The Downside of "Reliability"

It might seem strange to argue that "reliability" is a potential negative in the telecommunications business, but in some ways "high reliability" can be a problem, rather than an advantage. 

The simple problem is that "high reliability" costs money. And in today's market, it isn't clear that consumers and business buyers are willing to pay a service provider for traditional reliability standards. 

A presentation by Sam Johnston, Equinix director of cloud IT services, nicely captures many of those challenges are faced by the global telecom business.

If you extrapolate from the shift in the way computing is accomplished, and the way software strategies evolve, you will see clearly why the traditional "telco" value-price proposition increasingly is being disrupted.

Consider "over the top" apps such as Skype, cloud-based productivity apps such as Google Drive, Google Docs, messaging apps such as WhatsApp. 

When creating apps and services of any type, designers have choices to make. They can assume or create "reliable software" designed to run over "unreliable hardware." That largely is the position occupied by major consumer and enterprise-facing apps. 

That also is the way major data centers are designed, using racks of cheaper servers instead of a smaller number of reliable servers. 

Conversely, at launch, the strategy might be "unreliable software" running over "unreliable hardware" or "reliable hardware." 

That approach might be taken by a newly-launched over the top app, aimed at the bottom of the functionality scale, or with an initial set of features that grows over time to provide more robustness.

The approach that arguably does not work so well is "reliable software" running over "reliable hardware." The reason is that this approach costs too much. 

You might argue that approach--reliable software running on reliable hardware--is the traditional telco approach to business, in the monopoly era.

That is why so much attention has been paid to "five nines" of reliability, and stringent testing of new apps. "Our name is on it" is one way of describing the traditional telco concern about app or service robustness. 

Today's software apps typically do not use that approach. They often launch in beta, expecting some things to break, and fix those problems on the fly. 

The point is that this approach necessarily involves a different approach to product development and market launches. "Moving fast" requires a willingness to launch products that are not yet fully formed and completely robust. 

Telcos typically do not create or launch products that way, which means telco apps tend to take longer to develop, and imply more cost. 

And that is the problem. It no longer is the case that high-cost approaches such as "reliable software running on reliable hardware" will work, in a competitive and fast-moving market. 

"Good enough" reliability really is the new requirement. Consumers are used to mobile phones that do not work some places, calls that drop occasionally, operating systems that need to be rebooted, perhaps daily. Users understand how to deal with using apps that do not always work perfectly, but work well, most of the time, and feature very low cost. 

No mobile network ever approaches "five nines" levels of availability. Nor do operating systems, browsers or other apps. 

Instead, the approach is "high value" experiences that "mostly work" but which are not as reliable as traditional telco services. 

Service Provider Business Models are About to Change, Really

Since about 2009, U.S. cable TV companies might have gained about 10 million high speed access accounts, while losing about five million video subscriptions, according to researchers at Moodys.

In 2014, cable high speed access and video units sold are about even, at about 50 million units of each.

In fact, by about 2015, U.S. cable operators might find that high speed access is the product that represents the most accounts or units sold.

That would be a first for the cable TV industry, which began life selling just one product, namely TV channels.

Cable operators will not be alone in seeing such transformations. At some point, tier-one telcos will likewise find high speed access is their anchor product as well. Mobile operators will someday make more money from Internet access than voice or text messaging.

To some extent, that trend already is appearing in other ways, as well. Even if it now is a truism that a consumer services provider sells a triple play or quadruple play package of services, even that conventional wisdom might reverse, in some cases.

Small independent telcos in the United States have different economic models than tier-one service providers--either of the cable TV, mobile or fixed line sort.

Some of the difference flows directly from scale. There are just some lines of business a small provider cannot reasonably expect to undertake, because scale is required. Mobile service, video entertainment or services for enterprises provide examples.

Without scale--both lots of customers and wide geographic scope--those businesses have tough business models. In fact, for years, small telco executives have said, either in private or in public, that they do not actually make money selling linear video entertainment.

Linear video is a business with substantial shared costs. And, by definition, better economics are obtained when a service provider can spread fixed costs over a large base of customers. A tier-one provider can do so; a small provider cannot do so.

The potential customer base also dictates and limits business models. Larger national or regional providers actually have viable enterprise segment opportunities, many small and mid-sized customer possibilities and lots of consumer accounts to chase.

