WhatsApp to Add Voice

WhatsApp says it will add voice calling capability in the second quarter of this year, according to Jan Koum, WhatsApp CEO.

That will create a “Skype style” over the app voice and messaging firm with more than 450 million users globally. Most observers would agree WhatsApp is headed for perhaps a billion users over the next several years, as it currently is adding about a million users a day.

WhatsApp already had become a direct competitor for mobile messaging. Now WhatsApp will put more pressure on carrier voice as well.

The larger observation might well be that fears service providers have had about competition from application and device suppliers has indeed emerged, across many parts of the mobile and telecom ecosystem.

For at least a decade, observers of the telecom business have speculated about how and when application providers would become “telecom service providers.”

In some cases, that competition is direct, in other cases primarily indirect. For WhatsApp, voice likely will be a feature, not a direct revenue-generating service. On the other hand, such indirect forms of product substitution illustrate the fundamental dynamics of a loosely-coupled application ecosystem on suppliers of historically tightly-coupled communications and content services.

One might reasonably disagree about the impact of over the top apps on markets for voice or messaging. To some extent, such apps displace use of existing voice and messaging. In other cases, OTT apps stimulate usage by people who would not otherwise have communicated or shared.

In other words, OTT apps both displace legacy app use, and stimulate new behavior that would not otherwise have happened. WhatsApp now will displace both voice and messaging volumes and revenues.

The WhatsApp challenge is only part of a bigger trend, of course. One of the clearest implications of a loosely-coupled Internet ecosystem is that all apps become disaggregated from “access.”

The primary implication for legacy service providers is that apps such as voice and data become products “anybody” can create and deliver, potentially shifting the “service provider” value away from such apps and towards an “access provider” role. That is the origin of the fear about service providers becoming “dumb pipes.”

At a strategic level, that is inevitable. It is not that legacy service providers cannot create new apps to sell. They can. But those businesses are more or less disaggregated from the core access function. Of course, even the access function is threatened by the likes of Google Fiber.

The point is that virtually every revenue stream traditionally supporting cable, satellite and telco service providers is threatened.

From time to time, the perceived dangerous competitors shift. “Skype” was the perceived danger to voice revenues.

WhatsApp is the latest perceived threat to mobile messaging revenues. Google has been seen as the threat to voice or Internet access revenues.

Fon and municipal Wi-Fi likewise have seen as competitors to service provider high-speed access services, or potentially to the mobile network.

From time to time, in other parts of the business, Google, Amazon or Microsoft have been seen as competitors to traditional handset and device suppliers.

Some also have speculated about whether Apple, Google, Facebook or others might actually decide to become mobile service providers.

In the mobile payments business, eBay (PayPal), Square, Google, Starbucks and others stand as competitors in that business.

The point is that every legacy communications service provider product, and virtually all new potential lines of business, have “non-traditional” competition.

In the video entertainment business, Netflix has been viewed as a challenger to traditional cable TV, satellite TV and telco TV businesses, on one hand, or as a burgeoning programming network that challenges HBO.

As time goes by, many of those potential areas of competition have become realities. Google Fiber now is emerging as a significant competitor to cable and telco high-speed access and video entertainment services.

Fundamentally, all legacy service providers are being recast as “access providers” who also own and operate some application businesses. That is the essential content of the observation that broadband access revenues drive service provider growth, or that service providers are in danger of becoming “dumb pipes.”

Telcos and cable companies already create and sell applications that are conceptually divorced from a tightly-integrated bundle that includes access. In the future, that will be even clearer.

Netflix Strikes New Interconnection Deal with Comcast

It appears Netflix will pay transit fees, and will not peer with Comcast on a settlement-free basis. Peering without settlement payments traditionally has been used bilaterally when two networks exchange roughly equal amounts of traffic.

Payment of transit fees has been the traditional arrangement when two networks are of unequal size, or traffic flows are asymmetrical, as is the case for Netflix and Comcast. By definition, Netflix primarily sends traffic to Comcast, and receives very little traffic from Comcast.

The new agreement presumably is a transit deal, not a settlement-free peering agreement.

