"Micro-Basic" Subscription Video Tiers in 2014?

Though program networks generally dislike the concept, video subscription providers are well aware many customers think their monthly costs are too high.

That is leading a steady but slow stream of customers to abandon video altogether. Then there are the younger consumers who simply never have acquired the habit of purchasing linear video. 

So some might predict that worried programmers will consent to "micro tiers" of programming that might entice some customers to stay, and others, who never have bought the product, to try it.

These possible smaller packages of channels will cost less, and possibly appeal to many consumers who otherwise would not buy anything, or would be tempted to disconnect.

We'll see. As much effort as will go into constructing tiers that add incremental customers without triggering significant downgrades on the part of existing customers will be tricky. 

One More Example of How Internet Apps Can Grow ISP Revenue

With the caveat that a mobile or fixed network Internet access provider has to be able to charge for greater consumption by end users, Internet apps possibly have harmed telecom revenue less than imagined.

In fact, even cannibalization of text messaging by over the top services might not be as big a hit to revenue (globally), as often is assumed.

A shift to greater amount of video streaming actually should help Internet service provider revenues, assuming some rather direct correlation between consumption and revenue is possible.

For the sake of argument, assume a household shifts consumption from a linear video TV subscription to some form of online delivery.

Ignore for the moment any revenue the Internet service provider can earn from providing TV content that once was consumed using a cable TV, satellite TV or telco TV connection, and focus only on the impact on purchased Internet access service.

Assume a one-hour TV show streamed to a TV requires 1GB at standard definition, and 2 GB, for an hour of HDTV. Assume you are a typical users and consume five hours of video a day. Assume half your consumption if HDTV and half is standard definition.

That implies 75 hours of standard definition TV consumed per person per month. At 1 GB per hour, that’s 75 GB of data. The 75 hours of HDTV represent 150 GB of data consumption, for a total of about 225 GB of data consumption a month, for linear entertainment television.

That might not be an issue for a single-person household with a monthly usage allowance of 300 GB. Assume the monthly cost is about $70 for such a plan.

The math gets tricker for multiple-person households, especially if many users are watching different programs. But the revenue logic is simple enough. If two residents watch five hours a day of TV, and that consumption is shifted (for the sake of argument) to online delivery, then that household has to buy an access plan with a bigger data allowance, to account for the 450 GB of video consumption by the household.

As this one example illustrates, demand for Internet apps drives enough incremental usage that one might argue the Internet sometimes directly drives ISP revenue.

It’s complicated, but not quite a zero-sum game, as some might fear.

How Much Text Messaging Cannibalization, Really?

Following up on the issue of how much the Internet has harmed telecom revenues, the amount of revenue destruction is rather complicated. While most wouild agree that some amount of telecom service provider revenue from voice and text messaging has been disrupted by over the top alternatives, the net revenue impact has to be balanced by creation of new revenue streams directly created by end user use of the Internet.

For example, Portio Research questions the actual amount of lost revenue. While in some markets over the top messaging presumably does cannibalize significant text messaging revenue, in other markets, where mobile Internet access is not widespread, dramatic growth of mobile adoption means more text messaging revenue is being created.

“During 2012 and 2013 we have seen many reports that operators are losing $20 billion to $30 billion in SMS revenue to OTT messaging apps,” said Karl Whitfield, a director at Portio Research. “We see reports that OTT traffic will be double that of SMS by the end of 2013,” he says. “This is wrong on both counts.”

It may be true that SMS revenues are levelling off and that OTT is on the rise, but SMS is still generating revenues of $15.3 million per hour, 24/7, that’s a massive $133.8 billion in 2013, Whitfield says.

Over the top apps generate about $3 million an hour, by way of comparison.

Worldwide SMS revenue has gone up year after year since the early 1990s and will continue to be above 2010 levels until 2017, Whitfield said.

In fact, in some markets, SMS and OTT apps are coexisting, serving end users in different ways.

There is a huge uptake of OTT messaging in Japan, particularly with local player LINE, yet the SMS market remains healthy and stable, he says.

The same goes for South Korea, where KakaoTalk is enjoying huge success; here again the SMS market remains stable and is not declining as many predicted.

Where SMS has seen a decline, in markets such as Spain and Greece, there has been an overall fall in subscribers and revenues at the same time.

“Our research into mobile messaging completely contradicts what some other industry observers are saying,” said Whitfield.

Global OTT and P2P Messaging Traffic (Billions)

	2010	2011	2012	2013F	2014F	2015F	2016F	2017F
P2P SMS	5,812	6,546	6,623	6,687	6,654	6,522	6,304	5,931
OTT Messaging	1,494	3,840	6,774	10,452	14,970	20,437	26,359	32,141

source: Portio Research

The point is that product substitution, while a fact, might not be as destabilizing a revenue trend as sometimes  believed.

FAA Authorizes Commercial-Drone Testing

Most rather exotic technologies take a while to reach commercial maturation. Artificial intelligence and robotics might provide another example. Though robotics have been a mainstay of manufacturing for 40 years, the extension of more advanced forms of applied artificial intelligence only now seem to reaching a new stage of commercialization.

Google's self-driving cars are one example. A more important development is that the 
U.S, Federal Aviation Administration has selected a handful of universities and state agencies to operate sites for drone testing, in a step toward eventually integrating commercial unmanned aircraft into the U.S. aviation system.

That might begin to happen as early as 2015, some think. That's a huge step forward.

The six operators of test sites for unmanned aircraft include the University of Alaska, the State of Nevada, New York's Griffiss International Airport, the North Dakota Department of Commerce, Texas A&M University - Corpus Christi and Virginia Polytechnic Institute and State University.

