Asymmetrical Traffic Dominates Networks; Will Affect Interconnection Wars

Asymmetrical traffic demand has been a technology and business issue in the networks business for some time, and is becoming an issue again as video traffic starts to dominate all traffic types, and networks have to be fundamentally redesigned to account for the new traffic characteristics.

The biggest single change is that IP network traffic increasingly is dominated by highly-asymmetrical entertainment video.

Metro traffic will surpass long-haul traffic in 2014, for example, and will account for 58 percent of total IP traffic by 2017.

Metro network traffic will grow nearly twice as fast as long-haul traffic from 2012 to 2017, propelled by the increasingly significant role of content delivery networks, which bypass long-haul links and deliver traffic to metro and regional backbones.

Likewise, content delivery networks will carry 51 percent of Internet traffic in 2017, up from 34 percent in 2012.

Globally, IP video traffic will be 73 percent of all IP traffic (both business and consumer) by 2017, up from 60 percent in 2012. The sum of all forms of video (TV, video on demand [VoD], Internet, and P2P) will continue to be in the range of 80 and 90 percent of global consumer traffic by 2017.

But significant business issues are raised, not just technology and architectural issues.

Though some of the implications mostly are about efficiency, many of the traffic-related issues have revenue and business implications.

In years past, the Federal Communications Commission has had to consider situations where asymmetrical traffic flows have cost implications for service providers that are one-sided and distort the normal economics of traffic exchange.

Historically, the assumption was that traffic would be symmetrical, both inbound and outbound on any single network, and then symmetrical across network boundaries. That had obvious implications for network design and also the arrangements whereby networks compensated each other for terminating or carrying traffic.

But business relationships between networks have been, and will be, affected by various types of arbitrage, especially when traffic flows or retail rates are asymmetrical.

Traffic pumping, also known as access stimulation, is a controversial practice by which some local exchange telephone carriers in rural areas of the United States inflate the volume of incoming calls to their networks, and profit from greatly increased intercarrier compensation fees.

They do so by operating inbound toll-free calling services services where traffic is, by definition, unbalanced. Back in the days when dial-up Internet access was the norm, the same sort of arbitrage existed.

Modem pools could be located where favorable long distance termination rates could be leveraged.

Phantom traffic is another form of interconnection arbitrage.

Granted, IP network interconnection is governed by different rules than common carrier services.

But the same potential for arbitrage can exist, if networks with highly-unequal traffic flows are forced to interconnect on a settlement-free basis. That already is an issue for interconnecting content delivery networks or networks handling video applications such as Netflix, which by definition are characterized by huge downstream flows and almost no upstream traffic.

For that reason, the potential for arbitrage will exist, if IP networks are forced to interconnect on a settlement-free basis. Proponents naturally will put the best light on such mandatory, settlement-free interconnection by arguing it is necessary to maintain lawful content access.

In other words, the mandatory settlement-free interconnection will be couched in “equal access to content” or “network neutrality” terms.

Others might say the issue is business arbitrage.

And that potential arbitrage will grow as all public IP network traffic comes to be dominated by content, specifically entertainment video.

Google Fiber Coming to More Cities? Probably

Google Fiber now is available in three U.S. cities, but Patrick Pichette, Google CFO suggests people should "stay tuned," when asked whether additional cities will be added. 



Since the middle of 2013, Google execs have been saying that Google Fiber actually was a money maker for Google, not an experiment, or simply a way to apply pressure on other major ISPs to upgrade their speeds.



Some might say the evidence since 1983 suggests that improvements in Internet access speed grows at almost the rate Moore's Law would predict.

		Annualized Growth Rate	Compound Growth Over 10 Years
Nielsen's Law	Internet bandwidth	50%	57×
Moore's Law	Computer power	60%	100×

Subscriber Growth Still Matters

Some observers might argue that the mobile industry errs when it continues to measure progress, in part, as a function of subscriber volume (number of accounts or users). In some ways, that makes sense.

The corollary is that in many markets, even organic growth might be secondary to growth by acquisition. Still, how to measure organic growth remains an issue.

Fixed network operators long ago started to emphasize revenue units or revenue per account, especially since it became clear that “subscriber growth” was likely to become muted. In other words, revenue sold to a smaller number of customers, rather than revenue earned by gaining customers, was the salient metric.

Mobile service providers are starting to move that direction as well. Verizon Wireless no longer reports “revenue per user (subscriber)” but only “revenue per account.” In part, that is preparation for a new wave of growth fueled by devices with lower average recurring revenue, including tablets and sensors (Internet of Things or machine-to-machine services).

To be sure, service providers also can grow the amount of revenue they earn from each account, but the driver remains the number of subscriber accounts, at least in terms of what can be accomplished organically.

