Messaging Apps Do Not Take SMS Share; They Destroy the Market

Text messaging might be worth about $140 billion annually over the next three years for mobile service providers. 

But use of over the top messaging apps is growing. On the other hand, that doesn't mean the revenue earned by messaging app providers is anywhere close to that of text messaging. 

The analogy likely will be the impact of Skype on international long distance revenue. 

Skype displaces some amount of international long distance revenue. But it displaces a huge amount of usage. 



In other words, even as Skype is a substitute for much international long distance, Skype doesn't just take share. Skype essentially destroys the international long distance market, exchanging usage pennies for former usage dollars. 

Usage is not revenue, for voice or messaging. 

BII

Disruption of Access Pricing Will Be Necessary

In a competitive market, the lowest-cost competitor tends to win, all other things being equal. Nobody would question the notion that tier-one telcos tend to be the highest-cost providers in any market.

In the U.S. market, cable operators operate at lower costs than their telco foes can. Many ISPs operate at lower costs than cable operators.

All of that should have some drop dead simple implications. Tier one telcos will have to keep cutting costs. So it is no surprise that the UNI Europa ICTS union now estimates that European carriers will probably cut their workforce by 30 percent by about 2018.

Within a decade, industry employment will be cut in half, the group also says. In large part, that is only an effort to benchmark against more efficient North American carriers.

But that isn’t good enough. That only makes a very-high-cost European carrier as efficient as the high-cost providers in the North American market.

To be sure, access networks always have been expensive. But as cable and mobile networks now have demonstrated, there are ways to significantly trim access network costs. The big challenge now is whether it is possible to disruptively lower access costs.

Google Fiber, it might be argued, is not so much disrupting network cost as it is disrupting user expectations about the value-price relationship for Internet access. But Google Fiber does not appear to have massively disrupted the actual cost of building an access network.

Recent experience with municipal Wi-Fi has been disappointing, but perhaps more for revenue than cost of network reasons. In other cases, as for rural wireless ISPs, middle mile backhaul can be a bigger business model input than the cost of access networks.

But the economics of WISP networks have gotten better in recent years. Improvements in the price-performance of radio gear are largely the reason.

So the issue is whether disruption of high-quality access markets is possible. Right now, it isn’t clear whether it can be done, or how it might be done. But that doesn’t mean it can’t be done.

And the fixed network is the key problem for other reasons, not least of the problems being that mobile networks generate about two thirds of global industry revenue.

So no matter what is spent on the fixed networks, they only generate a third of total revenue. And that assumes the revenue ratios do not tilt in the direction of mobile even more than at present.

U.S wireless revenue in 2012 of about $335 billion represents about 66 percent of communications revenues.  Fixed network voice revenue was about $132 billion, with an additional $38 billion in broadband access revenue and $6 billion in television revenue, for a total of about $176 billion in fixed network revenue.

U.S. mobile revenues as a percentage of total revenues have been climbing for a decade. The only issue has been the precise year of crossover, when wireless surpasses fixed network revenue. That will happen in 2013, some believe.

As those trends continue, it is going to be harder than ever to create a good business case for fixed network access. And yet it must be done. For that reasons, some of us think disruption is going to be necessary.

Users Now Want an Order of Magnitude More Speed

User expectations matter in virtually all markets. At any point in time, there is a bundle of values that constitute the minimum acceptable offer for any product. The obvious example is all the component parts and features of an automobile that are essential as part of the basic product. 

The same is true for end user expectations of what constitutes a minimum acceptable level of broadband access service. Back in 2008, policymakers routinely spoke of 2 Mbps as a minimum threshold. 


There is a reason. Historically, "broadband" was defined as any speed at or above 2.5 Mbps. These days, user expectations outstrip the original industry definitions. 

A new poll by thinkbroadband of U.K. respondents finds that about a third think 20 Mbps is the minimum speed for any universal service requirement.

That is an order of magnitude increase over the 2008 levels of expectation that were commonly cited by policymakers as a floor. But it appears policymakers might already have underestimated expectations by close to an order of magnitude. 

That is why it is dangerous for ISPs to assume too much about what customers want, and how fast expectations can change.

That, in fact, is precisely what Google Fiber intends to achieve: a disruptive increase in end user expectations about what a minimally acceptable offer is, in the area of Internet access. 

There are huge implications for ISP investment decisions. There are equally huge implications for the future roles of various types of networks. The point is that end user and customer expectations apparently are highly elastic. 

Elastic expectations mean ISPs must be prepared not just for higher speeds, but rapidly-changing end user expectations as well. 

Top-Line Revenue Growth Will be Challenging for U.S. Telcos

U.S. mobile and fixed network service providers are not the only firms struggling to grow top-line revenues right now. Nor might telcos and mobile service providers be unusual over the next several years, in that regard. 

AT&T and Verizon Wireless probably have the best shot at growing revenues. Other telcos without mobile capabilities might be unable to grow revenues, top line. 

