EC Officials Now Telecom Policy Must Take Service Provider Profit into Account

In theory, it is possible to create regulatory frameworks that simultaneously promote both competition and expedited investment in next generation networks. In practice, almost any set of policies will be criticized, and often sharply, by some contestants whose business interests the framework does not help.

One recent difference in thinking is noteworthy. U.S. regulators, working to implement the Telecommunications Act of 1996, which intended to promote competition in the U.S. telecom market, initially crafted a set of rules very similar to European Community rules, namely widespread and mandatory wholesale access, at steep discounts.

Though it never is formally said, the test of any new “pro-competition” policy in a legacy telecom market is to cause former incumbent market share to fall. If you think about key performance indicators, that is the key KPI.

A policy “works” when the incumbent loses substantial market share.

But there was a key difference between the U.S. set of facts on the ground and the equivalent EC set of facts. In most EC nations, there was but one facilities-based dominant supplier.

In the U.S. market, there were two broadband providers--the telco and the cable TV operator. Eventually, to spur faster investment, not just competition, U.S. regulators decided to rely on facilities-based competition, not mandatory wholesale access, especially for new optical fiber facilities.

Non-facilities-based competitors were not happy about the change, as the switch in policy favored the cable TV companies, who had facilities in place.

But some would say the switch to an emphasis on “facilities-based competition” has succeeded, as per-capita investment in U.S. access networks has been substantially higher than in the EC region; about twice as high, by some estimates.

It now appears that a decisive change in thinking has happened. EC authorities are worried about lagging investment in next generation networks, and are prepared to take steps to promote investment, not just competition.

The other change is that cable TV operators have begun to create a new facilities-based competitor to the former telco incumbents in many EC nations, creating a feasible foundation for facilities-based competition.

The larger point is that policies matter. Both competition and investment in next generation networks are important. EC regulators now are thinking about how to promote investment, not just promote competition.

That remains a valid framework in the U.S. market as well. In principle, policymakers are right to think about policies that encourage innovation and investment in Internet-delivered apps and services.

But a primary charge for U.S. telecom policy officials is precisely what EC officials now see as important: promoting robust investment and sustainable competition for Internet and other access services.

At some point, policies will have to be evaluated not only for their pro-competition impact, but also from the impact on sustainable and high rates of investment in core access networks. As the EC experience illustrates, one cannot indefinitely favor “competition” without at some point being faced with the challenge of negative incentives to invest.

If you have followed European telecommunications market for any time, you might well agree that a major shift in regulatory thinking has happened in the European Community, which for decades has been more concerned about promoting competition than promoting investment in next generation networks.

Specifically, regulators have encouraged affordable wholesale access to the former-monopoly telecom networks, in a variety of ways. It is hard to argue with the results.

Incumbent market share across the EU-27 in 2010 was 38 percent. In other words, competitors had gained 62 percent share of the fixed network market.

But that degree of competition has come at a price. The EU is in danger of failing to make its announced goal of 30 Mbps by 2020, a target that originally was set before the launch of Google Fiber, which has changed market dynamics and investment in the U.S. market, for example.

So regulators should ease up on IT and telecommunications companies to allow them to compete with rivals around the world, said Guenther Oettinger, new European Union digital economy commissioner.

"So far, we have ensured that consumers benefit from the liberalization of telecoms markets,” Oettinger said.  From now on our actions must be more geared more toward allowing companies to make fair profits."

That represents a huge change in thinking. The main point is not that the EU has decided to take a “North American” or “U.S.” approach. Instead, the big shift is the recognition that promoting competition and promoting investment can become rivalrous and mutually-exclusive goals.

The way competition is promoted can lead to greater investment, or less investment. As the former incumbents have argued for years, mandating wholesale access at rates favorable to wholesale customers--while effectively promoting competition--has created disincentives for investment in upgraded next generation networks.

Though the financial cost and risk is borne by the firm building the networks, wholesale customers can reap the advantages without any capital investment in the core network, at all, though they might face the requirement, or have the option, of investing in some access network elements.

The shift to thinking about policies to incentivize investment in access networks is a huge shift in thinking.

