How Revenues Can Grow Even in Midst of a Price War

A key caveat for all economic predictions is that something will happen, ceteris paribus (all other things being equal). 

In real life, almost nothing is ever equal. In fact, the act of change itself changes the environment, leading to changes in behavior and outcomes. 

Likewise, it is difficult to identify the specific act of one change, such as T-Mobile US launching a pricing and packaging assault, when multiple other changes also are occurring, such as fast-growing demand for mobile data services, addition of new classes of devices to connect and key changes in retail packaging of multi-user plans. 

And that is why there actually can be disagreement about whether any such mobile pricing war actually is occurring.

Some will look at the numbers and conclude there is no mobile price war under way in the United States, despite the many changes in retail packaging and pricing we have seen over the last year.

In fact, some note, mobile service provider revenues are growing, at least in the U.S. market, and that the amount of an average monthly bill also is rising.

Average monthly revenue per postpaid customer across the industry rose 2.2% to $61.15 in the fourth quarter, according to New Street Research. That is up more than $5 per user from the first quarter of 2010, when the same measure was at $55.80.

But T-Mobile US fourth-quarter and full-year 2013 results might strongly suggest there is indeed a price war going on.

In the fourth quarter, T-Mobile US posted revenues of $6.83 billion, compared with revenues of $6.19 billion in third quarter of 2012.

Adjusted earnings, though,  fell from $1.36 billion to $1.24 billion. T-Mobile US average revenue per user also slipped.

Average revenue per user for T-Mobile US branded postpaid customers slipped sequentially from $52.20 to $50.70. In other words, as customers adopt T-Mobile’s lower cost plans, ARPU drops and that makes it harder to boost earnings.

For AT&T, one might note that fourth quarter 2013 results showed AT&T lagging substantially behind Verizon Wireless, while the pace of net new customer additions dipped, year over year.

So many would say those developments are signs that a price war has not broken out in the U.S. mobile market, and that the price war is an illusion.

Such sentiments might be scoffed at, among executives at the leading U.S. mobile service providers, who seem to be pouring lots of effort into recrafting offers and retail packaging to parry T-Mobile US attacks.

Equity analysts generally do believe a marketing war is underway, and will destabilize revenues for several of the providers, if not all.

As so often happens in the communications business, multiple trends operate at once. Retail promotions offered by the leading mobile service providers are changing formal price points, even if consumers are acting in ways that do not affect recurring revenue all that much.

But U.S. mobile revenues have been a bright spot, so a marketing price war and growing revenues are not strictly and necessarily mutually incompatible. A price war could weaken either gross revenue or profit margins, or both, but in the context of a still-growing market might not necessarily lead to lower overall revenues.

In other words, a price war can exist even in aggregate market revenue grows. But the growth arguably is less than might have been the case in the absence of the price competition.

To be sure, one might argue that some of the price war is illusory. One example is the separation of device purchases and creation of new device installment plans from recurring service fees. On a formal basis, monthly costs drop when device subsidies are removed.

But many consumers choose to finance their devices using installment plans which, in aggregate, are roughly revenue neutral for the carrier offering the plans.

On the other hand, revenue is but one part of the carrier bottom line. If marketing costs rise, or churn increases, then even growing gross revenues might result in less robust returns on the bottom line.

Also, there is a secular (structural or long term trends) change underway, in addition to cyclical developments, thus changing end user demand in contradictory ways.

Higher smartphone adoption leads to higher data plan purchases, growing average revenue per device and account even if cyclical promotions might cut prices for many consumers.

Sooner or later, in a saturated market, once a player decides to operate at a lower operating margin, it triggers the value destruction in the industry, which can be sometimes devastating to incumbents, argues mobile analyst Chetan Sharma.

Reliance in India in 2002 introduced “really low cost” voice plans that hit industry revenues overall.

In 2012, Free Mobile (owned by Illiad) in France decided that it doesn’t need to operate at 30 percent to 40 percent margins and could exist, long term, with 20 percent margins.

Perhaps the evidence for T-Mobile US damaging the other leading carriers is not clear cut. AT&T’s revenue increased five percent and the average revenue per user was stable.

Verizon saw a six percent increase in revenue in 2013. Sprint revenue was flat, but Sprint also was in the midst of a major network revamp that limited its marketing in significant ways.

