When Does Revenue Per Megabyte Matter?

As a rule, mobile and fixed network Internet service providers must care about revenue per megabyte and cost to supply megabytes, since revenue growth now often is driven by Internet services, and Internet services dominate overall network bandwidth issues.

But mobile now is a multi-product business, and each type of key app has distinct revenue per megabyte profile.

The price of various telecom services varies by as much as four orders of magnitude, per megabyte, with text messaging having the highest profit margin, voice having a high to moderate profit margin, video entertainment having moderate margins, and Internet access having widely-varying margin.

Of course, that is product profit margin, not “profit per megabyte.”

Does that matter? Not in some cases. Text messaging and voice consume such little bandwidth that profit per megabyte is not an issue, though other concerns--such as revenue per unit or unit volume--clearly are issues.

Buckets of mobile data usage likely are not particularly troublesome. So long as the service provider understands its costs, prices reasonably in relation to costs and consumers continue to believe the price-value relationship is reasonable, profit margin should not be a particular issue.

The issue is what happens as consumption continues to grow rapidly and consumption is related in some direct way to cost. And then there is Moore’s Law, and its analogies in the bandwidth business.

Long Term Evolution fourth generation mobile networks are desired for any number of reasons, but among them is network efficiency, often said to be at least 30 percent more efficient at supplying megabytes, in addition to providing higher latency performance.

Some might argue LTE is much more spectrum efficient than that, perhaps as much an an order of magnitude more efficient. Others say LTE is a rather minimally more efficient network .

It might yet be reasonable to argue that more mobile capacity will be gained by use of multiple techniques, though, including new spectrum allocations, spectrum sharing, small cell architectures, modulation and air interface changes, offload, retail pricing and packaging and possibly, in some cases, device or app performance improvements.

One study has shown that some  mobile apps consume significantly more data--seven to 21 times more--than the same content accessed using a browser.  It is conceivable more efficiency could be wrung out of app performance.

Still, the demand side changes will be key. If consumers increasingly rely on their Internet connections to consume video, the amount of data consumed will skyrocket, growing a minimum of two to three orders of magnitude in perhaps a decade. If consumption is a product purchased “by the pound,” that will pose a key challenge.

Consumers are unlikely to spend two to three orders of magnitude more money on their Internet access services.

Unlimited pricing of Internet access is where the clear trouble lies, since the service provider easily could find consumers consuming vastly more data than is matched by revenue, putting huge pressure on profit margins.

The revenue per bit problem is easy to describe in another way, in the fixed network domain.

Assume a fixed network ISP sells a triple-play package for a $100 a month retail price, where each component--voice, Internet access and entertainment video--is priced equally (an implied price of $33 for each component).

How much bandwidth is required to earn those $33 revenue components? Almost too little to measure in the case of voice; gigabytes for Internet content consumption and possibly scores of gigabytes for video.

So, by some estimates, where voice might earn 35 cents per megabyte, revenue per Internet app might generate a few cents per megabyte. Recall that actual revenue per megabyte is statistical: it hinges on how much a user consumes after paying a flat fee for the right to use bandwidth.

There are potential analogies in the mobile segment as well.

McKinsey analysts have argued in the past that a 3G network costs about one U.S. cent per megabyte. The problem, in many developing markets, is that revenue could drop to as little as 0.2 cents to 0.4 cents per megabyte, for any mobile Internet usage.

That implies a strategic need to reduce mobile Internet costs to as little as 0.1 cent per megabyte, or an order of magnitude. Tellabs similarly has warned about revenues per bit dipping below cost per megabyte, leading to an "end of profit" for the mobile business.

But some apps arguably require very low prices per megabyte to be viable products, entertainment video being the best example. In such cases, low revenue per megabyte, or low profit margin per megabyte, is a precondition for offering or supporting the product.

So does gross revenue per megabyte matter? Yes, but less than gross revenue per account, device or line. It is doubtful anybody really cares about voice revenue per megabyte. Revenue per device, yes; revenue per account, yes; revenue per user, yes.

Is profit per megabyte important? Yes, especially for retail plans that feature unlimited usage.

Service providers that have moved to some metered form of usage, where consumption and price are somewhat related, might not have to worry about profit margin per megabyte.  

