Orange Says Google Pays Orange for Carriage

Orange CEO Stephane Richard says Google now pays an unspecified fee to Orange for essentially terminating Google traffic on Orange end points. That might be true, but might not mean much of anything.

The agreement appears to be a voluntary business-to-business agreement between Google and Orange that should be not be properly characterized as a case of Google "paying Orange for access."  

It appears to be more like a standard IP transit arrangement between two networks with unequal traffic volume. 

Separately, European content firms have been arguing for mandatory payment of fees of some sort for use of their content in Google's search results displays.

Both of those issues--new Internet forms of intercarrier compensation and participation in Google's advertising revenues--illustrate the difficulties regulators will face in crafting appropriate regulatory frameworks for IP-delivered content and usage of IP network resources.

Traditional regulatory models do not work so well in an IP context. Application or media providers do not have traditional intercarrier compensation obligations. But there is little question today's new IP network traffic generators--video, media and content apps--impose "use of network" cost issues very similar to traditional intercarrier termination issues.

Nor does the traditional media model work so well. Traditionally, media have used their owned networks to deliver their content. TV broadcasters, radio broadcasters, newspapers and magazines provide the key examples in a classic sense.

Cable networks long ago became a new model, though. To be sure, local TV and radio broadcasters have commercial relationships with their content suppliers. But cable operators have taken the model much further, essentially signing up whole programming networks and then packaging those networks for delivery to cable customers.

There is no intercarrier compensation analogy there, since cable operators own their own networks. The problem with IP content is precisely that the ownership of the networks and ownership of content are separated, by design.

Current regulatory frameworks were not designed for such business arrangements. For media and cable TV style business models, there is a well-understood framework for sharing revenue created by the services, but those arrangements do not require intercarrier compensation mechanisms.

The problem is that all networks are becoming IP networks, which, by design, separate the network access from the content people use on those networks. And there is, by design, no reason for actual bilateral business relationships between the providers of network access and the providers of content.

It's a growing and important issue, and app providers will have to make business decisions the way communications carriers sometimes must: make voluntary business arrangements that solve a problem or wait for regulators and legislators to "do it for them."

The reported deal between Orange and Google is something more akin to a cable TV network carriage agreement than anything else. Some won't like that.

AT&T Warns of Lower Long-Term Rates of Return on Investments

AT&T has lowered its expected long-term rate of return for pension obligations due to the continued uncertainty in the securities markets and the U.S. economy in 2013. AT&T will book at $10 billion charge in the fourth quarter to compensate. 

Verizon is taking a $7 billion charge in the fourth quarter, to cover pension obligations of its own. 

AT&T said the changes will not affect It said the pension loss will not affect its operating results or margins.

Still, the shortfall in pension obligations, which largely reflect assumptions about interest rates, will strike some as unsettling. 

What Makes Messaging Different?

Line, the Asia-based instant messaging app, says it has reached 100 million downloads in 18 months.  That sort of raises the issue of how over the top instant messaging apps are different from text messaging. 

In many cases, instant messaging is a relatively straight forward substitute for text messaging, the value being that users do not incur incremental costs. WhatsApp and Kik might be examples of that use case. 

But Line seems more akin to chat (broadcast messaging), than text messaging (person to person communications). In other ways, Line seems like a gaming portal, and less like a simple substitute for text messaging. 

But Line also is a bit like a social network as well. 

Line also has become an over-the-top voice calling app. The point is that it isn't so easy these days to describe how "instant messaging" is different from "text messaging."

Text messaging and IM are in many ways substitute products. But sometimes even that distinction is inadequate. Messaging seems to be evolving. 

Subscriber Growth Dwindles in U.S. Market: What Will Carriers Do?

There are basically two major ways mobile service providers or fixed network service providers can grow revenues: they can add more units (subscribers) or grow revenue per unit (average revenue per user).

And it is starting to look as though even mobile services, which have been the growth driver for the U.S. telecommunications industry, is facing a new era, when subscriber growth in the internal market can be propped up, near term, mostly by acquiring other firms. In other words, the internal U.S. market is approaching a zero-sum game, where one carrier can gain only by taking share from another supplier.

That is one primary reason why U.S. suppliers are so interested in machine-to-machine services, as that could add unit growth from telemetry services sold to other enterprises, rather than “humans.”

Average revenue per unit is a contest at the moment. Service providers face potential erosion of voice and text messaging revenues, though that has for the most part been a muted trend in the U.S. market, as real as it has become in some other markets, particularly in Europe.

But average revenue per unit is now driven by mobile broadband, which can grow for some time, though not indefinitely. Right now, it is unit growth that is the biggest issue.

Retail net additions (postpay and prepaid net additions) for the  three largest U.S. wireless service providers declined 23 percent on a year-over-year basis during third quarter 2012 to approximately 1.6 million, according to Fitch Ratings.

The decline is largely attributable to a 62 percent  year-over-year drop in prepaid net additions. In other words, not even a consumer shift of demand from postpaid to prepaid now is sufficient to propel revenues for some suppliers who specialize in prepaid services.

Wireless revenue growth will be driven more by usage based data pricing plans and increasing capabilities of smartphones as opposed to expanding the wireless subscriber base, Fitch Ratings says.

The leading U.S. mobile providers added 1.1 million revenue generating units during the thrid quarter of 2012, compared with approximately 3.3 million RGUs during the same period of 2011.

