70% of 3Q 2014 Net Mobile Adds Will be Tablets

As we near release of third quarter 2014 earnings, observers will be looking at net subscriber additions to assess how the mobile marketing wars are going.

As has been the case recently, the net new subscriber gains might present only a partial picture. To be sure, a net add is helpful. On the other hand, no matter how many new accounts are added, it is the composition of net new accounts that also matter.

Over the last year, growth has essentially shifted to tablet devices being added, not so much phone accounts.

Perhaps 30 percent of those net new accounts, over recent quarters, have been lower-yielding tablet accounts, rather than phone activations. The reason is that a tablet added to an account might represent $10 a month in incremental revenue.

A phone account might represent $40 to $80 in incremental revenue.

Many observers would expect to see net additions in the million-account range from Verizon, T-Mobile US and AT&T. Sprint likely will lag, with perhaps 250,000 to 300,000.

The only shocks would be if aggregate gains were substantially lower overall gains, or if any of the individual contestants did markedly better or worse than those expectations.

As has been the case recently, T-Mobile US is the carrier with subscriber gains most likely to surprise to the upside.

T-Mobile US already has said that, in August 2014 the company had its best month ever in terms of postpaid net adds.

"We had our biggest net add postpaid month in the history of the company in August, with 552,000 postpaid net additions,” according to CEO John Legere. The company also had 208,000 prepaid net adds in August.

That suggests T-Mobile US could easily break one million net postpaid additions for the full quarter.

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In the third quarter of 2013, T-Mobile US added about 672,000 net accounts. In the second quarter of 2014 T-Mobile US added more than a million net new accounts.

Since about the second quarter of 2013, phone account growth has been rather low by historical standards, with tablet additions driving connected device growth.

Of course, there are average revenue per user (or unit) implications. A tablet addition can represent $10 a month incremental revenue, while a phone, especially a smartphone, can represent $40 to $80 worth of incremental revenue.

Assuming net adds come in at about 3.4 million for the quarter, that might represent about 2.4 million tablet connections and about a million phone accounts.

How Uber, Lyft, AirBnB Have Lessons for the Communications Business

The sharing economy (peer-to-peer economy, mesh, collaborative economy, collaborative consumption) represents a shift in the way human and physical resources to create, produce, distribute or consume goods and services.

Think of Fon, BitTorrent, Uber, Lyft, AirBnB, eBay or Craigslist.

A related and fundamental concept is that resources are rented rather than owned. In other words, people rent cars instead of owning them, for example. A business might be created out of allowing travelers arriving at airports to rent the vehicles of other travelers who have parked their cars at the airport on trips of their own.

It might be easy to extrapolate too much from the trend. One attribute of today’s successful “sharing” models is that they are built on new ways of using resources created in more-traditional ways, and based on “owned” assets that can be used more intensively.

In a nutshell, sharing of owned assets is a way of wringing more usefulness out of assets that occasionally or frequently are idle.

It might be stretching matters to imply much more than that angle. The sharing economy is about effective, better and more efficient use of resources.

In telecommunications jargon, sharing helps alleviate the problem of “stranded assets,” investments that have been deployed and paid for, but which are not being actively used.

In many ways, licensed spectrum has a stranded asset element. Many blocks of scarce communications spectrum useful for communications networks are lightly used, most of the time, for one reason or another.

In some cases, the licensed military or government users have spectrum resources that need to be available, but are not necessarily used all the time, or much of the time.

In other cases, the licensed frequencies might be used a lot in some geographies, but are lightly used in other geographies, even if the licenses are national in scope.

So one new element of thinking, in some quarters, is that it might be possible to relatively quickly, and efficiently, put unused capacity to work by sharing licensed spectrum.

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In the U.S. market, sharing of 500 MHz worth of spectrum is being looked at in the 3.5 GHz frequencies, for example, as well as at 210 MHz to 512 MHz.

The idea is similar to resource sharing in the consumer space: make better use of available assets in ways that grow overall value and utility, while compensating asset owners.

Google to Release Biggest Phablet?

Google in October 2014 is expected to to release its largest-screen-ever device, with a screen measuring 5.9 inches diagonally.

The Nexus device,  code-named Shamu after a popular killer whale, will feature a screen larger than the iPhone 6 Plus, which features a screen measuring 5.5 inches, and the Samsung Galaxy Note, featuring a screen of 5.7 inches.

In 2011, phablets accounted for one percent of global smartphone shipments. In 2014, phablets  will account for 24 percent of the market, according to Strategy Analytics.

