How Big a Deal is Mobile "Spectrum Exhaust?"

Forecasting is a perilous business, and forecasts "always" are wrong, to some extent. That holds for estimates of Internet bandwidth demand as well, which historically tend to overestimate long term rates of growth.

“The evidence reveals a persistent tendency to overestimate in both number and value,” say researchers Aalok Mehta of the University of Southern California and J. Armand Musey, Goldin Associates, LLC principal.

“Of the past seven Cisco mobile traffic forecasts for North America, for example, overestimates were nearly twice as frequent as underestimates (19 vs. 10),” they say. “Overestimates are also on average of greater magnitude than underestimates (103 vs. 81 PB/month).”

In the case of mobile bandwidth, unexpected developments such as Wi-Fi offload could have had an impact, as users learned to substitute Wi-Fi networks for mobile network demand. True, aggregate Internet demand does not change simply because a different access network is used.

But the specific amount of mobile network demand does change. Such estimates matter for policymakers, Internet service providers and ecosystem participants, as matching supply to demand hinges on the predictability of demand growth forecasts.

With the important caveat that end user demand and “traffic growth” are different items (set high prices and demand will drop, for example), “everybody” might agree that mobile traffic will continue to grow, for the simple reason that more consumers are buying smartphones, which means there are more potential users of the Internet access feature, and more users watch video, the most bandwidth-intensive application of all.

Also, there is a physical dimension to mobile bandwidth forecasts that does not exist to the same degree in the fixed access area.

When traffic is confined to a waveguide (wire or optical fiber), there often are multiple ways to increase available bandwidth. Internet service providers can use multiple wires or fibers, for example.

Up to a point, that spatial division also is how small cells work. But the risk of interference arguably puts limits on the practicality of ever-smaller cells as a means of increasing effective ability to support higher volumes of traffic.

Though some might claim there are no theoretical limits to mobile bandwidth supply, most would admit there are some physical limitations, where it comes to commercially-viable supplied bandwidth, even if network architecture, improvements in coding and modulation, antenna design, commercial tariffs and offloading mechanisms do exist.

Precisely how much mobile or untethered spectrum might be required, and when, remain matters of some debate. Mehta and Musey correctly argue that over-allocation of capital in spectrum resources is unwise.

So is under-investment, says George Ford, Phoenix Center for Advanced Legal and Economic Public Policy Studies chief economist.

The issue in the mobile realm is the time it takes to release additional spectrum for commercial use, as well as the physically-available alternatives for releasing new spectrum.

Verizon 3Q 2014: Revenues Up 4%

Verizon Communications reported 89 cents in earnings per share for the third quarter of 2014, compared with 78 cents per share (or 77 cents on a non-GAAP adjusted basis) in the same quarter of  2013. Whether one is happy with those results depends, as always, on expectations.

Some had estimated Verizon would do even better than it did. But Verizon did post significant revenue growth.

Total operating revenues in the third quarter of 2014 were $31.6 billion, a 4.3 percent increase compared with third-quarter 2013, Verizon reports.

Almost an afterthought these days, Verizon switched access lines (plain old telephone service) declined more than 15 percent, year over year. At that rate, the number of remaining switched access lines will decline by about half in another five years.

By 2023, if current rates hold, Verizon will have lost 80 percent of its current switched access lines.

Of course, at some level, Verizon eventually will lose 100 percent of its switched access lines, as the public switched telephone network actually is retired.

If legacy PSTN lines in service were only replaced, one for one, by IP lines, the change would not be consequential. It has not mattered that mobile voice lines have transitioned from analog to various generations of digital networks, for example.

The problem for the telco fixed network segment of the business is that users are abandoning use of voice lines.

At the same time, the total number of fixed network lines in service is not dropping nearly as fast telcos are losing lines, because market share has been taken by new providers, including cable TV companies, most notably.

The reason the 15 percent annual decline of voice lines is not more consequential is that Verizon is adding new units of high speed access, video entertainment and digital voice at a faster rate than it is losing voice accounts.

Still, total attrition of voice lines (PSTN and IP) is in excess of five percent a year.

One notable observation is the huge disparity between operating income margin between the mobile and fixed network segments, though.

In the third quarter of 2014, mobile segment operating income margin was 31.9 percent and segment earnings (EBITDA) margin on service revenues was 49.5 percent.

