Remember Economics of Dial-Up ISP Business? Get Ready. You Might See it Again

For those of you who actually remember the economics of the dial-up Internet access business, you will recall that a profitable smallish business became unsustainable with the advent of broadband access. Profit margin was the key issue.

When Internet access was an app that rode on top of a standard unlimited use local voice connection, small ISPs could make a business case for service because they were not leasing access connections.

With broadband, independent ISPs suddenly found themselves required to lease wholesale capacity from facilities-based providers in order to provide service, which wiped out profit margins.

One wonders whether, eventually, that is a problem similar to what independent ISPs will face in the future, on the assumption that the market-standard Internet access offer is 1 Gbps, in urban and suburban markets.

Cable companies and telcos will have to spend more, but can adjust.

Whether that will also be true for wireless ISPs is not so clear. To be sure, there traditionally is a gap between price-performance of urban Internet access and rural Internet access. That will allow rural and independent providers a shot at survival, if they can offer 100 Mbps or more, even if 1 Gbps proves prohibitive.

But nothing is certain, and the precedent of the dial-up to broadband transition might provide a warning. As broadband initially meant a transition from kilobits per second to megabits per second, or an order of magnitude increase, so might a jump of two orders of magnitude likewise pose a calamitous challenge for wireless providers, who might not have access to enough bandwidth to compete.

At least for the moment, what many service providers (cable and telco) will have to do, when faced with the reality of a 1-Gbps competitor, is drop prices. Sooner or later, though, even that is going to be a tough proposition, since the immediate steps have tended to be creation of offers something like “100 Mbps for $70,” when Google Fiber offers 1 Gbps for $70.

At an implied price of seven cents per Mbps (1,000 Mbps at $70), a 100 Mbps service “should” cost $7 a month. That is why Google Fiber prices 5 Mbps at the level of “free.” Using the same metric, 5 Mbps would cost 35 cents a month.

Mobile service providers might eventually face the same challenge. If enough people have very high speed connections, and there is even more Wi-Fi available than there is at present, it will make sense for people to buy relatively small mobile data access packages, and default to Wi-Fi most of the time.

One might argue that is what people already do.

To be sure, mobile access likely always will come at a price premium to fixed service. But the premium will shift as the price per megabit per second for a fixed connection climbs towards the gigabit for $70 a month level.

Even if mobile data continues to cost about an order of magnitude more than the equivalent amount of bandwidth delivered by a fixed connection, absolute cost has to adjust. If 50 Mbps on a fixed network costs about $3.50 a month, for the sake of argument, then 50 Mbps on a mobile network might be expected to cost $35 a month.

Bandwidth economics are going to be interesting going forward. Where we normally operate within “scarcity” constraints, we might in the future actually be facing relative abundance. And that is going to have financial implications for ISPs.

Seeing "Throttling" Where it Does Not Exist

It probably was inevitable: some will see content “throttling” in the wake of a U.S. appeals court overturning of Federal Communications Commission “network neutrality” rules.

Verizon Communications was swift to say it was not blocking or impeding packets. Peering congestion is the likely culprit. Verizon is not dumb enough to block or impede lawful packets, a clear violation of still in force FCC rules.

U.S. Mobile Marketing Wars Will be Intense, Since 50% of Customers Will Not Churn

One reason why mobile marketing wars become so intense is that markets often are quite stable. In other words, in mature markets, customers simply do not change service providers all that often.

According to a recent study by Ofcom, the U.K. communications regulator, just eight percent of adults fixed network voice customers in the last 12 months. About nine percent of broadband access customers switched in the last year.

Just six percent of mobile customers switched providers in the last 12 months, while just five percent switched their subscription TV provider over the same time frame.

What that means, for any mobile service provider in a mature market is that only about one half of one percent of current customers will choose another provider in any given month. So all marketing efforts by any service provider, in any month, are aimed at inducing just one half of one percent of customers to switch.

That is by any accounting an expensive proposition.

Likewise, Parks Associates consumer data show that almost 50 percent of U.S. mobile phone service customers did not change providers over the last 10 years. In other words, fully half the customer base virtually never changes providers, meaning that all switching behavior is concentrated on just half the total subscriber base.