Small providers, operating in rural areas, have few, if any, enterprise customers or prospects. They have smaller number of opportunities to serve small and mid-sized firms as well.

And population densities are much lower in rural areas.

Without in any way intending to demean, there actually is not a sustainable business model for many small telcos in rural areas. That is why universal service funds exist. Without the support funds, actual profitably or self-sustaining operations might not be possible for a fixed network or mobile service provider.

So even if it is quite clear that the triple play or quadruple play now is the offer sold to consumers by tier-one providers, that might not be feasible for at least some rural providers.

Whether a sustainable business model exists for high speed access, with voice, and without video entertainment, by fixed line operators in rural areas, is not yet possible to ascertain with certainty.

The key issue is that universal service funding now goes only to service providers who offer high speed access and voice. And if universal service funding is the difference between sustainability and failure, then it sort of makes sense that some executives would decide to get out of the costly and typically money-losing subscription video business altogether.

They won't be alone. Nearly all business models will change, over the next decade.

Global Telecom Capex Will Slow in 2015

Globally, mobile and fixed network service providers will have increased their capital investment by about three percent in 2014, according to Dell’Oro Group.

As you might guess, capex in the mobile segment significantly outpaced investment in fixed networks. Mobile network infrastructure investment was in double digits, while investment in fixed networks was in the low single digits, Dell’Oro Group says.

But Dell’Oro Group also predicts that capex spending will decline in 2015, for reasons that are entirely logical. Capital investment in either mobile or fixed segments tends to occur in stair step fashion.

Investments are made to enable new services or alleviate congestion, create brand new networks or significantly upgrade existing networks. But those construction jobs, once finished, also mean investment will slow until the next required round of infrastructure investment.

Hence the stair step pattern. Also, service providers tend to invest in direct proportion to revenue generation. When they are generating more revenue, they tend to invest more. Conversely, when revenues are declining or flat, they invest less.

“Higher device penetration, decelerating mobile data growth rates, lack of new revenue streams, and increased competition in both the developing and developed markets have caused worldwide revenue growth to decelerate in the last couple of years,” says Stefan Pongratz, Dell’Oro Group analyst.

In particular, “slower growth in service revenues coupled with the rapid network progress during 2014 in China, North America, Japan and Europe will also put some pressure on worldwide capex upside in 2015,” Pongratz said.

One example is investment to support 3G networks. The amount of mobile capex required to support incremental mobile data usage has declined more than 50 percent per year since the smartphone boom started.

On the other hand, with new demands for faster fixed networks, fiber to customer investment and building of new Long Term Evolution 4G networks will drive service provider telecom capital investment in 2014 and 2015.  

Will PayPal be Bigger than eBay?

That PayPal now is thought to be a business eventually larger than eBay, its parent, could explain why eBay is spinning out PayPal as a separate company. Pressure from activist investor Carl Icahn is an important trigger for why it is being done now, however.

The spinout also shows how synergies between firms sometimes are not as great, nor as strategically important, as initially claimed.

Auctioneer eBay bought PayPal in 2002, at a time when the immediate issue seemed to be that PayPal increasingly was the preferred payment mechanism for eBay shoppers.

More than a decade later, the synergies arguably are less obvious than originally thought. Over time, PayPal’s revenue has outgrown its eBay activity.

PayPal has more than 152 million active registered accounts, with growth of about 15 percent year-over-year.

Revenue over the last 12 months grew by 19 percent over the prior year period to approximately $7.2 billion, eBay says.

PayPal facilitates one in every six dollars spent online today.

Total payments volume over the last 12 months increased by 26 percent to $203 billion. PayPal is fully localized in 26 currencies, is available in 203 markets worldwide and has relationships with 15,000 financial institutions.

Separation from eBay arguably will provide PayPal with more autonomy to compete in the payments space, particularly with respect to Apple Pay and other emerging mobile wallet providers.

In the United States, for example,  mobile proximity payments--payments made using a phone to make a physical transaction at the point of sale--will reach $3.5 billion in 2014, according to eMarketer estimates. By 2018, that figure is expected to reach $118 billion.

As a separate entity, PayPal has a chance to focus its efforts and compete more effectively, the logic suggests.