In the third quarter of 2013, mobile segment operating income margin was 33.8 percent and earnings (EBITDA) 51.1 percent.

Some might see the dip as an impact of the U.S. mobile marketing wars, as well as the shift by consumers to non-subsidized device plans, which have the impact of lowering service revenues, even if device sales revenue can rise, in the short term.

Compare that performance with results from the fixed network segment. Total revenues were $9.6 billion in third-quarter 2014, down 0.8 percent year over year. So the first comparison is that fixed network revenue declined, while mobile segment revenue grew.

Fixed network  operating income margin was 2.3 percent in the third quarter of 2014, up from 1.5 percent in third-quarter 2013. So mobile operating income margin was an order of magnitude higher than fixed network operating income margin.

In other words, the mobile business is 10 times more profitable than the fixed network business, on an operating income margin basis.  

Fixed network segment earnings (EBITDA, non-GAAP) was 23 percent in third-quarter 2014, flat compared with third-quarter 2013. While fixed network EBITDA was lower than in the mobile segment, earnings margin was not so dissimilar.

Still, consumer revenues were $3.9 billion, up 4.5 percent compared with third-quarter 2013, with FiOS revenues representing 76 percent of the total.

Consumer ARPU for wireline services increased to $125.32 per month in third-quarter 2014, up 10.3 percent compared with third-quarter 2013.

Total FiOS revenues grew 13.4 percent, to $3.2 billion, comparing third-quarter 2014 with third-quarter 2013.

It is possible to attribute the slight decline in fixed network segment revenues to the business customer segment.

Sales of strategic services to enterprise customers increased one percent, to $2.1 billion, compared with third-quarter 2013.

Strategic services include private IP, Ethernet, data center, cloud, security and managed services.

Still, overall sales in the enterprise and wholesale weakened, year over year.

New revenue streams from machine-to-machine and telematics totaled $150 million in third-quarter 2014, or more than $400 million through the first nine months of 2014, an increase of more than 40 percent year to date, from a small base.

Net income for the third quarter was $3.79 billion, which fell year-over-year from $5.58 billion.

Total revenues from the mobile segment were $21.8 billion, up seven percent from the previous year. Service revenues totaled $18.4 billion.

The mobile segment added 1.53 million retail net connections, and at the end of the third quarter the total retail connections the company had was 106.2 million.

Total revenues for the fixed network segment were $9.6 billion, up 0.8 percent from the previous year. Out of this, consumer revenues made up $3.9 billion.

Most service providers likely would be very happy to post results of the sort Verizon just did, in terms of revenue growth and profit margin, on the mobile or fixed network sides of the business.

U.S. Mobile Broadband Passes 90% Penetration

In the United States, as elsewhere, mobile Internet capability has become an important means for eliminating access divides.

We have seen this pattern before. As recently as the 1980s, policy analysts and regulators might have legitimately been concerned about how to eliminate the gap between people who could make a phone call, and those who could not.

Already, it is fairly clear that mobile devices and networks also will close the gap between people who have access to the Internet, and those who do not.

“Mobile phones are becoming more common among historically disadvantaged groups” and the “adoption gap is shrinking across demographic and socioeconomic groups,” NTIA reports.

Already, mobile Internet access has 91 percent or higher adoption, where fixed broadband has about 79 percent adoption.

In fact, use of mobile phones now is “no longer statistically significant” across racial groups, NTIA reports. In 2011, 86 percent of Whites used mobile phones, compared to 84 percent of African Americans and 83 percent of Hispanics.

In 2012, however, adoption among African Americans and Hispanics grew to 87 percent each, while adoption among Whites grew more slowly to 88 percent, NTIA says.

The point is that use of mobile broadband now is an important way people choose to use the Internet and Internet apps and services, even when fixed access is available.

Mobile broadband networks (with speeds of at least 3 Mbps download and 768 Mbps upload) are available to 97.5 percent of U.S. population as of June 30, 2013. Equally important, 90 percent of U.S. residents had access to 4G service, defined as service with download speeds of at least 6 Mbps, as of the end of 2012.

Mobile phone use among those with family incomes below $25,000 and among disabled Americans each increased by four percentage points, growing from 73 percent to 77 percent for lower-income families and from 68 percent to 72 percent for disabled residents.

Similarly, mobile phone use among seniors 65 and older grew by four percentage points between 2011 and 2012, from 68 percent to 72 percent.

