Competing with "Free" Remains an Issue

How to ”compete with free" is a major question in the Internet era, where many goods--especially of the non-tangible sort-- can be replicated and produced with low marginal cost.

For communications service providers, the issue has arisen mostly in conjunction with low cost or “free” services such as Skype or WhatsApp that supply voice or messaging services “at no incremental cost,” once a user has suitable devices and Internet access.

That has lead many to say the economics of abundance makes new revenue models possible. Some would say “abundance,” a relative term, makes new models essential, in at least some cases. But the implications are startling.

The basic idea is that transistors, storage, computation and bandwidth are so abundant the cost of their use is a price very close to zero. The corollary is that businesses based on the use of such resources can be viewed differently from businesses where inputs are expensive.

In other words, businesses based on abundant inputs can "waste" those resources. In a pre-broadband, pre-Internet-Protocol era, unicasting (content on demand) would have been nearly impossible.

With fast broadband access and abundance of terminals (smart phones, tablets, PCs, game consoles, specialized decoders and TVs), unicasting is feasible.

With that infrastructure in place, real-time cloud storage and computing is possible to a degree that would have been impossible just a decade ago. Likewise, streamed Netflix content, Pandora and Google Drive (cloud based productivity apps and storage) would not have been a reasonable experience for most people.

The degree of “abundance” in various parts of the Internet ecosystem is open to question, but all theories of abundance require a “not scarce” approach to value and retail pricing. That doesn’t necessarily mean “no cost,” only costs so low they are not a barrier to use of a product.

In some ways, a shift to 1-Gbps fixed network Internet access services, priced at $70 a month, is one example how “abundance” can drive even deployment of capital-intensive Internet access services.

ISPs would not claim it is “nearly free” to build and operate such networks, nor would most consumers consider $70 a month “almost free.” By historical measures, a symmetrical gigabit consumer connection costing just $70 a month is quite “abundant.”

Such logic defies conventional  sense, and certainly conventional economics, which is fundamentally based on assumptions of scarcity. In fact, such retail prices, for those capabilities, virtually require new thinking about additional revenue sources not contingent on charging for actual use of bandwidth.

In part, that explains the intense amount of attention many service providers are paying to machine to machine services, the Internet of Things, mobile payments, connected car and other initiatives.

Those efforts directly reflect the reality that many goods in an Internet era actually seem to defy the logic of scarcity, which tends to underpin retail prices suppliers can command.

That doesn’t necessarily mean a product or experience has “no cost,” only that once created, the marginal cost of distributing one more unit is fairly low. Nor, in truth, do the economics of virtual goods imply there is no scarcity: in fact, “hit” experiences and products still remain scarce.

Still, some talk about the economics of “abundance,” characterizing the business context for some potential products--especially digital goods--as representing a new type of context, where incremental costs are so low that “free or nearly free” is a reasonable price point.

In fact, the “freemium” revenue model, where a base product is usable for no incremental charge, while additional features are available for fee, is precisely an expression of the notion of “abundance” or low incremental marginal distribution costs.

It is true that marginal distribution costs for many digital goods are relatively low, even when initial production costs can be large. A movie or a broadband access network can represent huge amounts of capital investment, but the cost of using a marginal or additional unit can be quite low.

For a movie, marginal distribution cost arguably is lowest when a title is available to be streamed.

For a communications service provider, marginal distribution cost is lowest when enough customer adoption has occurred to recover all sunk costs, but before saturation of network capabilities.

In other words, when a service provider has extra capacity on the network, but already is recovering capital investment costs, the marginal cost of delivering one more phone call, one more text message, one more email or song is quite low.

At about the point where network utilization climbs up to about 90 percent, the economics change, as additional investment costs loom. So sunk costs dominate. Usage-related costs are relatively minimal.

Since nothing is ever truly “free,” the issue is how to construct a revenue and business model around a product that end users can avail themselves of “without incremental charge.”

The answer continues to evolve, but up to this point indirect revenue models, such as advertising, donations, transaction fees and commerce, have provided the revenue model, even when use of a product requires no incremental charge or payment.

Those are difficult revenue models for most communications service providers,in large part because of more than a century of operating as utilities. That experience has shaped both buyer and seller expectations.

