Is Facebook, and Mobile Advertising, at an Inflection Point?

Is U.S. mobile advertising at an inflection point? During 2012, ad spending for mobile campaigns grew about 180 percent, mostly because Facebook seems to be reaching a potential inflection point for its own advertising efforts. 

Facebook’s third quarter seems to have been decisive.  Facebook offered no mobile ad inventory at the beginning of 2012 but grew its mobile business at an astonishing rate.

Research firm eMarketer expects overall spending on mobile advertising in the United States, including display, search and messaging-based ads served to mobile phones and tablets, will have risen 180 percent in 2012 to top $4 billion.

As recently as September 2012, eMarketer though market growth would be "only" 80 percent. Now eMarketer expects US mobile ad spending to reach $7.19 billion next year and nearly $21 billion by 2016, a significant upward revision.

U.S. mobile ad spending is growing more quickly than previously expected, due in large part to the success of so-called “native” ad formats like Facebook’s mobile news feed ads and Twitter’s "Promoted Products."

How We Measure Service Provider "Success" Will Have to Change

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.

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. But neither, over time, can service providers ignore their profitability delivering services that ultimately are related to bandwidth.

For some services, especially entertainment video, some combination of subscription and advertising probably will eventually be adopted, much as "free" over the air TV has traditionally been supported, as video subscription services and audio services now are supported.

Those approaches do not put the full retail cost of using the network on the end user, but partly on advertisers and business partners.

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.