Connected Car is an Early Candidate for Mobile-Supported IoT or M2M Because Revenue Model is Clear

Sometimes the actual details of a product growth forecast are less important than the depiction of direction. That probably is true for any forecast of revenue potential for sensor-based applications of the "machine to mahcine" or "Internet of Things" sort.

Nor, at this point, do our efforts to define the difference between M2M and IoT so important. The direction is the main thing. The big take-away from a forecast produced by Telco 2.0 Research is the potential growth of connected sensors or other monitoring devices.

Connected things potentially will rapidly outstrip phones, PCs or tablets as devices using moible and other networks by about 2020, representing more than half of all connected devices by 2020. 

Virtually all forecasts show exponential Internet of Things growth from now to 2020, outstripping additions of mobile phone, connected PC or connected tablet accounts. 

What remains unclear is how revenue oppotunities might evolve, and which networks and service providers stand to benefit most. If most of the devices or sensors use Wi-Fi, incremental access revenue will be small to moderate.

If most of the devices or sensors rely on mobile connections, mobile service provider service revenues would get a big boost, albeit with per-sensor revenues far smaller than generated from phone connections. 

But it is hard to ignore the potential volume of new connected devices. What remains unclear the magnitude of the growth, as current IoT or M2M forecasts vary by an order of magnitude. 

The other issue is the fragmented nature of the "market," which might be said to consist of scores of potential markets, ranging from automotive to logisitics to health care to smart building apps, as well as security or logistics, for example. 

So far, utility apps have been in the forefront, in part because of government mandates. Right now, "connected car" is getting lots of attention. Among the reasons is the certainty that the connections will have to be provided by a mobile network of some kind, making the revenue opportunity clear for a mobile service provider. 

In other stationary apps, it isn't so clear that mobile networks are the only option, or the best option. 



source: Telco 2.0 Research 

"Skinny Bundles" Illustrate Growing Revenue Instability in Linear Video Entertainment

Smaller bundles of channels increasingly are seen as one way for linear video providers to provide consumers with more-affordable bundles of channels, while giving distributors more leverage in negotiations with program suppliers.

In the U.S. market, service providers are looking at smaller bundles of perhaps 20 channels, offered as a “streaming only” package. Dish Network and Verizon are the foremost proponents of such offers, at the moment.

Whether “skinny basic” packages can be created for linear video packages is the issue. Current programming contracts make that difficult, as standard contracts typically require that channels be included in whatever tiers are most popular with consumers (measured by number of subscribers taking each bundle).

In Canada, the Canadian Radio-television and Telecommunications Commission is considering mandating offering of lean programming packages that cost less, possibly by stripping out U.S. channels from the low-cost bundles, or even making channels available on a full “a la carte” basis.

Such discussions have been active in Canada since at least 2012, when the CRTC issued rulings related to bundling rules.

Since then, the CRTC has a number of options for containing consumer costs, including full a la carte offers, a move with unsettling implications for service providers and customers.

Nobody knows precisely how pricing might change in an environment where consumers can buy any single channel, on a stand-alone basis. That would create huge instability for service providers, who would likely lose the ability to predict future revenues.

On the other hand, consumer impact might be highly disparate. Some consumers could save money, while others find they wind up paying the same. And some consumers might even pay more. Everything hinges on which channels consumers really want, how those channels can be sold, and what rules might be created pertaining to bundling.

The present proposed changes in CRTC rules illustrate the amount of instability that now seems to be growing in traditional service provider businesses. Nobody really knows how distributor revenues might change if a la carte rules are imposed, or what consumer reaction might be.

Observers watching for signs of major change also are paying attention to what Time Warner might decide to do with its HBO service.

Some day, it has been reasonable to predict, one content owner would break with precedent and offer it’s content direct to consumers, over the top, without the requirement to buy that same product as part of a linear, bundled video subscription.