As with electrical, natural gas or water services, people are accustomed to buying an admittedly essential service that nevertheless is sells a product (electrons, BTUs or gallons) viewed as a commodity.

So the key, many would argue, is changing the experience of the products sold in ways that add value and differentiate the products. As always for an intangible product such as a “service,” there are tangible elements, but the product itself (“the experience”) is not directly something a buyer can touch and feel.

To be sure, fixed network service providers, though always faced with high sunk costs, might arguably have an advantage in the “bandwidth supply” area that spectrum-using mobile and untethered service providers do not enjoy.

Though the sunk costs are substantial, once a fiber to home network is in place, the incremental cost of activating or enabling bandwidth is relatively low, up to a point.

So, in many ways, “abundant” computing, storage and bandwidth resources create new problems and opportunities for ISPs and communication service providers.

Does Wireless Charging Cause RF Interference?

USB-based device chargers can create noise that interferes with touchscreen operation especially when the chargers omit noise suppression features. So with the advent of wireless charging, one wonders whether noise will be added to the communication channels used by Wi-Fi or Bluetooth devices.

It appears that such corded charging creates noise in the 100 kHz to 1 MHz range, and should therefore not cause problems with Wi-Fi or Bluetooth devices.

But what about wireless charging? Granted, charging systems work by creating localized magnetic fields, which should not, in principle, interfere with radio frequency signals. But three major approaches to wireless charging (radio charging, inductive charging and resonance charging) do use radio frequencies.

Radio charging, intended to reach low-power devices operating within a 10-meter (30 feet) radius from the transmitter, is seen as a way to recharge batteries in medical implants, hearing aids, watches and entertainment devices.

The transmitter sends a low-power radio wave at a frequency of 915 MHz (frequency for microwave ovens) and the receiver converts the signal to energy. The radio charging method is closest to a regular radio transmitter.

But more common are wireless chargers using inductive charging featuring a transmit and receive coil in close proximity. Electric toothbrushes were one of the first devices to use this charging method, and mobile phones are the largest growing sector to charge without wires.

For larger batteries such as electric vehicles, resonance charging, or electro dynamic induction, is being developed, and at least some of those methods use the 915 MHz frequency.

When a new source is “radio” based, there is potential for signal interference. So far, nobody seems to think there will be a problem with magnetic fields and energy in the radio frequency bands.

Of the several systems being developed, including auto charging, the Qi (Wireless Power Consortium), Power Matters Alliance (PMA) and the Alliance for Wireless Power (A4WP) systems, all use localized magnetic fields to transfer energy.

The Cota charging system uses the same spectrum as Wi-Fi and Bluetooth. That naturally raises the question of whether adding a new electromagnetic source can interfere with radio frequency communications, perhaps by adding more noise into a channel.

Wireless charging uses a magnetic field to transfer energy from an alternating current source, using a localized magnetic field, to a device able to convert the magnetic energy into direct current. Of course, the process is inefficient. The only issue is how inefficient.

The point is that wireless charging is convenient, just not “green.”

Competing with "Free" Remains an Issue

How to ”compete with free" is a major question in the Internet era, where many goods--especially of the non-tangible sort-- can be replicated and produced with low marginal cost.

For communications service providers, the issue has arisen mostly in conjunction with low cost or “free” services such as Skype or WhatsApp that supply voice or messaging services “at no incremental cost,” once a user has suitable devices and Internet access.

That has lead many to say the economics of abundance makes new revenue models possible. Some would say “abundance,” a relative term, makes new models essential, in at least some cases. But the implications are startling.

The basic idea is that transistors, storage, computation and bandwidth are so abundant the cost of their use is a price very close to zero. The corollary is that businesses based on the use of such resources can be viewed differently from businesses where inputs are expensive.

In other words, businesses based on abundant inputs can "waste" those resources. In a pre-broadband, pre-Internet-Protocol era, unicasting (content on demand) would have been nearly impossible.

With fast broadband access and abundance of terminals (smart phones, tablets, PCs, game consoles, specialized decoders and TVs), unicasting is feasible.

With that infrastructure in place, real-time cloud storage and computing is possible to a degree that would have been impossible just a decade ago. Likewise, streamed Netflix content, Pandora and Google Drive (cloud based productivity apps and storage) would not have been a reasonable experience for most people.