According to Parks Associates, about 25 percent of respondents changed service providers only once in 10 years.

Just 13 percent of respondents  switched providers three times or more (about once every three years or so).

Verizon Wireless and AT&T Mobility have the most stable customer bases. About 62 percent of Verizon and 56 percent of AT&T customers have been with their present carrier for more than five years.

Parks Associates estimates that about 35 percent of AT&T customers are worth $5,000 (lifetime value of the account) or more, the highest among the four national carriers. T-Mobile US, by way of comparison, has about 21 percent in that category.

Of course, the lifetime value of an account varies wildly. If half of all accounts churn almost never over a decade, and if those accounts are multi-user accounts, lifetime value could easily reach $48,000 over a 10-year period ($400 a month, for 10 years).

That is why churn management (for the incumbent), or churn encouragement (for the attacker), matters so much. Some acquired accounts could be lucrative far beyond the $1,000 to $3,600 “lifetime” value of a single-user account.

Far more lucrative are shared accounts (“family or framily”), which represent multiple users, devices and lines, and therefore higher account value. Dislodging a single such account, under some circumstances, could literally be a $48,000 win, over 10 years.

And it is even possible that churn rates could decline, longer term, in Europe and the United States, though a reasonable observer would expect a temporary increase in churn rates as marketing wars heat up.

The percentage of mobile subscribers who are planning to switch service providers decreased from 14 percent annually in 2009 to nine percent annually in 2010, for example, Analysys Mason analysts say.

                                Subscriber Churn Intentions

Source: Analysys Mason, 2011 (2009 data not available for Spain and the USA)

The mobile churn rate in some developed markets stood at about 30 percent as recently as 2009, Analysys Mason says.

And though one might not want to make too much of it, a study sponsored by Ofcom, the U.K. communications regulator and conducted by Ipsos Media CT suggests females are less likely to churn, and males more likely to churn.

The U.S. mobile services marketing war will be intense, in part because it is so difficult to dislodge even a single customer, and will be particularly important for multi-user accounts that historically have been resistant to churn.

Majority of Mobile Data Will be on Wi-Fi by 2018

By 2018, more mobile handset data will be delivered by Wi-Fi than the mobile network, Cisco predicts. Globally, 45 percent of total mobile data traffic was offloaded onto the fixed network using Wi-Fi or a femtocell in 2013.

Without offload mechanisms, mobile data traffic would have grown 98 percent rather than 81 percent in 2013, according to Cisco.

And as is the case at present, 3G still will be the leading mobile broadband network in 2018.

Video will be a factor, as mobile video traffic was 53 percent of total data consumption by the end of 2013. By 2018, mobile video will represent 69 percent of global mobile traffic.

Most users will find they cannot watch much video on their mobile devices, using their mobile data plans, before exceeding usage limits. So there will be a clear incentive to shift video consumption to Wi-Fi networks.

Another important indicator of change is the amount of predicted machine-to-machine traffic.

By 2015, M2M traffic will surpass feature phone traffic, according to the Cisco’s Visual Networking Index (VNI) Global Mobile Forecast, 2013-2018.

To be sure, the bulk of those devices will be personal mobile devices, not telemetry devices such as utility meter sensors. By 2018, of the more than 10 billion mobile-ready devices, about eight billion will be personal mobile devices. Some two billion M2M connections also will be in use.

By 2018, M2M devices will represent the third-biggest category of devices in use, after smart phones and feature phones. By way of comparison, M2M devices are predicted to represent nearly 20 percent of total connected mobile devices, where tablets will represent five percent of total devices in use, and PCs 2.6 percent of connections.

Does LTE Decrease Use of Wi-Fi Offload?

Recent surveys have reached different conclusions about how Wi-Fi offload affects, and is affected by, Long Term Evolution mobile access.

A Devicescape analysis suggests that Wi-Fi Wi-Fi usage doubles for consumers on 4G networks at a similar rate to how their mobile data usage increases. In other words, consumers increase mobile and offload consumption in proportion to their current behaviors.

In contrast,  a recent survey by EE of its UK subscribers that found a significant proportion of its LTE customers are using fewer or no public Wi-Fi hotspots, defaulting instead to the LTE connection most of the time.