Starbucks Customers Use Mobile Payments 4 Orders of Magnitude More Often

In 2014, possibly $1.6 billion worth of in-store U.S. retailer purchases will be handled by mobile payments, eMarketer estimates.

At Starbucks, mobile payments account for about 15 percent of purchases. If Starbucks processed at least five million transactions a week early in 2014, some estimate that Starbucks could have processed $1 billion in transactions by the end of 2014.

If so, Starbucks might well represent 63 percent of all in-store mobile payments. That might seem high. It might be.

Everything depends on the assumptions one makes about the volume of 2014 proximity payments in the U.S. market.

Some estimate U.S. mobile payments transaction volume as high as $162 billion in 2014. Others estimate U.S. mobile payments using proximity at less than $4 billion in 2014.

If the former is correct, Starbucks mobile payments represent only a bit more than half of one percent of U.S. retail transactions. That strikes us as too low.

At the latter figure for total U.S. proximity transactions, Starbucks represents about 27 percent of all transactions, which to some might seem more a reflection of reality, if still possibly high.

Still, everything hinges on one’s estimates of total proximity payments, which Javelin Strategy has estimated at less than $1 billion in 2014.

About the only safe statement is that Starbucks customers use mobile payment at rates four orders of magnitude greater than all retail in-store retail customers.

Will Mobile Operators Lose $14 Billion in 2014 Revenue to OTT?

source: TeleGeography

Mobile service providers will lose some $14 billion in revenue to over the top alternatives in 2014, according to Juniper Research. about 26 percent more lost revenue than in 2013, Juniper Research says.

To be sure, such estimates are complicated, as researchers have to model revenue volumes “as if” competitive or replacement solutions did not exist, compare those hypothetical amounts to actual revenues and then estimate the amount of potential revenue lost because consumers have shifted to alternatives.

The report suggests that in a number of markets, including Italy, Spain and the United Kingdom, operator mobile voice revenues had fallen to less than 60 percent of their value five years ago.

Juniper Research argues that a combination of instant messaging, VoIP and social media substitution was primarily responsible.

The report identifies more than $66 billion in revenue opportunities over the next 5 years, highlighting opportunities in areas such as M2M (machine-to-machine), mobile money, direct carrier billing and ‘Big Data’ analytics.

The resulting revenues could more than offset the decline from core service revenues on an annual basis by 2018.

http://www.juniperresearch.com/research/Mobile-Operator-Business-Models

The analysis is similar to the challenge of estimating how much voice usage has been displaced by email and text messaging, social posts or use of free or low-cost VoIP.

It is not unreasonable to assume this has happened, as it is not unreasonable to assume that email and document scanning have displaced facsimile transmission.

But some are skeptical of the “lost revenue” claims, at least in degree. Portio Research, for example, has questioned the actual amount of lost revenue.

While in some markets over the top messaging presumably does cannibalize significant text messaging revenue, in other markets, where mobile Internet access is not widespread, dramatic growth of mobile adoption means more text messaging revenue is being created.

Juniper Research analysts would not disagree, in that sense.

“During 2012 and 2013 we have seen many reports that operators are losing $20 billion to $30 billion in SMS revenue to OTT messaging apps,” said Karl Whitfield, a director at Portio Research. “We see reports that OTT traffic will be double that of SMS by the end of 2013,” he says. “This is wrong on both counts.”

It may be true that SMS revenues are levelling off and that OTT is on the rise, but SMS is still generating revenues of $15.3 million per hour, 24/7, that’s a massive $133.8 billion in 2013, Whitfield says.

Over the top apps generate about $3 million an hour, by way of comparison.

So even if all OTT messaging displaces text messaging--and that almost certainly is not completely the case--the lost revenue might be estimated as somewhere between $3 million per hour (OTT revenues) and a figure higher than $3 million per hour that represents the lost revenue that otherwise would have used the SMS format.

The analogy is the lost revenue from Skype. Much of the Skype usage is incremental, and would not have happened, were public network calling, messaging and video conferencing the only alternative.

Skype, in other words, creates new usage, rather than cannibalizing traditional forms of communication, much of the time.

Still, one way of estimating the impact is to compare actual revenues with former trendlines. as TeleGeography has done, comparing annual growth of international minutes of use, by adding Skype volume and carrier traffic volume, for example.