The degree of “abundance” in various parts of the Internet ecosystem is open to question, but all theories of abundance require a “not scarce” approach to value and retail pricing. That doesn’t necessarily mean “no cost,” only costs so low they are not a barrier to use of a product.

In some ways, a shift to 1-Gbps fixed network Internet access services, priced at $70 a month, is one example how “abundance” can drive even deployment of capital-intensive Internet access services.

ISPs would not claim it is “nearly free” to build and operate such networks, nor would most consumers consider $70 a month “almost free.” By historical measures, a symmetrical gigabit consumer connection costing just $70 a month is quite “abundant.”

Such logic defies conventional  sense, and certainly conventional economics, which is fundamentally based on assumptions of scarcity. In fact, such retail prices, for those capabilities, virtually require new thinking about additional revenue sources not contingent on charging for actual use of bandwidth.

In part, that explains the intense amount of attention many service providers are paying to machine to machine services, the Internet of Things, mobile payments, connected car and other initiatives.

Those efforts directly reflect the reality that many goods in an Internet era actually seem to defy the logic of scarcity, which tends to underpin retail prices suppliers can command.

That doesn’t necessarily mean a product or experience has “no cost,” only that once created, the marginal cost of distributing one more unit is fairly low. Nor, in truth, do the economics of virtual goods imply there is no scarcity: in fact, “hit” experiences and products still remain scarce.

Still, some talk about the economics of “abundance,” characterizing the business context for some potential products--especially digital goods--as representing a new type of context, where incremental costs are so low that “free or nearly free” is a reasonable price point.

In fact, the “freemium” revenue model, where a base product is usable for no incremental charge, while additional features are available for fee, is precisely an expression of the notion of “abundance” or low incremental marginal distribution costs.

It is true that marginal distribution costs for many digital goods are relatively low, even when initial production costs can be large. A movie or a broadband access network can represent huge amounts of capital investment, but the cost of using a marginal or additional unit can be quite low.

For a movie, marginal distribution cost arguably is lowest when a title is available to be streamed.

For a communications service provider, marginal distribution cost is lowest when enough customer adoption has occurred to recover all sunk costs, but before saturation of network capabilities.

In other words, when a service provider has extra capacity on the network, but already is recovering capital investment costs, the marginal cost of delivering one more phone call, one more text message, one more email or song is quite low.

At about the point where network utilization climbs up to about 90 percent, the economics change, as additional investment costs loom. So sunk costs dominate. Usage-related costs are relatively minimal.

Since nothing is ever truly “free,” the issue is how to construct a revenue and business model around a product that end users can avail themselves of “without incremental charge.”

The answer continues to evolve, but up to this point indirect revenue models, such as advertising, donations, transaction fees and commerce, have provided the revenue model, even when use of a product requires no incremental charge or payment.

Those are difficult revenue models for most communications service providers,in large part because of more than a century of operating as utilities. That experience has shaped both buyer and seller expectations.

As with electrical, natural gas or water services, people are accustomed to buying an admittedly essential service that nevertheless is sells a product (electrons, BTUs or gallons) viewed as a commodity.

So the key, many would argue, is changing the experience of the products sold in ways that add value and differentiate the products. As always for an intangible product such as a “service,” there are tangible elements, but the product itself (“the experience”) is not directly something a buyer can touch and feel.

To be sure, fixed network service providers, though always faced with high sunk costs, might arguably have an advantage in the “bandwidth supply” area that spectrum-using mobile and untethered service providers do not enjoy.

Though the sunk costs are substantial, once a fiber to home network is in place, the incremental cost of activating or enabling bandwidth is relatively low, up to a point.

So, in many ways, “abundant” computing, storage and bandwidth resources create new problems and opportunities for ISPs and communication service providers.

Intel TV Seeking Partners?

Intel TV, Intel's Web-based streaming video service, was supposed, to launch by the end of 2013. Most observers have guessed that Intel would not make that deadline, in part because Intel has been slow to announce the key content deals that would anchor its service, namely the channels subscribers tend to expect when they buy any video entertainment service from a cable, satellite or telco TV provider.

Now there is a report that Intel is looking for partners, presumably partners with customer bases or existing programming rights that could be leveraged. 

But Intel also faces Sony Corp., Google and Apple, all of which have their own plans or interest in launching such a service.

