Alteva, Frontier, Windstream Show Transformation Success, and Limits of the Strategy

Alteva is not alone among rural telcos by embracing a growth strategy built on business customers, rather than consumers. Windstream and Frontier also have chosen to do so. And you might well be surprised at the degree of success each of those firms has achieved, at least on the revenue sources front.

“UC revenues increased 21 percent over the last 12 months and now contributes 53 percent of consolidated revenues,”, said David Cuthbert, Alteva CEO. “Users or seats on Alteva's hosted platform at the end of the second quarter increased by over 15 percent from the installed base at the end of the first quarter.”

In other words, revenue growth now is driven by the hosted voice communications business, not the traditional telephone business.

Consolidated revenue was $7.4 million for the second quarter of 2013, an increase of over eight percent  from $6.9 million in the same period of the prior year. UC revenues, net of eliminations, were $3.9 million in the second quarter of 2013. In other words, the new revenue sources provide 53 percent of total revenues.

Telephone revenues, net of eliminations, were $3.5 million in the second quarter of 2013, down from $3.6 million for the same period of the prior year and down from $3.8 million in the first quarter of this year.

Alteva, a provider of hosted or cloud-based unified communications or hosted PBX service (depending on your preferred terminology) in 2011 was bought by Warwick Valley Telephone Co. for $17 million.

Gross margin also has changed because of the weight of UC application revenue. In the first six months of 2013, Alteva says it added over 30 percent of the installed UC base of users that had been accumulated for the past eight years. As a result, the UCaaS (unified communications as a service) recurring revenue from seats in service has driven consolidated gross margin to 57 percent of revenues, said Cuthbert.

Warwick Valley, based in Warwick, N.Y., provides telecommunications services in southern Orange County, N.Y. and part of central New York and northwestern New Jersey, as well as a competitive local exchange carrier business, USA Datanet.

There are a couple of lessons here. Sometimes a business is in secular decline because demand for its product is declining, much as any product you might think of also has a product life cycle.

That will have uncomfortable and nevertheless real implications for rural telco business strategy. There simply are times when a business is destined to decline, if it sticks to its current product line.

Sometimes that business is destined to decline, if more slowly, even when it adds major new product lines. Think of the transition from selling voice only, to selling triple-play packages.

And one traditional problem for rural telcos is that there simply aren’t that many potential customers in a service territory, even if a provider gets almost all the potential customers as actual customers.

Warwick essentially made a choice to harvest its original business--being a rural telco--and recreate itself--through acquisition--as a hosted communications provider.

One might be tempted to suggest that this is a growth strategy for all or most or many other rural telcos. And there lies the other lesson. What works for a few firms will not work for most firms, because the new markets are not big enough to support hundreds to thousands of suppliers on a sustainable basis.

So one other lesson is that transformative measures must be taken early, before the opportunity is foreclosed or made hugely more risky because one is entering a crowded or saturated market.

In other words, what a few might succeed in doing to transform their businesses cannot work for all members of the same class.

Still, the uncomfortable reality is that, for nearly all rural telcos, sooner or later, a business exit is necessary, either by sale or transformation. Sale will be the most common outcome.

If the Windows Operating System Were a House, It Would Look Like This

From here. It reminds me of the much older "if operating systems were airlines, which I actually continue to find much funnier:

What if Operating Systems Were Airlines?

DOS Airlines

Everybody pushes the airplane until it glides, then they jump on and let the plane coast until it hits the ground again, then they push again jump on again, and so on.

OS/2 Airlines

The terminal is almost empty, with only a few prospective passengers milling about. The announcer says that their flight has just departed, wishes them a good flight, though there are no planes on the runway. Airline personnel walk around, apologising profusely to customers in hushed voices, pointing from time to time to the sleek, powerful jets outside the terminal on the field. They tell each passenger how good the real flight will be on these new jets and how much safer it will be than Windows Airlines, but that they will have to wait a little longer for the technicians to finish the flight systems.
Once they finally finished you're offered a flight at reduced cost.  To board the plane, you have your ticket stamped ten different times by standing in ten different lines. Then you fill our a form showing where you want to sit and whether the plane should look and feel like an ocean liner, a passenger train or a bus. If you succeed in getting on the plane and the plane succeeds in taking off the ground, you have a wonderful trip...except for the time when the rudder and flaps get frozen in position, in which case you will just have time to say your prayers and get in crash position.

Windows Air

The terminal is pretty and colorful, with friendly stewards, easy baggage check and boarding, and a smooth take-off.  After about 10 minutes in the air, the plane explodes with no warning whatsoever.

Windows NT Air

Just like Windows Air, but costs more, uses much bigger planes, and takes out all the other aircraft within a 40-mile radius when it explodes.