The other example of failed synergy, some would say, was Microsoft’s purchase of Skype. In 2011, when Microsoft bought Skype, the deal was viewed as a way for Microsoft to gain immediate stature in peer-to-peer communications, messaging and IP communications in general.

Whether the benefits are so clear is the question. In a narrow financial sense it does not seem there are significant benefits. Microsoft does not break out Skype earnings or revenue.

To be sure, there were other advantages. Skype was acquired to replace an ailing Windows Live Messenger. So the enterprise messaging platform Lync arguably was a beneficiary. Integration of Skype with Windows and Outlook likewise was seen as a benefit.

Adding Skype to Xbox also will be touted as an advantage. Still, many would argue the strategic value is tough to discern.

Will Facebook be an Internet Service Provider in 21 Countries by 2018 or 2020?

Facebook believes it will be able to provide Internet access to 21 countries in Latin America, Africa and Asia sometime as soon as 2018 to 2020. Whether Facebook would do so on its own, or perhaps in partnership of some sort with other entities is not yet clear.

But Facebook “becoming an Internet service provider” might be as disruptive for Internet service providers in those 21 countries as Google Fiber has been in the United States.

Facebook hopes to begin testing the first examples of solar-powered aircraft (drones) for Internet access in 2015, over U.S. territory.

Facebook also believes the commercial deployment of such unmanned aircraft to provide Internet access would not occur until three to five years after the completion of successful tests, according to Facebook Connectivity Lab Engineering Director Yael Maguire.

As currently envisioned, such aircraft would fly at altitudes up to 90,000 feet. Maguire claims there are currently no regulatory issues for planes flying above 60,000 feet that would prevent using such a platform to provide Internet access in Asia, Africa and Latin America.

Such planes would have huge wingspans comparable to that of a Boeing 747 jet.

Facebook almost certainly will face competition from Google.

Separately, Google acquired Titan Aerospace, a manufacturer of jet-sized drones that are intended to fly nonstop for years. Google said the technology could be used to collect images and offer online access to remote areas.

Once in the air, the drones would fly unmanned for several months at a time. Some immediately will ask how will Facebook's network will work. After all, a moving aircraft flying near 90,000 feet will effectively be a platform operating much as a satellite or ground-based cell tower would, in many respects.

So Facebook might look at drones as a backhaul mechanism, with ground stations that retransmit Wi-Fi signals to standard smartphones able to use Wi-Fi. The other alternative, more complicated, would require use of special phones able to receive signals directly from an airborne transmitter.

Some might suggest that is rather too expensive for mass adoption in the markets Facebook is targeting.

None of that is as potentially shocking as is the sheer idea that Facebook could be joining the ranks of Internet service providers.

Is Low Customer Satisfaction a Result of Deliberate Strategy?

Sean Bergin, a founder of AP Telecom, just related a story that might explain why consumers rate their Internet service providers and video service providers so harshly. He explained that he used to spend $4,500 a month on his own phone, each month. That went on for years.

Finally, he found an alternative provider with a monthly recurring cost about half that much. That isn’t the point of the story, though. The point is that “not once” did his former service provider ever reach out to him to suggest ways to reduce his bills, offer a small token of recognition, or anything else, for a consumer account that big.

To be sure, anybody with knowledge of the economics of the consumer business would understand how difficult it is to create touchpoints of any sort with the “best” consumer accounts, to say nothing of the typical account.

Still, that anecdote probably explains why Vodafone is losing 100,000 customers a month in Australia, Bergin says. In 2011, Vodafone lost 500,000 customers. In 2012, Vodafone lost 500,000 customers in six months. In the first half of 2013, Vodafone shed a similar number of customers.

For whatever reason, suppliers of video services, phone services and even mobile phone services have tended to rank towards the bottom of consumer rankings in “customer satisfaction.” That was true of the May 2013 edition of the American Customer Satisfaction Index (ACSI) index, for example.

A separate analysis confirms the basics of the issue. Some firms do better than others, but as a class, video entertainment providers and telcos, and now telco-owned ISPs as well, rank in the bottom 10th percentile, according to an analysis by Temkin Group Research.

In fact, the bottom three industries were the mobile, Internet access and video entertainment categories.

