Facebook Will Become a Major ISP

Facebook will become an Internet access provider on a wide scale, it now appears, joining Google Fiber as a major supplier of Internet access services.

Facebook has purchased Titan Aerospace, giving Facebook the ability to launch fleets of solar-powered drones providing Internet access to billions of new users in the global south, primarily in Africa, it now appears.

The Titan Aerospace drones would represent a novel attempt to bring Internet access services to billions of people at lower cost than has been possible so far.

The Titan Aerospace purchase is among activities Facebook and others are taking as part of the Internet.org project, which is is similar in intent to Google’s “Project Loon,” which uses fleets of balloons, not aircraft, to bring Internet access to billions of people in the global south.

Internet.org is a Facebook-sponsored effort to connect the unconnected. Ericsson, Nokia, Samsung, MediaTek, Qualcomm, and Opera are members.

As you might guess, both the Facebook and Google initiatives are among examples of instances where traditional suppliers of key communication services face new competition from new providers, with new business models.

The biggest challenge to incumbent service providers (telco, cable, satellite, wireless ISP) are the alternative business models, where Internet access might in many cases be a loss leader or breakeven activity, in other cases profitable lines of business with revenue models beyond actual payment of access fees.

There are any number of potential losers, including satellite providers of access and mobile service providers.

Fixed network providers might actually gain, eventually, as consumers discover the value of Internet access, and then desire faster speeds. Also, an “inside out” approach that extends fixed network access from buildings out into other areas could  achieve an order of magnitude improvement in coverage, Internet.org believes, without imposing heavy new infrastructure costs.

In the near term, there would in any case be little potential for fixed service providers to serve the billions of people the new Facebook, Google and potentially other ISPs will target.

Mobile operators and satellite access providers have the most to lose, as the new delivery methods could have vastly lower capital and operating costs.

Facebook also is working on ways to lower its data center costs, using standard and lower-cost hardware for servers as well as using content delivery networks. Facebook believes CDN approaches could help it lower access costs.

Reallocation of spectrum (including TV white spaces and shared spectrum), particularly when available on a non-licensed basis, also can help.

Overall, Facebook hopes to increase the capacity of its networks by at least an order of magnitude over the next five to 10 years while keeping costs relatively constant.

That in turn would enable lower costs per megabyte, lower by perhaps an order of magnitude.

Better coding and protocols also can help by reducing the need for transmitting so much data to enable use of applications. “Facebook for Every Phone” is one example, allowing Facebook usage on feature phones.

Data compression is another tool. Modern text compression frequently yields results of 70 percent to 80 percent bandwidth savings, for example.

The Facebook for Android app originally used about 12MB per day on average. By focusing on improving data usage, Facebook expects to reduce data consumption to about 1MB per day.

Greater use of Wi-Fi also will help. And Facebook also is “zero rating” Facebook access, a move that encourages people to use the app without worrying about the cost.

The point is that Facebook expects to provider Internet access to billions of people at far lower costs than has been possible in the past. That will be helpful for billions of people, but also prove a challenge to incumbent Internet access providers.

Could "Winner Take All" Become "Even Winner Loses"?

With the major caveat that creating an app-based or software-based company has infinitesimal barriers to entry, compared to building an access network, bond market wizard Mohamed el-Arian says research and development spending buys less than it used to, because markets have tended to take on a  “winner take all” character. Others have documented the "winner take all" trend in technology markets.

The key now is whether a firm can execute on commercializing a killer app, and less about how much money it has put into “innovation.” Apple is the firm that probably comes to mind, even if it has produced what some might call a killer gadget.

Whether network effects always are so strong in all markets is one issue, though. Some argue that winner take all trends are common, across many industries. Consider the recent “battle” between Long Term Evolution and WiMAX to create a global fourth generation mobile network standard.

That was settled in much the same way the VHS versus Betamax standard war was resolved, with complete victory by one of the proposals.  

