To Attack U.S. Mobile Pricing Structure, Sprint and T-Mobile US Will Have to AddressTheir Own Cost Structures

If a mobile service provider wants to attack prevailing retail prices in a serious way, it also has to attack its own operating and possibly capital costs.

That's the only way to sustain lower prices (and hence lower revenue) over time, while maintaining long-term profit margins at a level that allows the firm to survive.

And time works against even a successful attacker.

Given enough time, and enough success, a contestant in a market attacking with “low prices,” and operating with a better cost structure, eventually will find itself with fewer of those advantages. Consider Southwest Airlines, which revolutionized air travel and best exemplified the “discount carrier” concept.

In 2004, there was a 36 percent cost gap in terms of operating costs per available seat mile for the three largest US network airlines versus Southwest Airlines, a study on airline costs found.

But the cost gap has narrowed. By 2011, the “mainline” or “full service” airlines had gotten costs down as well. Southwest still had an advantage, but it was a narrower advantage.

Southwest's cost per average seat mile was still 30 percent lower than even the most efficient of the network carriers. For a brief period in 2008, the cost gap was greater than a 70 percent.

More has changed. Southwest now is the largest U.S. domestic airline, and by some reckoning, its labor costs are higher than the “mainline” carriers. Keep in mind that fuel represents 28 percent of total operating cost, while labor represents 24 percent.

At least so far, it would be hard to find an exact analogy in the U.S. or global telecommunications business. But, in broad outlines, legacy service providers have been chopping away at operating costs, while upstart providers, ranging from over the top app providers to metro fiber access providers have been building business models designed to attack retail prices by economizing on cost parameters.

Some might argue that robust wholesale access policies in Europe have allowed many contestants to enter markets and compete precisely because they can operate without the cost of building their own access networks.

Cable TV operators in the United States arguably have been able to build profitable voice and data access businesses because cable TV operators, while building their own networks, have chosen an approach that--by luck more than design--works well for broadband access and IP services.

Cable TV operators also have had lower operating costs, compared to legacy telephone network operators. As the Southwest example indicates, though, advantages can erode, or even flip, over time.

Whether or not that is possible, and to what extent, in the U.S. or other markets, is unknown. Fixed networks remain capital intensive affairs. And, to some extent, “service quality” is related rather directly to hiring enough people to handle the customer service load.

However, as Southwest Airlines and the U.S. airline industry experience already has shown, given time and will, legacy providers can reduce the operating cost advantage over lower-cost, competitors.

At the same time, the longer a competitive service provider remains in business, and the bigger it gets, the more its costs will tend to grow.

If a SoftBank-lead Sprint or T-Mobile US assault on U.S. retail pricing is to be sustainable, it also will have to be accompanied by creation of a cost structure that sustains reasonable profit margins over time.

How that can be done is the issue. Sprint says Network Visions is one such example. 

Motorola Modular Phone Prototype "Almost Ready"

The first prototype of a modular smart phone, likely including the exoskeleton and at least a few module variations that can be assembled to create a working smart phone with various features, is almost ready.

Though commercialization is a ways off, Motorola's Project Ara, working with Phonebloks, looks to be first out of the gate with such a device architecture. 

Project Ara is an open source project run by Motorola that aims to create a modular smart phone, where crucial components, such as screens, processors, batteries and radios are components that can be put together on a custom basis.

In principle, modular smart phones might be attractive for several reasons. Users could customize their hardware features to some extent, as they now customize the look and feel of their screens and have personalized app loads.

That should allow for the possibility of lower-cost devices as well, as devices are custom-built the way Dell used to assemble PCs only after they were ordered.

Less waste would be another advantage, since a device would not have to be thrown away when a major upgrade was required. Perhaps a module swap would do.

Such devices also would to a greater extent be easier to repair, as a module swap would be possible in some cases, not replacement of a whole device.

The whole idea is to create a smart phone that is completely modular, so each component, including the display, processors, battery, storage, camera, Wi-Fi and Bluetooth, for example, all are all separated into discrete blocks that all attach to a main board and are secured by just a couple of screws.

Usage-Based Billing Might be Good for Many Enterprise and Consumer Users

Gartner analyst Robert Desisto notes that suppliers of software as a service (SaaS) for the enterprise continue to resist to the move to “pay as you go” because it will have a very big impact on their business model predictability. 

As understandable as that is, SaaS suppliers are vulnerable to viable suppliers willing to offer true "on demand" pricing where users pay on a "usage" basis.