Not much had changed in early 2014. Internet access service was the lowest ranked industry--last out of 43 industries--in the American Customer Satisfaction Index. Just above it--at position 42--is consumer satisfaction with video subscription services.

The old joke about outrunning a bear--you don't have to be faster than the bear, only faster than the other guy being chased--likely applies here, as the rankings show significant differences between contestants in the ISP and video markets.

But the latest J.D. Power round of surveys might suggest ISPs and video service providers are doing better.  

For video service providers, Satisfaction with performance and reliability has improved to 743 in 2014, an increase of 17 points from 726 in 2013, according to J.D. Power.

DIRECTV and Verizon FiOS (738) rank highest (in a tie) in TV customer satisfaction in the East region; AT&T U-verse (750) ranks highest in the North Central region; Verizon FiOS (751) ranks highest in the South region; and DISH Network (739) ranks highest in the West region, J.D. Power reports.

Satisfaction with ISP performance and reliability has improved to 700 in 2014, an increase of 37 points from 663 in 2011.

Verizon ranks highest in ISP customer satisfaction in the East (712) and South (725) regions; WOW! (Wide Open West) scores 728 ranking highest in the North Central region; and AT&T (704) ranks highest in the West region.

To be sure, to the extent that customer satisfaction is directly associated with customer loyalty, the rankings show relatively high unhappiness with most of the providers, and with the industry products compared to 41 others, according to the ACSI studies.

It might be unreasonable to suggest that customer satisfaction in the video and Internet access or mobile businesses is lowish because of rational decision making on the part of service providers.

Service providers, rightly or wrongly, might have concluded that the investment in additional customer service, recognition or other soft processes is not justified by the consumer customer lifecycle, lifetime value of an account and profit margins for such accounts.

That isn’t to say the situation is any way optimal, only to suggest service providers have made rational decisions.

"Follow the Money"

Rule number one when analyzing the telecom business is to “follow the money.” What service supplier executives, regulators, supplier executives or policy advocates might say provides clues about where value is perceived or business models are anchored.

Consider the issue of mobile roaming charges within the European Union. EU. A survey commissioned by the European Commission shows that 28 percent of those who travel in the EU switch off their mobile phone when going to another country.

Only about eight percent of travelers within the EC zone, who also reside in the zone, use their phones abroad in the same way as at home. About 33 percent of traveling EC area residents never use their phones at all when traveling outside their home countries, but within the EC.

Some 94 percent of Europeans who travel outside their home country limit their use of services like Facebook, because of mobile roaming charges, the survey also suggests.

About 47 percent report they would never use email or social media in another EU country.

About 10 percent say their behavior does not change, at home or roaming. Only about five percent say their use of social media when roaming is the same as when they are in their home countries.

Basically, mobile service providers have opposed an end to roaming charges, while EC regulators have favored it. To be sure, there are valid public policy issues here: EC regulators want lower prices for consumers.

But that is where the notion of “follow the money” applies. EC regulators, whatever the merits of policies first to reduce, then put an end to roaming charges, do not suffer financial downside as a result of those policies, of course.

Mobile service providers, by way of contrast, earn perhaps three percent of total revenue from roaming charges.

The European Commission argues that mobile service providers “are missing out on a market of around 300 million phone users because of current pricing strategies.”

“This makes no sense,”  regulators have argued.

Well, not exactly. Mobile service providers will lose three percent of their revenue. Consumers will gain lower prices for texting, voice and mobile Internet usage. App providers, on the other hand, will gain directly as use of their apps grows.

But “follow the money.” Mobile service providers lose a specific amount of money. Consumers will save money and app providers will make more money, as usage, and therefore advertising and commerce, increases.

When ecosystem participants support policies, it is because they gain. When participants oppose policies, it is because they lose.

It is hard to argue against lower consumer prices. It also is hard to ask providers to invest more, while earning less.

EC officials might argue that three percent gross revenue reductions are not relevant for investment decisions. Earnings from roaming charges only support dividend payments.

Whatever the truth of that charge, it remains true that dividend payments are a major cost of doing business for public telecom companies. They must be paid, and then capital investment made out of the rest of cash flow or earnings.

Three percent less income might not be a big deal for regulators: they don’t lose the money. It is material for a mobile service provider asked to give up three percent of gross revenue.