Customers are switching to T-Mobile US based on T-Mobile US prices. If the other carriers respond, the T-Mobile US attack becomes increasingly more difficult.

If There is No More Beachfront, Users Have to Share the Beach: the Argument for Flexible Spectrum Sharing

Spectrum valuable for the same reason beachfront property is valuable: "they aren't making any more of it."

In other words, if mobile and untethered spectrum demand grows by 1,000 times over the next decade, as many assume it will, there is precious little unallocated spectrum that can be put to use.

Indeed, there is growing recognition in the U.S. communications policy community that the big potential gain in useful communications spectrum will have to come from more efficient use of spectrum already allocated, but under used.

Though in principle it might be possible to move existing licensees from their current frequencies to new spectrum, the cost to do so generally is quite high, and the time to make the changes generally long.

So there is new thinking about ways to share existing spectrum, without the need to move existing users. There also is new thinking about how to manage interference in a decentralized and efficient way, without relying on slow, cumbersome, expensive adjudication by FCC rule makings.

“Today’s great spectrum policy challenge is thus to maximize the value that can be derived from bands already in use,” say the authors of Unlocking Spectrum Value through Improved  Allocation, Assignment, and Adjudication of  Spectrum Rights, written by Pierre de Vries, Silicon Flatirons Center senior fellow and co-director of the Spectrum Policy Initiative, and Philip Weiser, University of Colorado Law School dean.

And, as a practical matter, there is no way to do so efficiently is to create a new framework for the decentralized management of spectrum, the authors argue.

The authors suggest “command and control” regulation of communications spectrum be replaced by a system allowing spectrum users to directly negotiate coexistence and spectrum agreements without government regulators having to act as gatekeepers.

New ways to manage potential interference and then adjudicate interference disputes would be part of the framework, largely because “a lack of clarity concerning interference

prevention between neighboring spectrum users and an inadequate system for allowing trades and resolving disputes between users” are primary reasons why spectrum is inefficiently used.

Claims of harmful interference between systems are at the heart of disputes about whether a user’s rights have been violated, or, alternatively, whether a user has lived up to its responsibilities to tolerate reasonable levels of interference, the authors note.

So any decentralized, fast-acting system would require clear methods to identify when harmful interference (not simply some interference) has occurred, and a mechanism for judging whether such claims have merit, and addressing the claims.

The three-part plan would create “harm thresholds” that are clear, allowing devices and users to tolerate some amount of interference, but also specify clear signal level impairments that create the basis for action against an infringing party.

In other words, there would be some mutually agreed upon interference that does not compromise a licensed holders rights and ability to use spectrum. Under that threshold, a license holder would not have sufficient cause for action against another party sharing spectrum.

The rationale there is that not all interference is debilitating, and much time and expense would be removed if all parties knew exactly what the limits were.

But the harm claim thresholds also would specify what in-band and out-of-band interfering signal levels would trigger a claim of harmful interference, and the ability to seek a remedy.

A second requirement is to create a more-liquid market by allowing licensees to negotiate efficiently with holders of neighboring blocks of spectrum. Right now the process of creating operating rights between spectrum neighbors is cumbersome, expensive, politically charged and slow.

A second challenge for spectrum regulation is to overcome the collective action problem that stems from band fragmentation.

At present, it is cumbersome and expensive for licensees to negotiate with spectrum holders in neighboring spectrum bands to deal with potential interference issues. One reason is that the FCC and National Telecommunications and Information Administration are required to handle any such conflicts.

Such disputes would be resolved faster, at less cost, if the parties could efficiently negotiate with each other.

The third element is creation of an adjudication mechanism capable of acting faster than the FCC now can act, without the need to rely on “rule making” processes.

The proposal would allow more-flexible clearing of spectrum for shared use, including both

exclusive, tradable and flexible use licenses assigned by auction (mobile services, typically) and open access or “unlicensed” regimes that allow unlicensed flexible use.

Fiber to Home Momentum has Changed Significantly Last 2 Years, Expert Says

Blair Levin, former Federal Communications Commission chief of staff to Reed Hundt, also was the executive director of the the National Broadband Plan effort, issued about four years ago.

