Public Wi-Fi Illustrates Primary Use of Fixed Network as Mobile Backhaul

Global public Wi-Fi deployments reached a total of 4.2 million hotspots in 2013, and will continue to grow at a compound annual growth rate  of 15 percent between 2013 and 2018, to exceed 10.5 million hotspots by the end of 2018, according to ABI Research.

Among the global Wi-Fi hotspots, 68.6 percent of Wi-Fi is in Asia-Pacific, followed by 12.3 percent in Latin America, nine percent in Europe, 8.7 percent in North America, and 1.4 percent in Middle East and Africa.

Offload of mobile Internet access traffic is a primary reason for using public Wi-Fi.

“Global mobile data traffic will grow to 190,000 petabytes in 2018, from 23,000 petabytes in 2013,” said  Marina Lu, ABI Research analyst.

That is one reason why many are bullish on use of 5-GHz Wi-Fi as a backhaul solution for mobile service provider small cells. U.S. cable TV operators likewise view Wi-Fi as a major platform for supporting either mobile or untethered access services and devices, on a facilities-based network.

The simple thinking is that if 80 percent of mobile Internet data access is offloaded to Wi-Fi, then just 20 percent of potential mobile data demand might need to be sourced to create a full mobile or untethered network service.

A mobile service then might be able to operate at lower costs, when sourcing capacity from a wholesale provider of mobile access.

Alternatively, it might be possible that an untethered access service that is not billed as supporting full mobile access could be supported by Wi-Fi hotspots.

In Asia-Pacific, China alone has deployed 620,000 Wi-Fi hotspots, of which 420,000 have been built by China Mobile, followed by China Telecom with 128,000 hotspots, and China Unicom with 72,000.

In Latin America, Brazil’s carrier Oi has completed its target of 500,000 Wi-Fi hotspots by the end of 2013, ahead of the 2014 FIFA World Cup, ABI Research says.

The point is that Wi-Fi--public hotspots, at-home access and carrier Wi-Fi--now functions as a major backhaul mechanism for mobile service providers.

Quality of Service Revenue Will be Tough to Generate

Enhanced services revenue always has been tough to generate.

Some years ago, when conducting an analysis of enhanced services potential for dial-up and broadband access providers, it became clear that the overwhelming percentage of total direct revenue available to most ISPs, especially independent and smaller ISPs, was the basic access service itself, and not the value of bundled security apps, advertising or public Wi-Fi hotspot access.

In the voice services market, voice mail once was a separate, add-on feature, as was caller identification. Both those former revenue-generating services now are merely features of a voice line, fixed or mobile, in the U.S. market, for example.

In some respects, one might consider long distance revenues an ancillary revenue source generated by a voice line. But even that revenue stream has, for domestic calls, been eliminated, in the U.S. market and some others.

In growing markets, such as China, enhanced services might still add up to 22 percent of basic access revenues. But the point is that even there, the actual access line generates nearly 80 percent of gross revenue.

So it would not be a surprise to predict that new forms of ancillary or enhanced services will likewise represent a small percentage of total access line revenue, even if such services prove attractive to end users.

“Sponsored data,” like toll-free calling services, where a commercial or other enterprise pays for customer usage, might be used by Internet app providers, as Amazon uses AT&T access to support delivery of Kindle content.

But there are a number of practical obstacles, argues analyst Dean Bubley. Bubley sees similar problems for quality of service features which could be created by mobile service providers.

That would be in keeping with historic patterns, where the bulk of revenue comes from “access.” That is likely to remain the case for hosting and cloud services as well, not simply cable TV or linear video service, voice, Internet access and messaging.

Deutsche Telekom Obviously Wants a Sprint Acqusition of T-Mobile US

Acknowledging the significant opposition by U.S. regulators and antitrust officials, T-Mobile says it is "open" to an acquisition of T-Mobile US by Sprint.

Of course T-Mobile is open to such a deal: it would allow Deutsche Telekom to liquify its T-Mobile US holdings and deploy the capital elsewhere.