NTIA’s “Exploring the Digital Nation: Embracing the Mobile Internet,” is based on a U.S. Census Bureau survey in October 2012 of more than 53,000 households, and found that U.S. residents were increasingly using their mobile devices to engage in applications that they might have previously done on a desktop or laptop computer or not at all.

Between July 2011 and October 2012, the report found big increases in mobile phone users 25 and older who used their devices to download mobile applications (22 percent to 32 percent), browse the Web (33 percent to 42 percent), check their email (33 percent to 43 percent), and use social networks (22 percent to 30 percent).

The point: in the United States as elsewhere, mobile Internet access often is the preferred way of using the Internet. Mobile access closes gaps between haves and have-nots, in part because mobile access and apps seem to represent the ways many people prefer to use the Internet.

When combined with advances in mobile Internet connectivity, some form of broadband, whether fixed or mobile, is now available to almost 99 percent of the U.S. population, the National Telecommunications and Information Administration now reports.

“Internet availability” is one problem, “Internet usage” is a separate problem. The former deals with the ability of a potential consumer to buy, the latter with the willingness to do so.

Availability is related to adoption, but not in a strictly linear way.

There remain some consumers who say they do not buy Internet access (particularly fixed access) because it is “too expensive.”

U.S. fixed network Internet access now is purchased by 72 percent of households. That leaves 28 percent of homes that do not buy, as of  October 2012.

Over a quarter of these non-users, representing over seven percent of American households, did not go online at home primarily because it was “too expensive.”

But a lack of need or interest remain the main reasons why people do not buy fixed network Internet access.

About 48 percent of non-using households gave this reason in both 2011 and 2012, NTIA reports.

Not owning a computer, or a suitable computer was the reason cited by 11 percent of homes for not buying fixed Internet access.

Libraries were important locations of Internet access across all income and educational brackets (used by 11 percent of households nationally), but especially so for unemployed householders (20 percent), households with school-age children (18 percent) and African Americans (16 percent).

The larger point is that all assessments of “Internet use” now have to contend with end user preferences, not simply take rates and availability. Increasingly, consumers choose to use one, the other, or both, in ways that suit them.

Retail price and affordability remain important, but might not be the crucial issues. Consumers need to see value in relationship to price, as is true for all products and services. Only 79 percent of respondents say they own a PC, for example.

At least historically, not using a computer was a very good reason for not buying high speed access. These days, there are other reasons to buy high speed access. In a growing number of cases, video entertainment or gaming might drive the decision, not just PC operations.

source: NTIA

Mobile phone use among rural Americans also grew by five percentage points to 85 percent between 2011 and 2012.

Mobile phone use among urban Americans increased more slowly during this same period, from 86 percent to 88 percent, matching the two percentage-point increase to 88 percent in mobile phone use among all Americans 25 and older.

Still, affluent mobile phone users and those with college degrees were more likely to engage in a range of activities on their devices than those with no high school diploma.

For example, 57 percent of mobile phone-using college graduates checked email on mobile devices, compared with 19 percent of users without a high school diploma.

And 63 percent of users with family incomes of $100,000 or more said they used their devices for email, compared with 27 percent of users with family incomes below $25,000 – a 36 percentage-point gap.

The report found that 28 percent of households still do not use broadband at home. Those households not online at home cited a lack of interest or need (48 percent) as the main reason why, followed by 29 percent who said they could not afford home Internet service.

Keep in mind that mobile broadband usage is higher than fixed network usage. In the United States, mobile broadband adoption already had reached 90 percent by 2012.

Fixed high speed access still is important. But there increasingly are different ways consumers can mix and match their Internet access choices. Mobile might be the most-important choice for many consumers.

Spectrum Futures 2014

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Do Programmers Really Believe in Streaming, or Just Business Leverage?

The latest moves by HBO, CBS, ESPN and Starz in the area of channel unbundling have been heralded as the beginning of a wave of over the top streaming moves by a wider range of networks.

Such moves, it is said, will put pressure on the distributor relationships that have anchored the linear video subscription business. And that might be precisely the point, some argue.

In that view, the whole point of launching over the top services is two fold. Such moves--irrespective of actual take rates by end users--puts more pressure on big distributors including cable TV, telco and satellite TV distributors, giving the networks more negotiating leverage when contracts are up for renewal.