With the caveat that not everybody agrees the drafting of a “national plan,” by any country, necessarily means very much, Levin, an experienced “inside the Beltway” operator well versed with the politics of communication policy, has an interesting take on progress in the U.S. market, after release of the plan.

There are four areas Levin says are important for estimating progress. “One is, are you driving fiber deeper?” Levin says. Also “are you using spectrum more effectively?”

Third, “are you getting everybody on?” Levin says. Finally, “are you using the platforms to deliver public goods more effectively?”

As you might guess, Levin thinks progress has been uneven. “It's mixed on all of them,” Levin said.

But Levin is surprised by the progress in the area of “driving fiber deeper.” As recently as two years ago, Levin says he would not have said progress was not being made in that area.

Now, Levin thinks we are making progress, and that ISPs are driving fiber deeper into their networks. One might credit Google Fiber for much of that progress, simply because it is disrupting the market with symmetrical gigabit network services, sold for a market-destabilizing $70 a month, on the back of its own networks.

That Levin, no casual observer of broadband and communications policy, thinks something has changed for the better in terms of optical fiber deployment, over the last two years, is as clear a testament to Google Fiber’s impact as anything else you might point to, except for the growing number of incumbent ISPs willing to build gigabit networks in multiple markets.

Apple Wants Priority-Assured Video Services Delivery

The fundamental problem with “network neutrality” rules aptly is illustrated by Apple’s talks with Comcast about enabling an Apple set-top box that has assured quality of service on Comcast’s high speed access network. 

 In other words, Apple does not want “best effort access,” which is what network neutrality mandates. Instead, Apple wants a managed service with quality of service controls. 

Some immediately will note that what Apple wants is not "packet prioritization" of the type forbidden by network neutrality rules. 

 But some will say the nomenclature is a bit of a ruse. 

 To wit, Apple does not believe “best effort” is good enough to ensure the quality of its proposed streamed content, and wants to be provided as a managed service over Comcast's access network. 

 To be sure, the Federal Communications Commission specifically exempts such managed services from the network neutrality rules. 

But some will note the irony: an IP app a "managed service" is lawful.  An over the top Internet app cannot use priority delivery mechanisms. 

 If Apple succeeds, you can be sure a wave of new "managed services" will be created, using prioritized access. 

 One immediate question is what is required for a service to be considered a "managed service," not an over the top Internet app. On the face of it, it would seem to be the offering of such a service by an Internet service provider directly, much as telcos, cable companies and satellite providers sell "managed" voice service or linear video entertainment.

In other words, "who owns the service" might well become the clear delineation. 

That also suggests lots of opportunity for future business deals between over the top and ISP partners to create such managed services. In large part, that would render "network neutrality" a bit more hollow. 

 Such "who owns the service" regulation is one reason many have supported “network neutrality;The whole point of such a framework was to prevent ISPs from favoring "their own" apps over similar offerings provided by independent third parties. 

 The potential Apple deal with Comcast would increase the uncertainty about the soundness of the framework long term. 

Few would question, at least at this point, the "right" of a facilities-based access service provider to create its own branded managed services. 

That is what voice service is, after all. Likewise, nobody would question the right of a TV or radio broadcaster, telco, cable company or satellite services provider to create and deliver a service over its own network. 

The big issue has been the framework for over the top, unaffiliated apps and services. 

The Apple proposal gets around that issue because the proposed streaming service essentially would be a service created and "owned" by the access provider (even if Apple is the essential partner). 

There are some trade-offs for the video service supplier. It might mean such a managed service is not available as an Internet app, only as a for-fee service offered by one or more ISPs. 

That will limit potential audience to a certain extent, unless the managed service reaches agreement with most of the ISPs in a market that represent 80 percent to 90 percent of the potential customer base. 

The enduring issue is that quality delivery of paid-for video entertainment is subject to the same congestion issues that cause video stalling as all other apps when access networks are congested. In seeking to become a managed service, Apple wants priority delivery of its video bit, the very sort of thing network neutrality advocates have opposed. 

But that is the fundamental problem with network neutrality, some would argue. Prioritized access, under conditions of congestion, is a surefire way to deliver the bits with higher end user value. 

