What are the Right Metrics to Measure Service Provider Success?

“The financial community does not measure our industry correctly,” says Norman Fekrat, former VP and partner at IBM Global Business Services. And there will be consequences once analysts finally figure out that the current metrics, from the legacy voice business, do not accurately describe the actual financial results being generated by telcos globally.

The number of subscribers once was a meaningful metric. Because “subscribers” was useful, so was the concept of “churn,” reflecting a service provider’s ability to keep its customers.

These days, “revenue generating units” are reported by many service providers, because that simply makes more sense. Average revenue per user likewise made perfect sense in a long era where “subscribers” and “lines” were accurate and useful ways to measure business health.

Fekrat argues that the current metrics actually do not capture financial performance in ways that will matter as all services wind up as IP-bandwidth-based apps. In the era to come, where the fundamental network resource consumed by any app is “gigabytes,” profit will have to be measured, per service or application, in relationship to use of the network.

In a voice-centric business model, additional usage actually did not really affect “cost,” in terms of use of the network resource. That means the profit of a video entertainment service would have to be evaluated not only in terms of revenue, but also in terms of consumption of network resources.

The same would hold for voice, messaging, web surfing or any other application using the network. Part of the reason for Fekrat’s concern is that, just to keep profit margins where they currently are, assuming growing consumption of bandwidth, cost per gigabyte has to decline about 70 percent to 90 percent every three to four years.

Some of that cost reduction might already be happening, at least for buyers able to buy in some volume. Fekrat assumes wholesale capacity prices of about $4 to $5 per gigabyte. Some buyers or sellers might argue prices, on some routes, already are in the two cents to three cents per gigabyte range.

In other words, if the cost per gigabyte per service argument is valid, at least for the capacity part of the business, costs might already be falling fast enough to make operating, capital and other overhead costs more significant than network costs, at least where the core networks are concerned. Access networks might be a different matter, since traditional cost analysis might attribute as much as 90 percent of end-to-end cost to the access networks on either side of any session.

And Fekrat has one benchmark in mind: service provider network costs must, over time, match those of Google. That’s a very tall order, but wise advice, if you assume that, in a competitive market, over the long term, the lowest cost network wins.

"Smart M2M" and "Smart ARPU"

It is by no means clear what a “smart” pipe strategy really is, compared to a “dumb pipe” or capacity play, in the retail telecommunications business. To be sure, it is obvious why communications executives find the term “dumb pipe” distasteful, as it implies “low value” or “low margin” or “low gross revenue.”

In truth, virtually all “smart pipe” strategies are built on largely “dumb pipe (best effort Internet access).” In that sense, all retail strategies now are a mix of “dumb pipe (best effort Internet access)” and applications (“smart pipe”). Any service provider selling video entertainment services or voice, for example, by definition is selling an application running on top of the pipe.

Some might say the National Broadband Network in Australia, or any other wholesale-only network services business is akin to a “dumb network” business strategy. But even there, when a wholesale voice service is sold, it is an application running on the network, not a true “dumb pipe” service.

That isn’t going to stop all sorts of service providers from selling or using “smart” as part of their retail branding strategy. Nor, in truth, is the notion incorrect. The point is that service providers all over the world are seriously engaged in a pursuit of new applications to create and sell that incorporate communications features enabled by their networks.

Telefónica Digital, for example, touts “Smart M2M,” a web-based platform for machine-to-machine (M2M) communications. How precisely any active mobile device could provide communications for a sensor function, without being a “smart” activity, is a subtle matter.

“Smart M2M” provides real time monitoring of traffic type, volume and current consumption, technical supervision of lines (maps of connected devices, advanced diagnostics) and localization, Telefónica Digital says.

The service includes  fraud detection functionalities, including the ability to restrict communications between a list of given devices or the possibility to establish traffic caps.

NTT Docomo, for its part, now talks about “smart ARPU.”

Minoru Etoh, managing director with NTT Docomo, says Docomo now refers to new value added services including music and video on demand as “smart ARPU (average revenue per user),” which now accounts for about 10 percent of NTT Docomo revenue.