The problem attackers will have, when trying to disrupt the traditional TV business, is that if the content owners control the value proposition, disruption is not possible unless those content owners agree to be disrupted.

In other words, it is the content that provides the value, not so much the delivery network. To disintermediate the distributors, the content owners will have to conclude that they can make as much, if not more money, by supporting Internet-direct suppliers such as Intel.

For consumers, there are direct implications as well. Most people probably assume that one advantage of Internet delivery is the ability to watch content on any device, nearly anywhere, for less money.

To be sure, those value dimensions are not necessarily linked. Value could be "watch on any device," or "watch anywhere" or "watch for less money" or any combination.

But the "watch for less money" remains one of the assumptions nobody can be too sure about.  Intel, for example, is offering to pay as much as 75 percent more than cable operators do, to get the content Intel needs to provide a viable competitor to cable, satellite or telco TV offers.

There are other elements of its business plan, of course, but it is hard to sell at a discount to the market leaders when the cost of goods might be that much higher.

Intel hopes it can create a successful, and sizable new business selling video entertainment delivered "over the top." But don't count on that service saving you money, or "disrupting" the video subscription business. It won't.

As some have suggested, the new service might require that a customer first buy a video subscription service, then pay for the Intel offerings, and use an Intel decoder box as well.  Intel’s web TV service will not offer la carte access to channels and networks, either.

That is a tough value proposition.

89% of U.K. Fixed Connections are "Untethered"

It is a truism that any form of Internet access, tethered, untethered or mobile, is designed to get an end user connected to the core network. In that sense, all untethered or mobile access methods are tail circuits.

About 89 percent of consumer Internet access users in the United Kingdom report using a Wi-Fi router, for example. 

Revenue Sluggishness Will Propel Consolidation Wave

Whether telecom revenue is growing, flat or shrinking has enormous consequences for any communications service provider, for obvious reasons. Public companies whose revenues do not grow, do not survive as independent entities.

Privately-owned firms might, or might not, survive if revenues are flat. Few can survive, long term, if revenues are dropping. And there are some signs of trouble, in that regard, though as with virutally anything related to the Internet ecosystem, “averages” can be misleading.

Researchers at Ovum think global telecom revenues will remain roughly flat over the next few years, with a decline in spending on voice services counterbalanced by growth in spending on mobile and fixed (broadband) data services.

Others believe growth will continue. Gartner researchers expect 4.3 percent revenue growth, globally, for 2013. IDC also forecasts low single digits revenue growth.

The total worldwide telecom market grew by 3.2 percent during 2012, and IDC is forecasting growth of 3.4 percent during the 2013 time frame, with the market settling into a steady growth rate of about 3.2 percent," according to Courtney Munroe, IDC VP. But those service provider revenues will be unevenly distributed, growing in most regions, but shrinking in Europe.

Telecom retail revenue in Latin America will grow at a compound annual growth rate (CAGR) of 3.3 percent between 2012 and 2017, according to Analysys Mason.

But the European telecom service market decreased for the third year in a row in 2011, by 1.5 percent, the European Telecommunications Network Operators Association reports.

In the third quarter of 2012, European carrier revenue contracted, though growing in other regions such as China, the United States, India and South America.

Even in the United Kingdom and Germany, the markets with the brightest future, STL Partners forecasts a respective 19 percent and 20 percent revenue decline in mobile core services (voice, messaging and data) revenues by 2020.

Revenue in the French market will decline 34 percent by 2020. In Italy, revenue will drop 47 percent and in Spain revenue will drop 61 percent by 2020.

Overall, STL Partners anticipates a reduction of 36 percent or €30 billion in core mobile service revenues by 2020, a loss of about €50 billion for Europe as a whole.

Flat or lowish growth rates are not an insoluble problem, in the near term, as some firms can grow by making acquisitions. And the growth problems generally are most acute for fixed network service provides, not mobile service providers, for the moment.

What is clear globally s rapid growth of mobile usage and revenues, notably with European weakness. 

In 2001, there were about one billion mobile phone subscribers in total, most of them in developed countries. By about 2012  there were six billion subscribers, and 73 percent of those (4.4 billion) were  in developing countries that account for just 20 percent of the world’s total gross domestic product.

In just 10 years, mobile phones have almost reached saturation point in countries where people earn just a few dollars per day. Smart phone adoption is following a similar sort of trajectory.