For CBS, which often earns $2 per subscriber in payments from distributors, the existence of a rival $6 a month direct-to-customer service raises the threat of direct competition to linear video services.

A programming network might rightly guess that the existence of the threat makes more likely an increase in program fees paid by distributors.

At the same time, CBS is offering linear video distributors wholesale access to CBS All Access, so the streaming service can be sold directly to linear video customers. That would mirror existing business relationships, where programming is sold by networks on a wholesale basis to distributors who in turn sell at retail to end users.

Part of the reason Time Warner is launching a standalone HBO product is to gain more leverage against the cable companies that it feels do not do enough to promote HBO as a premium channel, some argue.

Some cable systems have as few as 14 percent of their subscribers taking HBO, while others have as much as 44 percent take rates.

So whatever benefits consumers might reap, there is at least some element of jostling within the ecosystem for business advantage, not necessarily some newfound belief that streaming’s time has come.

Spectrum Futures 2014

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"Fast Follower" Strategy Might Not Work in Video Streaming Business

As a rule, major transitions in technology and revenue models are slower to develop than most predict.

In other words, the amount of change tends to be overestimated in the near term, and underestimated in the long term.

That has direct implications for would-be suppliers. Overestimating near term demand means some firms will enter too early, and fail before the opportunity can be realized.

Others simply will over-invest in promotion, before conceivable sales justify that level of investment.

Other potential constants will wait too long to enter the market, and fail to gain a foothold at all.

In fact, some common business strategies, such as the “fast follower” model, will fail, in part because brand-new markets, after an inflection point, are created so fast that there is no time to use that strategy.

In fact, that illustrates the tension between the “first to market” and “fast follower” strategies overall. The “first to market” principle suggests that firms entering a new market need to move quickly, so they are in position to dominate the new market.

Others argue that, generally speaking, a “fast follower” strategy works better, and that the benefits of being a first mover are over-rated.

That might not be true for every market, and almost certainly will not be the case for over the top video. The reason is that big new markets often develop so quickly, once an inflection point is reached, that contestants not already in the market do not have time to get in.

So maybe, somewhere between “first mover” and “fast follower” is a position that might be termed “early mover,” where a contestant perhaps is not first, but is early into a developing market, without waiting for the market to develop to the point where a “fast follower” strategy works.

The other issue is what qualifies as “fast.” Some firms, especially those facing disruption of their core legacy businesses, simply wait too long to respond, and might be called “lagging followers.”

Others who might say they are “fast followers” wait until they are fairly certain a sizable market exists before jumping in. That can make them “faster, but not fast enough” contestants, if the market goes from a small number of early adopters to mass market too quickly.  

Such decisions are tough because inflection points, where adoption of any new product dramatically increases, are tough to spot, in advance.

In the consumer electronics industry, the inflection point often occurs when the innovation is adopted by about 10 percent of homes. As slow as adoption might have been before the inflection point, adoption often is quite rapid after the inflection point.

Seven years after the iPhone was launched, 70 percent of the US population is using smartphones.

Smartphones existed before the iPhone so the category is older than seven years but as far as adoption goes this is nearly the fastest ever.

The CD Player reached 55 percent adoption in seven years and the Boom Box about 62 percent. If measuring the period between nine percent penetration and 90 percent, Asymco estimates a nine-year period between smartphone inflection point and saturation.

So if market saturation is reached in nine years, one might reason that a firm has to be ready to scale up in the first years of a new market where global distribution and manufacturing are required.

The reason is simply that the market will be saturated in just nine years. Any firm that requires four years to build a global capability will already have missed half the potential market before it is ready to compete fully.

More to the point, it took only six years for smartphone penetration to grow from 10 percent to 70 percent in the U.S. market.

Even competitors already in the smartphone market were not assured of success. “Late” in this case was tantamount to “never.”

Something like that could happen in the over the top video streaming market. Consider the effort, time and money Netflix is spending to build a more-global capability, as much as it dominates the U.S. market.

Netflix, which operates in about 40 countries, has to spend money to add local programming in many of those countries, and local content really does not scale. And Netflix points out that 80 percent of the potential market lies outside the United States.

Whether you consider Netflix a first mover or a fast follower, it is in the market at a point where the broader inflection point--a shift of most major channels to over the top delivery--has not yet occurred.  

