"Law of Big Numbers" is a Key Telco Innovation Challenge

Innovation is critical to telco survival, most observers would tend to agree. If key legacy revenues are declining, new revenue sources must be found. Where to look for such new revenues is a key issue, though.

Nor is it easy to find big new revenue sources, in the communications or any other big business, where the law of large numbers is at work. Basically, a firm generating large revenues cannot easily find big new revenue sources that significantly impact total revenue.

After looking at 3,500 new service launches since 2009, Ovum concludes that “many operators miss the big picture, exaggerate the threat from over-the-top (OTT) players, and misunderstand the broader benefits of innovation,” says Emeka Obiodu, Ovum principal analyst.

Some executives might disagree with some of those conclusions. In four years' time, telco text messaging revenue will decline on average by around 40 percent across Europe and the Middle East, according to senior execs surveyed by STL Partners.

Mobile voice isn't that far behind, with a 20 percent decline predicted. That hardly qualifies as “an exaggeration,” one might argue.

Ovum implies that telcos were too selective when choosing partners and overburdened their partners with unrealistic revenue expectations. That is largely a structural problem.

A service provider with $20 billion to $100 billion annual revenues is not helped much by new lines of business that throw off annual revenues less than $500 million to $1 billion. The “unrealistic” revenue expectations largely are driven by the fact that organizations with large revenues cannot “move the revenue needle” with large new revenue streams.

Ovum also emphasizes the importance of prioritizing innovations that exploit the centrality of operators’ networks. Whatever service provider executives might have thought in the past, the advice to look for new services that build on the network and its users seems a generally accepted point of view at the moment.

“No matter how much telcos try to diversify, their primary role will always be as carriers of voice, messaging, and data traffic,” says Obiodu. Doubtless most service provider executives in the telco world would agree. It perhaps is not so clear that cable TV operators or satellite providers necessarily agree so much.

Other studies suggest telcos already have gotten that message. The approach currently pursued by the majority of respondents (64 percent) to an Accenture survey can be defined as renovation, or a more limited, incremental approach based on line extensions.

As one example, AT&T post paid customers are paying a new 61 cent a month “administration fee” that will raise $512 million a year in revenue ($7.32 per year per post paid customer), on a base of roughly 70 million customers.

To be sure, that is what most people would consider a consumer-facing innovation, but does make the point.

The amount of money AT&T makes from that 61-cent charge will be roughly equal, every month, to the amount of gross revenue Verizon Communications fixed network operations makes from all small business customer operations every month.

That is a practical example of the ways large telcos most easily can create new $1 billion annual revenue streams, namely by building off things they already do.

Generating $1 a month in incremental revenue from 70 million customers creates $840 million a year in incremental revenue.

Softbank to Invest $16 Billion at Sprint

Softbank Corp. plans to invest $16 billion in Sprint over the next two years, mostly to support Sprint's Long Term Evolution network, more than doubling the investment Sprint has been making on its own. 

After the two-year surge, spending is expected to stabilize at about $6 billion annually. 

Softbank also believes it can cut $2 billion to $3 billion annually, based on increased purchasing volume for items such as smart phones and base stations.

Whatever else might happen, the SoftBank purchase of Sprint already has vaulted SoftBank into third place globally for mobile revenue.

"No Good Reason for Smart Phone Profits"

In what has to be one of the most astounding statements ever made by the chief executive officer of a company, about his business, Motorola Mobility CEO Dennis Woodside reportedly has said his company intends to drive down prices for Android devices.

That might not be too big a surprise. Perhaps the more astounding statement is that  "there's no good reason anyone should make huge margins selling smartphones," Woodside said. 

To be sure, price disruption is not unusual in the Internet ecosystem. Many firms have tried to disrupt pricing in a market. But that normally is a strategy employed by attackers, not incumbents. 

Of course, the difference in this case is that Motorola Mobility is fully owned by Google, which has different motivations than the owners of virtually all other handset suppliers. 

Smart phone profits have become a bigger issue recently, as margins seem to be under pressure, with more earnings difficulties  expected. 

The problem is similar to that of tablets, where greater competition is leading to commoditization, with falling profit margins. 

Are Handset Subsidies Good for Consumers?

Are handset subsidies “good” or “bad” for consumers who choose to buy service plans featuring bundled devices? A study by the Organization for Economic Cooperation and Development tries to answer the question.

Perhaps not surprisingly, the answers are nuanced.