It isn’t so clear the analogy is so apt in the telecom business, though one might note that scale always has been a key asset in the  access or transport services business.

On the other hand, the “winner take all” concept does resemble the shape of most mature telecom markets, even if that was not the case at the beginning, as with the mobile service provider business in some countries. Some predict African mobile markets will feature a winner take all pattern.

On the other hand, one might also speculate about the future benefits of “winning” in the access market. There are two key aspects, first the value of dominating market share in the access business, and then the broader matter of the relative value of access in any Internet-based business ecosystem.

To be sure, most of the value in any Internet-enabled ecosystem flows to the “application layer” participants, not the “access provider.” That, perhaps, is less the issue. Maybe the bigger issue is what value accrues to the market share winner in the Internet access business.

It’s a bit of an abstract notion. Any contestant in a telecom revenue segment would prefer to be the leading and dominant supplier. In that sense, winning is its own reward.

But one might argue there is a potential dystopian angle. If one accepts the thesis that bandwidth prices tend to decrease over time, then the logical counterweight is to sell more units.

ISPs will be doing that.

At the same time, it is reasonable enough to assume that future revenue contributions from important applications such as voice, text messaging and possibly even video entertainment will decline dramatically.  

To be sure, that is why mobile service providers have such high hopes for machine-to-machine or Internet of Things applications. If mobile penetration increases from 100 percent (one phone per person) to 400 percent or 500 percent (multiple devices and sensor applications per user), it is easy to see the impact of potential new revenue streams.

Still, access networks are expensive, and some firms have legacy cost structures that arguably are too high, compared to other key competitors. So the imponderable is what happens to aggregate revenues in a decade or two? Can a major telco or cable company actually go bankrupt?

To be sure, lots of competitive carriers, and at least a few incumbent local exchange carriers, have gone bankrupt, without apparent long term harm to the national access infrastructure. But those firms were, by definition, not the carrier of last resort, with national or ubiquitous coverage.

But there are some potential warnings one might make. AT&T, one might argue, sold itself to SBC because it otherwise would eventually have gone bankrupt.

So a major telco bankruptcy is not unthinkable, only historically rare.

“Winner take all” economics might occur because of network effects or platform economics. But there is one more hard-to-answer question. Sometimes “winner take all” happens because a market is shrinking.

It is possible, perhaps likely, that major telcos will find a way to create new revenue sources big enough to offset declining revenues from legacy sources. But market failure is conceptually possible.

It hasn’t happened yet. But it could happen.

source: Business Insider

"Utopia" and Tech Bubbles

Sometimes it is hard to know what to make of Tesla. It is hard to know what to make of Google's self-driving vehicles. But we should try not to get silly. 

This analysis of the impact of autonomous vehicles uses the term "utopian society" by 2026. You might keep in mind that "utopian" means "an imaginary place or state of things."

Maybe one sign of a bubble, especially a tech bubble, is that silly things get said. 


source

Telco Capital Investment: Running Harder to Stay in Place

Competition has negatively affected the potential return from any major capital investment in carrier networks. One recent illustration is a warning by Fitch Ratings that telcos will have to invest more network capital than they used to, just to maintain earnings where they are.

“While investment in data networks is still economically justified, weakening cash flows from traditional services means that telcos have to spend more capital simply to maintain EBITDA at the same level,” said Fitch Ratings.

That actually is not a new problem. Fixed network telcos have had to face the problem for a decade, and is easy to understand. In a monopoly environment, either a cable company or telco could safely assume that “cost per home” and “cost per customer” were about the same, when evaluating a network upgrade.

In a highly-competitive environment, “cost per home” and “cost per customer” diverge sharply, depending on customer penetration. If a service provider makes an investment, passing three homes, only one of which is a customer, then the cost per customer is 300 percent higher than cost per home.

The same sort of dilemma was faced by fixed network telcos pondering fiber to home upgrades. Voice revenues would not increase, and a decade ago, one might have argued that upgraded copper facilities would handle demand for high-speed access.

