Permanently Lower U.S. Mobile Prices Among Likely Outcomes of Current Mobile Price War

When all is said and done, when the current marketing mobile marketing war has ended, and when some major acquisitions have been approved or denied, when the U.S. cable industry makes its first “owned facilities” entry into the mobile business, what will market structure look like?

Even if one assumes regulatory authorities will prevail, and that the U.S. market features leadership by at least four providers, who will those leaders be, and how will revenue models have changed?

At a broad level, if one assumes the rationale for three leading providers instead of four or five is that markets would stabilize and feature more stable and attractive financial returns, the U.S. mobile market seems destined for more instability.

At a minimum, both Dish Network and Comcast must enter the market--Dish Network according to a fixed schedule set by the Federal Communications Commission, and Comcast at a time of its own choosing.

Whether other actors, including but not limited to Illiad, will be significant elements also remains to be seen.

Most would assume AT&T Mobility and Verizon Wireless will remain the leading providers, longer term.

Beyond that, much remains in flux. Some believe Sprint will be a third name among the leaders of the U.S. market. T-Mobile US assets, most assume also will be part of the story, even if T-Mobile US as a brand, or T-Mobile US under current ownership,  might not be a future reality.

If Dish Network eventually acquires T-Mobile US, then Comcast enters as a fifth provider.

The issue then is how market structure changes, as five providers would be even more unstable than the current market.

In addition to possible changes in the names of the players, a permanent lower level of revenue per account is possible.

In Singapore, for example, a price war among gigabit fixed network services has broken out.

M1 launched a gigabit access promotion where initial prices are S$49 ($39) per month, a price that apparently includes a 1Gbyte usage bucket for M1 mobile broadband service.

M1 had been charging S$399 for the service a year ago. Mi’s move appears to be a response to a new MyRepublic 1Gbps access service priced at S$49.99, eight times cheaper than M1 and StarHub's plans at the time.

It takes little to suggest that once a widespread pricing war begins, disrupting the value-price relationship for consumer high speed access, it is difficult to impossible to reset expectations afterwards.

In other words, one outcome of a prolonged mobile price war in the U.S. market would likely include permanently lower retail prices, across the board.

That, more than the names of the handful of market leaders, is among the few virtual certainties as both T-Mobile US and Sprint battle on the price front.

It's Always Dangerous When a Competitor Gives Away the Thing You Sell

One characteristic of newly-competitive markets, including both former monopoly markets that are deregulated, and existing markets that are roiled by transformative and disruptive new technology, is that the boundaries separating one industry from another typically become porous.

Put simply, what happens is that “firms not in your business get into your business.” 

That is the inter-industry analogy to intra-industry segment encroachment, where one contestant in an existing value chain decides to enter a related part of the value chain.

That is why, in recent years, questions have been raised about app providers becoming Internet service providers, app providers becoming device suppliers, telcos becoming banks or mobile payments suppliers, cable companies becoming telcos or telcos becoming video entertainment distributors.

Sooner or later, U.S. cable companies also will become contestants in the U.S. mobile communications as well.

But the most-unsettling moves arguably have come from app provider entry into Internet ecosystem adjacencies, specifically Internet access and devices.

As with the earlier examples of Voice over Internet Protocol (VoIP), the business problem is extreme: legacy providers suddenly face competitors willing to give away the thing the incumbent sells.

Much advice has been offered about “what telcos can do about voice revenue erosion.” For the most part, almost nothing has worked, with the salient exception of the shift of demand from fixed lines to mobile phone access.

The range of offered device ranges from “add more value” to “gain more scale” to “cut costs.”

In practical terms, service providers have tried all of those approaches. The triple play bundle was a successful effort to change the perception of value. High definition voice or Wi-Fi calling are efforts to add more value directly to a product.

Firms have expanded into new markets outside their legacy footprints, and taken many steps to reduce capital, operating, customer service or marketing costs.

Porous boundaries, in other words, both increase competition within existing businesses and transform revenue and cost parameters, distribution and marketing methods.

“Will Facebook become an ISP?” is among the new questions.

In some ways, Facebook already has taken a half step, by creating bundles of mobile apps available to users in many markets without the need for a mobile Internet access plan.

Facebook also seems to be preparing for some sort of freemium strategy as well, allowing users to upgrade from “no incremental cost” to “for fee” application access.