The phablet category arguably has emerged because the function of a smartphone has changed.

In the past, a phone was about “calling,” so small size arguably was an advantage, making it easier to fit a phone into a pocket or purse. Then texting and email became more important, emphasizing the advantages of a keyboard.

These days, those functions have been augmented, or supplanted, by Internet access, content consumption and transactions.

That calls for new features. Screen size and browser support then become more important.

It is just an anecdote, but I can remember the growing unhappiness I experienced as a BlackBerry user who really appreciated the email functionality, but also was finding that email  support was less mission critical than Internet access and browser-accessed apps.

In other words, though I expect a phone to handle voice and support texting, the most-important criteria is usefulness for app and browser support.

For others, the value also includes the device functioning as a music player platform, or a playback device for entertainment video.

For all those reasons, phablets make sense.

The emergence of tablets also arguably is having an impact. As users once often had to juggle leaving the house with a notebook, a phone and a music player, they today often have to choose between notebooks, tablets and phones.

A phablet can reduce the need to carry one extra device.

ISP Business is Likely to Become More Challenging

Unless something rather unusual happens, it is likely that U.S. Internet access providers--and by direct implication cable TV and telco service providers--will in the future face tougher business models.

There are a few reasons. For starters, competition in the mobile and fixed segments of the business has heated up, and likely will get more intense. In the fixed networks business, telcos and cable TV high speed access providers now face Google Fiber and possibly other new ISP initiatives.

In the mobile segment, Sprint now is actively challenging T-Mobile US for the role of price disruptor. So now two of four national providers are attacking retail prices and packaging in a mobile marketing war that shows no signs of lessening.

All of that is going to cause pressure on gross revenue as well as profit margins, right at a point where access providers must invest heavily in their core networks to accommodate must-faster access speeds (gigabit fixed network speeds and fourth generation mobile network investments).

At the same time, new potential rules related to network neutrality will shape access provider revenue models, most likely in a more-limiting way. Regulating Internet access services using a common carrier framework also is a live issue, and likely would be worse, for ISPs.

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In addition to reimposition of net neutrality rules for fixed operators, extension of “best effort only” access rules for consumer mobile services could be imposed for the first time.

The consumer impact could be substantial, though industry participants differ significantly on the direction of the impact. App providers think consumers would be better served under either net neutrality or common carrier rules.  ISPs take the opposite view.

The net effect of possible future rules will be that “brute force” bandwidth upgrades will remain the dominant way of providing quality of service, compared to potential alternative network management methods.

That means more capital investment, and possibly less revenue, than otherwise would be the case if ISPs were better able to shape services to match end user priorities.

The best example is voluntary end user specified priorities for latency and jitter sensitive services such as voice and video conferencing.

In the business segment, other applications where low latency is important might include in-field sales reps interrogating inventory databases in real time.

Just how much bandwidth upgrade investments might be affected by new rules is unclear. A compelling argument can be made that major ISPs must now upgrade, for core business reasons, unrelated to policy changes.

For fixed network ISPs, the upgrade to gigabit networks is underway, irrespective of any other considerations. Some might argue the same is true of 4G Long Term Evolution network speeds.

In that sense, new network neutrality policies might be viewed as an irritant, at the margin. Common carrier regulation could have quite more impact, though.

It isn’t surprising that cable TV companies, telcos or Internet service providers oppose common carrier regulation, while ecosystem partners sometimes favor such regulation.

Common carrier regulation implies, and often imposes price controls, as well as shaping permissible features, terms and conditions of service.

When value in the Internet ecosystem is highly uncoupled--app providers can reach any customer so long as those customers have Internet access--”access” is an input to an app provider’s business.

For an ISP, access is the business. That explains the prevalence of past debates about dumb pipes and smart pipes.

Current efforts by the Federal Communications Commission to shape regulation of Internet access inevitably will affect revenue models for app providers and access providers alike.

The reason is that  there almost always are shifts in competitive fortunes within the ecosystem when pricing-related or quality-related rules are changed.

The Telecommunications Act of 1996 opened up competition in the local exchange market for the first time. AT&T, MCI and scores of new competitive local exchange carriers believed they would, as a result.

Major changes in wholesale discounts--not to mention the acquisition of both AT&T and MCI by former Bell operating companies--eventually reshaped competitive fortunes. Facilities-based cable TV companies emerged as the single biggest beneficiary in the consumer market, even if many CLECs were able to sustain themselves in business customer markets.

Dynamics in the ISP--and therefore broader telecom business--likewise will be affected once the current regulatory reset has occurred.

