AT&T Adds "No Incremental Cost" International Text Messaging

Starting February 28, 2014, AT&T's Mobile Share and Mobile Share Value plans will include unlimited text messaging from the United States to more than 190 countries worldwide and unlimited picture and video messaging to more than 120 countries around the globe. Both new features come at no extra cost.

In doing so, AT&T joins T-Mobile US and Verizon Wireless, both of which had added “no incremental cost” international text messaging on some popular plans. Verizon More Everything plans and T-Mobile US Simple Choice plans feature no incremental cost global text messaging.

T-Mobile US also features no incremental cost Internet access when roaming, on it Simple Choice plans.

The new capabilities illustrate the trend of declining revenue opportunities for mobile and fixed network service providers in the voice and messaging application areas, as well as the growing use of substitute products such as WhatsApp.

As recently as 2005, voice revenues represented 73 percent of total revenues. By 2013, voice had dropped to just 43 percent of total revenues.

The average length of a local call has fallen more than 50 percent over the last decade to 1.8 minutes, according CTIA-The Wireless Association.

And consumer email traffic fell nearly 10 percent between 2010 and 2012, according to Radicati Group.

Over the top messaging, meanwhile, is growing at triple-digit rates. WhatsApp recorded an all-time high of 10 billion outgoing messages in a single day in June 2013, which equated to an average of more than 30 messages per user per day, according to Stephen Sale, Analysys Mason principal analyst.

“We estimate that the total volume of messages sent from mobile devices via IP services exceeded the volume of SMS messages for the first time in 2013, at more than 10.3 trillion compared with 6.5 trillion worldwide,” said Sale. “Messaging volumes associated with OTT services are expected to almost double in 2014 and will reach 37.8 trillion messages sent in 2018.”

That is having an impact on voice revenues and usage as well, at least in many markets.

To be sure, Insight Research projects that U.S. telecommunications service revenues will continue to grow from 2013 to 2018. But that growth will not come from voice services.

Instead, voice revenue will continue to decline at -4.81 percent compound annual growth rate from $163 billion in 2013 to $127 billion in 2018, Insight Research predicts.

Mobile voice—which peaked at $118 billion in 2008—will decline at -3.82 percent CAGR to $84 billion in 2018. Fixed network voice will drop even faster, at a negative 6.56 percent CAGR from $61 billion in 2013 to $44 billion in 2018.

Voice lines in service obviously will mirror those declines. The U.S. fixed network voice installed base peaked at 192 million access lines in 2000. In the following decade, despite nominal population growth, close to 80 million  access lines or more than 40 percent of wireline network lines were disconnected, replaced largely by mobile phones, Internet-based phone services or a shift to other communication apps, Insight Research says.

Globally, by 2002, the global telecommunications industry reached a crossover point at which the number of mobile service subscribers surpassed those of fixed telephone networks. At the close of 2002, there were 1.2 billion mobile customers around the world, compared with

1.1 billion fixed telephone lines.

Those are daunting challenges for observers who argue that service providers actually can do very much to protect and then grow voice revenues. Some might argue that, no matter what service providers do, voice revenues will drop.

Millennials Watch Lots of "TV," Just Not So Much on TVs

Though some studies indicate that Millennials watch less linear TV than older consumers, some research suggests they consume more video, just not on linear TV services, a study sponsored by YuMe suggests.

Over a recent three-year period, Millennial women watched about 10 percent less linear TV since 2010, while Millennial males who dropped TV usage seven percent since 2010. The YuMe survey used an 18-24-year-old group (born in 1989-2000) as the “Millennial” definition, a narrower definition of Millennials than others would use.

Millennials also use their smartphone and tablets more than any other demographic, for the purpose of watching video. Also, Millennials did not use digital video recorder features at all, YuMe suggests.

Millennials do report watching a lot of TV shows and user-generated content. What they don't watch, is news, with only 13 percent saying they watch it.

About 49 percent of Millennials reported watching web videos on smartphones, 44 percent said they watched web videos on PCs and 44 percent said they watched web videos on tablets.

4.3 Billion People Do Not Have Internet Access

Of the world’s seven billion people, 2.7 billion have access to the Internet, while 4.3 billion do not. 

Most of them live in developing countries.

Though it still is possible to argue about whether the high adoption of Internet access and higher degree of economic development are causal or correlated, even those who might tend to think high Internet access and higher economic development are correlated, not causal, might support fastest possible adoption of Internet access everywhere, for the same reasons it was deemed important to provide voice communications to everyone.

If developing countries were to catch up with levels of internet access in developed economies today, they would reach a penetration level of around 75 percent, more than tripling the number of present “global south” Internet users from 800 million to three billion.

Of the new global south Internet users, some 700 million would be in Africa, 200 million in Latin America and 1.3 billion in Asia.

Public policy makers can help through initiatives that focus on reducing costs and administrative barriers for operators, strengthening competitive incentives for operators to expand coverage and the services they offer, and ensuring that consumers face affordable prices, the study suggests.

Expanded Internet access in developing countries to levels seen today in developed economies could increase productivity by as much as 25 percent in developed economies,  generating $2.2 trillion in gross domestic product,  and more than 140 million new jobs, lifting 160 million people out of poverty, according to a new study by Deloitte, and sponsored by Facebook.