None of those tests seem yet to involve commercial applications, instead focusing on how such systems might work, safely. The next big steps will involve apps using such drones.

Economics Does Not Explain Everything Because "Irrational" Behavior Matters

Economics is a discipline rather rare in the public policy arena, including the communications business, at times.

Though political rationality also is at work when policies are created, political rationality ("what can be done; what is possible") is not always quite so rational in terms of how people, firms and markets will change, once any set of policies are implemented.

In fact, it is impossible to know, with certainty, how behavior will change, in unexpected way, once a set of changes is made. That also applies for incentives people have when creating products and services. 

"People can be really smart or have skills that are directly applicable, but if they don’t really believe in it, then they are not going to really work hard," says Mark Zuckerberg, Facebook CEO.

That intangible--commitment--cannot be modeled mathematically. Sometimes forces that cannot be measured or modeled--love, affection, idealism--indeed can shape behavior. At least sometimes, that means impossible things can, at least for a time, become "possible."

So "irrational" behavior sometimes can confound forecasters and predictions. And by "irrational," one does not have to imply "not rational and therefore destructive." Love is irrational, too. Passion and idealism likewise can sometimes cause behaviors we cannot quite anticipate.

If some firms seem to continually outperform others, at least some of the time that is because those organizations have harnessed "irrational" commitments. No bureaucratic structure can fully compensate for that. 

New Sprint Nextel Business Offer Might Combine Fixed, Mobile Access

Anybody in the mobile business can attest how expensive and how difficult it is to create differentiation around a mobile brand and offer. Speed, price and coverage tend to be the concrete tactical sources of differentiation. 

Creating value through branding always is more tricky, but Sprint might try something that is interesting, for the small business customer segment. Apparently, Sprint is considering relaunching Nextel as a small business brand, with one interesting twist.

The proposed Nextel offer would combine both fixed broadband access and mobile service, a byproduct of Sprint's ownership of the former "Clear" fixed wireless network. In essence, Sprint would create a fixed network plus mobile service bundle. 

Some might say that only matches what AT&T or Verizon might be able to offer, but perhaps that is the point. In at least some markets, Sprint might be able to compete more effectively in the small business segment with a fixed broadband plus mobile offer, partly offsetting the speed, price and coverage comparisons every potential customer knows are among the potential differences between suppliers. 

How Much has the Internet Harmed the Telecom Business?

Has the Internet harmed the telecom business as much as it apparently has reshaped many other retail and consumer businesses?

You might think the answer is fairly simple. It would, after all, be possible to argue that the Internet has affected virtually every business in a way that reduces friction (and hence distribution cost), provides price transparency (driving prices towards the lowest cost producers) and creates new alternatives to existing services and apps that reduce demand for the legacy apps.

To use the most obvious example, over the top mobile messaging and over the top voice apps have displaced some amount of calling and text messaging, while arguably having the more important impact of reducing or capping prices for legacy services.

Of course, matters are more complicated. The Internet also creates the need for fixed and mobile network data services, which add revenue. So any assessment would have to include actual lost revenue from reduced legacy services, abandonment of services, the effect of stranded investments in legacy infrastructure, higher investment in IP infrastructure and then incremental new revenue based on Internet access.

Even the apparently clearest signs of cannibalization--abandonment of fixed voice lines--are not necessarily the result of Internet substitution, but rather preference for mobile calling. And though it also is possible that some amount of mobile carrier voice will be displaced by Internet calling, the magnitude of the eventual shift is not clear.

And some might argue that even when over the top calling services displace some carrier voice revenue, there are other forms of value that actually increase revenue for service providers.

Based on interviews with executives from 3 in the UK and customer analytics data from 3 and Skype, CCS Insight  concluded that use of Skype provided unexpected benefits for mobile service provider 3 in the United Kingdom.

“While 3 initially aimed to use Skype as a means of differentiation and as an acquisition tool, one of the most significant impacts was to drive up margins, especially through an increase in voice revenue, but also by reducing churn,” CCS Insight argues.

Mobile Skype users generated almost 60 percent more voice revenue than non-users and spent

almost a third more on text messaging than non-users of Skype.

Skype users provided margin uplift of more than 20 percent and regular Skype users churned 14 percent less churn than non-users, CCS Insight argued.

To be sure, it also is possible that heavy or regular users of Skype also use more communication services in general, so whether there is causation or only correlation is tough to say.

For example, in the U.S. market, though telco revenue from fixed voice lines is down, broadband and video entertainment revenues are up. For U.S. cable providers, the loss of video customers has been compensated with growth in Internet access and voice services.

For Verizon, whose third quarter 2013 mass markets revenue was up slightly over the third quarter of 2012, the obvious implication is that video and broadband are driving revenue growth at rates that compensate for losses of traditional voice accounts.

Likewise, AT&T reported third quarter 2013 fixed network consumer revenue growth of 2.4 percent versus the year-earlier period.

Those performances occur against a backdrop of declining demand for fixed voice lines.

Perhaps 39 percent of U.S. households no longer buy fixed voice service, according to the Centers for Disease Control.

The point is that the Internet has had a complex impact on telecommunications revenue. On one hand, it has put pressure on profit margins for legacy voice. At the same time, it has created a brand new market for Internet access in the fixed line business.

In the mobile services business, a similar trend is occurring. Revenue growth in saturated mobile markets now is lead by Internet access revenues.

In other words, the Internet arguably has had both positive and negative revenue implications for service providers.