That is not to say the outcome is ordained. But under the best of circumstances (from an ISP point of view), restrictions are going to increase.

Whether that is dangerous or not depends on one’s view of industry health. The issue is whether the U.S. access provider market is robust and profit rich, or becoming less robust and less able to afford investment in new facilities.

That is important, long term, since any government policies that limit some important ways of boosting revenue, at a time of product maturation, will consequently lead to lower investment. That is an issue European telecom regulators are dealing with.

On that score, there is some disagreement about growth prospects for future telecom global revenue. Some predict slow but rather steady growth. Others think a slowdown could happen. 

The one scenario virtually nobody believes is that, after the new regulations, whatever the outcome, ISPs will have an easier time growing revenue, creating new products and innovating.

Even in Fast-Growing SE Asia, Commoditization and Margin are Big Issues

source: Statista

South Asia and Southeast Asia are parts of the world where communications growth (subscribers and revenue) remains among the highest in the world. Unlike some other regions, huge upside remains for uptake of mobile phone service and Internet access, for example.

Still, service providers from Southeast Asia have many of the same concerns as their counterparts in regions where revenue and subscriber growth is slow or negative.

During a recent course attended by executives from service providers from Angola, Brunei Darussalam, Cambodia, Indonesia, Philippines, and Thailand, a litany of business challenges that would be familiar in many other regions were mentioned.

Declining profit margins already are an issue, even if retail growth opportunities remain. As elsewhere, “commoditization” of telecom services is an issue.

source: AT Kearney

“We need to differentiate our services” was a common theme, as telecom services are not viewed as “sexy,” compared to devices or apps.

Competition from over the top competitors already is an issue, and managers wonder whether cooperation is possible.

With the growing importance of Internet access, executives said providing greater capacity was a definite issue.

Service provider managers also said they were concerned about the ability of their firms to “execute” in a fast-moving and competitive environment where innovation is difficult.

Organization skills also are seen as issues. “Do we have the right skills; and if not, how do we acquire those skills” was seen as a challenge.

Also, as you might guess, in a region with significant populations living in hard-to-reach areas, local connectivity was viewed as an important issue, as costs are too high.

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The meeting, held in Nonthaburi, was organized by the Pacific Telecommunications Council and  sponsored by APTelecom and hosted by TOT Academy.

Instructors included:

• Sean Bergin, President, APTelecom, Thailand
• Anup Changaroth, Director, Portfolio Marketing, Asia Pacific, Ciena,Singapore
• Eric Handa, CEO, APTelecom, USA
• Aamir Ibrahim, dtac, Thailand
• Sam Johnston, Director, Cloud & IT Services, Equinix, United Kingdom
• Gary Kim, Founder, Spectrum Futures, USA
• Rozaimy Rahman, EVP, TM Global, Malaysia
• Chris Wilson, International Head, TIME dotCom Berhad, Malaysia
• Qian Zhong, Managing Director, Asia Pacific Sales, TE SubCom, USA

Even in high-growth regions, telecom professionals are dealing with some issues common with their counterparts in slower-growing regions. Product commoditization and declining profit margins are salient examples.

Why European Commission Deregulated Fixed Network Voice

Among the most-important considerations for any regulatory body is the fundamental health of the industries regulated.

The reason is that regulatory policies arguably should be lighter to foster the growth of a new industry, heavier in highly-concentrated industries at their peak and lighter again when an industry already is in decline.

But what often happens is that declining industries lobby for “protection” (which might be considered a form of regulation) when threatened, essentially propping up demand that otherwise might naturally shift at a faster pace.

The point is that flexibility (letting the market shape new demand) is needed most when new industries are struggling to be born, or conversely when an industry is in decline and resources must be shifted to new replacement lines of business.

In other words, though a common industry strategy is “protection,” or artificial support for falling demand, letting a market’s supply fall to match demand arguably is the rational choice. Still, the frequent choice is to “regulate less.”

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During the 1930s Great Depression, for example, U.S. regulators encouraged firms to compete less,  limiting price competition and restricting production, investment in plant and equipment and the workweek.

In essence, the government reversed its normal stance of seeking to prevent market concentration, and actually encouraged such concentration.

So one might argue different circumstances call for different regulatory approaches. When a new industry is growing, it might make sense to forbear from imposing regulations.

When an industry is established and there is danger of market power abuses, regulators might apply more stringent rules.

When an industry is in great trouble, regulators often seek to protect the industry by again loosening rules.

Neelie Kroes, the outgoing European Commission digital agenda commissioner, arguably illustrates the application of the principle.