The EE survey found 43 percent of LTE network customers were using fewer or no public Wi-Fi hotspots since moving to 4G. In addition, almost 50 percent indicated their mobile browsing time had increased since getting the faster connection.

The Devicescape survey found that average monthly Wi-Fi usage among LTE users increased from 1GB to 2GB. Data usage on the cellular network grew from 0.7GB to 1.5GB when users upgraded from 3G to 4G, it said.

But previous Mobidia research has shown that smartphone users rely on Wi-Fi for their

primary data connection, with Wi-Fi data consumption two to 10 times that of cellular data

consumption.

Mobidia’s data on global Wi-Fi usage in January 2013 found that smartphone users continue to rely on Wi-Fi as their primary connection.

With very few exceptions, such as Japan, users in most developed countries consume well over 80 percent, and often over 90 percent, of their total mobile data on Wi-Fi networks, especially home connections.

Managed public hotspots also consistently accounted for very little traffic across all countries analyzed. For example, traffic on these hotspots was just three percent and two percent of all Wi-Fi traffic in the leading Wi-Fi markets - the U.S. and the U.K., respectively, Mobidia found.

But behavior might be different on LTE networks. Mobidia also found, early in 2013. In virtually all markets studied, Wi-Fi usage decreased when users switched to 4G LTE networks.

That suggests behavior could change, as more users are served by LTE networks.

source: Mobidia

AT&T Ends Early Termination Fee Subsidy Program

AT&T has ended a promotion to pay T-Mobile customers up to $450 to switch services, stopping the program after less than a month, though launching a new lower-price family plan.  In addition to the price cuts on family plans,  AT&T continues to offer to give customers a $100 bill credit for every new line they add to their accounts.

The quick changes resemble the similarly-rapid changes Sprint made prior to unveiling its “Framily” group plan. Sprint had launched a more flexible device upgrade program, some would say in response to similar T-Mobile US programs.

One might argue that Sprint quickly determined frequent device upgrades were less potentially valuable as an acquisition or retention program than creating more-flexible group plans.

Similarly, one might argue AT&T grabbed headlines and attention with its program to pay user early termination fees if they switched to AT&T, but like Sprint concluded it would fare better by changing the value-price relationship for its group plans.

T-Mobile US continues to offer payment of early termination fees of up to $650 when customers switch accounts to T-Mobile US.

The pace of offers suggests we might be early in the marketing battles now erupting in the wake of a furious effort by T-Mobile US to attack and rearrange market shares in the U.S. mobile business.

Investors might rightfully worry that the process is a bit open-ended at this point, creating greater instability in the market and threatening to make industry revenue and earnings forecasts far less reliable. Share prices for U.S. mobile service providers have taken a hit recently, largely, it might be argued, over concern about what marketing campaigns might do to revenue and earnings.

Recent actions by AT&T, T-Mobile US and Sprint suggest that, at the very least, service providers are prepared to launch new offers in rapid succession, and that revenue predictability is going to be exposed.

Apple Building its Own Content Delivery Network

Facts are stubborn things. And the simple fact is that content experiences often require network management or packet prioritization to provide the best experience under conditions of congestion. That is at the heart of the “network neutrality” debate, and one might note what Apple is doing as an example that optimizing packet delivery is a key concern for app providers.

Apple now is doing what Google, Netflix and others have done, namely create delivery infrastructure that optimizes delivery of content to end users. Those content delivery networks are not “best effort.” Instead, the app provider content delivery networks optimize packet flows to eliminate latency.

“An iPhone user who subscribes to Sprint Corp., for instance, might download a song more quickly if Sprint's network links directly to the Apple data center storing that song, rather than channeling the file through a series of middlemen,” a writer for the Wall Street Journal notes.

Apple reportedly is hiring experts with content delivery network experience, especially building in-house content delivery networks, as Netflix itself did.

In 2012, Netflix cut its costs by creating its own delivery network, called Open Connect, instead of buying CDN services from Akamai.

Note the irony: app providers who support network neutrality themselves already optimize their own content. In other words, app providers who already optimize and discriminate between packets want to deny the same capability to ISPs who deliver packets to actual consumer end users.