If the market is largely a zero-sum game, so long as a firm does not lose customers, it gains primarily by growing revenue per account.

On the other hand, a focused effort to protect or acquire some accounts might be among the most-lucrative ways to affect revenue. For starters, some accounts, especially multi-line “family accounts,” are more resistant to churn, but also feature higher revenue.

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. A disproportionate share of those accounts likely are family accounts.

According to Parks Associates, about 25 percent of respondents changed service providers only once in 10 years. So 75 percent of the market is highly resistant to change.

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

That suggests the real battle to shift consumer allegiance would be fought over about 13 percent of customers. Under those conditions, any significant change in postpaid market share will be a stubborn affair.

But anything that dramatically affects propensity to change, especially for the churn-resistant family accounts, would be significant.

According to the CTIA, the average revenue per user in 2012 was about $49 a month. But Verizon Wireless average revenue per account was much higher, about $153 a month, on the strength of its large base of family accounts.

AT&T does not report revenue per account, though AT&T reported average revenue per wireless customer of $65 for the fourth quarter of 2012. But analysts at Cowen and Company peg the average AT&T account bill at $141 per month.

The Cowen survey also found that 68.5 percent of postpaid respondents were paying for family plans, with 26.1 percent on individual plans and 5.4 percent on corporate plans.

An older 2011 survey by PriceWaterhouseCoopers suggested perhaps 47 percent of accounts were family plans. The percentage of AT&T Mobility and Verizon Wireless accounts undoubtedly was higher, even then.

The point is that changes in subscriber numbers still matter, but matter most if something happens to increase subscriber propensity to change service providers, especially among the higher-value family accounts.

New Coalition to Lobby for More Unlicensed Spectrum

A new coalition formed to push the U.S. Federal Communications Commission to release more unlicensed spectrum, called WifiForward, includes cable companies Comcast Corp., Time Warner Cable and Charter Communications, Google and Microsoft.



Notably, WifiForward does not include the largest U.S, telcos, for reasons you will understand. 



Mobile service providers, for a couple of reasons, prefer licensed spectrum. They can control quality, for example. But it also is obvious that licensing provides the highest "scarcity" value, creating better conditions for monetizing spectrum and also preventing other competitors from using that spectrum to compete.



Applications providers prefer unlicensed spectrum since they are users of networks based on spectrum, not providers of services earning revenue based on the access. Unlicensed spectrum makes Internet access more available, at lower cost, than otherwise would be the case.



Cable operators also have reasons for wanting more unlicensed spectrum released. Though cable operators have tried for decades to create an independent role in the mobility business, U.S. cable companies essentially have abandoned the effort. 



Instead, cable companies hope Wi-Fi will be a way to enter the untethered communications business without having to create full mobile assets of their own. 



In essence, cable companies continue to hope that untethered communications will create new revenue opportunities for them, both as retailers of service and suppliers of wholesale capacity.

Video Economics Could Crush Mobile Profit Margins

It is easy to overlook the huge change in mobile industry economics as video becomes the chief bandwidth generator on mobile networks. It is hard enough to maintain profit margins for a service created and sold by an access provider; harder still when an access provider does not derive any direct revenue at all from an application.

And that latter problem is precisely why over the top video poses such a challenge for mobile service providers. Even ignoring for the moment the lack of any direct revenue model for over the top video, revenue per bit always has been an issue for broadband services, compared to narrowband services.

In fact, even if mobile service providers might prefer to price according to value, that is difficult for video services, since the perceived price per bit for video is so low, relative to other types of apps.

To be sure, even some thoughtful analysts have been wrong about profit margins. Despite some claims to the contrary, mobile broadband service is profitable. Still, video poses a problem because it is so hugely different, in terms of bandwidth consumption, than any other media type.

Even though McKinsey analysts have argued in the past that a 3G network costs about one U.S. cent per megabyte, the growing problem is video consumption per megabyte, even when a service provider gets paid to provide it.

Consider over the top video, which might be supported by retail mobile Internet plans costing about $10 per gigabyte.

Assume a user is consuming an hour of Netflix, at “best quality,” representing about a gigabyte per hour, or perhaps 2.3 GB an hour. That earns $10 for supplying a gigabyte of usage.

That, in itself, is not a problem, so long as users agree to pay for what they use. But that is the potential problem: it is unlikely users will continue to behave the same way as consumption grows.

According to Ericsson, video traffic on mobile networks grows about 60 percent annually. According to Cisco, mobile video consumption is growing at a compound annual growth rate of 69 percent between 2013 and 2018.