Deutsche Telekom's willingness to sell is not a secret. Whether U.S. regulatory and antitrust authorities would approve such a deal, and with what conditiions, is not clear at all.

Apple And Samsung Have 106% Of The Smartphone Industry's Profits

In the smartphone business, some things haven't changed: Samsung and Apple continue to represent the only two smartphone suppliers that actually make profits on sales of smartphones.



Apple earned 65 percent of smartphone profits while Samsung earned 41 percent, in the first quarter of 2014, according to Canaccord Genuity.



Whether Nokia, Motorola, Blackberry and HTC can move from losses to gains is not clear. Nor is it clear when that might happen. 



Recent moves by leading U.S. mobile service providers away from device subsidies is not going to help, as those moves could, or should, depress the rate at which customers replace their smartphones. That implies lower sales turnover, which would not help efforts to improve profit margins. 

Will Netflix, Amazon Prime Price Hikes Do Lasting Damage?

Will Netflix and Amazon Prime find planned subscription price hikes have long-term negative impact? Though there might be near term impact, there is reason to believe there will no significant long term impact on subscriber growth or perceptions of value.

The reason is past Netflix experience with significant price hikes, as well as most history of price hikes in the subscription video business.

To be sure, subscription service price hikes often are troublesome in markets where there is significant competition, since customer defection is a possibility.

But there are cases where price hikes, even annual and significant price hikes, do not seem to do much damage to take rates.

Subscription TV has proven to be such a market, at least until quite recently. Despite virtually annual price increases that outstrip general inflation rates, the overall linear video subscription business had grown virtually without a dip until 2013 or so, when overall subscriptions dipped for the first time, ever.

Many would argue future price hikes will occur in a different business context, though, where the business is flat to shrinking, and with competitive offerings gaining subscribers as well. And one might well argue that the online video entertainment business is at a very early stage.

That might bear a greater resemblance to the earlier days of cable TV, allowing a situation where adoption keeps growing despite price increases.

And Netflix will over the next year or two find out what higher prices do for take rates and churn, much as Amazon will find out what price hikes for Amazon Prime do for take rates and churn.

To be sure, consumers might suggest there is some danger of churn. In a recent survey, 14 percent of Netflix consumers who use the streaming service said they would cancel their subscriptions if the monthly price climbed by $2.

The YouGov survey also found that if prices were hiked by $1 a month, just six percent of Netflix streaming customers reported they would cancel their subscriptions.

But consumers often do not act as they indicate they will. Just as often, consumers say they will not do something, and do.

That sort of disconnect might be more common when surveys deal with behaviors and attitudes. But the danger of misleading survey results is rather common, even for most commercial products.

Perhaps the biggest problem area is the accuracy of end user remarks about potential future behavior. Quite often, the reported expected behavior does not materialize.

There are two other areas of concern. Consumer surveys often are inaccurate when used to ascertain why consumers behave in certain ways, or might behave in certain ways. That limits ability to shape promotional strategies, for example.

Also, end user surveys relying on self-reported reasons for past behavior can err, as the actual reasons consumers made a purchase decision might later be described in other ways.

Such error can occur especially when asking “how much would you pay” for a proposed product.

When asked, consumers often will choose the lowest price. But actual buying behavior is a mix of perceived value, product quality and features, in relation to a specific price.

That is tough to capture is a survey.

Also as Steve Jobs, Apple CEO noted, consumers have no way of evaluating the value of a product they never have seen.

Netflix and Amazon won’t face that sort of problem. Consumers generally understand the product and the value. What remains uncertain is possible falloff from current users who deem price increases out of proportion to value.

Amazon has hiked Amazon Prime prices about 25 percent, as did Netflix several years ago, for new customers. That lead to significant customer churn for Netflix, at least temporarily. But subscriber growth continued, after the hiccup.

Amazon is gambling a similar hiccup might occur, but would quickly prove to be a temporary phenomenon.

Netflix ran into a huge problem when it repriced its services to emphasize streaming delivery in 2011, losing about a million subscribers after the 2011 pricing change was announced.