The larger point is that the inflection point is approaching. Would-be leaders in the video streaming market essentially need to be in the market, or get into the market soon, to ensure they are in position once the inflection point is reached.

The National Basketball Association and ESPN are planning a new online video service that would stream regular season games, apparently on an over the top basis, without requiring purchase of a linear video subscription.

The contract rights for such a move have been approved by the NBA, which means we might eventually see a direct-to-consumer NBA package similar in revenue model to

HBO's over the top streaming service and the CBS All Access over the top streaming service.

Starz likewise is launching an over the top video streaming service for Asia, Africa, the Middle East and Latin America.

It seems only a matter of time before other channels and networks also decide it is time to launch their own OTT services as well.

You might wonder why the inflection point, and which firms are in the market when that happens, matters.

The “fast follower” strategy might not to work.

In brand-new markets, adoption grows so quickly after the inflection point that there simply is not time for a new contestant to gear up to meet the demand.

If a firm has not already positioned in the new market space, it often takes too long to respond to the new market’s sudden emergence.

And that means market leadership goes to one or more firms that already have invested in the new space, and are poised to scale up operations quickly once a mass market develops.

Once the inflection point is reached, contestants might have only six to nine years before most of the market is taken by one of the suppliers.

FCC Looks at 24 GHz for Mobile Communications

The Federal Communications Commission is looking at whether 24 GHz spectrum can be released for mobile communications applications.

The Notice of Inquiry occurs at the same time that Google has asked for permission to test communications across different high-frequency spectrum bands, including millimeter-wave systems operating in the 71 GHz to 76 GHz band and the 81 GHz to 86 GHz range.

“Years ago, engineers and policymakers debated the feasibility and practicality of using spectrum above 2 GHz for mobile wireless services,” FCC Chairman Tom Wheeler noted.

More recently, 3 GHz has been seen as the highest frequency that could be used to support mobile operations.

The difference now is signal processing that allows practical communications at frequencies traditionally unusable. But cheaper signal processing now means it is possible to overcome propagation issues that have prevented use of millimeter waves for mobile or fixed communications apps.

So there now is optimism that frequencies above 24 GHz could be used to support mobile service, a previously-unthinkable option.

This matters for obvious reasons. More spectrum is needed. Also, the basic trade off--capacity and distance are inversely related--means very-high capacity is possible at millimeter wave frequencies, even if distance is limited.

Physics dictates the higher bandwidth possible at millimeter wave frequencies, even if coverage is more limited than at frequencies below 2GHz. Despite digital coding, potential bandwidth still is dictated by the number of oscillations a radio wave makes in a single unit of time.

In other words, at the peak of the cycle, coders might represent a positive bit, at the trough, a negative bit. So the total number of possible symbols depends on the frequency, or number of instances in a given unit of time that the waveform crosses between high and low states.

As the name implies, higher frequency signals have many more oscillations than lower frequency signals. Hence, more potential bandwidth, using any particular coding and modulation scheme.

The trade off is the effective distances at which such waves are useful for mobile or fixed communications, as millimeter waves are attenuated by water and, in some cases, oxygen. The trick is to use frequencies where attenuation is relatively lower, as is the case for optical communications as well.

Still, it seems highly probable that new frequencies, best suited for use in dense population areas, will be released for service, at some point.

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LTE Users Consume 5X as Much Video as 3G Users

Long Term Evolution 4G networks have a rather predictable impact on mobile data consumption: the amount of data consumed each month grows, compared to data consumption on 3G networks.

In fact, some studies also suggest that access to LTE networks also increases use of Wi-Fi.

A study of Android smartphone users by Devicescape, conducted over six months, found that 4G LTE users consumption of Wi-Fi and mobile data doubled, compared to data consumed by 3G users.

On average, 4G smartphone users consume 2.1 times more mobile data per month and twice as much Wi-Fi than their 3G counterparts.

This is due to the fact that 4G customers use their mobile device about 40 percent to 50 percent more than 3G users and consume richer content. Also, as a practical matter, one minute of use of LTE results in more consumption than one minute of 3G usage simply because more data can be transferred in the same amount of time.

A September 2014 report by Citrix found that video accounted for 52 percent of all mobile traffic, on both 4G and 3G networks.

But 4G users were 1.5 times as many requests for video over 4G LTE networks than on 3G networks, and those requests resulted in five times as much video data traffic on 4G compared with 3G.