“It is not a healthy sector,” she says of the EC telecom industry.

In the voice services area, the EC says a shift of calling to mobile, VoIP and over the top messaging (with voice), competition has increased dramatically.

For that reason, EC authorities have decided that two telecom markets should no longer be subject to regulation in Europe, and that two more should be redefined to reflect market and technology developments.

Segments that have been deregulated include retail fixed telephony and wholesale markets for fixed call origination.

The Commission also redefined two broadband markets, in order to limit regulatory burdens to that necessary for competitive broadband access and investment.

The new rules recognize that “virtual access products” can be considered substitutes to physical unbundling when they fulfil certain characteristics.

Those customers who still use fixed telephony also are now able to purchase fixed access from a number of different platforms, such as traditional telephone network, fiber or cable networks, and also from alternative operators offering broadband and voice services over unbundled local loops, So deregulation is possible, the EC says.

Some might argue that, not only is deregulation possible, it is necessary so that service providers can invest capital elsewhere, to support high speed access, for example, while adjusting voice prices as required to harvest what remains of the business.

Will Wi-Fi First Lead to Retail Prices 25% Lower Than Current Prices?

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Mobile service providers necessarily have a mixed attitude towards Wi-Fi. As always, mobile service providers prefer licensed spectrum to support the core of their operations, in part because it allows them to better control quality of service, and also in part because licensed spectrum is scarce.

Because licensed spectrum is scarce, it offers scarcity value, creating a barrier to competitor entry, for example.

On the other hand, Wi-Fi allows mobile service providers to offload substantial amounts of traffic, increasing end user value while also allowing investment in the core mobile network to be substantially lower than otherwise would be the case.

Some attacking mobile service providers have even more reason to like Wi-Fi, as it has a substantial positive effect on the cost of a wholesale approach to supplying mobile services.

The concept of using a fixed network for mobile service actually is not new. Before firms such as Sprint and T-Mobile US got spectrum to support their mobile networks, there was speculation about how a fixed network could be adapted to support untethered, if not fully mobile services.

In other cases, there was speculation new spectrum could be used to create new services that might offer full call handoff between cells, but only when users were moving slowly between cells (walking along a sidewalk), rather than traveling in cars, for example.

When able to employ a “Wi-Fi first” access approach, the amount of wholesale capacity the attackers have to pay for is reduced.

Some have estimated a “Wi-Fi first” approach could save about 35 percent of capital investment that otherwise would be required to create a mobile capability.

And that might allow a firm such as Comcast to offer mobile service about 25 percent lower than other mobile service providers.

That, in fact, is why Republic Wireless, Scratch Wireless, BT, Comcast and Free Mobile all rely on Wi-Fi networks, or plan to rely on Wi-Fi networks, to underpin mobile service efforts.

Doing so requires efficient and reliable call handoff, in addition to a dense network of Wi-Fi hotspots, in tandem with wholesale access to mobile service, for times when no Wi-Fi connection is possible. That is the importance of the Passpoint 2.0 initiative of the Wi-Fi Alliance.

Passpoint aims to provide seamless call handoff between Wi-Fi zones and mobile networks.

Some might argue there are several ways this approach leads to lower costs for the service provider. For starters, the suppliers save the cost of investing in their own spectrum.

In other cases, the suppliers are able to leverage the cost of already-installed fixed network infrastructure.

Comcast, for example, is able to use customer-supplied power as well as piggyback on Wi-Fi gear installed at the customer premises to support high speed access. In other words, Comcast is able to create a wide area communications capability on the back of its consumer entertainment and communications business.

Comcast already offers access to the Wi-Fi network to KDDI and Taiwan Mobile, for example, to support mobile access when customers of KDDI or Taiwan Mobile are traveling in the United States.  

The advantage, presumably, is lower per-minute or per-megabyte roaming charges for the customers using the roaming access.

Comcast aims to have eight  million hotspots activated by the end of 2014, covering 19 of the 30 largest U.S. cities.

In 2013, according to Cisco Systems Inc.’s Visual Networking Index, mobile service providers offloaded 45 percent of all mobile data traffic onto a fixed network using Wi-Fi or some other “small cell” method.

By 2018, Cisco predicts, there will be more data traffic offloaded from moble networks using Wi-Fi than remain on the mobile networks.

There still are challenges, but the “Wi-Fi first” method is becoming a realistic way for service providers to get into the mobility business without using a licensed mobile spectrum approach.

Wi-Fi is combined with wholesale mobile access in ways that reduce the overall cost of supplying mobile network access.