Greater Scale Leads to Lower Prices, Even in a More Concentrated Mobile Business?

If telecommunications really is a business with scale characteristics, then additional scale should lead to lower retail prices. And there is evidence that higher concentration levels in the U.S. mobile business have happened at the same time that retail prices have dropped. 

2013 Began a Reset of Consumer Expectations about Internet Access

Major Internet service providers long have argued that demand for very high speed Internet access (50 Mbps, 100 Mbps, 300 Mbps and faster) is limited. For a very long time, those ISPs have had the numbers on their side.

But that is changing.

By the end of fourth-quarter 2013, 46 percent of Verizon Communications consumer FiOS Internet customers subscribed to FiOS Quantum, which provides speeds ranging from 50 Mbps to 500 Mbps, up from 41 percent at the end of third quarter 2013.

In the fourth quarter of 2013, 55 percent of consumer FiOS Internet sales were for speeds of at least 50 megabits per second. That is a big change, as historically, consumers have tended not to buy services operating at 50 Mbps or faster.

ISPs in the United Kingdom have in the past also  found demand challenges for very high speed services.

Major ISPs would have been on firm ground in arguing that most consumers were happy enough with the 20 Mbps to 30 Mbps speeds they already were buying, and that demand for 50 Mbps, 100 Mbps, 300 Mbps or 1 Gbps services were largely limited to business users or early adopters.

But something very important changed in 2013, namely the price-value relationship for very high speed Internet access services. The Verizon data provides one example. Google Fiber was the other big change.

Previously, where triple-digit speeds were available, the price-value relationship had been anchored around $100 or so for 100 Mbps, each month.

In the few locations where gigabit service actually was available, it tended to sell for $300 a month.

Then came Google Fiber, resetting the value-price relationship dramatically, to a gigabit for $70 a month. Later in 2013, other providers of gigabit access lowered prices to the $70 a month or $80 a month level, showing that Google Fiber indeed is resetting expectations.

Sooner or later, as additional deployments, especially by other ISPs, continue to grow, that pricing umbrella will settle over larger parts of the market, reshaping consumer expectations about the features, and the cost, of such services.

That price umbrella also should reshape expectations for lower-speed services as well. If a gigabit costs $70 a month, what should a 100-Mbps service cost?

So the big change in 2013 was that the high end of the Internet access or broadband access market was fundamentally reset, even if the practical implications will take some time to be realized on a fairly ubiquitous basis.

Google Fiber’s 1 Gbps for $70 a month pricing now is reflected in most other competing offers, anywhere in the United States.

And those changes will ripple down through the rest of the ecosystem. Where Google Fiber now offers 5 Mbps for free, so all other offers will have to accommodate the pricing umbrella of a gigabit for $70 a month.

Be clear, Google Fiber has sown the seeds for a destruction of the prevailing price-value relationship for Internet access.

Eventually, all consumers will benchmark what they can buy locally against the “gigabit for $70” standard. And those expectations will affect demand for all other products.

Where alternatives are offered, many consumers will opt for hundreds of megabits per second at prices of perhaps $35 a month, because that satisfies their needs, and is congruent with the gigabit for $70 pricing umbrella.

One might also predict that, on the low end, 5 Mbps will be seen as a product with a retail price of perhaps cents per month.

One Reason Why U.S. Vehicle Communications (Machine to Machine) Market HAS to Grow

The U.S.  Department of Transportation (specifically the U.S. NHTSA) is preparing regulatory proposals to make vehicle-to-vehicle communications (part of the broader "machine to machine" market) compulsory, to prevent crashes, reduce traffic congestion and to save fuel.

The U.S. Department of Transportation's (DOT) National Highway Traffic Safety Administration believes vehicle-to-vehicle communication technology for light vehicles, allowing cars to talk to each other, would  avoid many crashes altogether by exchanging basic safety data, such as speed and position, ten times per second.



That is one way to create a market: mandate it.  The major mobile service providers possibly stand to  benefit, even if the actual communications will use the 5.9GHz band and Wi-Fi air interface (802.11p), in part because any such systems will benefit from wide area communications as well. 

But most of the revenue likely will be earned by application providers, in a complicated ecosystem.

60% of All Internet Devices Exchange Traffic with Google Every Day

About 60 percent of all Internet end devices and end users exchange traffic with Google servers during the course of an average day, according to Deepfield.  In 2010, Google represented just six percent of Internet traffic.

In the summer of 2013, Google accounted for nearly 25 percent of Internet traffic on average. Perhaps as significantly, Google has deployed thousands of Google servers  (Google Global Cache) in Internet service provider operations around the world, accelerating performance and improving end user experience.

Aside from all the other things that presence could mean, one might argue that Google might be able to leverage all of that to better compete with Amazon Web Services, the clear market leader in the cloud infrastructure business.

Mid-2013 research by Synergy Research Group  indicated Amazon Web Services (AWS) had 27 percent market share of the infrastructure as a service and platform as a service segments of the cloud computing business.

At that point in time, North America accounted for well over half of the worldwide market, while Asia-Pacific region accounted for 21 percent of revenue and Europe, the Middle East and Africa accounted for 20 percent of revenue.

Ignoring Salesforce.com, which is in the applications as a service segment, Microsoft, IBM, Google and Fujitsu arguably were positioned in a clear second tier of providers, with market share between four percent and five percent.

AT&T and Verizon each had about two percent share. The question is what any of the other contenders can do to catch up to AWS. Some might argue Google is the firm best positioned to leverage other assets in that regard.

Some argue that Google is Amazon's only competition. Other cloud infrastructure providers might disagree, but few would doubt Google’s ability to challenge AWS, in ways other cloud infrastructure providers would find difficult and expensive.

By some estimates, since 2005, Google has spent $20.9 billion on its infrastructrure. Microsoft has invested about  $18 billion and Amazon about $12 billion.

TV is Turning Out to be Quite a Srtategic Asset for Telcos

There's a good reason why Vodafone bought Kabel Deutschland, and might be considering additional purchases of video subscription service assets in the United Kingdom: video services are among the areas where telco market share is growing.

And while profit margins at smaller providers will be slim to non-existent, larger telcos likely are seeing profit margins in the 20-percent range. 

Video also has emerged as a core application complementing a broadband access service. According to Bernstein Research, where U.S. cable TV and satellite TV providers are losing customers, U.S. telcos are gaining them.

Would You Rather Be HBO or Netflix?

HBO generated $1.8 billion in operating profit in 2013, propelled by revenue growth of four percent (to reach $4.9 billion). 



Netflix's revenue rose 21 percent in 2013 to $4.37 billion and $228 million in operating income. 



Netflix is growing faster, and already generates more gross revenue than HBO, though HBO has much higher profit margins. 



You might argue Netflix is more exposed to a slowdown in growth, as it will have to increase spending on original content. 

Verizon to offer $100 for New Lines in February

One big question observers have had about the escalating mobile marketing wars in the U.S. market is whether Verizon Wireless would have to respond. It appears that is happening, on at least a limited basis. 



Verizon will offer $100 for new lines from Feb. 7, 2014 to Feb. 28, 2014, on a two-year contract plan. 



What remains to be seen is how the offers and counter-offers develop over time, with or without any merger between Sprint and T-Mobile US.