In principle, Netflix likely will have to keep signing transit deals with other large ISPs with huge audiences Netflix wants to reach, as the user-aggregating ISPs will continue to see highly-unequal amounts of traffic delivered by Netflix, and little traffic flowing back to Netflix from the major user-aggregating ISPs.

The transit fees will likely raise Netflix operating costs, though it is not clear by how much.

How Big a Market Will Internet of Things Be, for Mobile Service Providers?

Some 1.9 billion devices already are connected to the Internet, and nine billion will be connected by 2018, making the “Internet of Things” a bigger market, in terms of devices, than smartphones, smart TVs, tablets, wearable computers, and PCs combined.

Whether the revenue implications will be so large, despite the billions of connections, remains the issue. Some think $1.2 trillion will be earned, collectively, by about 2022, by all participants in the Internet of Things ecosystem.

Such forecasts are not granular enough to be of practical help to most participants, but it might be reasonable to assume that perhaps 10 percent of that total revenue might represent access fees.

Even by that measure, mobile service providers might earn $100 billion in 2022, a large enough number to warrant serious effort.

EU Broadband Policy Not Working, Strand Consult Argues

The EU’s broadband and telecom policy is not working, according to Strand Consult. Disincentives for investment and inability for firms to merge are among the key problems, Strand Consult argues.

On the other hand, one might argue that EU public policy was intentional. By mandating affordable wholesale access to incumbent networks, EU policy has succeeded at promoting competition.

But that very competition reduces network owner incentive to invest in upgraded facilities. The issue is not so much that the EU policies are “wrong,” as that they emphasize competition at the expense of investment.

U.S. regulators faced the same problem in the first decade of the 21st century, but made different choices. Aided by the fact that at least two fixed broadband networks exist in most markets, with two national satellite broadband providers and fixed wireless networks in many rural areas, U.S. regulators decided to create a framework conducive to investment, at the expense of mandated wholesale access.

The existence of Google Fiber, which seems on the cusp of becoming a much more serious force in the U.S. ISP market, was made possible, in large part, by a framework that allows ISPs and service providers to reap the rewards of their investments, principally by not forcing them to give wholesale customers easy access to those facilities.

In that sense, EU policy is not so much “wrong” as intended to produce different outcomes.

With important caveats (it always is possible to discover “gaps” of one sort of another. Whether those “gaps” are permanent or even fundamentally significant is the issue).

Strand Consult argues that the gap between European Union and U.S. investment in next generation networks is growing, as a result of the differing policy frameworks.

“The EU approach of managing competition through open access and price controls has not created incentives for investment in next generation broadband access,” says John Strand, Strand Consult CEO.  3. While the US has certain advantages being a large country with a common language, it made a decision to support the policies that maximize investment and innovation, namely a light-touch regulatory framework that allows broadband providers to get economies of scale, consolidate, earn profits, and invest.

Also, although many U.S. observers continue to insist there is a “broadband access problem” in the United States, Strand notes that the United States is “leading the EU on broadband measures such as the availability of broadband with download speeds of 100 Mbps or higher and availability of cable broadband, LTE, and FTTH.”

“Ten years ago the EU expected to lead the world in mobile with the GSM standard and six European phone manufacturers that accounted for half of the world’s phone,” says Stran. “Today no European handset makers remain, and America has surpassed Europe with 4G/LTE.”

It isn’t fundamentally too difficult to illustrate how policy would have to change to promote more investment. EU officials would have to make investment the policy objective.

That might involve allowing further consolidation of service providers and curbing wholesale obligations for fiber networks. As cable networks have in many markets emerged as the key challenger in the broadband networks space, measures that allow cable operators to invest in new networks also might be helpful.

The foundation of U.S. policy has been “inter-modal” competition between cable, telco and satellite providers, not “intra-modal” competition between incumbent and wholesale-based competitors.

That will be tougher in the EU zone. Still, policymakers fundamentally have to choose between investment or competition as the anchors of policy.

Any measures that create incentives for investment might limit wholesale access. And there would be a danger. Investment incentives for new, not just incumbent operators, would have to part of any change.