Some have predicted HBO would be first to do so, as HBO already does so in the Nordic countries, and has sold its service as an over the top product since 2012.

That logically suggests HBO would be willing to do so elsewhere where such a tack might make HBO’s owner Time Warner, more money than restricting over the top sales.

Time Warner has gradually warmed to the idea of doing so even in big legacy markets such as the United States, juding by public statements over the past few years.

As recently as 2013, though, top HBO executives continued to insist there was no business model in the U.S. market.

But business viability is coming closer, Time Warner CEO Jeff Bewkes indicates.

“Up until now, it looked to us as though the best and main opportunity was to focus on improving the penetration, the offering, the servicing, the interface, the monetization of HBO through the existing affiliate system,” Bewkes said.

“So now the broadband opportunity (over the top delivery) is getting quite a bit bigger, and the ability of the plant to deliver something robust is getting stronger,” said Bewkes.

That doesn’t mean the tipping point has been reached. It hasn’t.

But the new language does suggest the advent of over the top HBO streaming is closer than it has been in the past.

“We’re seriously considering what is the best way to deal with online distribution,” said Bewkes.

HBO is a logical candidate to move first for several reasons. HBO historically has been marketed as a premium add-on to the basic linear video subscription.

In other words, customers had to first buy a basic cable subscription of some sort before they were eligible to buy HBO or other “premium channels.”

In part for that reason, premium channel buy rates always have been a fraction of basic plan purchases, although it can be argued that aggregate purchases of premium channel subscriptions amounts to about 88 percent of basic tier buy rates.

In 2013, about 23 percent of U.S. households purchased Showtime, while about 29 percent of households bought HBO.

Purchases of  Cinemax penetration stood at nearly 14 percent while Starz penetration was 22 percent.

So the challenge for HBO remains: how much incremental purchasing could it gain by offering an over the top product, and how much might it lose in support and revenue from video distributors.

At least so far, the risk has been deemed too high. But thinking is evolving. The big issue is what happens once HBO really does make a change.

At the same time, Canada might be on the cusp of a rather significant change affecting the widely-viewed basic channels. Even if full a la carte does not become law, the way the skinny basic tiers are created could have significant impact on programmers.

If excluded from skinny basic packages, and if those skinny basic packages become popular, some programmers might find they cannot afford to remain in the market. That obviously would reduce programming diversity and end user choice.

Like streaming alternatives, a la carte and skinny basic illustrate the coming challenge for video suppliers and distributors. What are the odds fundamental changes (a la carte or streaming) will enhance revenues for programmers or distributors, rather than leading to lowering revenue?

To be sure, the existing ecosystem participants might prefer a revenue-neutral or revenue-enhancing solution. But it simply remains unclear whether that is a reasonable expectation, if or when unbundling is widespread.

U.S. Cable and Telco Businesses Will be Tougher, Soon. The Only Issue is How Much Tougher

If you have followed U.S. communications policy for any period of time, you know that regulatory policies blow hot and cold, for industries and segments within industries subject to regulation, from time to time.

Not often in recent decades have U.S. communications providers faced such strong negative headwinds as they do at the moment.

The U.S. Federal Communications Commission  says it might consider regulating high speed access as a common carrier service. Most observers argue that would immediately decrease investment by telcos or cable companies, as the expected financial return would drop, while operating costs might well rise.

Then there is the impact of new network neutrality rules on mobile and fixed Internet service providers, generally expected to reduce revenue opportunities for the affected firms.

Add also the growing demand for government-owned or run access networks, as well as FCC arguments that it has the authority to overrule any state-passed laws concerning government networks.

Connecticut, for example, appears to be among the U.S. states that wants to encourage more public entities within the state to pursue building of new gigabit access networks.  

On September 2, 2014, the City Council of North Kansas City approved a 10-year agreement with local company DataShack for the operation and maintenance of the city's fiberoptic network, known as liNKCity.

DataShack will operate and maintain the fiber network, but the city will continue to own the network.