So the one new service with incremental revenue was video entertainment. So, essentially, the fiber to home upgrade business case had to be driven by incremental video revenues, in a market where cable had half the market, and the two satellite providers had the other half. That would make the telco the fourth provider in the saturated market.

That is a tough business case, indeed.

Now mobile service providers are encountering the same problem, as over the top apps erode demand for carrier voice and messaging.

To be sure, observers will note, use of over the top apps (especially video) increases demand for mobile data. That is true.

But Fitch notes that the boost in data usage does not translate into proportionally higher telco EBITDA, because data services have lower margin than the voice and messaging services the mobile data services replace.

That is another way of saying that revenue per bit is challenged. The problems might not yet be so pronounced everywhere, but Fitch does note that even some markets in growing Asia could be exposed.

Philippines mobile service providers earn about 30 percent of total revenue from text. for example. In other markets, including India, Indonesia and Sri Lanka, smartphone penetration is relatively low, and carrier voice and text prices also are low, reducing the potential for OTT substitution.

Changing demand for carrier voice and data also is affecting retail pricing plans. Whether particular products are best sold on a metered or unmetered basis is an important issue.

Generally speaking, it will make sense to meter usage of a high-demand product, and supply declining demand products on a flat rate basis.

Sometimes the approach changes with the product lifecycle. At one time, international voice and national long-distance were drove profit for the whole business, and it made sense to meter and rate usage.

These days, with cheap OTT alternatives, voice does not drive revenue growth, and the issue is how to protect what remains of a declining business. Under those circumstances, bundling voice and texting inside a bundle, and charging on a flat rate basis, makes sense.

Telcos have learned that triple-play bundled services not only increase revenue per account, and also reduce churn.

They now also have learned that converting metered services to non-metered services inside bundles has additional value, namely reducing revenue loss for legacy services that have declining levels of demand.

In the Netherlands, for example, KPN saw a 13 percent fall in consumer mobile service revenue in the fourth quarter of 201111, and warned of a poor 2012 outlook, in large part because its declining voice and messaging services were not protected by being moved to a bundle, Fitch Ratings argues.

In contrast, Vodafone's Netherlands business saw a much smaller impact in the same quarter because of its earlier introduction of integrated tariffs that protected some level of voice and messaging revenue, Fitch Ratings argues.

So we are likely to see a bigger shift to bundles putting voice and texting inside usage plans sold at a flat rate, at least in markets where demand for voice and texting is flat or declining.

Unlicensed Spectrum Now is Essential for Licensed Mobile Networks

Unlicensed spectrum has become a central, and arguably essential part of mobile service provider network economics, even if mobile service providers generally favor licensed spectrum.

That vital role for unlicensed spectrum is likely to become even more important as video content dominates network demand in the future.

In 2013, 45 percent of total mobile data traffic was offloaded onto the fixed network using Wi-Fi or a femtocell in 2013.

By 2018, more data will be offloaded to Wi-Fi from mobile networks than will remain on mobile networks, according to Cisco.

Without offload mechanisms, mobile data traffic would have grown 98 percent rather than 81 percent in 2013, Cisco notes. Mobile video is the driver. 

Mobile video traffic was 53 percent of total data consumption by the end of 2013, and by 2018, mobile video will represent 69 percent of global mobile traffic, according to the Cisco’s Visual Networking Index (VNI) Global Mobile Forecast, 2013-2018.

The other observation is that such offloading of bandwidth-intensive video content matches the propagation characteristics of low-power unlicensed spectrum.

Where a primary concern of older voice-oriented mobile networks was coverage, most video is consumed when users are not moving. That means "capacity," not "coverage," is the new requirement.

And most of the "capacity" can be supplied using low-power unlicensed spectrum. All of which underpins the argument that more unlicensed spectrum is required, and should be released.

