Why Budgets Matter: Debt Load is "Unsustainable"

The current impasse over U.S. federal government spending really is not the big issue. Debt and structural obligations constitute the sword of Damocles hanging over the federal and most state governments. It's math, not politics. 

The U.S Congressional Budget Office simply says federal debt held by the public would reach 100 percent of gross domestic product in 2038, while clearly harming economic growth as well.

That debt load "could not be sustained indefinitely." A broken economy and a bankrupt United States that would find it had to break many "promises" is the real problem. Either the country will learn to live within its means, or it will be forced to do so, by debt burdens growing faster than gross domestic product, and hence ability to "tax our way out of the problem."

"Increased borrowing by the federal government would eventually reduce private investment in productive capital," CBO warns. 

States have the same underlying problem. Spending driven increasingly by obligations already incurred will outstrip tax revenue to support current obligations. 

In simple terms, at some mathmatically inevitable point, virtually 100 percent of local property taxes used to support public education will be consumed by retiree retiree obligations. The problem has been known for more than a decade. 

Already, in Michigan, 66 percent of all education funding goes not to teaching children but to paying retiree benefits and health care costs. That's a structural problem. 

Huawei, Nokia in Top-4 Hanset Sales Ranks, But Samsung Leads

Smart phones are the focus of most attention paid to supplier trends and consumer preferences, even though feature phones continue to represent a significant number of new sales. 

Looking at all phone sales, sales volume is not a Samsung-Apple battle, but includes Nokia and Huawei, on the strength of feature phone sales.

Are U.S. Mobile Prepaid Data Plans Really Out of Whack?

There is a recurring problem when comparing Internet access or mobile data costs across countries, beyond the obvious problem that all local prices are meaningful primarily in relation to other consumer goods in any particular country. In other words, wealthier countries are going to have higher prices for just about anything.  

The other problem is that when making a comparison of rates, one has to make a choice about what sorts of plans to compare. Prepaid mobile is the dominant way most end users in the world buy their service. But that is not the way most people buy service in most parts of North America, with the exception of Central America, where prepaid is dominant.  

In terms of “actual” prices, prepaid prepaid mobile data data plans in the United States are among the highest in the world, an International Telecommunication Union study suggests.

The average prepaid U.S. phone plan with 500 MB of data costs $85 in the United States, compared to $24.10 in China and $8.80 in the U.K., in terms of U.S. dollar Purchasing-power Parity (PPP).

Whether those findings are correct, some will contest. The issue is that most people do not buy prepaid plans in the United States. And the new Target brightspot service, for example, costs just $50 a month, and comes with unlimited domestic voice, text messaging and mobile data access, with 1 Gb of data access on T-Mobile US 4G networks (HSPA+ and Long Term Evolution), the balance on T-Mobile's 3G data network.

Beyond that, one might question which U.S. prepaid data plans were chosen for analysis, as some of us would have a tough time finding prepaid plans with charges that high, even if the selected plans were those available only to consumers with no credit history and no banking relationships.

According to the analysis, the cheapest countries around the world to pick up a prepaid phone plan with data are India, Indonesia, Germany, Italy and the U.K, where $10 plans (PPP) cost $85 in the United States.

That aside, the more important insight is simply that prices make sense mostly within the context of all other goods and services in a single country.

Even if you accept the logic that the prepaid data plans are high, and ignoring the fact that most consumers do not buy those plans, that $85 phone plan is just 2.1 percent of the Gross National Income in the United States, whereas in Botswana the cost of a prepaid mobile data plan  is nine percent of GNI, and in Morocco is 20 percent of GNI.

Using even the ITU data for mobile prepaid (and that is not the best way to look at U.S. mobile data plans, since most people do not buy prepaid) U.S. prepaid prices are comparable to Canada, Mexico, most all of Europe and Russia, one might argue.

NTT DoCoMo Sees Record Monthly Drop in Subscriptions

NTT DoCoMo reported a "record" drop in net subscriber additions, losing 66,800 accounts in September 2013. On the other hand, keeping matters in perspective,  DoCoMo's market share drop since 2008 has been from 50 percent to 46 percent. 

The figures might be slightly different if considering only 3G market share. 

Some might have expected losses to abate, as September also was the first month DoCoMo had the ability to sell the Apple iPhone. But NTT says it did not have enough devices in stock to meet customer demand. 


DoCoMo said subscriptions dropped by 66,800 in September, in stark contrast to rivals KDDI and SoftBank. 

73% of 4G Retail Price Plans Have Dropped

Mobile data plan retail prices have been dropping, in many countries, since early 2013, according to ABI Research.

ABI Research now has found that Long Term Evolution 4G network tariffs also are falling, either in actual posted prices or as measured by “cost per bit.”

Comparing mobile Internet access pricing between the second quarter of 2012 and fourth quarter of 2012, 73 percent of countries surveyed have reduced the “effective cost” of their 4G tariffs to a significant degree.

The effective cost, measured in terms of “dollar per Gigabyte,” has dropped by 30 percent. In the U.S. market, service providers generally have maintained retail prices, but  introduced larger data quotas.

In Australia, Sweden, Japan, and Saudi Arabia the operators lowered the monthly fee but have kept data quotas unchanged.

That state of affairs poses questions, such as whether mobile service providers actually will be able to drive higher revenue, in the near term, from LTE access services.

“ABI Research is concerned that a number of operators have introduced 4G pricing plans at the same, or even lower, price points than 3G,” stated Jake Saunders, VP for forecasting. “In Norway, Telenor has introduced 4G tariffs that are cheaper than 3G.