Mac Airlines

All the stewards, stewardesses, captains, baggage handlers, and ticket agents look the same, act the same, and talk the same. Every time you ask questions about details, you are told you don't need to know, don't want to know, and would you please return to your seat and watch the movie.

Unix Airlines

Each passenger brings a piece of the airplane and a box of tools to the airport. They gather on the tarmac, arguing constantly about what kind of plane they want to build and how to put it together. Eventually, they build several different aircraft, but give them all the same name. Some passengers actually reach their destinations. All passengers believe they got there.

Wings of OS/400

The airline has bought ancient DC-3s, arguably the best and safest planes that ever flew, and painted "747" on their tails to make them look as if they are fast. The flight attendants, of course, attend to your every need, though the drinks cost $15 a pop. Stupid questions cost $230 per hour, unless you have SupportLine, which requires a first class ticket and membership in the frequent flyer club. Then they cost $500, but your accounting department can call it overhead.

Mach Airlines

There is no airplane. The passengers gather and shout for an airplane, then wait and wait and wait and wait. A bunch of people come, each carrying one piece of the plane with them. These people all go out on the runway and put the plane together piece by piece, arguing constantly about what kind of plane they're building. The plane finally takes off, leaving the passengers on the ground waiting and waiting and waiting and waiting. After the plane lands, the pilot telephones the passengers at the departing airport to inform them that they have arrived.

Newton Airlines

After buying your ticket 18 months in advance, you finally get to board the plane. Upon boarding the plane you are asked your name. After 6 times, the crew member recognizes your name and then you are allowed to take your seat. As you are getting ready to take your seat, the steward announces that you have to repeat the boarding process because they are out of room and need to recount to make sure they can take more passengers.

VMS Airlines

The passengers all gather in the hanger, watching hundreds of technicians check the flight systems on this immense, luxury aircraft. This plane has at least 10 engines and seats over 1,000 passengers. All the passengers scramble aboard, as do the necessary complement of 200 technicians. The pilot takes his place up in the glass cockpit. He guns the engines, only to realise that the plane is too big to get through the hangar doors.

BeOS Air

You have to pay for the tickets, but they're half the price of Windows Air, and if you are an aircraft mechanic you can probably ride for free. It only takes 15 minutes to get to the airport and you are cheuferred there in a limozine. BeOS Air only has limited types of planes that only only hold new luggage. All planes are single seaters and the model names all start with an "F" (F-14, F-15, F-16, F-18, etc.). The plane will fly you to your destination on autopilot in half the time of other Airways or you can fly the plane yourself. There are limited destinations, but they are only places you'd want to go to anyway. You tell all your friends how great BeOS Air is and all they say is "What do you mean I can't bring all my old baggage with me?"

Linux Airlines

Disgruntled employees of all the other OS airlines decide to start their own airline. They build the planes, ticket counters, and pave the runways themselves. They charge a small fee to cover the cost of printing the ticket, but you can also download and print the ticket yourself. When you board the plane, you are given a seat, four bolts, a wrench and a copy of the seat-HOWTO.html. Once settled, the fully adjustable seat is very comfortable, the plane leaves and arrives on time without a single problem, the in-flight meal is wonderful. You try to tell customers of the other airlines about the great trip, but all they can say is, "You had to do what with the seat?"

U.S. Licensed and Unlicensed Use of White Spaces Hangs in the Balance

As the U.S. Federal Communications Commission prepares rules for repurposing some broadcast TV spectrum (TV white spaces) no longer used, one key issue is the method of licensing. 

Some believe the best way to commercialize the TV white spaces spectrum is to auction most of the frequencies. Others believe it is vital to preserve significant amounts of that white spaces spectrum for unlicensed use, using the prior example of Wi-Fi as an example of innovation that should arise.

As always, there are huge commercial implications. As always, major users of licensed spectrum will prefer a licensing method. As always, many others think the greatest amount of innovation will occur if an unlicensed model is used.

Given the huge commercial implications, many believe only portions of the spectrum actually will be available on an unlicensed basis. 

There are valid arguments for both points of view (licensed versus unlicensed access). A licensed approach will help mobile service providers; an unlicensed approach will help all sorts of innovators and entrepreneurs, with mostly indirect economic benefit, as with Wi-Fi.

Some think the best outcome would be a mix of licensing, with significant amounts available on an unlicensed basis. 

Since most broadcast TV spectrum tends to be used in bigger markets, the amount of available white spaces spectrum will be most limited in dense urban areas, and most abundant in rural areas where there are fewer people.

So one key issue is how much usable spectrum might be available on a nationwide basis, consistently enough to provide incentives for services, devices and apps to be created that are usable everywhere. 

Innovation without permission is how some would describe the advantages of unlicensed approaches to use of spectrum. 

Some might say it is clear both mobile services based on licensed spectrum, and Wi-Fi style services, apps and devices based on unlicensed spectrum are complementary and strategic ways to clear and commercialize new frequencies. 