Concede or Compete? Messaging and Voice Pose Same Strategic Challenge

Many mobile service providers continue to believe there is financial value to be had in creating and supporting branded over the top messaging apps. One might argue that seems extremely unlikely, given the network effects other over the top messaging providers have achieved. 

Of course, many argue that the basic voice product can be enhanced in ways that allow prices to be raised, and can reverse the trend of declining usage in many markets where alternative communication modes make more sense. Some might say that is a questionable long-term strategy as well.

Ovum estimates mobile SMS plans accounted for $120 billion in revenue during 2013, down from $145 billion in FY 2012. That decrease of $25 billion, or 17 percent, is largely attributed to the move away from SMS toward data-driven communication applications.

Telcos have been down this road before. For years, when AT&T was an independent provier of long distance service, it struggled to break into the "local access" business in the United States. 

Ultimately, AT&T failed. In fact, the actual strategy, for years, involved harvesting declining international calling revenues as long as possible, at the highest possible rates, while the transition to a new revenue model could be achieved. 

One might likewise have argued that AT&T could change the product by creating more valuable calling services and adding features. In retrospect, that has proven incapable of halting the revenue erosion.

One might argue that mobile and fixed network calling, and mobile text messaging, face precisely the same problem, and ultimately will find the same results. 


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Lower EU Roaming Charges Will Boost Demand: What is Net Revenue Impact?

Lower prices for a product consumers want should, and does, increase usage. That should occur within the European Union as roaming tariffs are sliced in 2014, as they have been for each of the past seven straight years, as part of mandatory wholesale price reductions mandated by the European Commision.

The issue is whether higher usage will compensate for lower revenue per unit of use.

The latest round of EU-mandated wholesale roaming price cuts will cut wholesale data roaming to 28 percent of 2012 levels. International outbound wholesale voice roaming will fall to about 66 percent of 2012 levels. International text messaging will decline to about 67 percent of 2012 levels.

And there have been proposals to set rates to zero.

European Union mobile service providers have been pointing to the mandatory price cuts as responsible, in part, for declining revenue over the past couple of years.

For example, combined revenues from voice, messaging and data services in the EU5 economies (UK, France, Germany, Spain and Italy) will drop by nearly 20 billion Euros, or four percent per year, between 2012 and 2017, according to STL Partners, and by 30 billion Euros by 2020.

Roaming charges account for between five percent and 12 percent of European mobile service provider revenue, according to brokerage Oddo Securities. If the EU succeeds in scrapping roaming completely, carrier revenue for voice, text and data could fall by over 20 percent in 2016, consultancy Juniper Research forecasts.

Whether EU roaming users now will boost consumption is not much of a question: they will, in aggregate. The issue is whether revenue gained from the higher usage will offset the lower tariffs.

                                          EU Mobile Revenue Forecast

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Potential New Room for Maneuver by Municipalities Looking to Promote Broadband Investment?

The extent of local authority over broadband policy seems to be emerging in a new way in 2014. The recent District of Columbia decision overturning network neutrality rules contains some interesting potential new strategic elements.

The decision concludes that the Federal Communications Commission has authority to overrule state-level laws that prohibit municipalities from building and operating their own broadband access networks, under its interpretation of Section 706 of the Telecommunications Act of 1996.

But some also argue there is another possibility as well, namely that states might be able, under the same provisions, to impose “regulatory methods that remove barriers to infrastructure investment” under the same legal theory.

Those of you who remember the regulatory wars over Voice over IP will recall that the FCC eventually decided it had authority to preempt state regulation of VoIP, as VoIP was an interstate service.

In the latest twist, some might argue that states have co-equal authority with the FCC to remove barriers to broadband investment locally.

In that respect, words will matter. Most assume federal preemption over “telecommunications services.” But broadband access is not a telecommunications service.

Some think federal preemption of state laws prohibiting municipal broadband might eventually result from subsequent FCC action. But a more interesting possibility also is what municipal authorities might try, in terms of policies to promote broadband investment in their communities.