At least so far, it appears that some retail pricing plans, such as the “shared data plans” available from Verizon Wireless and AT&T Wireless in the U.S. market, have provided revenue lift.

Verizon’s “Share Everything Plans” arguably helped Verizon achieve a net increase of 2.2 million subscribers in the fourth quarter of 2012, as well as a boost in service revenues by 8.5 percent.

But that is an inference, since lots of other factors are at work, ranging from Verizon’s 4G coverage, reputation for quality and the fact that Verizon has been gaining share rather steadily over the past few years.

When looking at tariffs in the “cheapest 20” markets between the third quarter of 2013 and third quarter of 2012, ABI Research found that the average mobile Internet price dropped by 17.7 percent.

Also, ABI Research estimates that 38 percent of the lowest priced data plans worldwide are 4G tariffs compared to 21 percent a year ago.

Of course, as often is the case for communication services, lower prices spur usage and revenue growth.

While mobile data pricing is on the decline, data revenue has grown because more people are accessing the Internet from smart phones.

Total data revenue will reach $400 billion in 2013 with a year over year increase of 13.4 percent, and is forecast to grow to $527 billion, accounting for 47 percent of global mobile service revenue in 2018.

At the same time, many service providers in developed markets are shifting revenue growth strategies directly to mobile data, and away from voice and texting, often by offering free in-country calling and text messaging.

Multi-device shared data plans represented just six percent of tariff plans, but its share jumped 20 percent, quarter over quarter, ABI Research says. Most common are tiered consumption plans, where pricing varies on the amount of traffic consumed, at about 66 percent of all plans.

India offered the lowest priced plan in ABI Research’s Mobile Internet Pricing study of fourth quarter 2012 prices, and the most-affordable mobile data plans decreased 29.4 percent year-over-year, compared to fourth quarter of 2011, ABI Research has said.

Apple 5s, 5c Lead Smart Phone Sales at All 4 Top U.S. Mobile Service Providers

Though the debate over Apple’s long-term future isn’t directly affected, one study of Apple iPhone 5c and 5s sales suggests the devices are being received well.

An analysis by Canaccord Genuity analyst T. Michael Walkley suggests both 5c and 5s devices are selling well. Only the Samsung Galaxy S4 appears in the ranks of the top-three devices being sold at the four national mobile service provider retail stores.

Is LTE a Revenue Driver or a Cost of Doing Business?

Will Long Term Evolution 4G be a business repeat of 3G in Europe? In other words, will European mobile service providers be able to make money from new services and features enabled by 4G, or discover that, at least in the near term, 4G creates few new revenue sources, and drives up costs?

For an industry already facing sliding revenues and profit margins, that would be a crisis. Mobile revenue in Europe fell 12 percent between 2008 and 2012 to $215.8 billion (€162 billion in 2010 to €151 billion), and it is expected to drop another 3.8 percent in 2013, according to the GSM Association.

The problem is not new. In past decades, for example, U.S. fixed network operators have debated whether fiber to a neighborhood or fiber to the home is the better near-term strategy, in part for reasons of capital investment requirements, in part for revenue expectations about new services enabled by those investments.

And for other reasons, namely overpaying for 3G spectrum, many European mobile operators faced bankruptcy when introducing 3G, which was expected to enable many new services. But 3G did not do so.

In some ways, European mobile service providers now appear to face challenges U.S. fixed network service providers have faced as well, namely the business case for upgrading their networks.

The basic conundrum fixed network telcos have faced is that voice services that drove the business would not benefit much, if at all, from the new investments. And at least initially, it wasn’t so clear higher-speed access services would contribute outsized revenue gains, either, since lower-speed digital subscriber line services also could be delivered (if unevenly) on the copper access networks.

In fact, the one clear new service was video entertainment, a saturated business. In most cases, a telco faces a market-leading cable TV provider and two satellite providers. In some markets, there are other fixed network providers as well. And all that was before the growth of online services.

One thing seems clear: whether Long Term Evolution networks allow mobile service providers in Europe to grow revenues or not, LTE is coming.

But if new revenues are not forthcoming, mobile service providers are going to face excruciating pressures on their cash flow and profit margins. "Of course many are struggling to see the business case," said Joachim Horn, the chief technology officer at Sweden's Tele2, which is building an all-4G network in the Netherlands.

In some ways, LTE is less a clear-cut revenue opportunity and more a threat to profits, even as mobile operators know they have to upgrade. Observers will point to higher levels of competition, market fragmentation and regulatory rules as the reasons U.S. experience with 4G and European expectations differ.

Generally speaking, U.S. operators have been able to charge a premium for use of the faster LTE networks. Though the speed gains might not be so noticeable for mobile data operations, the differences are highly visible for users who tether their smart phones to connect other devices such as notebooks or tablets.

Some seem to believe 4G is simply needed to support growing user data demand, but might not actually help on the revenue front. In that sense, 4G is not a direct revenue driver, only a cost of doing business.

Sometimes that is a decision that must be made, though. Many fixed telco executives pondering the decision to upgrade their access networks likely have come to much the same conclusion: a network with higher ability to deliver bandwidth is mostly a cost of staying in business, not a direct driver of significant net new revenues.

To be sure, video entertainment has emerged as a key new source of revenue, if not so much profit margin. But as one executive once put it, “we need to build fiber to the home to trade market share with the cable operator.”

In other words, investment in fiber to the home was a necessary cost of continuing to stay in business in a competitive market, allowing the telco to add video subscribers it takes from the cable company as the cable company takes voice customers from the telco.

Oddly enough, at the time, fiber to the home was not viewed as much of anything other than a way to keep pace with cable high speed access services, which it was assumed would be a market mostly split between the cable and telco operator in each market.