Under the agreement, DataShack will collect revenue for broadband services sold to businesses.

But as of January 1, 2015, DataShack will provide existing and new residential broadband customers with gigabit service for an installation fee of $300 (or $100 for 100Mbit/s service, or $50 for 50Mbit/s service).

Residents in the city of about 4,000 people won't pay any more for service for the duration of the 10-year deal. In other words, gigabit access will be free for 10 years.

As part of the agreement, North Kansas City will share profits and losses equally with DataShack, with any potential losses for the city capped at $150,000, including capital investment.

DataShack will assume all costs associated with providing free gigabit services, reports indicate.

Some might welcome such a development, in the hope it will reduce access provider “power” within the communications ecosystem. That arguably could happen. But so could a massive “capital strike” by investors that would cripple service provider efforts to rapidly upgrade access infrastructure.

It’s a giant game of chicken with the U.S. Internet access infrastructure at stake.

Some will simply quip that if the telcos and cable companies refuse to invest, let them go bankrupt. Others will take up the challenge. Maybe. But fixed access networks remain hugely expensive undertakings with a growing amount of risk.

In the end, it is likely ISPs will operate in a more-constrained regulatory environment and a more-competitive business environment.

There won’t be much alternative but to take whatever measures are necessary to restructure business plans so incumbent providers remain competitive with attackers. You know the story well enough to predict what will happen to the incumbents.

Profit margins will fall. Revenue growth will slow. Operating costs will have to be reduced.

A tougher environment is coming. The only issue is how much tougher it will be.

Redefining "Broadband" is Only One of Several Big Challenges Service Providers Now Face

Among other potential changes in U.S. policy pertaining to high speed access is the question of what numerical value should be set to define what “broadband” actually is.

At the moment, the Federal Communications Commission uses a functional definition of a minimum of 4 Mbps in the downstream direction, and 1 Mbps upstream.

The definition matters because universal service support and other data collection efforts hinge on use of the definition.

FCC Chairman Tom Wheeler says 25 Mbps is “table stakes,” while universal service should be based on a definition of at least 10 Mbps for Universal Service Fund activities. In other words, the FCC chairman thinks classic “Ethernet” speeds of 10 Mbps should now be the minimum any Internet service provider must provide, in a rural area, to qualify for universal service support.

That has clear financial implications for at least some rural ISPs, and also creates a sort of “speed umbrella” for all competitors in rural areas. In other words, in many markets, ISPs will have to contend with a speed floor at 10 Mbps, or whatever speed the FCC might mandate as the minimum for getting universal service funds.

To be sure, floors are not ceilings. Some service providers might already be selling services at speeds of 25 Mbps or much higher.

The new definition might, or might not affect mobile service providers as well. In some cases, mobile “broadband” might suddenly become less widespread, if the definitions used for fixed and mobile networks are the same.

Even Long Term Evolution networks might not meet a 25 Mbps standard immediately. On the ohter hand, some providers, such as T-Mobile US, might welcome a chance to upstage its major competitors, as T-Mobile US already is operating LTE networks operating as fast as 100 Mbps.

The other important non-financial angle is that resetting minimum definitions from 4 Mbps up to 10 Mbps or 25 Mbps will likely have implications for the integrity of record keeping, creating a statistical anomaly in the year the new and different definition is used.

It is possible that the percentage of U.S. “broadband users” will decrease when the change is made.

Over the long term, such periodic revisions will make sense for government regulators. When large numbers of U.S. consumers are able to buy service ranging from 100 Mbps to 1 Gbps, keeping a 4-Mbps definition is silly.

On the other hand, some service providers--satellite and fixed wireless come to mind--will be quite challenged as overall speeds climb. For satellite providers, network architecture is the limit. For fixed wireless providers, available spectrum is the limitation.

In a market where 1-Gbps or 300 Mbps access is common, 15 Mbps services will seem like dial-up access.

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.