Smart phone penetration has reached 59.3 percent, an important figure because smart phone accounts drive mobile data revenue.

High speed data growth remains flat. Fitch estimates that approximately 542,000 new HSD subscribers were added by all large broadband service providers during third-quarter 2012, 3.1 percent  lower than the same quarter of 2011.

Perhaps surprisingly, video now seems to be driving growth for AT&T and Verizon in the fixed network segment of their businesses.

Fitch researchers also note that the largest incumbent  local-exchange carriers are successfully transforming their consumer businesses into broadband- and video-focused models, largely compensating for saturation or decline of the legacy revenue streams.

“The increasing scale of AT&T’s U-verse and Verizon’s FiOS service platforms is sufficiently
mitigating the ongoing secular and competitive pressures of their respective consumer landline
businesses and has strengthened their relative competitive position,” says Fitch.

AT&T U-verse revenues increased 38.3 percent during  third-quarter 2012 when compared with the same period last year. The revenue growth is driven by higher service penetration rates along with  higher levels of customers taking triple or quad play service plans.

AT&T estimates that three fourths of its U-verse TV subscribers have triple or quad play service with the company. U-verse triple play subscribers generate $170 of ARPU.

Verizon’s  FiOS  service accounts for 66 percent of wireline consumer revenues. Verizon’s consumer ARPU accelerated to 10.3 percent over the same quarter of 2011. Triple play customer ARPU is  $150 a month.

Still, even Verizon and AT&T have to now be looking at how to sustain revenue growth when the underlying fundamentals are shifting. Subscriber growth has become a zero-sum game, though revenue growth can continue for some time, lead by mobile broadband growth.

What to do after that revenue segment slows is the current issue. As a practical matter, none of the developing new lines of business are going to contribute sizable immediate revenue. That suggests a wave of acquisitions is going to happen, as that is the most tangible way of growing subscribers.

ARPU, in that sense, will be a secondary growth driver, once mobile broadband becomes ubiquitous.

AT&T Considering Europe Market in a New Way?

Verizon Wireless, AT&T, China Mobile and mobile providers in India have advantages over suppliers in many other markets, namely a huge internal market. Some would argue that is why AT&T and Verizon have done relatively better than many European providers over the past several years, in terms of internal revenue growth.

But even a large internal market might not be sufficient to keep a very-large telecom provider growing, indefinitely. So it is that the Wall Street Journal reports AT&T is considering acquiring a European operator. The United Kingdom, Germany or the Netherlands reportedly are seen as the most-viable markets.

Whether the move is simply opportunistic, or evidence that AT&T sees some clear limits to U.S. growth, is not so clear. Some might argue European telco assets currently are undervalued, so an acquisition would be a relatively attractive way to deploy capital and gain revenue.

To be sure, the move would be a bit of a change of strategy. Obviously, AT&T and SBC had been looking at international growth opportunities for at least a decade. But up to this point, no particular deal seemed to make so much sense.

On the other hand, one might argue that AT&T has taken a hard look at its growth prospects, and does not see sufficient revenue mass from any of the new sources it is working on, compared to the advantages of "growing by acquisition."

However much AT&T might be hopeful about the new bets it is placing in applications and services, it does not currently appear that any could represent incremental revenue large enough to move the needle for AT&T, in the near term.

Have we reached a point where even a firm the size of AT&T cannot grow fast enough in the U.S. market? Possibly. The other issue is simply regulator objection. The Federal Communications Commission essentially has told AT&T, by opposing AT&T's acquisition of T-Mobile USA, that it cannot grow larger in the U.S. market.

So, like it or not, the obvious corollary is that AT&T will deploy its capital, and try to grow, elsewhere.

Tablets ARE PCs

With talk of a "post-PC" era, the role and understanding of tablets has become a key requirement not only for device manufacturers, which face significant potential disruption of their markets, but for application providers, access providers and others in the ecosystem.

In some ways, the tablet represents a clear new appliance category. In other ways, it also displaces the use of PCs. But there remains some uncertaintly about whether the tablet is a "mobile" device or is primarily an "untethered" device. 

In truth, the tablet is a mix of both. Sometimes it will be used as a "mobile" device, carried by a user outside the home, used outside the home and on a mobile network connection. Most of the time, though, it is used inside the home or office in "untethered" mode. 

That leads some to note, not without justification, that a tablet is simply the latest form factor for a PC. Some might say the tablet is why "netbook" demand has collapsed, for example. 

Pan-EU Telco Infrastructure Talks Are Unlikely to Succeed

Will European telcos be able to create a unified fixed nework infrastructure across borders? Fitch Ratings doesn't think so. 

The proposal, which presumably would have to be ratified and approved by the European Commission, would allow all the contestants to essentially create a continent-wide infrastructure company that would sell capacity and services to any retail operator in any of the participating countries.

If you think about it, this is a bigger version of the infrastructure sharing mobile operators have been doing: sharing towers and sometimes radio infrastructure in ways that lower costs for each of the retail providers.

Doubtless there are pragmatic difficulties, such as technology incompatibilities in some cases. But Fitch thinks the bigger problem simply will be EC regulator opposition to a move very likely seen as the precursor to more consolidation in the EC telecom markets. 

Deutsche Telekom, Orange, Telecom Italia, Telefonica, Belgacom and KPN are among the carriers interested in such a cross-country infrastructure sharing plan. The sharing might not be seen as "consolidation" in the market by some. But regulators might not agree.