Can Service Providers Raise Prices?

Though it might sound almost silly, one wonders whether, given the key structural changes happening in the fixed network communications industry, service providers must not raise retail prices, somewhere, somehow, to offset both declining legacy revenues and growing costs.

And, one might add, do so at a time when many competitors will continue to attack prices.

In some real ways, fixed network service providers--especially smaller independent and rural providers--are being squeezed in a vice. Though demand for broadband remains high, and demand for video entertainment is relatively strong, the core voice product is a declining revenue source. And as demand dwindles, per-customer costs rise, since the fixed costs have to be spread over a smaller base of customers.

Raising prices would be one logical way of recovering costs, under such circumstances, in part because the customers that remain tend to be the customers who value the product more than the customers that have left.

Bundling, to sell more units to the same customer, is another tested and proven  approach, even if price discounting is unavoidable.

But there is a paradox. “If you might characterize large telcos as being contemptuous of their customers, you might characterize rural telcos as being afraid of their customers,” says Kent Larsen, CHR Solutions SVP.

What Larsen means is that many in the rural portion of the business shy away from package deals, teaser rates or other inducements seen as devaluing the product. “Customers want those deals and even might expect it,” says Larsen.

The point is that marketing matters. Larger cable companies and telcos found out long ago that consumers value triple-play packages for one important reason: they save money. One can argue about “devaluing” the products, but the apparent reality is that consumers now have come to expect the fundamental triple-play promise: “buy in bulk and save money.”

Sometimes the “answer” is simply to hide the actual cost of products. Giving a customer something of value that is viewed as “free” is one such tactic, even if, in actuality, all costs must be recovered.

Verizon Wireless has made domestic U.S. voice and text messaging a sort of “network access fee,” the prerequisite for using a network, while broadband is now the variable cost part of the service. In essence, to use the network, customers pay a flat fee for unlimited U.S. voice and texting, and then select from a variable bucket of data usage across all devices.

At some level, customers for fixed network voice services will have to be enticed to keep the voice service, and bundling with video and broadband probably is the easiest way to do so. Yes, that will “devalue” voice. But the alternative is to lose the customer. And there is another advantage: less churn.

It might be hard to measure triple-play customer satisfaction. But one fact remains: triple-play customers tend to be more “loyal,” or at least to churn less. If that is the outcome, it might not matter how satisfied those customers are. They are satisfied enough not to choose another provider, despite what they might say.

And make no mistake, Fixed line telephone service routinely ranks as among the U.S. industries with the lowest consumer satisfaction scores, as measured by the American Customer Satisfaction Index, for whatever reason.

It simply is a fact that surveys of U.S. consumer satisfaction routinely show low scores for fixed line telephone service, compared to most other products people buy, and which are tracked by the American Customer Satisfaction Index.

Subscription TV scores rank even lower, but at least those typical scores have risen since 1994. Likewise, reported satisfaction with mobile phone service has risen since 2004.

Reported satisfaction with phone service has fallen 13.6 percent since 1994, the greatest drop for products in any industry, followed by newspapers, which have seen an 11 percent drop since 1994.

Industry executives might not like the comparison, since, by most accounts, the U.S. newspaper industry has been shrinking for decades, with economics that grow worse over time.

On the other hand, low satisfaction scores do not necessarily lead to product abandonment, either.  Airlines routinely get low satisfaction score, but people continue to buy airline tickets. But prices are rising, in part because there is no other way for airlines to stay in business.

But all might agree that, other things being equal, low satisfaction is a potential problem, and high satisfaction is the preferred outcome of business operations.

On the other hand, both airlines and fixed network telcos might face structural problems. Some might argue that U.S. domestic airlines cannot simultaneously provide “high quality, highly-satisfying service” and also offer customers the lower fares they prefer. In other words, airlines cannot afford to make their customers “extremely happy” and stay in business.

Some might argue that fixed network communications providers are in something of a similar situation. With customers abandoning the product, it is more difficult every year to raise investment in service attributes that might boost satisfaction. And costs are growing.

Could the service be made better? Some would argue it can, providing high-definition voice, or calling features, for example. But some might not want to make the investment. In that case, lower prices and bundling might be the other course of action.

The larger issue is whether the fixed network telephone industry now has attributes similar to the airline industry, namely an inability to provide “excellent” service and “low fares” at the same time.

The other issue is how prices can rise to cover growing costs, at a time when consumer demand is shifting away from the legacy voice product. Broadband is the obvious candidate.

Whether retail video prices can be raised, long term is an issue. And fixed network voice is going to face price pressures, no matter what service providers do, even if features and value are enhanced.

Time Warner Cable Drops One Lightly-Viewed Channel, Others Obviously will Follow

Time Warner Cable is dropping arts TV channel Ovation from its channel lineup on Dec. 31, 2012 the first channel to suffer removal as part of Time Warner Cable's policy of not carrying lightly-viewed channels.

"Steeply escalating programming costs are forcing us to closely assess each network as it comes up for renewal,"  Time Warner Cable said. Ovation is not the only channel that doesn't get many viewers. Time Warner Cable says the channel is watched by "less than one percent of our customers on any given day."

The new policy is one step the cable operator is taking in an effort to halt the escalating cost of programming fees that threaten to make its video subscription service too expensive, relative to value, for many customers. 

Smaller networks without significant viewership will face similar problems, though the big test will come later, when the major network contract negotiations occur, some occurring several years from now. 

Of course, cable operators have other concerns than simply rapidly-escalating costs of video programming. The bandwidth used to deliver video progrramming could be used in other ways, such as to beef up the capacity available for business and consumer high-speed access services.

In fact, the conversion from analog to digital delivery formats was driven, in part, by the upside from freeing up capacity precisely to support high-speed access and voice services. 

Sprint Will Own Most Spectrum of All U.S. Mobile Operators

If the FCC approves the Sprint purchase of the rest of Clearwire it does not already own,  Sprint will be the largest spectrum holder in the United States with an average of just over 200 MHz of spectrum across the country. 

But there's something else important: Sprint will have fewer customers to contend for use of that spectrum. Of the total of 547 MHz of spectrum in use for mobile broadband, Sprint will own more than a third of the spectrum, but serve less than 17 percent of customers.

That means Sprint will have 3.57 MHz of spectrum to support each subscriber, compared to  Verizon, with 1.05 MHz of spectrum available for each customer.

That means Sprint has more freedom to attack the value-price relationship, something many observers are certain Softbank will do, as the owner of Sprint. 


It is virtually certain that mere operating efficiency between SoftBank, Sprint and Clearwire will not make the deal work. More likely is some oblique assault on AT&T and Verizon, not a direct competition using today's value proposition. Softbank is much more a consumer software company than Sprint, Clearwire, AT&T or Verizon. 

If there is a clue to what a SoftBank-owned Sprint might do with the Clearwire assets, that is the place it probably makes sense to look. For those of you who prefer more complicated possibilities, there always is Google.  

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.