There already is only so much revenue service providers can earn from end users buying mobile broadband, said Etoh. Call that dumb pipe, best effort Internet access. But Docomo is pinning its future revenue growth on “smart ARPU” applications and services that are built on the assumption a customer is buying the “dumb” access services.

Google Extends Olive Branch to French Publishers

Google has offered French publishers about 50 million euros for the right to index their content. The problem Google (and other search engines) face is that French government is threatening to pass new laws requiring such payments.

That news comes as Google reportedly also is paying Orange to "terminate" or deliver its content to Orange end users. That deal, in all likelihood, is not what it seems to be. Google operates one of the largest IP networks in the world, so that specific deal probably is not a payment to Orange to deliver traffic, but only a traditional carrier-to-carrier termination agreement. 

The deal Google offered to the publishers includes the purchase of advertising space from Google, on paper and digital media, a commercial collaboration between publishers and search engine and the use by the publishers of Google's advertising platform AdSense.

Media owners rejected the offer, saying they wanted annual income of about 70 to 100 million euros.

The pressure from French publishers shows a possible crack in the traditional business relationship between some large application providers and some large media and telecom interests. Both of those industries want more of a share of Internet ecosystem revenue, and such fees as Google supposedly is paying are one way of achieving those objectives. 

Policy issues aside, the French media issue is significant, as Google now increasingly is faced with a choice: create new business and commercial deals with business partners, even when it would, in principle, rather not do so, or have regulators and legislators potentially force it to do so anyway, on terms Google will have no control over, or ability to influence. 

NTT Docomo Chases "Smart ARPU"

No matter how much the term of art is criticized, "dumb pipe" is never far from the surface in the mobile or fixed network business. NTT Docomo, in fact, now uses the term "smart ARPU (average revenue per user)" to describe some of its new value-added services.

The very term implies that there is "dumb ARPU," namely vanilla mobile broadband, offering best effort only access. Nor is there complete agreement on the issue of whether differentiated end user quality of service is a potential source of such smart ARPU.

In fact, said Minoru Etoh, NTT Docomo managing director, offering best effort only access is operationally much simpler than offering tiers of service based on quality metrics. Many others of course believe it will be important to offer differentiated service, where it is possible.

Still, the problem with all the new services mobile operators are experimenting with is that there is still not so much agreement about what will be wind up being a “big” revenue stream, and what might not. Nor is there complete agreement on where the biggest opportunities might lie.

That uncertainty was much in view at a session on the mobile business at the Pacific Telecommunications Council where Yijing Brentano, Sprint VP, expressed optimism about prospects for mobile advertising, as did David Schropfer, The Luciano Group partner.

On the other hand, Minoru Etoh, managing director with NTT Docomo, and a venture capitalist in the audience, disagreed. “I’ve seen hundreds of business plans based on advertising,” the VC said. But Schropfer argued that the type of advertising makes a difference. Traditional formats can change with mobile.

“You can change behavior if you offer a coupon to me while I am in the store,” Schropfer said.

There was less disagreement with the notion that machine-to-machine services would be a significant opportunity, but even there the magnitude of the opportunity is uncertain.

M2M will be important, but only as a business customer service, with mobile service providers selling to automobile manufacturers, said Etoh and Brentano. And Schropfer even classified much of mobile commerce as an M2M opportunity. “M2M is the crux of where mobile commerce is going,” said Schropfer.

But Etoh was not convinced about the timing, and was uncertain revenue or adoption would be significant, any time soon.

Etoh said Docomo now refers to new value added services including music and video on demand as “smart ARPU (average revenue per user),” which now accounts for about 10 percent of NTT Docomo revenue.

There was much more agreement that new revenue sources are essential, though. in large part because there already is only so much revenue service providers can earn from end users buying mobile broadband, said Etoh.

Etoh also warned that Wi-Fi offload might not provide as much benefit for capacity relief in dense urban areas as many now expect.

Despite the rage for mobile offload using Wi-Fi, Docomo has found that Wi-Fi offload doesn’t work in very dense areas, with smallish macrocells, because there is too much interference between the Wi-Fi sites.

