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Does Technology Drive Growth, or Does Growth Drive Technology Investment?

The conventional wisdom is that investments in information technology and high speed access and other forms of communication contribute to economic growth.

Like many other bits of conventional wisdom, the relationship between economic growth and technology investment is unclear.

Though most believe that technology investment “causes” growth, some might argue that it is economic growth that drives technology investment. And the issue might be more complicated than that.

Some would argue that it is not “technology” that contributes to economic growth, but “innovation,” and that might be quite a different matter. Using computers to create online retailing perhaps is an innovation.

Using computers instead of typewriters to create documents, while more efficient, might not represent so much innovation.

And there is a complicated “dark side.” Huge economic transformations, such as the Industrial Revolution, also disrupt the economic fortunes of huge numbers of people.

“Somehow, information and communications technology and Internet Protocol help grow the economy,” said Rozaimy Rahman, Telekom Malaysia Global EVP.

Rahman noted Malaysia’s stated goal of “becoming a fully-developed nation by 2020.”

But one might note the high rates of economic growth across Southeast Asia and argue that it is growth that is driving communications adoption and investment.

 source: Malaysia Chronicle

The problem is that investment in information technology does not necessarily lead to near-term boosts in productivity.

Some of us might argue that technological advances do increase productivity, but only after a lag. The lag might be as short as a decade, but might take longer.

As a practical matter, policymakers will behave as though they believe the theory that information technology and high speed access drives growth. Though the actual causal process is not so clear, the risk of betting wrong is simply deemed too great.

How Crucial are Video Streaming, Linear Video for ISPs, Long Term?

Redbox Instant by Verizon, the streaming service Verizon created with Redbox, is shutting down on October 7, 2014. The closure says less about the current or longer term viability of the business, and more about how tough the current business might be. Redbox Instant simply was not able to get traction.

The logic was simple enough: leverage the Redbox base of 30 million customers to create a rival $8 a month streaming service able to compete with Netflix, among others.

For $8 a month, users were able to stream with no limits plus have four nights of rentals from the local Redbox DVD kiosks.

Redbox Instant customers also could rent console games from the kiosks.

But Redbox Instant simply failed to get traction. Some will point to the catalog, noting that Redbox Instant had thousands fewer titles than Netflix, for example. A bigger issue was that most of those titles could be viewed on Amazon Prime or Netflix as well.

And while Netflix and Amazon Prime offered popular TV services as well as movies, Redbox Instant was a movies-only service.

Consider that TV content might account for as much of 66 percent of all Netflix streaming views.

Some might also argue that Redbox Instant was not available on as wide a range of devices as Netflix can reach.

Netflix is available on every major console type--not just Xbox--and most smart TVs and DVD players sold in the recent past. Redbox Instant could not match that level of device ubiquity.

Also, given the drive for content exclusivity and original content, Redbox Instant simply had none.

Still, the fundamental business logic made sense: if Netflix was doing so well, there is a market. What Redbox Instant had to do was establish a value proposition.

That does not mean some other competitor might eventually challenge Netflix, only to note that, for the moment, Netflix is the service that sets the standard.

Verizon likely will simply try another tack. Compared to AT&T, Verizon executives seemingly have become skeptical about the profit margins from offering linear video subscriptions.

Many small and rural U.S. telcos likewise are rethinking their video strategy. The problem is that a small service provider lacking scale will find the video subscription business model quite challenging.

So even if the triple play now is the mainstay of the telco and cable TV provider business, there are growing signs even that could change.

Larger Internet service providers such as Comcast and Verizon likely see a future where high speed access is the core product and linear video might not be offered at all.

The only salient issue is whether to participate in the streaming business, and if, so, how. At least some smaller telcos already are retrenching, moving to a “voice and high speed access only” product model.

Not least of the reasons is that their business models hinge on universal service revenues, and universal service support now is available only to providers who sell high speed access plus voice.

Sprint Layoffs Illustrate Fundamental Telco Problem

Sprint Corporation has announced a workforce reduction plan (layoffs) that might mean the loss of 1400 jobs at Sprint.

Sprint says the cuts will cost $160 million in Sprint’s second quarter.

Such cuts always are disruptive for the affected employees. But the downsizing is not unusual for service providers these days, as difficult as the process might be.

“Costs are going up and revenue is flat,” says Anup Changaroth, Ciena director, portfolio marketing. “In some markets, there is negative revenue growth.”

From 2002 to 2013 the largest 15 service providers lost 69 percent of their former revenue-per-subscriber revenue,” Changaroth said, quoting data provided by IBM.

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Over the same period, profit margins dropped four percent to 22 percent.

Competition that attacks top-line revenue is part of the problem. Also, shifts in perceived value are an issue as well.

Nor is it clear such job cuts would have been avoided if Sprint’s bid to buy T-Mobile US had succeeded. Any large merger of that sort would be expected to result in some job losses, as “synergies” generally are possible.

Left on its own, Sprint, which many expect will fall from the third position in market share to fourth, simply has to find ways to cut cost, if it cannot grow revenues fast enough.

Also, if Sprint really wants to challenge T-Mobile US as the undisputed “value provider” among U.S. mobile companies, it would have to drive its operating costs lower, to compensate for expected hits to top-line revenue.

The planned employee layoffs, expected to be largely completed by October 31, 2014, will include management and non-management positions, Sprint says.

Sprint expects to recognize a charge of approximately $160 million in the second fiscal quarter of 2014 for severance and related costs, but Sprint also says additional material charges associated with “future labor reductions may occur in future periods.”

In other words, this might only be the first of multiple employee cuts.

As traumatic as the cuts might be, they are not unexpected. No firm that is having trouble on the top line can avoid making changes below the top line to preserve the bottom line. And with Sprint’s new resolve to take price leadership of the U.S. mobile market, the top line is going to be under pressure.

Sprint is not the first, nor will it be the last “old line” telco that has to confront the growing implications of a changing market. As unpleasant as such cuts might be, a shift of value in the communications ecosystem has been underway since at least 2000.

The phrase “software eats the world,” where value shifts to Internet apps and processes, captures the direction of the shift.

While it is reasonable for access and transport service providers to take measures to increase the value of their services, it is hard to ignore the broader shift of value creation and equity value to application providers, within the communications ecosystem.

Under such conditions, access and transport providers will find growing pressure to align costs to revenue, when value continues to shift to app providers.

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.