Oddly enough, that's the model some policy advocates think is so detrimental for consumer users. To be sure, there would be winners and losers in a "usage-based" enterprise software market, as there certainly would be in a "usage-based" consumer market for Internet access.

Some lighter users would be better off with usage-based billing. Heavy users would pay more. 

U.S. Smart Phone Penetration Reaches 63%

According to comScore, U.S. smart phone penetration now has reached 62.5 percent. 

That probably surprises nobody, as smart phones are becoming "phones." 

As often is the case, the oldest age cohorts adopt at lower rates.

Over time, smart phones simply will be what people think of as "phones."

Enterprise Customers Say More Cloud, More Consolidation of Service Providers was Trend in 2013

Moving applications to the cloud and providing more mobility support for an enterprise's customers are the two notable emphases for respondents to a Forrester Research survey. 

Among the bigger changes is attitudes toward cloud-based apps, up sharply. That suggests stronger markets for cloud-based hosting services and bandwidth, if the trend holds up in 2014.

Also notable was the significantly higher interest in consolidating communications suppliers. Look for more supplier churn, if that trend continues. 

Nearly as big a change is the desire to consolidate or change equipment suppliers, as well. 

Does the Telecom Industry have a Life Cycle?

Though the roster of contestants within any industry changes over time, few entire industries actually disappear.

Much depends on how one defines "industry." One might argue that the computing industry has gotten bigger over time, even though the "mainframe," minicomputer" and now "personal computer" segments have declined.

One might ask the same about the telecommunications industry.

In some ways, the question seems odd.

Over nearly every time period, global telecom revenue grows. The only possible exceptions were the years 1929 and 2001, but even there the dips were relatively slight.

For that reason, many consider telecommunications “recession proof,” a theory that was tested in 2000 and 2008. For the most part, aggregate revenue remained fairly stable, though there were some changes in composition of revenues.

And that generally remains the present revenue trend, where annual revenue, on a global basis, grows about 2.7 percent.

That, however, is a secular trend that was in place before the recessions, so the actual impact of specific recession-induced changes is hard to measure.

So while revenue growth might slow, the 2008 global recession did not halt revenue growth. The impact of the Great Recession beginning in 2008 is easy enough to describe. According to TeleGeography Research, revenue growth  slipped from about seven percent annually to one percent in 2009, returning to about three percent globally in 2011.

To be sure, growth prospects vary between regions. In fact, growth in Western Europe has gone negative, perhaps the first time in history that communications revenue actually has seen a declining trend.

The point is that any particular telecom product or service has a life cycle. The bigger question is whether telecommunications, as an industry, also has a life cycle. That does not necessarily require that people “stop communicating.”

The issue is whether the presently-constituted communications industry represents the way people do those things, in the future, or to the same magnitude.

Glimmers can be seen in the role cable TV companies now have assumed in the communications business.

Whether “communications revenue” earned by the cable TV industry has shifted to “another industry,” or whether cable TV providers simply have become part of the communications industry, is a judgment call.

From a telecom service provider’s perspective, it does not really matter how one classifies the revenue and market share. Telecom providers have lost revenue and market share to new providers, across the consumer and business segments, and across the voice and data services markets.

To be sure, telcos have compensated by earning new video entertainment revenues and by making the formerly distinct “mobile communications” business a core part of the telecommunications business.

So the question of industry life cycle is no mere speculation. Can a telco go bankrupt? A few already have, though so far no former incumbent telco has literally disappeared altogether.

But it remains an open question, albeit not a major issue, whether the way communications services and access will be provided exclusively by today’s telcos, cable TV companies and other access providers in the future.

Google Fiber poses the challenge in somewhat concrete terms. Again, one can argue that revenues earned by Google Fiber are simply “communications revenues” earned by a new provider in the traditional business.

But one might also argue that Google Fiber might eventually be something else, namely part of a shift of the traditional access business to a new industry.

It’s a bit of a stretch to label Google Fiber access or video entertainment revenues as “application” revenues. Google’s advertising revenues generally are measured as a distinct business from that of communications access.

But the boundaries are getting porous, as Google manufactures and sells mobile devices and Internet access as supports for its application and ad revenues business.

Indian Mobile Market Illustrates Key Principle About Retail Pricing

This chart of subscribers and price per unit in the Indian communications market illustrates a principle that economists always point out: when the price of a desired product goes down, demand goes up (the reverse also is a key principle).

Economic rules apply in telecom, no less than in other markets.