Global OTT and P2P Messaging Traffic (Billions)

	2010	2011	2012	2013F	2014F	2015F	2016F	2017F
P2P SMS	5,812	6,546	6,623	6,687	6,654	6,522	6,304	5,931
OTT Messaging	1,494	3,840	6,774	10,452	14,970	20,437	26,359	32,141

source: Portio Research

Verizon, Comcast Show 4% Revenue Growth in 3Q 2014; AT&T 2.5%

In a quarter with a lot of moving parts (shift in the way AT&T accounts for device sales, Leap Wireless and Alltel revenue and costs), AT&T reported third quarter 2014 revenues up 2.5 percent versus the year-earlier period.

Verizon 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.

Comcast has a different mix of product lines, including theme parks, film production, broadcast TV operations and programming networks.

So although Comcast reported third quarter 2014 revenue that grew about four percent, in line with Verizon and AT&T, Comcast saw higher rates of growth from its broadcast TV segment (7.7 percent growth), a loss in filmed entertainment (-15.2 percent) and  theme park segment growth of 18.7 percent.

In the cable communications segment, video revenue grew one percent, while high speed Internet access grew 9.6 percent. Voice revenues declined -0.5 percent while business services grew 21 percent.

In tandem with Verizon, Comcast reported growth in its business customer segment, almost twice as much overall revenue growth as AT&T reported. As always, segment results are key.

Total AT&T mobile segment revenues, which include equipment sales, were up 4.9 percent year over year to $18.3 billion.

Total third-quarter fixed segment revenues were $14.6 billion, down 0.4 percent versus the year-earlier quarter and down slightly versus the second quarter of 2014.

Mobile service revenues were essentially flat in the third quarter at $15.4 billion, and wireless equipment revenues increased 44.3 percent to $2.9 billion as more customers chose equipment installment plans versus subsidized devices.

Third-quarter mobile operating expenses totaled $13.8 billion, up 7.5 percent versus the year-earlier quarter due to higher equipment costs, network systems expenses and marketing costs, largely attributable to the company’s acquisition of Leap Wireless, and wireless operating income was $4.5 billion, down 2.3 percent year over year.

Revenues from residential customers totaled $5.7 billion, an increase of three percent compared to the third quarter a year ago.

U-verse, which includes high speed Internet, TV and Voice over IP, now represents 64 percent of fixed segment consumer revenues, up from 54 percent in the year-earlier quarter. Consumer U-verse revenues grew 23.2 percent year over year.

As was the case at Verizon, total revenues from business customers declined. At AT&T, business customer revenues were $8.7 billion, down two percent year over year and stable sequentially.

As was the case for Verizon Communications, declines in AT&T business customer legacy products were partially offset by continued double-digit growth in strategic business services (VPNs, Ethernet, cloud, hosting, IP conferencing, VoIP, MIS over Ethernet, U-verse and security services).

Strategic business services grew 14.3 percent versus the year-earlier quarter.

The bottom line for AT&T includes continued revenue growth overall, with gains lead by the mobile segment, and by consumer services within the fixed network segment, as also was the case at Verizon in the third quarter.

Voice was an issue for all three companies, with growth driven by high speed access.

28 Billion IoT Devices to be Connected?

One reason mobile service providers particularly are interested in the "Internet of Things" and machine-to-machine apps is the sheer number of devices that will require communications capability.

Where fixed network connections are a roughly one billion size existing market, mobile is a six billion existing market and IoT might be a 28 billion devices market, in the 2020s, according to equity analysts at Goldman Sachs. 

Even if average revenue per IoT device is, for example, about $5 a month, where a phone might represent $40 to $80 a month in revenue, the sheer number of connected IoT devices creates a substantial connectivity market.

If mobile service providers are able to create a role in other parts of the IoT ecosystem (acquiring roles in the application and service areas, for example), the upside could be quite substantial. 

Why We Need Three Orders of Magnitude More Bandwidth

Nobody would be surprised to learn that over the top video streaming has become a mainstream activity, and that the amount of streaming is increasing.

Most would not be too surprised to learn that video--depending on resolution--requires two orders of magnitude, or perhaps three times more bandwidth than other apps.