In that move, Netflix eliminated a popular “DVD plus streaming” plan costing about $10 a month, in favor of separate DVD rental and streaming plans each priced at about $8 a month. That might have represented a 60-percent price hike for consumers who wanted DVD and streaming access.

This time around, Netflix will apply the higher charges only to new customers, grandfathering existing users for perhaps a year or two.

And Netflix is not talking about potential 60 percent price hikes, but something more on the order of 13 percent or 25 percent, on a base of $8 a month or $16 a month.

That earlier experience might suggest why Netflix believes a price increase of one or two dollars, applied only to new customers initially, and to all customers eventually, will not be detrimental.

Though Netflix took an immediate hit of about a million customers in the wake of the big packaging change in 2011, net customer additions have recovered to the point that the long-term impact seems nil to non-existent.

In its first quarter of 2014, Netflix added four million net new streaming subscribers, up from about three million steaming customers, year over year.

Netflix gained 2.25 million net new U.S. subscribers and 1.75 million international subscribers, for a total of 48 million global members, including 35.7 million in the United States.

IN 2013, about 30 million of those customers bought streaming plans, compared to about 7.5 million customers on DVD rental plans.

But Netflix is growing, arguably a result of providing a reasonable price-value relationship, and plans what might be considered modest price increases.

As a rule of thumb, raising prices for a product people want will tend to depress volumes purchased.

But consumer appetite for video entertainment tends to suggest value is high enough, in most cases, to overcome price resistance.

At least, that is what one historically would have predicted, given virtually annual price increases for cable TV, satellite TV and telco TV subscriptions.

Netflix and Amazon Prime might find similar results, this time around.

Would Verizon Recover its Cost of Capital if it Built Out FiOS Across the Rest of its Footprint?

Verizon has capped its FiOS deployments to about 19 million homes passed, enough network to reach about 70 percent of locations served by Verizon’s fixed network. Obviously, that means 30 percent of the network never will be upgraded for FiOS.

That is certain to raise hackles in some quarters. But a reasonable person might conclude that the additional investment, at current costs, revenues and adoption rates, might not recover its costs of capital.

Other companies, without Verizon's legacy cost structure, might have an easier time of it. But few would likely be able to compete against both Verizon, a cable competitor, the satellite video providers and any other ISPs that decided to enter specfic markets.

Is that a gamble? Certainly. It means Verizon will continue to lose market share to cable TV and possibly other ISPs over time, as Verizon is unable to offer equivalent speeds as its key competitors, and also is unable to compete fully in the video subscription business, at least using its fixed network.

But Verizon is betting that capital invested elsewhere, in mobile assets and services, and possibly at some point in acquisitions, will produce a higher financial return than building FiOS to reach another 20 percent or so of its installed base of fixed network customers.

The cost and revenue implications of competitive markets are the reason for the caution. Any extension of FiOS would lead to stranded assets that could represent as much as half of the access network investment.

The reason is simply that FiOS is unlikely to attain long-term penetration rates in excess of much more than 40 percent, either for Internet access or video services, where it operates.

FiOS Internet penetration was 39.5 percent at the end of fourth-quarter 2013, meaning that Verizon was able to sell a high speed connection to about four homes out of 10 it passes.

FiOS video penetration was 35 percent. In other words, Verizon also could sell a subscription video service to 3.5 out of every 10 homes it passes. For the most part, FiOS customers buy two or three services, with triple-play packages seemingly most popular.

The FiOS network passed 18.6 million premises by year-end 2013. Perhaps 68 percent of FiOS customers buy a triple-play service. Most of the rest likely buy a two-product bundle of Internet access and video.

That might imply FiOS overall penetration of about 50 percent (assuming 90 percent of FiOS customers buy a dual-play or triple-play service) while about 10 percent of households only buy a single service.

For the sake of argument, assume Verizon gets a long-term, sustainable penetration rate of 50 percent. On any new FiOS builds, that implies, at a network cost of $750 per home, a network cost of $1,500 per customer, plus about $600 to install a drop.

