Bundles, Scale and Scope Underpin Service Provider Strategy

There are several very good reasons service providers sell bundles of services. First of all, in a competitive market, where any single service sold by any single provider might only reach share of about 20 percent to 30 percent, an expensive access network can be justified, and remain financially viable, only when the network owner can sell multiple services.

In other words, selling a single customer three or four services at $30 a month, with household share between 25 percent to 33 percent, produces about the same amount of revenue as selling a single service to 95 percent of households.

Second, bundling reduces customer churn. In some cases, a triple play or quadruple play customer exhibits churn as much as 2.6 times lower than single service customers.

It isn’t so clear whether the new emphasis on ownership of fixed and mobile network assets in some markets, such as Europe, is viewed as so strategic in other markets.

In a way, the new interest in bundling mobile and fixed network services is an example of fixed mobile convergence, albeit involving consumer services more than enterprise-focused features.

That early interest, centered on unifying business customer voice and messaging, is not what the present bundling format is about.

Aside from the focus on consumers, not business customers, today’s bundling is more a response to the realities of competitive markets, where lower market share forces a “scope” approach, since a “scale” approach no longer works so well.

“Scope” involves the sale of multiple products to a single customer, where “scale” normally refers to the sale of a single product to more customers. The big distinction is scale within an existing market, and scale referring to growth in out of region markets.

Scale is not so viable within any specific highly-competitive markets where a firm already operates. On the other hand, scale can be gained by growth in new territories outside of the current domain.

In that sense, both scale and scope remain vital growth and revenue strategies. Scope applies within existing markets, while scale refers generally to growth outside the existing operational footprint.

The caveat is that sometimes “gaining scope” requires “gaining scale,” as when a mobile service provider buys fixed network assets where the mobile operator already provides service.

In such cases, a single move--acquiring a cable TV operation, for example--simultaneously provides scope and scale advantages. The scope comes from the ability to sell three new services. The scale comes from adding the additional customer accounts.

Apple Hopes Apple Pay is iTunes

The question about Apple Pay is how it helps Apple support its main business of selling devices. To be sure, iTunes and other services can be thought of as Apple standalone business segments.

But those services exist to sell more devices. In other words, Apple invests in content delivery and apps to sell devices. Other firms invest in devices to sell content or merchandise, or create advertising delivery networks.

So it is that Piper Jaffray Apple analyst Gene Munster argues Apple Pay is “potentially the most important Internet service introduced by Apple since iTunes."

In other words, Apple Pay, like iTunes, will provide lots of end user value, especially when those users are interacting on Apple devices.

As with iTunes, Apple does not have to “make money” in a direct sense. But Apple has to leverage the capability as it did with iTunes, creating a compelling app that drives sales of its devices.

Precisely how that develops, and how important the new value is, remains the challenge.

Apple could receive 15 cents out every $100 Apple Pay customers spend with participating merchants. It isn’t the amount of revenue, but the broader value, that Apple is seeking.

As iTunes drove sales of the iPod to industry leadership, Apple has to be thinking Apple Pay will drive device sales as well. High quality global journalism requires investment.

The list of early Apple Pay partners includes the 11 biggest U.S. card issuers, representing 83 percent of the card issuer market.

The early partners also include retailers such as McDonald’s and Walgreens which together have 220,000 U.S. stores.

One might argue the partners are hoping for Apple to take leadership in the mobile payments space, boosting transaction volumes and possibly reducing fraud losses, with the only direct competitors being the rival mobile payment system providers.

Basically, Apple has taken a non-threatening approach to revenue sources in the current payments ecosystem, keeping the retailers, card issuers and processing networks in their accustomed roles.

So the key strategic challenge for Apple is making Apple Pay so valuable people willingly buy and remain users of Apple devices for payments of all sorts.

The model is iTunes and iPod.

Comcast, Liberty Global Create Trans-Atlantic Wi-Fi Hotspot Network

Comcast Cable and Liberty Global will allow their customers to use each other’s Wi-Fi networks by 2015. The immediate upside is higher value for each firm’s high speed access services, allowing no-charge roaming.

On one hand, the deal merely extends the reciprocal roaming privileges cable operators have offered each other in the U.S. market, for example, adding more value to each operator’s fixed network high speed service.

Since 2012, Bright House Networks, Cablevision, Comcast, Cox Communications, and Time Warner Cable have allowed Wi-Fi hotspot access to each other's broadband customers.

The "CableWiFi" initiative initially provided access to more than 50,000 hotspots around the United States. The new deal adds a significant amount of roaming for travelers in parts of the United States and Europe.

On the other hand, the deal creates a wider footprint for other future services, as well. Comcast has publicly said its massive Wi-Fi hotspot network simply is a way to add value for its high speed access customers.

But Liberty Global has been more open, clearly saying that Wi-Fi can, at the very least, reduce the cost of providing mobile services, when cable operators lease capacity from mobile wholesalers.