When revenue per megabyte is very high, application bandwidth is very low, customer demand poses few, if any, peak load issues and marginal cost is negligible. revenue per megabyte is not much of an issue.

When does gross revenue per megabyte matter quite a lot? When revenue per megabyte is low, costs of supplying capacity are high, there are serious peak load issues, marginal cost is somewhat high and unlimited usage is the charging method, revenue per megabyte is an issue.

Also, there are instances where low profit margin actually is the desired outcome. Where the alternative is losing an account, low profit margin might be the preferred problem.

In markets where people are using voice and text messaging less than they used to, the telecom industry’s biggest problem is declining demand--not just profit margin. In such cases, lower revenue per service (especially when incremental bandwidth and other costs are quite low) is better than losing an account, since the incremental revenue arguably is more valuable than the actual profit margin.

Also, it can be very hard to determine what profit margins actually will be, in advance.

In many markets, such as the United States, mobile service now comes with truly unlimited domestic text messaging and voice. Actual profit margin depends on how much people use those services. No matter how low the retail price, if a customer uses very little of the resource (sends and receives few text messages, places and receives few calls), actual price per message, or price per call, can be quite high.

The same is true for many other services, including high speed access. Actual profit is statistical. If a consumer pays $20 a month, and talks 50 minutes, the price per minute is 40 cents. At 300 minutes, the price per minute is about seven cents.

And even if some do use the services at higher rates, the volume does not stress the network, and marginal costs are quite low.

To be sure, there are no telecom products other than content services that show an upward-sloping revenue trend.

Aggregate volume is growing but price per unit has been dropping, for virtually all communication services and products.

There is a key observation, though. So long as telecom services are bought “by the pound,” profit margin should be a controllable issue, So revenue per megabyte always matters, at a high level.

At a more granular level, sometimes low margins are a precondition for doing business, though.

Indian State Proposes Public Broadband Company Serving 12 Million Households

The state of Andhra Pradesh in India has proposed creation of a new public company to provide high speed access connections with peak speed of 15 Mbps to twelve million households for as low as Rs 150/month (US$2.40) in the first stage of its about Rs 5,000-crore optical fiber project.

That proposed price is about an order of magnitude lower than retail prices of Internet service providers, which tend to charge about Rs 1,100 per month for speeds in that range.

Andhra Pradesh Fiber Grid Corporation, a public company, aims to provide optical fiber network to villages and remote areas as part of the National Optical Fiber Network project, which is a part of Prime Minister Narendra Modi’s Digital India Initiative.

The NOFN has promised to connect 20,000 Indian villages with optical fiber. As planned, the new network will install 700,000 km of optical fiber nationwide.

Andhra Pradesh has proposed to execute the project at cost of Rs 4,913 crore in five years. The NOFN has earmarked Rs 1,940 crore for Andrhra Pradesh.

Full Video Cord Cutting Remains Relatively Rare, So Far

Just 55 percent of Millennials use TVs as their primary video entertainment viewing platform, according to a research study sponsored by NATPE and Consumer Electronics Association.

On the other hand, only about 2.7 percent of U.S. households (across every age group) actually do not buy a linear video subscription service, but do buy high speed access, considered to be an indication those households are reliant solely on streaming video services.

As you might expect, Millennials (in this case defined as those 13 to 34) are significantly more likely to consume full-length TV programs from a streaming source (84 percent streamed in the past six months) than live TV programming at its original air time (54 percent), or recorded content from a DVR (33 percent).

About half of Millennials say they watch TV programming on a laptop, and for 19 percent, it’s their preferred TV viewing screen.  About 28 percent watch television on a tablet and 22 percent on a smartphone.  

While 90 percent of all TV viewers say they watch on a television set, about 85 percent of Millennials say they do so. But some would argue full video cord cutting remains relatively rare.

But challenges keep coming.

Dish Network, at long last, is launching a $20-a-month TV streaming service that notably includes ESPN and 11 other channels.

Sling TV is the first stand-alone streaming service that does not require a prior subscription to a linear video service, and importantly will include ESPN. That matters because, up to this point, live sports programming has been known as a “firewall” against greater cord cutting. Pre-recorded video is available from the major streaming services and from some of the networks directly.