About 66% of Mobile Data is Offloaded to Wi-Fi

By 2016, perhaps 80 percent of all mobile device data consumption might happen over some offloaded network mechanism, according to Wik Consult. 

In 2013, offloaded mobile data might represent nearly 66 percent of all data consumed by a mobile device.

What those sorts of statistics indicate is that service providers whose business models are based on use of licensed spectrum now also are relying on third party facilities, and unlicensed spectrum as a rather integral part of their own branded services.

Some might say that further indicates the role of shared or unlicensed spectrum could be increased without necessarily harming the interests of licensed service providers, though the way shared or unlicensed spectrum is used could result in new forms of access competition.

"Multiple sources indicate that as much as 80 percent to 90 percent of Android smart phone and tablet mobile traffic is already being off-loaded to private Wi-Fi, within the end-user’s home," the authors of a study on mobile traffic offload say. "Particularly noteworthy is a new study by Informa and Mobidia that finds that at least two-thirds of mobile data for Android phones is already being off-loaded to “self-provisioned” Wi-Fi, which equates roughly to private Wi-Fi."

The report suggests that service providers gain when users offload traffic because they do not have to invest so much in network facilities. The authors estimate such savings in 2012 for the EU-27 nations to be as high as 35 billion euro, and the projected savings in 2016 as high as 200 billion euro.

“Based on our current assessment, drawing on all of these sources and others, we now believe that a majority of traffic that would otherwise be present on the macro cellular traffic is already being off-loaded, primarily to Wi-Fi in the home,” says Wik Consult.

The report does not recommend much new effort to free up additional unlicensed spectrum, beyond coordinating Wi-Fi spectrum across national borders. The report is more unambiguous about the need for additional licensed spectrum, calling for "more spectrum to be made available, either on an exclusive or a shared basis."

The report also suggests that mobile networks will have a role to play in at least two, or possibly all of the Digital Agenda for Europe goals.Those include, by 2013, supplying basic broadband to all Europeans; by 2020, supply speeds of 30 Mbps and by 2020, supplying half or more European households with services faster than 100 Mbps.

It is currently unclear what the relative impact of licensed and licence-exempt small cell technologies will be over the longer term, since the former is in its infancy; however, there appears to be a broad consensus in the industry currently that the two will largely complement rather than compete with each other.

Feedback from wireless network operators indicates that licensed and license-exempt spectrum are seen more as complements to one another rather than substitutes.

As always, licensed spectrum is preferred by tier one service providers because they can better control quality of service.

FCC Says It Will Not "Automatically" Allow Verizon to Substitute Mobile Service for Fixed

In the wake of Hurricane Sandy, Verizon has had to decide how to restore service to some affected areas that previously had fixed network service, but would be quite expensive to rebuild that same way, compared to use of Long Term Evolution network service, for example. 

The issue is whether, when a carrier has a universal service obligation, it has at least some ability to fulfill that obligation using an access network that matches the required service and application profiles, but uses a network access technology that is suited to the circumstances.

As any network economist will attest, in hard to serve areas, such as those with low density, mobile and fixed wireless or satellite networks can be built faster, and operated at lower cost, than a fixed and wired network. 

The issue is whether such obvious facts of network economics are allowable, especially at a time when the economics of wired access networks are declining. 

The Federal Communications Commission now says it will not "automatically" grant the request by Verizon to do so. 

The issue is whether mobile service can be a substitute for a fixed line service. 

Telekom Austria Wants to Buy Serbia Broadband

Telekom Austria wants to buy cable operator Serbia Broadband, a deal that might cost as much as  1 billion euros ($1.3 billion), and illustrates a number of key trends in the European telecom market.

As now is clear in virtually every developed telecom market, organic growth, when it can be obtained, is very difficult. That always makes rational a search for growth by acquisition. 

Such acquisitions also often tend to make more sense "out of region" than in domestic markets.

Also, it also sometimes makes sense to diversify into complementary or other strategic assets, as in this case where a telco (fixed and mobile) wants to buy into a cable TV broadband asset. 

Telekom Austria owns mobile operations in Serbia,Croatia and Slovenia and is looking to add fixed-line assets in the region as well. 

What is noteworthy, at least in part, is the choice of a cable TV asset rather than a "telco" asset. That is at least partly a recognition that a cable TV network is, by definition, a broadband access network. 

NSA Spying: How Can We Trust Anything You Now Say?

In the wake of newly revealed scandals about the extent of National Security Agency spying, a reasonable person would be permitted to say he or she no longer believes, or trusts, the NSA or the executive and legislative or judicial branches of government that supposedly police such spying. 

"The three pillars of American trust have fallen," the Electronic Frontier Foundation says. "It's time to get a full reckoning and build a new house from the wreckage, but it has to start with some honesty."

A government that loses the trust of its people is in trouble.