usage and price are related for "buckets" of usage.

Some 4,324 consumers,18 or older, were polled as part of the study.

In the United Kingdom, 33 percent of respondents  reported that they don't use the Internet despite having access on their phone, while 25 percent of U.S. respondents with an Internet-ready phone say they do not use that feature.

The point is that usage caps are not necessarily a plot by service providers to protect their revenues. At least in part, caps are a way to correlate usage and pricing in a way consumers are more willing to accept. 

Netherlands Mobile Service Providers Already Seeing 4G Spectrum Bid Problems

Vodafone shares fell 2.8 percent, and KPN said it wouldn't be able pay its promised end-of-year dividend. Those are two examples of how "success" in the Netherlands 4G spectrum auction is having financial effects on the auction "winners."

KPN bid €1.35 billion for 120 MHz of 4G spectrum covering the Netherlands, The Register reports. 

That doesn't necessarily mean Netherlands service providers have spent too much to acquire 4G spectrum. That can only be assessed over time. But there is recent precedent for the entire European mobile industry overspending for 3G spectrum, and some might say the industry is heading for that same mistake again. 

On April 27, 2000, the United Kingdom auctioned off five licenses for 3G wireless spectrum, raising $35 billion. Over the next year, a half-dozen other European countries held their own auctions, raising a combined $100 billion in a frenzy of overbidding. 

Ever since then, some have worried about the potential downside of "winning" a major spectrum auction. 

As you might expect, most of the new 4G spectrum that recently was won in the Netherlands spectrum auction were the biggest mobile service providers in the Netherlands. That happened despite restrictions on how much new spectrum the leading mobile service providers could acquire. 

In the auction, two spectrum blocks in the 800 megahertz band and one in the 900 MHz band will be reserved for new entrants. That was the provision that allowed Swedish mobile operator Tele-2 to secure 20 megahertz of spectrum in the 800 MHz band. 

Vodafone and KPN spent the most, with T-Mobile spending about 66 percent of what Vodafone and KPN invested. Tele-2 spent about 12 percent of what Vodafone and KPN spent, but also acquired a modest chunk of the new spectrum.

KPN has about 47 percent market share, while Vodafone has about 29 percent and T-Mobile has about 24 percent. Tele-2, a Swedish operator, also is entering the market. 

The 3.8 billion euros ($4.97 billion) proceeds were much higher than observers anticipated, far surpassing  the EUR400-500 million the government had expected.

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. 

The U.K.’s 3G auction raised £22.5 billion ($35.7 billion) in 2000, amounts that nearly bankrupted most of the firms that won the bids. 

As Much Bandwidth as You Need, Not "Want," is Key

In many cases, a fascination with broadband “speed,” however valuable, does not really measure total value as perceived by the user of the Internet access service. Mobile connections, for example, are slower than fixed connections. But mobility adds so much value that the slower speeds are outweighed by the virtue of “anywhere” access.

And it is hard to dismiss the value of low-speed text messaging or even dial-up access services in many parts of the developing world. Likewise, evaluating the importance or use of broadband is more complicated than simply measuring speed or even price per megabyte consumed.

These days, a majority of all broadband access now uses a mobile connection, and broadband increasingly is becoming something a “person” uses, not a “place.” And that’s important. One might argue that, despite the growing importance of video features and applications, much of the value of mobile broadband comes from use of lower-speed services and applications. 

Even though there is an order of magnitude, or perhaps even two orders of magnitude difference between Google Fiber, running at 1 Gbps, and a mobile broadband connection, the actual end user experience might be all that different.

In fact, mobile broadband seems to have surpassed fixed broadband in 2008. By the end of 2010, there were over twice as many mobile broadband as wireline broadband subscriptions, according to the Broadband Strategies handbook.

The point is that a narrow concentration on access speed probably does not capture the magnitude of value of such connections.

Wireless broadband is already more prevalent than wireline broadband, virtually everywhere. The number of wireless broadband subscriptions in Africa, for example, is more than four times that of wireline.

Europe’s wireless broadband penetration is nearly double the wireline penetration rate at 26 percent and 54 percent, respectively.

This suggests the potential for wireless broadband in areas where traditional wireline infrastructure may be absent, as well as in areas with substantial wireline build-out.

"Fiber to where you can make money" is one humorous way of analyzing how close to the home a fiber access network should be built. In a similar way, consumers will evaluate access speed in relationship to what it is they have to do, where they are, what apps and devices they are using, which networks they can use, and what use of those networks costs, incrementally. 

Is "Carrier of Last Resort" History? Give it A Few Years

Is it is possible AT&T and Verizon might be allowed by the Federal Communications Commission to stop serving customers in some rural areas, essentially abandoning their role as “carriers of last resort?”

The thought isn’t crazy. “Over the next five years, AT&T and Verizon will abandon some areas,” says Kent Larsen, CHR Solutions SVP. The reason is simply that executives no longer see a path to providing service that can earn a profit in some of their rural serving areas.

Neither do many investment analysts who study telco, cable or mobile industries. “The smart money left in 2006,” analysts say, according to Larsen.

It is likely AT&T and Verizon would only be allowed to do so if Long Term Evolution mobile service is available, and both firms could sell a fixed version of that service to customers in areas where landline service is terminated.

Still, the notion that the original bargain--”we give you a monopoly and in return you provide universal voice service”--no longer makes sense in a world of IP networks has merit. 

In most areas, even rural areas, there are two to five potential providers of broadband (A telco, a cable company, one or two satellite providers and often a fixed broadband provider.
And these days, if you can get broadband, you have voice.

Under those conditions, some will make the argument that a “carrier of last resort” obligation, particularly an obligation that applies only to one of the multiple providers, is just silly.

For clues as to what might happen, we all have to follow what the FCC is doing and saying about a transition to an all-IP network, with a shutdown of the legacy time division multiplex network. And there is a good reason the FCC is looking at such a change.

The IP transition for the whole U.S. communications business is getting new attention as the Federal Communications Commission launches a new effort to plan for an end to the time division multiplex “public switched telephone network.”

"The Technology Transitions Policy Task Force will play a critical role in answering the fundamental policy question for communications in the 21st century: In a broadband world, how can we best ensure that our nation's communications policies continue to drive a virtuous cycle of innovation and investment, promote competition, and protect consumers?" said FCC Chairman Julius Genachowski.

Dwindling use of the PSTN is driving the new attention.

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. At one time there were about 175 million access lines in service.

Others, such as Larsen, 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 leapt into leadership shortly thereafter.

Lots of potential changes could come with the IP transition. An end to traditional thinking about “carriers of last resort” and universal service obligations are just two of those changes.

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.