Can Carriers Afford "Unlimited" Internet Access?

With the caveat that retail price is not necessarily directly related to cost, it sometimes might be possible for an Internet service provider to offer truly limitless Internet access, for a while. That tends to happen only when a brand-new network, operated by an upstart trying to take share, first comes to market.

Under those conditions, the network has plenty of capacity, and it is customers that are in short supply. Assuming that service provider actually is able to make a business of Internet access, the number of customers soon will force a change in such policies at some point, to encourage customers to make choices about how much they use.

Also with the caveat that some think there really is not a bandwidth issue faced by major ISPs, Internet access actually is more akin to many other network services, and unlike a few that charge the equivalent of "flat rates."

The classic example of a "flat rate" network service is cable TV, which allows users "unlimited" use of all the channels, on multiple sets or devices, for the same charge. But that is a multicast service, which has important bandwidth implications. 

Essentially a multicast service sends one copy, usable by all users, on a point to multipoint basis. Satellite TV, broadcast TV and broadcast radio work the same way. Metering doesn't matter, because there are zero bandwidth implications for usage, high or low. 

No more bandwidth actually is consumed no matter how many customers decide to watch at once, or how many customer devices are in use at any one time. 

Internet access is a point-to-point medium, like a voice call, a videoconference, water, waste water or electrical service. There, each unit of additional usage really does have network implications. 

At least in part, that is why unlimited Internet access is disappearing. On networks with high usage, there are "peak" hour and "peak day" dimensions to usage. And though it often seems "unfair" to some observers that usage is metered at some level even when the networks are lightly used, that isn't the point.

Every communications network (point to point) has to be sized for "peak" usage, not "average" usage.

So ISPs will have to shift to some form of metered usage over time, even if only to encourage people to use the network at off peak hours, rather than peak hours. Mobile ISPs have been bigger problems, as some parts of their networks have very-high usage on a sustained basis, while other parts are more lightly used.

Any cell site right beside a major highway will become congested during rush hour. Some suburban cells might not become seriously congested at any hour of the day. Some downtown urban sites with high foot traffic might be heavily used during working hours, but lightly used during non-work hours, and on weekends. 

The whole point of metering is that metering also allows service providers to create incentives for using the network at times when capacity is not a problem. That's the whole theory behind weekend and evening calling  rates, which were important in the past. 

The other problem is video, which has bandwidth implications an order of magnitude or two orders of magnitude greater than voice, for example. While nobody seems to think retail rates actually can rise by an order of magnitude or two orders of magnitude, even if usage does grow that much, the additional usage carries real costs, and those costs have to be recovered. 

So can a typical ISP, with a serious number of customers, actually afford to offer truly unlimited access, if those customers start watching Internet-delivered video? Probably not. An order of magnitude worth of network is an expensive thing. 

One might hope more-efficient suppliers might enter any local market, but any large ISP will over time, experience higher costs "per unit," even if that supplier originally started out as a low-cost supplier. 

We can quibble about the cost elements, but those elements will develop, over time, especially in highly-competitive markets such as Internet access. 

People Access the Internet Everywhere, All the Time

A survey of abourt 60,000 U.S. users simply confirms what you would assume, namely that people now use their smart phones to use the Internet virtually everywhere, Forrester Research reports. 

Mobile Data Plans Will Grow 10 Times Bigger by 2015

Real-time entertainment applications on mobile devices (smartphone and tablets) being used on fixed access networks accounted for nine percent of all traffic in North America, according to Sandvine. 

By 2015, Sandvine believes mobile devices will account for 20 percent of all traffic on North American fixed access networks. 

In the past three years on North American fixed access networks, real-time entertainment has almost doubled its share of traffic, now accounting for 58.6 percent of all peak period traffic, Sandvine says. 

Sandvine expects real-time entertainment will account for over two thirds of peak period traffic by 2015.

For those reasons, Sandvine predicts mobile users will demand service packages with ten times the monthly quota that is available in 2012. The clear business problem for mobile ISPs is that virtually nobody believes service providers can charge an order of magnitude more for mobile broadband. 

LTE Smart Phones Will Grow 300% in 2013

The global LTE smart phone market will triple in size during 2013, according to Strategy Analytics, exceeding a quarter billion units for the first time. 

Some service providers a bit later to make the move to Long Term Evolution 4G networks might start feeling the pressure as sales volumes might reach an inflection  point, growing 100 percent a year for the next several years. 

Should Investors Worry About U.K. 4G Spectrum Auctions?

For some observers, the Long Term Evolution spectrum auctions just beginning in Europe are starting to look like the disastrous 3G auctions of the 2000 period, when mobile operators vastly overbid for spectrum rights, causing financial distress that threatened some of the leading firms with banrkuptcy.

It looks like the same thing is happening again, and the upcoming United Kingdom auctions might confirm the story. The precursor in this case was the Netherlands auction, which cost mobile service providers more than anybody really had expected. 

The first day of stock trading after the completion of the Netherlands spectrum auction, shares of winning bidders fell, across the board. 

KPN fell nearly 15 percent, the steepest drop in more than a decade. Shares of Vodafone were down 1.7 percent by the close of the day. Deutsche Telekom fell 0.3 percent in Frankfurt, and shares of Tele2 declined one percent in Stockholm. 

Up next are similar spectrum auctions in the United Kingdom market, which more than a decade ago witnessed a huge overbidding problem. 

KPN said it wouldn't be able pay its promised end-of-year dividend, because of new spending on the specgtrum. 

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.

The 3.8 billion euros ($4.97 billion) proceeds were much 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 many firms. 

Spectrum auctions, especially those enabling the next generation of networks, are strategic matters, of course. But the temptation to overpay is ever present. If European service providers guess wrong, again, and pay more than the business case can support. a period of financial distress is coming. 

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.