In Wholesale Business, Customer Satisfaction Follows Revenue and Profit

Analysys Mason Global Revenue Growth Forecast

One would expect service providers to focus their sales and customer efforts in market segments where telecom industry revenue growth is highest, or where profit margins are highest, in both retail and wholesale portions of the business.

In the wholesale telecom business, that should mean attention to buyers of IP data capacity rather than voice, mobile buyers instead of fixed network buyers, large buyers rather than smaller buyers and content providers and “new customer verticals” more than some traditional customers, for example.

Findings of a survey conducted by Atlantic-ACM of global wholesale buyers suggests that principle is at work in the wholesale telecom business.

Though overall buyer satisfaction has remained stable since 2010, it appears smaller wholesale customers are less satisfied than they once were, while large customers are more satisfied than they used to be.

Early in 2014, satisfaction among large customers virtually leaped five percent among large customers. On the other hand, satisfaction among smaller customers declined 0.5 percent early in 2014.

Customers in fixed network verticals reported satisfaction levels 1.1 percent lower, while satisfaction among customers with operations in mobile service grew 5.3 percent.

Customers in “emerging markets” (cable/content/ISP verticals, resellers/systems integrators and data center/hosting/cloud providers) reported satisfaction levels 2.1 percent higher.

It would be reasonable to assume further changes in satisfaction will occur over the next decade, since the volume of sales, and the attendant profit margins from some products, are expected to decline.

For example, U.S. local wholesale voice revenues will decline from $6.1 billion in 2013 to $5.4 billion in 2014, according to Atlantic-ACM, while U.S. long distance wholesale voice revenues will decline from $2 billion in 2013 to $1.6 billion in 2014.

In a market with total U.S. telecom revenue in the $400 billion range  (including video entertainment revenues), that level of wholesale voice revenue is almost nothing.

Elsewhere, wholesale revenue likewise is dropping, propelled in some cases by mandatory price reductions imposed by regulatory authorities. In addition to lower retail prices, lower demand also is an issue. Not only are retail voice prices dropping, people are consuming less fixed network and in many cases also mobile voice.

In the United Kingdom, there is some evidence that aggregate wholesale revenues began to decline, as a percentage of total service provider revenues, in 2011.

Total European wholesale revenue declined by 6.2 percent in 2012 to $45.1 billion, Ovum estimates, while service provider retail revenues fell by 10 percent in the same period. As you might guess, voice revenue declines were key drivers of the change.

In 2012 the European wholesale fixed voice sector accounted for less than a third of total wholesale revenues in the region, while revenues were 13 percent lower than in 2011, part of a downward trend in place for more than a decade.

Under those conditions, one would expect suppliers to focus on growth segments (new customers, apps or geographies) while deemphasizing declining and small segments.

One of the shifts is regional. Already, retail revenue is declining in three regions--Central and Eastern Europe, Western Europe and developed Asia--while growing in the “emerging” parts of Asia, Latin America, Africa and North America.

And where retail revenue grows, wholesale revenue is likely to follow.

Analysys Mason predicts that retail revenue worldwide will grow at a 1.7 percent compound annual growth rate between 2012 and 2017, with growth in mobile (3.2 percent) more than offsetting a decline in fixed (–0.6 percent).

Globally, LTE is Faster than Wi-Fi, Study Finds

With the caveat that Long Term Evolution speeds are directly related to the amount of bandwidth to support the network (it makes a big difference whether 10 MHz or 20 MHz or bigger channels are available), Long Term Evolution now offers faster speeds, on an average global basis, than fixed connections using Wi-Fi for local distribution, according to an analysis by OpenSignal.  

If speed is a key driver of usage, then users are going to rely more on LTE than Wi-Fi, much as they traditionally have used Wi-Fi instead of the mobile network because Wi-Fi offered a better experience.

There is some evidence of that. A study by Mobidia in 2012 suggested that South Korean users actually were reducing their Wi-Fi usage in favor of the LTE network.

But 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.

So it is not yet clear how a faster LTE network affects use of Wi-Fi.

source: OpenSignal