At the same time, a dense Wi-Fi network creates a wholesale opportunity as well. Other service providers (fixed and mobile) might lease access to bolster their core networks.

Consider that mobile service providers are talking about, and investing in, small cell networks that functionally provide similar advantages to Wi-Fi hotspot networks, often integrating Wi-Fi at the same time.

The point is that a widespread Wi-Fi hotspot network already plays an important role in supporting mobile Internet access, and should be more important in the future for cable operators, mobile service providers and other ISPs.

Illiad’s Free Mobile, for example, uses Wi-Fi hotspots to decrease the cost of access service supporting its mobile phone services, connecting users using Wi-Fi first, and then defaulting to the mobile network only when Wi-Fi cannot be used.

Dense  Wi-Fi networks of the sort both Comcast and Liberty Global are building will provide a foundation for doing the same thing, eventually.

Perhaps significantly, Tom Nagel, Comcast SVP touts the deal as “wireless broadband service.”

Comcast has more than three million Xfinity WiFi hotspots active in the United States, while Liberty Global has more than 2.5 million “Wi-Free” and “WifiSpots” access points in Europe.

The question is how big a force Liberty Global and Comcast eventually will be in the mobile business.

Eventually, most suspect, market structure in Europe and the United States will likely include both companies among the leading four or five providers.

Illiad to Boost Bid for T-Mobile US

France’s Illiad says it plans to boost the value of its bid for T-Mobile US, as observers expect a bid from Dish Network late in 2014 or early in 2015, and some expecting a possibly wider range of suitors.

Illiad initially submitted an offer to buy about 57 percent of T-Mobile US for $33 a share, not the whole company, a bid that Deutsche Telekom quickly dismissed as insufficient to create serious interest.

Illiad now says it will consider purchasing a bigger stake. Deutsche Telekom, meanwhile, has said it would sell at $35 a share.

But some think Dish Network would be willing to pay as much as $40 a share.

Oppenheimer equity analyst Timothy Horan argues that could be the case since Dish Network has to build out its network or forfeit rights to use spectrum assets valued at about $28 billion.

Dish Network is a motivated buyer: it stands to lose $28 billion in assets if it fails to begin construction on its network relatively soon, as ownership of T-Mobile US would give Dish the ability to do so.

There are other strategic issues as well. Dish Network believes its core linear TV business will be challenged over time, as video entertainment distribution shifts to over the top mechanisms.

Dish Network essentially is a single-play provider in a business that has become a triple-play business. So Dish needs some way to become both a triple-play provider and a service provider that can support over the top video delivery.

Horan speculates that Comcast Corporation or America Movil potentially could emerge as bidders.

Since regulators and antitrust officials have made clear a desire to maintain a four-provider structure of the U.S. mobile market, we should expect a minimum of four leading national providers in the near term: Verizon Wireless,  AT&T Mobility, Sprint and T-Mobile US (owned by perhaps Dish Network, Illiad, or some other firm). In the medium term, Comcast will join that list.

Un-Carrier 7.0 Relies on Unequal Treatment of One App and its Packets

To provide seamless high-definition call quality and full and seamless interoperability of the T-Mobile US network and Wi-Fi hotspots, T-Mobile US relies on quality of service and prioritization that does not treat all apps and packets equally.

The T-Mobile Un-carrier 7.0 slogan fundamentally is about “transforming all available Wi-Fi locations worldwide into extensions of our network,” according to Neville Ray, T-Mobile US CTO.

Un-carrier 7.0 also is about ways to employ quality of service mechanisms and packet priorities--not treating all bits alike--to enable seamless voice operations across the mobile and Wi-Fi networks.

“We added some T-Mobile secret sauce, our VoLTE (Voice over Long Term Evolution) magic and worked closely with our partner to ensure T-Mobile voice calls over Wi-Fi are prioritized, with seamless and simple setup and support,” said Neville Ray, T-Mobile US CTO.

“On top of all that, our patent-pending quality of service feature is designed so that T-Mobile voice calls maintain their clarity − no matter how much streaming music, video or games are coming through the T-Mobile Personal CellSpot ,” said Ray.

Those of you reading carefully will note the use of the terms “quality of service” and “prioritized.”

That is yet one more example of how the legitimate concern about “Internet openness” has become confused, over-extended and limiting to innovation and end user value.

Some applications--particularly voice and streaming audio and video--are highly susceptible to packet delay (latency and jitter). To preserve fidelity, T-Mobile US is applying quality of service measures using prioritization mechanisms of some sort.

But that does not “treat all packets equally.” As with other pro-consumer measures, such as providing no-incremental-cost access to Facebook or other apps, “not treating all packets or apps equally” sometimes is part of a value proposition for consumers and customers.

It might be subtle, but the new feature illustrates why network management and prioritized packet delivery sometimes are crucial for creating end user value.