In a typical 100-home neighborhood, that suggests network investment of about $75,000 and drop install costs of about $30,000, for a combined per-customer cost of about $105,000.

Assume that 70 percent of the FiOS customer homes generate about $150 a month in revenue, some 20 percent generate $100 a month and about 10 percent generate $50 a month worth of revenue.

That works out to about $63,000 in annual triple-play revenue; $12,000 in dual-play revenue and about $3,000 in annual single-play revenue, for total gross revenue of $78,000.

Assume operating cost of about $46,800 (assuming gross margin is about 40 percent). That would suggest net revenues (before dividends) of about $31,200.

Assuming half of net revenues has to be reserved for dividend payments, That might imply just $15,600 in profits from that 100-home neighborhood. Even if Verizon had no interest payments, it might take nearly seven years to reach breakeven.

Over a 10-year period, that further implies profits of about $4,680 or perhaps four percent annually. The issue is whether that actually covers Verizon’s cost of capital. If actual 10-year profits are anywhere close to this simple analysis, it isn’t clear the investment makes sense.

Cable TV Becoming the Primary Facilities-Based Fixed Network Strategy for Mobile Operators

It is not yet a universal truism that a fixed network services provider “must” own mobile assets. It is not yet firmly established that a mobile service provider likewise must own fixed network assets.

Nor is it yet clear that untethered access--in addition to mobile access--can provide enough value to replicate the value of mobile asset ownership.

But in some Western European markets, ownership of fixed broadband assets and mobile assets is the clear strategic direction. And while incumbents continue to rely on legacy telco access network assets, attackers increasingly are turning to use of cable TV networks to compete on a facilities-based basis.

Larger attackers find that an attractive approach for several reasons. As it turns out, the cost of upgrading a cable TV network, which is, by definition, a broadband network, arguably is less than the cost of upgrading a telco network for faster Internet access speeds.

Also, operating costs for cable TV networks typically are less than for competing telco networks. Also, video entertainment revenues are growing, while voice revenues shrink. And video entertainment has emerged as the second most valuable service for a fixed network, after high speed access.

Also, control over a network provides strategic advantages, in terms of controlling costs and offering greater opportunities to create differentiated retail packages, compared to a wholesale approach based on use of a wholesale network and offer.

Also, in some cases cable TV assets might not carry wholesale obligations that likewise help a service provider maintain distinctiveness and uniqueness in the market.

Some indications of the new strategy, namely ownership of mobile and fixed assets, and often cable TV plus mobile assets, are recent acquisitions by leading Western European service providers.

Spain’s Telefonica is offering 725 million euros ($1 billion) for a controlling stake in Spain's pay-per-view TV operator, Digital Plus. Telefonica already owns 22 percent of Digital Plus.

Telefonica wants to buy the 56 percent stake in Digital Plus in the hands of Promotora de Informaciones S.A., or PRISA, owner of Spain*s daily El Pais and the Cadena SER radio network.

Vodafone, meanwhile, recently purchased Grupo Corporativo Ono, the largest cable TV provider in Portugal.

BT, which had divested all its mobile assets, is re-entering the mobile (untethered access) business, using a strategy that is similar in essence to the way U.S. cable TV operators are assembling widespread Wi-Fi networks, hoping to create “untethered” platforms that can wholly or, in part, support full mobile operations.

Vodafone, Telefonica, Orange and Deutsche Telekom own both mobile and fixed network assets.

And both Telefonica and Vodafone are acquiring--or perhaps thinking about acquiring--more scale in fixed networks, perhaps ironically buying cable TV networks, not other telecom access networks.

You might therefore ascertain that the strategy is “fixed broadband plus mobile,” with video entertainment playing a key role. For fixed network operators, video has emerged as the key complement to high speed access, but also a key means of providing backhaul of mobile Internet traffic.

For mobile networks, video already is playing a key role in driving mobile Internet access revenue, while fixed networks complement mobile infrastructure and add a key facilities-based way to increase product scope.