In some cases, where one or more operators allow for the possibility of purchasing the smart phone device independently from a bundle, there is a higher total cost for consumers over three years.

For those countries where both bundled and “bring your own device” options exist, such as in France or the United States, the report concludes that the bundled option (with discounted smartphone) was, on average, between $10 and $20 a month more expensive than the BYOD option.

“This is not unexpected,”  a new OECD report shows. When service providers bundle or subsidize a device over time, they essentially are loaning the customer money. The difference in cost over three years essentially represents the cost of credit.

Practices that promote transparency, such as the use of handset purchase by unbundled monthly instalments, can have a positive impact on both consumers and the ecosystem that exists around smartphones, the report suggests.

This report also concludes that, in broad terms, service pricing is only slightly affected by the presence of bundled discounts for popular smart phones.

But the report also notes there are other forms of consumer benefit, irrespective of the possibly higher cost of bundled devices, over three years.

Bundled devices are beneficial, and promote smart phone use, by removing high upfront payments that are a deterrent.

Consumer lock-in is not an issue when regulatory authorities enforce maximum periods for contracts after which customers are entitled to have their handsets “unlocked”, do not permit devices to be locked or ensure there are procedures for early termination of service contracts.

The report does not that there is some evidence that when one mobile service provider provides subsidized devices, and others do not, the non-bundling carriers suffer marketplace damange.

In Spain, Telefonica and Vodafone, the two operators with the largest market share, decided to remove handset subsidies in February 2012 (Cinco Dias, 2012).This action was not followed by Orange (Spain) which gained market share from Telefonica and Vodafone during the first half of that year.

Possibly as a result of this experience Vodafone reintroduced what it described as a short term special offer, which included the price of a handset, at the end of July 2012.

TDS Fiberville: One More Way Google Fiber Has Changed U.S. Internet Access

TDS Telecommunications Corp. now is using a “Fiberville” concept to introduce social inducements for potential customers of its new optical fiber access network, apparently inspired by Google Fiber’s pioneering use of the “Fiberhood” concept to identify early adopter populations.

TDS is expanding its fiber access network in Concord, Tenn. and parts of Knoxville, Tenn. The Fiberville concept offers benefits for potential customers who pre-subscribe. The offers and discounts include free whole-home installation, when any neighborhood qualifies for Fiberville status.

If 15 percent of residents in a neighborhood sign up before a deadline, each of the pre-subscribed homes is eligible for a free lifetime upgrade, including either high-definition programming or Internet speed.

TDS has divided these new fiber-served areas into neighborhoods, each of which has the opportunity to become a “Fiberville” by having residents pre-register for TDS TV.

Neighborhoods with high TDS TV pre-registration rates will qualify for Fiberville status and will receive exclusive offers and discounts.

As did Google Fiber, TDS has created a web site that allows potential buyers to track their neighborhood’s progress toward Fiberville status on the new TDSfiber.com web site.

Aside from showing it is possible to use social principles to improve initial takeup of new high-speed access services, Google Fiber more importantly is likely responsible for faster and more extensive deployment of higher-speed Internet access networks by competitors.

Tizen Travails

Mobile service providers are starting to shift more marketing support to mobile operating systems other than Apple iOS or Android, trying to gain a bit more leverage over suppliers of devices using either of those two operating systems. 

Tizen, the Linus-based operating system backed by Samsung and Intel, has been considered one of the new OS alternatives in the mobile handset business, but there are some signs its backers are rethinking the value of a new operating system that has not yet attracted a wide range of application support.

These days, an OS to a great extent can be successful only to the extent it can create a robust developer community, able to supply lots of popular applications. It doesn't appear Tizen has been able to do so. 

So there is new thinking about new interest in Android, especially on Intel's part. And Firefox and Windows Phone are contending as well for what most expect will be the number-three spot in mobile operating system share. 

"Law of Internet Bandwidth" Has Since 1998 Suggested 1 Gbps by 2020

In April 5, 1998, Jakob Nielsen projected that Internet access bandwidth was on a growth path to reach 1 Gbps by 2020, growing about 50 percent a year.

Up to this point, Law of Internet Bandwidth has proven quite accurate.

Nielsen plotted access speed starting with 300 bits per second in 1984, and updated the data through 2010 when Nielsen was using a 31 Mbps cable modem service.

Extrapolating just a bit further, one reaches 1 Gbps by 2020.