Observers might object that the strategy ultimately requires either partnership with mobile service providers, or some way of replicating the access function. Facebook might do both.

While not confirming that Facebook had any interest in becoming a full-fledged Internet service provider, Facebook CEO Mark Zuckerberg has in the past noted that barriers to connectivity are an obstacle to Facebook’s growth.

The reason is that both Google and Facebook have business models that scale directly with use of the Internet in general, and of course their own applications in particular.

It might be clear enough that Google wanted to become an ISP in the U.S. Internet access market in order to force other major ISPs to radically upgrade their facilities and consumer offers.

Google itself might not have been completely clear, at the onset, about whether Google Fiber was simply a way to speed up bandwidth investments throughout the industry, or something more.

“To connect everyone in the world, we also need to invent new technologies that can solve some of the physical barriers to connectivity,” Mark Zuckerberg, Facebook CEO, has said.

In the past, the question of whether Google, Facebook, Amazon or others might likewise become device suppliers also has been answered. Google’s Nexus and Amazon’s Kindle and Fire phone provide part of the answer to that question.

Some think Facebook has decided it has to become an ISP in some developing countries. Among those who believe Facebook will do so is analyst Jeffrey Himelson

Among the moves that suggest this is coming is the string of acquisitions Facebook has made recently.

Pryte, now owned by Facebook, has developed software that makes it easier for consumers without mobile data plans to buy short term or temporary access. That is one way of boosting access to WhatsApp or Facebook, since users would not have to buy mobile data plans.

Facebook also owns Ascenta, a satellite drone company, Facebook's Internet.org initiative provides another clue.

Already, Internet.org has created an app allowing access to a bundle of applications without charge, and without the need to buy mobile Internet access.

Most might agree Facebook’s upside is greatest in developing regions without substantial Internet access at the moment. That might explain Facebook’s interest in drones and satellites.

Advertising now accounts for 90 percent of Facebook's revenue, but a significant portion of that advertising revenue comes from U.S. and Canada users, representing average revenue per user of about $5.16.

In the rest of the world ARPU is $0.68. Facebook might have concluded that, as does Google, connecting everybody to the Internet is fundamental for future revenue growth.

And that just might mean in is in Facebook’s interest to become an ISP, thus illustrating the way radically-important new technology erases boundaries between industries, and roles within existing ecosystems.

Competitive Implications of Seamless Call Handoff Between Wi-Fi and Mobile

Perhaps oddly, the ability to initiate a phone call from a Wi-Fi hotspot, with seamless handoff to the mobile network, is in the U.S. market, less about reducing the cost of calling (at least for domestic calls, and often calls to some high-volume international destinations) and more about signal quality and network coverage.

In other words, where voice over Internet Protocol arguably has had the greatest value and impact in the high-cost international calling market, Wi-Fi calling arguably provides the greatest value as an antidote for weak signal coverage inside buildings and homes.

Sprint added Wi-Fi calling early in 2014. And the value proposition was very clear: “With Wi-Fi Calling, Sprint customers will experience improved voice, data and messaging services in locations that previously had limited or no mobile network coverage,” Sprint said at the time.

T-Mobile US in September 2014 launched seamless handoff between calls initiated on either its mobile network or a Wi-Fi hotspot.  

AT&T says it now will add that seamless handoff feature as well. Most expect that will happen only after AT&T has launched Voice over Long Term Evolution service on its 4G network.

It is only a matter of time before Verizon Wireless does so as well.

That new feature illustrates two long-standing trends, first, that Internet Protocol tends to undermine the existing business and revenue model for virtually any business it reaches, sooner or later.

VoIP, for example, has undermined the profitability of international calling.

The other trend is that IP also enables new competition, and market entry by new competitors, in virtually every business. Consider the latest feature--seamless call handoff between Wi-Fi and the mobile network.

A mobile service provider with coverage issues--either limitations of its mobile network based on location of towers or in-building coverage based on frequency limitations--can use the technique to vastly improve user experience.

On the other hand, since widespread mobile wholesale business arrangements exist, seamless call initiation also makes it possible for new competitors to enter the market.

This especially is true for contestants using a “Wi-Fi-first” access method, where devices attempt to connect first to Wi-Fi, then defaulting to the mobile network only when that is not possible.

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.