That doesn't mean firms cannot grow. They can, and by acquiring other assets. For AT&T and Verizon Wireless, that almost has to come from offshore acquisitions. Not only will U.S. regulators not likely allow either firm to get much bigger, the telcos seem to be losing the battle with cable operators for high-speed access accounts which are the foundation for tomorrow's business. 

The Real Threat to Verizon Wireless, AT&T Might Not be Sprint or T-Mobile USA

It isn’t so clear whether the leaders of T-Mobile USA and Sprint really think they could become key threats to Verizon Wireless and AT&T, or whether the fallback position is simply to run their businesses as well as possible, under the circumstances, until an asset sale occurs.

At some level, one might wonder whether, at this late state of market development, it actually is feasible for anybody to unseat Verizon Wireless and AT&T. On the other hand, that does not mean that new upstarts could not attack the market in a new way.

If one’s concern were simply the fastest possible ubiquitous Internet access, provided at the lowest cost possible, other business models could emerge. One might simply have to assume the most-important requirement is Internet access, not carrier voice.

In fact, since most mobile users consume most of their Internet bandwidth at stationary locations (90 percent or more), “on the go” access, though important, might not be so important as Wi-Fi access. Whether a truly large national network can be assembled at reasonable cost, in reasonable time, is probably the issue.

Up to this point, it has been the 3G and now 4G networks that have offered national scale, and that might not change, any time soon.

That means the biggest threats to AT&T and Verizon Wireless are not Sprint and T-Mobile USA, but new competitors that really do not care about carrier voice, but Internet access. That would be firms such as Google, Apple, even Microsoft or Amazon.

The problem is that a rational buyer, interested primarily in Internet access, would not want to buy the liabilities associated with legacy firms with huge and underfunded pension obligations, for example.

The problem is simply the expense and political hassle of assembling a national Wi-Fi capability with extensive coverage, from the bottom up. Nor, in truth, is there much evidence suggesting that people would prefer to live without “always on” mobile access. So one logically would assume it could make sense to create a mobile virtual network operator capability, if not owning an entire network, specifically optimized for low-cost Internet access.

But carriers are embracing Wi-Fi for data offload, so the issue is not completely clear. One might assume that under some set of conditions, every Internet access provider would actually prefer a combination of full mobile access and fixed Wi-Fi.

Wireless networking is at an inflection point where it can completely replace wired networking everywhere but the data center," said Robert J. Pera, Ubiquiti Networks CEO.

Allowing for a bit of hyperbole, we are probably once again at a point where observers are going to speculate about whether Wi-Fi networks can compete with or displace mobile networks. That debate is not as robust as it once was.

It might not be too early to suggest that such displacement does not make as much sense for voice networking or messaging as for Internet access, where use of fixed access by mobile devices primarily for Internet access is a rather common occurrence.

Proportion of mobile network traffic that is generated indoors, by region

source: Analysys Mason

POS is Biggest Mobile Payments Change So Far

Transaction volume tells the story of where mobile payments have gotten early traction. 

As of year-end 2012, only 7.9 million U.S. consumers use consumer-facing mobile wallet systems such as Google Wallet.

But in-store mobile payments using such systems nearly quadrupled in 2012, representing about $640 million in transaction volume. 

This figure notably does not include swipes on mobile credit card readers like Square and PayPal.

Card readers such as Square represented $10 billion in transaction volume in 2012.  That two order of magnitude difference in transaction volume illustrates the perceived value of the solutions. 

What already has changed is the point of sale terminal business. 

Dumb Display is Analogy to Dumb Pipe

Can a home be a TV household without owning a TV? Nielsen now says that is the case. Henceforth, Nielsen will measure TV viewing on a "TV" as well as video viewing on other screens, such as smart phones, tablets and PCs. 

Of course, one might also say there are other potential ramifications. Way back in the old days when there were not PCs or smart phones or tablets, some technologists suggested that the best way to handle the matter of displays was to produce "dumb screens" driven by cable or other boxes that provided the channel tuning.

The reason is that, even today, the actual tuner in a TV becomes redundant, if the user is connected to a decoder supplied by the video entertainment service provider, and that is more than 85 percent of U.S. homes.

So the "obvious" solution was to create simple, cheaper, dumb monitors without the cost and overhead of "tuning" functions, on the assumption that the tuning would be supplied by a cable, satellite or now telco TV provider.

That never happened, and one reason is that TV manufacturers hate the notion that they make dumb terminals as much as service providers hate the idea that they sell dumb pipe access. 

One might suggest that the debate will arise again, now that any number of screens and CPUs are used to drive viewing. At least in principle, consumers might want flexible large screens that simply take inputs from any number of other CPUs, ranging from game players to tablets, smart phones, PCs or decoders of various types. 

TV set manufacturers typically will resist. So we are likely to see multiple, redundant CPUs used in the home, even when they might not strictly be necessary. The issue will be most relevant for decoders and game players, since all other CPUs have built-in smaller screens. 

Still, there is logic to big, dumb terminals outfitted to take CPU inputs of many types, with Internet access and other functions provided by the outboard devices, not the TV set. But don't hold your breath. TV manufacturers will not do so.