“Now for the first time, thanks to our launch of next generation Wi-Fi calling and our use of new capabilities in our evolved Packet Data Gateway (ePDG), we’re providing our customers a seamless HD (high definition) voice calling experience whether they’re connected to a T-Mobile tower or a Wi-Fi connection,” said Ray. “No other major national carrier is doing this with Wi-Fi calling today.”

What that means is that T-Mobile US customers can use a smartphone to start a call on VoLTE and hand off to a connected Wi-Fi network, or initiate a call on Wi-Fi and then migrate to the T-Mobile US network, seamlessly.

“Your call won’t drop,” said Ray. “You won’t even know you’ve switched between networks.”

The new T-Mobile “Personal CellSpot” is an indoors picocell that acts like a small T-Mobile US cell site, boosting signal quality indoors.

The $25 personal Wi-Fi hotspot uses any fixed broadband connection to create a small area of mobile coverage indoors.

“In the age of the mobile Internet and interconnected devices, you simply can’t ignore the Wi-Fi connection,” said Neville Ray, T-Mobile US CTO.

Un-carrier 7.0 refers to value created by extending network coverage, high-definition voice and in-home access points, all tied together by the role of Wi-Fi in the T-Mobile US access architecture.

Notably, effective use of Wi-Fi to support seamless call handoff between Wi-Fi and the T-Mobile US network, and maintenance of call quality, seems to require that all packets not be treated equally.

Apple Both "Listens to Customers" and "Doesn't Listen to Customers"

Nobody "gets it right all the time," not even the late Steve Jobs, who unusually refused to drive new product creation using end user surveys. 

But there is an exception for every rule. And Apple, with the launch of the iPhone 6, and earlier with the launch of the mini version of the iPad, reacted informally to end user preferences as expressed in buying behavior.

An Apple Fy 14 Planning document shows company executives were aware sales trends were lead by products in a segment Apple had eschewed, namely bigger-screen phones costing $300 or less.

Some might argue Apple responded to both issues, over time, by creating the iPhone 5C (lower price) and introducing larger-screen iPhone 6 models. 

To be sure, Apple did not abandon its "premium" positioning, but some studies suggest the lower-priced 5C did attract users who otherwise would have bought an Android.

There is an inherent tension between "listening to customers" and "innovating." Listening to customers tends to produce incremental improvements to products customers already buy.

Creating totally new lines of business and brand new products often requires that firms not listen to customers, instead striving to identify unmet needs. By definition, potential customers cannot always identify what is lacking and unmet.

They can often identify where an existing product or service needs improvement. Apple's customer studies showed that "small screen size" was a frequent complaint. 

But Jobs undoubtedly was often correct in maintaining that consumer surveys were useless for proposed new products they never had seen or used.

Fundamentally, every firm faces the tension. "Listening to customers" will yield incremental improvements in existing products.

Looking for unmet needs will lead to uncovering new lines of business or product categories. Apple historically has excelled at creating new categories.

But some also would note that Apple has tended not be "first to market" in any category. Instead, it has tended to try and figure out the best way to create a product for a category.

But in doing so, it has often come to dominate and define a category it did not actually create.

So there's the paradox: listening to customers is good--but so is not listening to customers.

Are 20 Channels the New “300?”

Consumer dissatisfaction with packages of linear video can be summed up in the phrase “500 channels and nothing on.”

Count Dish Network and Verizon among the firms that think the answer is 20 channels, delivered over the Internet or a mobile network.

Skeptics have estimated the market for a 20-channel streaming video service is only about five million customers in the U.S. market. Of course, that would be understandable from suppliers of the traditional linear video packages sold to well over 80 percent of U.S. households.

Verizon seems to believe the primary market is Millennials who do not subscribe to traditional linear video subscription services, and particularly single-person households.

Dish Network, on the other hand, which plans to launch its service late in 2014, seems to be focusing more on sports, entertainment and children’s programming appealing to young adults who love sports and have kids but won't pay $100 a month for TV.

Dish has been aiming at a service costing perhaps $20 to $30 a month.

As always is the case, success hinges on willingness of the content owners to license rights to Verizon and Dish, followed closely by the value-price proposition. But Verizon expects to launch a 20-channel streaming service in 2015.

Verizon says it will offer major broadcast channels plus some custom channels, such as DreamWorks Annimation’s AwesomenessTV targeted at Millennials.

As you might guess, mobile delivery is a key channel for Verizon, in part because that allows Verizon to market nationwide to a hard-to-reach customer segment while adding distinctiveness for its mobile offering.

“No one wants to have 300 channels on your wireless,” Lowell McAdam, Verizon CEO said. The issue is what a transition to full a la carte access might look like.

But count Verizon in the camp that believes early audiences will include Millennials accustomed to viewing video on smartphones and tablets.

Verizon also believes it will make better profit margins, longer term, on Internet access services than video entertainment.

“Nobody makes much money at this point in distributing content,” McAdam argued.

AT&T has a contrary view, of course. AT&T’s bid to buy DirecTV is a big bet on the continued viability of linear video.