Already on some networks, video consumption is on average 2.6 GB per user per month. At some point, most consumers will reach a point where they either stop consuming more, stop buying bigger plans, or both.

Of the 15.9 exabytes per month crossing the mobile network by 2018, 11 exabytes will be due to video, Cisco says. In 2012, mobile video represented more than half of global mobile data traffic, Cisco says.

If mobile service providers become providers of mobile entertainment services, the basic problem remains. Assume a mobile service provider offers a Netflix style service, and earns $8  a month, while consumers watch five hours a month.

Total revenue might be as high as $58 a month, including the $8 video subscription fee, plus $50 in Internet access fees. The issue is where consumer resistance, or reduced app usage, or offloading, comes into play.

But assume people watch five hours each day of mobile video, the same amount U.S. residents watch. That implies as much as 150 hours of video a month, per subscriber. There simply is no way a subscriber pays $1500 a month in data charges, simply to watch video.

So the practical issue is how much any typical consumer will pay to watch video. And there the economics get tricky. A household of three, for example, might watch as much as 450 hours of video, if there is no shared viewing.

Assume a monthly video subscription price of $90 a month. That implies a cost of about 20 cents an hour. Mobile data charges are $10 per gigabyte, which is roughly an hour of viewing. The economics will break down quickly.

A mobile network designed to handle mostly video has to be designed and operated differently--and at far lower cost--than a network designed for narrowband services. That has been obvious for some time. It now will become a most-practical issue.

Without dramatic cost reductions, video will crush mobile service provider networks and profit margins.

Where Does Verizon See Greatest Churn Danger?

The new Verizon Wireless “More Everything” program seems aimed at shared data plan accounts that buy 3 GB, or less, of Internet data usage each month, rather than heavier users on popular Verizon Wireless shared data plans.

That suggests Verizon sees the immediate churn danger among shared data accounts purchased by single users connecting multiple devices, or two-user or three-user accounts.

The new program features bigger data allowances for the same price formerly charged for smaller data allowances. Some customers will see their data allowance doubled for the same monthly price they paid previously, Verizon Wireless now says.

More Everything customers who choose to enroll in the Verizon Edge device program also will get $10 off monthly smartphone access for data allowances up to 8 GB, and $20 off monthly smartphone access on plans of 10 GB and higher.

Though unlimited U.S. domestic texting has been a staple of new plans across the industry, Verizon Wireless now is extended unlimited international texting, picture and video messaging (MMS).

Each More Everything line also will be able to  use up to 25 GB (or up to 250 GB on a 10 line account) of cloud storage from Verizon Wireless.

Verizon Wireless also is offering price breaks on some additional features, which can be added for no extra charge for three months, then costing $5 a month thereafter.

Among them are Family Base. Also, the Verizon Wireless International Long Distance Value Plan provides rates as low as $0.01 per minute to Canada and Mexico, and $0.05 per minute to many other countries in Latin America and the Caribbean.

Marketing War is Only the Prelude: U.S. Mobile Revenues Will Decline by 2018

Among developed markets, the U.S. mobile industry has been a revenue bright spot for several years, growing where revenue has been dropping in Western Europe, for example. For several reasons, that is likely to change.

For starters, some forecasters have argued that even global mobile revenue will start to drop, beginning about 2018. Ovum, for example,  forecasts mobile operators will face global revenue decline by 2018 for the first time in mobile industry history.

Western European service provider revenue is predicted to decline by 1.5 percent on a compound annual basis. In the Middle East, average revenue per user will decline 2.5 percent on a compound annual basis.

Africa and Asia will be the exceptions. Africa will grow at a CAGR of 4.2 percent. Parts of Asia-Pacific and Latin American regions will see growth as well, Ovum predicts.

Overall, global connections will grow by by less than four  percent compounded annually between 2012 and 2018, while global revenues will grow at less than half that rate.

According to Ovum, global mobile connections will grow from 6.5 billion in 2012 to reach 8.1 billion by 2018, while annual mobile service revenues will rise from US$968 billion to US$1.1 trillion.

However, global service revenues will contract in 2018 for the first time in the history of the mobile industry, declining from 2017 levels by one percent or US$7.8 billion, Ovum predicts.

Connections in Western Europe will grow by less than one percent, compounded annually,  while revenues will decline at a CAGR of 1.48 percent, said Sara Kaufman, Ovum analyst.

The U.S. market also will decline by about one percent in 2018.

Much of the revenue decline will be driven by falling ARPU, which will continue to decline across all markets by a 2.7 percent global CAGR between 2012 and 2018, says Kaufman.

One might argue that the current mobile marketing war will be part of the reason revenue decline begins.

source:eWeek

source: Analysys Mason

source: Analysys Mason