But live sports have been unavailable in a streaming service. So ESPN will provide a major test of live sports exclusivity on linear subscription services, and the ability of live sports to glue subscribers to linear video.

Sling TV will offer live feeds of sports, news and scripted shows on TVs, computers and mobile devices, with programming  from ESPN, ESPN2, TNT, ABC Family, Food Network, HGTV and Travel Channel as part of the 12-channel package.

But, so far, no broadcast TV networks or the most-watched cable news channel, Fox News, are part of the package.

The $20 Sling TV base package features add-on packs with additional kids and news programming, available for $5 each.

Most observers would say a package including the major local TV networks plus sports and perhaps HBO is the likeliest candidate for a winning, but stripped-down, streaming package. So the Sling TV will not be a full test of that thesis.

So far, linear video, as a business, has only plateaued, and begun what looks like the declining part of its life cycle. The real shift is yet to arrive.

Austrian Mobile Prices Rise Significantly After Consolidation

As much as consumers legitimately enjoy low costs, or ultra-low costs, for products they buy, it sometime is possible that prices are too low. One might argue that prices are too low when they imperil the ability of an industry to keep supplying better versions of products consumers really want.

Ironically, significant price increases in mobile markets that have recently consolidated from four to three suppliers might be instances where substantially-higher prices are needed to allow an industry to keep investing.

Some might point to similar strategic issues in the energy industry. Ironically, low oil prices suppress the development of alternative energy supplies and demand for all-electric or hybrid vehicles.

Global oil prices that are too low suppress the development of domestic energy supplies. So, sometimes, price increases arguably are a good thing for consumers, long term. Consider the Austrian mobile market, long among the most-competitive in Europe.

Tariffs for mobile service in Austria grew substantially in 2014, according to a report by the Arbeiterkammer Wien, the Vienna Chamber of Labor. The analysis deals only with posted tariffs, and does not appear to analyze which plans people buy most. But posted prices are higher.  

Retail plan costs increased 29 percent to 78 percent from September 2013 to December 2014, the group says. Of course, some would note that Austria has had ultra-competitive prices that are unsustainable over the long term.  

The average price rise for voice-only prepaid subscriber information modules (accounts) was 29 percent. The average increase in postpaid voice-only contract plans was 56 percent.

Prices for mobile Internet plans for frequent users grew 58 percent. Higher mobile Internet access prices in Austria are a result of the market consolidation, some argue, and other studies also show a 60 percent increase in mobile Internet plan prices in 2013 in the Austrian market.

Some argue the Austrian market remains highly competitive, even after the increases, where it earlier had been “ultra competitive.”  

Also, some argue it is the presence of an attacker dedicated to competing on price that matters most, not whether the number of leading providers is three or four.

Tariffs for voice and text, but no mobile Internet service grew 78 percent, according to Arbeiterkammer Wien. In certain cases, rates had even doubled, the group said.

Some will say the price increases are a direct result of consolidation of the Austrian mobile market to three facilities-based providers, from four. Others argue prices will be better, longer term, as investments are made in facilities and spectrum.

Consumers will benefit from the consolidation of providers from four to three, a study prepared for the GSMA suggests. Other studies suggest consumer prices will increase when a market consolidates from four to three operators.

But as many as 16 new mobile virtual network operators are set to enter the Austrian market, potentially promising more pricing changes.

The Arbeiterkammer Wien said that registration fees have risen by about 40 percent at A1 Austria Telekom, T-Mobile Austria and 3 Austria.

Prices have been falling in key parts of Europe’s mobile industry for some time, and also revenue, so some might argue a sustainable industry requires higher prices. That is never a popular idea.

With Shared, Licensed, Unlicensed Spectrum, Who will Not be Able to Become a "Mobile" Service Provider?

Since 2010, there has been movement towards possibly freeing up 500 MHz of spectrum now primarily under the control of federal government agencies for potential use by private sector users on shared basis.

Such shared spectrum access would allow existing licensees to retain primary use of their licensed frequencies, but also allow commercial users access when primary licensees do not need the capacity.