So a prediction that some mobile markets might well require 1,000 times more bandwidth (three orders of magnitude) over a relatively short time frame (perhaps a decade) requires only a few assumptions.

One assumes that people routinely will use smartphones with data plans. And one assumes that a growing percentage of total usage will consist of video.

At a high level, use of video automatically drives a two order of magnitude increase in bandwidth consumption, for each minute of usage.

Add in the impact of more smartphone users, as a percentage of total, plus higher-resolution video formats, and the need for 1,000 times more capacity (three orders of magnitude) is a prudent assumption, not a wild extrapolation.

The issue is how it might be possible to supply 1,000 times more bandwidth, and where this is more feasible, on a sustainable basis.

The reason is that most of the growth will have to come from small cell network architectures, even if one assumes a tripling of bandwidth and perhaps a tripling of device performance (antennas, coding algorithms, modulation techniques).

And small cells are most useful in dense urban areas, less useful to impractical in rural areas. That is one reason some believe new ways to release spectrum for mobile and untethered communications is so important.

Some of the available tools will have limited utility in rural or hard-to-reach areas.

source: Qualcomm

Will Shift to Postpaid Shrink MVNO Market?

The line separating postpaid and prepaid mobile services is getting a bit more porous, as costs for single-line postpaid service are starting, in many cases, to approach the recurring cost of a prepaid account.

“If you look at single line pricing, those price points are pretty darn close to what a prepaid customer would pay on prepaid,” said Fran Shammo, Verizon Communications CFO.

The significant difference, some might say, is not just the matter of whether service is paid for in advance, or after service is provided.

“The hurdle is there is a credit check,” said Shammo.

Sprint reportedly has revised its credit standards, allowing more customers to qualify for postpaid accounts, instead of buying prepaid service. That shift in demand is relatively recent, beginning in 2013.

But at least in the single-line segment of the market, it appears as though postpaid now stands to benefit as more former prepaid customers are able to qualify for a postpaid plan.

That should have implications for many providers of prepaid service, at least in the U.S. market, especially mobile virtual network operators (MVNOs) that often specialize in prepaid service.

From 2007 to 2010, North American prepaid grew from about eight percent of total subscriptions to about 12 percent. But changing credit standards and retail price points could put a brake on MVNO subscriber growth.

In fact, prepaid growth had been substantial from 2000 to 2010, though adoption has leveled off since then.

Of course, prepaid is more important for T-Mobile US, AT&T and Sprint than it is for Verizon. Verizon Wireless has only around five percent of its total connections base on prepaid deals, while prepaid accounts for more than 30 percent of connections at AT&T, Sprint and T-Mobile US, according to the GSMA.

The four biggest mobile service providers appear set to add a net 4.3 million postpaid phone subscribers in 2014, according to UBS estimates, compared to just 737,000 in 2013.

Conversely, the U.S. mobile industry saw a big drop in prepaid subscriber additions in 2013 to 1.2 million from 4.5 million the previous year, for example.

The industry should add only 959,000 prepaid subscribers in 2014, UBS says. There were some 74 million prepaid subscribers in the U.S. mobile market, compared to 228 million postpaid subscribers.

Fran Shammo, Verizon Communications CFO, confirmed the trend during the Verizon Communications third quarter of 2014 earnings call.

Noting that during the first nine months of 2014 Verizon prepaid net adds were only 5000 compared with 274,000 in 2013, Shammo added that “we believe that price sensitive prepaid customers are moving to the postpaid market.”

Initially left unsaid was a judgment about whether that means Verizon prepaid customers are moving up to become Verizon postpaid customers, or whether potential prepaid customers are choosing to become postpaid customers on other networks.

Shammo answered that question during the question-and-answer portion of the call. “We see a shift from prepaid to postpaid--not necessarily within our base--because of high quality and strict requirements we have from a credit perspective,” Shammo said.

The latter seems likely, given Verizon’s positioning in the U.S. mobile market. “Growth in wireless revenue and profitability continues to be driven by our high quality retail postpaid customer base,” Shammo said.

In other words, Verizon will continue to focus on the “premium provider” segment of the market.

And that almost certainly means Verizon will continue to shy away from the prepaid segment, and value end of the single-line segment as well.