In 2009, the Asia-Pacific region had 86 million smart phone users. In 2013, 738.2 million smartphone users. By way of comparison, that means the Asia-Pacific region has more than four times as many smart phone users as the next largest region, , Western Europe, which will have 161.1 million by the end of the year, and North America, which will have 152.2 million.

Furthermore, nearly 2.5 billion of the world’s 4.3 billion mobile phone users in 2013 will be in the Asia-Pacific region, according to eMarketer.

Research firm eMarketer estimates that 2.43 billion people in Asia-Pacific will use a mobile phone at least monthly in 2013, representing 56.3 percent of the world’s mobile phone users.

More than one billion of these mobile users will be in China alone, and about half that number will reside in India. By 2017, eMarketer estimates, Asia-Pacific will have nearly three billion mobile phone users out of a total 5.10 billion across the globe.

So smart phones might be the fastest-adopted technology in human history.

Mobile phone usage is growing exponentially in the Middle East and Africa as well, with Africa expected to become the second-largest mobile phone region, after Asia.

In the Middle East and Africa, 525.8 million people use a mobile phone at least monthly. .

Smart phone use in the region will nearly double  to 112.2 million, up from 67 million in 2012, while penetration of smart phones among the population as a whole in will increase from 5.1 percent to 8.3 percent.

In 2001, there were about one billion mobile phone subscribers in total, most of them in developed countries. By about 2012  there were six billion subscribers, and 73 percent of those (4.4 billion) were  in developing countries that account for just 20 percent of the world’s total gross domestic product.

In just 10 years, mobile phones have almost reached saturation point in countries where people earn just a few dollars per day. Smart phone adoption is following a similar sort of trajectory.

In 2009, the Asia-Pacific region had 86 million smart phone users. In 2013, 738.2 million smartphone users. By way of comparison, that means the Asia-Pacific region has more than four times as many smart phone users as the next largest region, , Western Europe, which will have 161.1 million by the end of the year, and North America, which will have 152.2 million.

Furthermore, nearly 2.5 billion of the world’s 4.3 billion mobile phone users in 2013 will be in the Asia-Pacific region, according to eMarketer.

Research firm eMarketer estimates that 2.43 billion people in Asia-Pacific will use a mobile phone at least monthly in 2013, representing 56.3 percent of the world’s mobile phone users.

More than one billion of these mobile users will be in China alone, and about half that number will reside in India. By 2017, eMarketer estimates, Asia-Pacific will have nearly three billion mobile phone users out of a total 5.10 billion across the globe.

So smart phones might be the fastest-adopted technology in human history.

Mobile phone usage is growing exponentially in the Middle East and Africa as well, with Africa expected to become the second-largest mobile phone region, after Asia.

In the Middle East and Africa, 525.8 million people use a mobile phone at least monthly. .

Smart phone use in the region will nearly double  to 112.2 million, up from 67 million in 2012, while penetration of smart phones among the population as a whole in will increase from 5.1 percent to 8.3 percent.

Virtually no observers seem to think global telecom revenue will shrink in the near term, despite regional weakness in Europe. The only real questions seem to revolve around the rate of growth, especially for mobile services, which are the growth driver in most markets.

U.S. 4G Users Consume 36% More Data

Faster networks have direct implications for the amount of data consumed by users, virtually all studies suggest. Users of Long Term Evolution 4G networks consume more data than users of 3G networks.

That trend also was found to exist for 3G networks, compared to 2G networks. According to a Nokia Siemens study, each 3G user consumes more data, close to 300 percent more, than a typical 2G user.

That higher level of consumption also typically leads 4G mobile users buy bigger data allowances than 3G users, a study by Mobidia has found.

U.S. users on 4G LTE networks consume 36 percent more data than users on 3G networks, Mobidia says. But consumption disparities are higher than that in some other countries.

source: Mobidia

Even though 4G’s share of mobile subscriptions was less than three percent at the end of the second quarter of 2013, it is expected to account for slightly more than 20 percent of the total data consumed on mobile networks worldwide in 2013.

After surpassing 3G networks in 2016, 4G networks will go on to capture 66 percent of data traffic by 2018, according to ABI Research.

In fact, 4G data traffic will grow at a compound annual growth rate of 82.2 percent between 2013 and 2018, ABI Research says.