Phablets Could be Big for Developing Markets

The controversy about phablets (some think it is a momentary fad , others think it is something more, and will grow) could have some implications for broadband usage in many parts of the developing world, irrespective of what it could mean for consumers who want a smart phone with a bigger screen.

And that implication is that users who already have demonstrated huge appetite for mobile phones, and will soon want to use the Internet on a more convenient screen, might gravitate to phablet devices as a sort of “best of both worlds” approach to devices.

We’ll have to wait and see, but the emergence first of smart phones and now tablets has begun to make concrete the notion that in many markets, the most-popular computer people use will be a mobile device of some type. 

What Comes After the PSTN?

Some would say it is misleading to talk of the “end of the public switched telephone network,” as that implies something more than a technology replacement (IP for TDM) as the industry earlier evolved from copper to optical fiber, or analog to digital switching, will happen.

In a real sense, the decommissioning of the PSTN, though a big event, is something veterans of the mobile industry are well acquainted with. That, in fact, is the meaning of the current transition to “fourth generation” networks.

The first generation U.S. analog network was shut down in 2008, for example. The second generation TDM network will be shut down in 2017, according to AT&T.

Verizon will shut down its 2G and 3G networks in 2021.

Still, there is a reasonable sense that something more than mere generations of outside plant, switching technology or protocols are at play for the fixed network. In part that might be because it hasn’t happened before, as it has in the mobile business.

The other obvious difference is that the mobile ecosystem, which requires tighter integration of networks, devices and apps, arguably will have more protection from “dumb pipe” scenarios that worry fixed network executives.

An open-ended question rhetorically asked by TeleGeography VP Stephan Beckert at the Pacific Telecommunications Council illustrates thinking about “the end of the PSTN.”

“Does anyone have a post-PSTN business model?” he asked. The question came in the context of a presentation about the international voice market. Mobile executives would not understand the question, since it is akin to asking “does anyone have a post-analog business model?”

Granted, the post-analog mobile business model did not have to contend with the existence of the Internet. And though mobile service providers are starting to deal with over the top alternatives to carrier services, they have not faced nearly the pressures on the fixed network business.

But the transition to IP, and the diminution of voice as the key revenue driver, probably already has an “answer.” The answer obviously is broadband. One way or the other, fixed network service providers will base their revenue models on broadband access and as many valuable carrier applications and partner relationships using that network, as is possible.

Entertainment video is the second most important application, beyond high speed access. Beyond that, much remains to be seen. But in a simple sense, the post-PSTN business model already can be seen: broadband is the foundation service.

On the other hand, the precise timing of voice as a sizable revenue stream is hard to predict. Service providers have any number of retail packaging techniques that could extend the carrier voice revenue opportunity for some time, even if usage begins to dwindle significantly.

Think of the way voice not is bundled with broadband and video entertainment to encourage people to keep voice service in order to get discounts on all three services. That doesn’t necessarily mean people use the voice service much, but they pay for it.

But even a self-proclaimed optimist such as Becket notes that although “voice is not dead yet,” the end is coming, for voice as a major revenue source.

Executives already know the answer, it is fair to say. The answer begins with broadband access, but only begins there. Much more will have to follow, and the outcome is uncertain at the moment. But it builds on broadband.

Mega hits One Million Users in a Day

Mega, the new file sharing service from Kim Dotcom, has passed one million users, gained in a single day, Dotcom says. The launch, not a "re-launch" of Megaupload, still is about "content distribution," a business focus that got Megaupload into trouble over content piracy.

Dotcom says that will not be an issue for Upload. Content owners are certain not to be reassured. The service offers users 50 Gbytes of free content storage, and operates in that sense in a manner similar to Dropbox or Skydrive.

The new twist is that Upload is described as a privacy play. Since all data is encrypted, the service can claim that it has no idea what users are uploading and storing, or sharing. The user terms of service specifically forbid upload of copyrighted material, but, by design, Upload won't know what content is uploaded.

It's just another example of friction between IP-based technology and legal frameworks, between what can be done and what is supposed to be done. Even the privacy angle has a dual character. The site protects user data, which many will say is a good thing, for obvious reasons. But that same privacy also cloaks criminal and other anti-social activities.