Deloitte estimates that if developing regions achieved internet access levels seen today in

developed regions, their long run productivity could increase by about 25%. This effect is most pronounced in regions currently characterised by lower current levels of productivity or lower penetration rates.

In India, long run productivity could increase by 31 percent, while Africa productivity could grow 29 percent.

In South and East Asia, productivity increases of about 26 percent is possible. Productivity in Latin America could increase by 13 percent.

Mobile and internet connectivity in the agricultural sector would improve productivity by providing farmers with information on weather conditions, disease control and new methods of maximizing crop yield, as well as provide livestock tracking.

Access to market and pricing information through the internet and mobile phones enables small-scale farmers to access markets directly instead of through costly intermediaries. That could increase profits for farmers by up to 33 percent, the report suggests.

In the Kerala region of India, the use of mobile phones to track weather conditions and compare

wholesale prices led to an eight percent increase in profits for fishermen, along with a four percent drop in prices for consumers, Deloitte says.

These gains in productivity might benefit up to 360 million individuals, many of them small-scale subsistence farmers.

By reducing transaction costs, the internet reduces barriers to market entry and allows small and medium-sized businesses to reach a broader market, as well.

Smaller businesses with Internet access in countries such as Vietnam, Mexico, Malaysia, Argentina, Turkey, Taiwan, Hungary and Morocco all experienced on average an

11 percent productivity gain due to Internet-accessed applications, the study suggests.

A World Bank study suggests developing economies with a 10 percent increase in

broadband penetration can increase growth in per capita gross domestic product by 1.3 percent.

Deloitte estimates that an expansion in internet access is worth between $450 and $630 per year to individuals in the developing world, an average increase in per capita incomes of

about 15 percent.

In Africa, Internet access could grow per capita income by 21 percent. In India, Internet access could increase per capita income by 29 percent.

Deloitte estimates that increasing internet access to levels experienced in developed countries can increase GDP by up to $2.2 trillion (an increase of 15 percent), with South and East Asia and India each gaining about $0.6 trillion in additional economic activity.

Output in Africa could increase by over $0.5 trillion. Across the developing world, the GDP growth rate would be boosted over 72 percent. In India GDP growth rates have the potential to double, in Africa to grow by 92 percent and in South and East Asia to rise by 75 percent.

Is There Demand for Gigabit Access? Yes and No

There are two different ways to characterize the present level of demand for gigabit Internet access service; both correct. Some, especially Google Fiber, argue there is high demand now, at $70 a month.

Even many competitors might agree, while also maintaining, paradoxically, that consumers might not “need” a gigabit service, in terms of applications they want to use right now.

The fundamental issue is value compared to price, not simply value, expressed as raw speed. A gigabit service sold at $500 a month would attract relatively few consumers. The same service at $70 a month seems to have reasonable demand.

The issue, as always, is consumer estimation of value, related to price. If Google Fiber sold a 500-Mbps access service for $35 a month, would that be its most-popular offer? Many would answer in the affirmative.

Others might continue to argue that most consumers do not need, or perhaps even want, a gigabit service at $500 a month. They might even prefer a 500-Mbps service for $35 a month, which is probably why Google Fiber does not offer such an option.

So part of the “demand” equation is value, as related to price. The supply issue is easier to characterize. Most incumbent cable companies and telcos would rather not invest more than required to meet current levels of demand, if they fundamentally believe they cannot sell enough gigabit access product, at low prices, to earn a return on the investment.

Without question, a gigabit for $70 a month destroys all existing value-price relationships for access services now  offered by most ISPs.

If you assume the typical monthly price for a 20 Mbps service is about $50 a month, you can understand the impact of Google Fiber’s price umbrella.

The Google Fiber $70 a month price implies that the cost of 1 Mbps of access speed “costs” about seven cents. So a 100-Mbps service would logically “cost” about $7 a month.

But the issue of demand for gigabit service is more complicated than often supposed. Are there lots of consumers who would buy a gigabit service for $70 a month. Certainly. But would most choose to buy 500 Mbps for $35 a month? Probably, at least for the moment.

So do people “need” or “want” a gigabit service? Yes and no. Yes, they do want faster speeds, but just how fast might hinge on the price. More people might prefer 500 Mbps for $35 a month, compared to a gigabit for $70 a month, or even 20 Mbps for $7 a month.

But few ISPs would really want to find out which offers people really want. Google Fiber can show there is demand for gigabit speeds priced at $70 a month. The issue even Google Fiber probably does not want to test is whether there actually is overwhelming demand for 500 Mbps at $35 a month.

$35 Smartphone Suggests Telecom Costs Still Way Too High

In any competitive business, the provider with the lowest cost tends to win. And that is a problem that has not yet been solved by most tier-one service providers in developed markets. 

One example is a $35 smartphone. WhatsApp offering voice and messaging provides another example. 

The rise to prominence of firms such as Huawei, network function virtualization, software optimized networks and software defined networks provide additional examples. 

On a global basis, the telecom industry continues to have operating and capital costs that are too high. 

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.