Consumer welfare, in other words, is increased when consumers get priority delivery of apps that are highly susceptible to degradation when access networks are congested. Apple’s efforts essentially are a rebuke to the notion that network neutrality actually enhances consumer welfare. 

It is one thing to argue that all lawful apps should be accessible to any user of the Internet. Everybody agrees on that point. The Federal Communications Commission, furthermore, already has adopted “no blocking” as a fundamental principle. 

But priority delivery is not blocking. It is a mechanism for providing quality of service when networks are congested. It’s the same principle as all content delivery networks lawfully use. 

Apple wants its video streaming traffic managed, not delivered “best effort,” as is Comcast  Internet traffic; in other words, to have its service offered as a managed service, not an “Internet app,” as Comcast’s linear TV also is treated.  

Precisely how regulators might view any future service of this type is not clear. 

The FCC already exempts “managed” services from the “best effort only” network neutrality principle. 

The important observation is that Apple is pointing out why prioritized access (even when it is called something else) is so important for voice and video apps, and why “best effort only” is not an optimal solution for delivering applications highly dependent on stable and predictable bandwidth.

Why "Cloud" is Strategic for Capacity Providers

“Cloud” is a key business concept and the underpinning of revenue growth strategy for capacity providers, not simply a new computing architecture for app providers. 

Simply, revenue growth hinges largely on serving the needs of content providers and data centers serving content providers. Content demand now drives the places bandwidth has to be supplied, why it has to be supplied, and therefore where transport revenues can be earned.

Instead of networks optimized for moving symmetrical narrowband traffic from one telco point of presence to another telco point of presence, the long-haul networks now mostly move asymmetrical broadband traffic from one data center to other data centers.

That shift to “east-west” (server to server) traffic, from “north-south” (client to server) is shaping demand for capacity, and therefore revenue, with a big role played by end user demand for content, and hence for content delivery networks.

About 51 percent of all Internet traffic will cross content delivery networks in 2017 globally, up from 34 percent in 2012, according to Cisco. And since much of that content is high-bandwidth entertainment video, CDN-related traffic flows now are crucial for transport services providers.

The other big change wrought by cloud-based content apps is dramatic change in the geography of demand.

In fact, Cisco estimates, metro traffic volume will surpass long-haul traffic in 2014, for example, and will account for 58 percent of total IP traffic by 2017.

In fact, metro network traffic will grow nearly twice as fast as long-haul traffic from 2012 to 2017, Cisco argues. And much of that traffic will consist of video.

Globally, IP video traffic will be 73 percent of all IP traffic (both business and consumer) by 2017, up from 60 percent in 2012.

Cloud architecture has other implications for transport providers, namely the way cloud-based apps are “assembled,” rather than simply served up whole to requesting users. That is one reason why east-west traffic is growing.

Transport provider revenue growth increasingly is driven by supporting customers needing to move large amounts of content--especially video--from one data center to another, to assemble full apps or pages served up to end users.

In fact, the bulk of global undersea traffic arguably now consists of video-based Internet applications, hosted from huge data centers. One way of describing such east-west traffic flows is that traffic moves between servers, not between an end user and a server.

Though the actual application the end user uses is a communication north-south (client to server), often much of the “app” gets assembled from multiple servers.

And those are some of the ways “cloud computing” is shaping transport provider revenue opportunities.

Twitter Cutoff in Turkey is What Blocking Really Looks Like

Twitter was blocked in Turkey after Turkish Prime Minister Tayyip Erdoğan objected to tweets critical of his government. That is what app blocking really looks like.

Twitter also has been blocked It was blocked in Egypt in 2011, Pakistan in 2012, and China in 2009.

Network neutrality, by way of comparison, concerns only the preservation of "best effort only" levels of Internet access by consumer customers.

Network interconnection, or Internet domain interconnections, which some want to drag into the network neutrality framework, also is not "blocking" of lawful apps.

E-Commerce is a Winner Take All Market, So Far

Another example of “winner take all” economics in Internet-based content, e-commerce and advertising markets, where a few giant competitors rule the market.

Amazon is larger than the next dozen largest e-tailers combined.  That same sort of effect can be seen in mobile advertising, over the top video entertainment, and is developing in over the top messaging.

source: Jeff Jordan, Internet Retailer

source:TelecomLead