Such spectrum sharing approaches are the newest idea in spectrum allocation policies that primarily have relied on exclusive licenses, and partly on unlicensed approaches.

The big innovation is the concept that a shared access system will deliver results faster, at lower cost, than clearing spectrum, moving  licensed users to new bands, and then allowing new uses of cleared spectrum.

Current thinking is that current licensed users would have priority, while other users could use spectrum when it was available and not needed by primary licensees. Among the ideas for allowing such access is that perhaps new users could pay for secondary rights, while fully non-licensed use would be possible for users who do not have any quality of service guarantees.

At the moment, the National Telecommunications and Information Administration (NTIA) is working on a plan that would make about 100 megahertz of spectrum available for shared small cell use in the 3.5 GHz band currently used primarily for military radar systems.

NTIA also is evaluating additional unlicensed use in the 5 GHz band.

The plan has not been universally well received. Traditional telecom, cable TV and satellite firms prefer the exclusive licensee approach, for reasons of quality of service control, and, some would say, for reasons of promoting communications spectrum scarcity.

Some have noted that signal propagation issues in the 3.5-GHz and other similar bands would likely mean that shared spectrum is most helpful in urban areas, where small cells are practical.

But that might suit some mobile service providers just fine. Illiad’s Free Mobile relies on Wi-Fi access where it can, as a way of reducing the cost of sourcing capacity from other mobile operators. Republic Wireless and Scratch Wireless do the same.

Comcast is deploying Wi-Fi hotspots as part of its consumer fixed network broadband service, in an effort to create a huge footprint of potential public Wi-Fi hotspots that likewise could be used to reduce the cost of creating a mobile virtual network operator operation.

Other ISPs with fixed network assets, including Google Fiber, might be able to use such shared spectrum assets in similar ways, to reduce the cost of mobile service that relies on wholesale-sourced facilities.

Some have argued that a separate Google initiative to supply Wi-Fi gear for businesses, and centrally manage all the routers, could play an infrastructure role as well.

The point is that new ways of combining licensed and unlicensed; exclusive and shared; carrier, enterprise and consumer network assets are coming. All of that is going to create new possibilities for varieties of Internet access and mobile service.

That would be the fulfillment of a hope that has been raised for decades, namely that it will be possible for any entity to become a mobile service provider. 

In an earlier iteration, sports brands (EXPN), family brands (Disney), electronics brands (Best Buy) and others have experimented with custom mobile service provider brands. In other markets, supermarkets have considered offering their own service, and Walmart already does so.

With many more federated public Wi-fi networks, much more spectrum and new contenders with fixed network assets, the possibilities will reach a new level, and lower retail price points than possible before.

If most mobile device use occurs in the home, then some believe new mobile providers such as Comcast could operate as MVNOs with 30 percent lower retail costs.

AT&T Introduces "Rollover Data"

AT&T Mobility has introduced "Rollover Data," a program that allows customers on Mobile Share Value plans to roll over unused data in one billing cycle, for use in the next cycle, at no extra charge. 

If you have a 15GB AT&T Mobile Share Value plan and only use 10GB, the remaining 5GB (the Rollover Data balance) can be used the next month (a total of 20GB). 

 There’s no cap on the amount of unused plan data within a given month that’s eligible for rollover, but one month's rollover data last only for the next month.

Some of you might remember that Cingular, the brand AT&T once used, offered a rollover feature for voice minutes that, as I recall, expired if unused after about a year. 

After T-Mobile US launched its Data Stash plan, it was inevitable that there would be a response. 

The difference, at least for the moment, is that the Data Stash unused mobile data usage will be available for a year.  

Internet Access Speed Growth is Linear, but in a Moore's Law Way

You might not know it from the stream of quarterly updates on “average” Internet connection speeds around the world, but a long history of speed advances confirms that consumer Internet access grows about as fast as Moore’s Law would suggest.

So even if it seems very little is happening, quite a lot is happening, all the time. You couldn’t tell that from quarterly or even annual changes in typical access speeds.

In the third quarter of 2014, for example, global average mobile Internet connection speeds dropped 2.8 percent to 4.5 Mbps, and the global average peak connection speed fell 2.3 percent to 24.8 Mbps in the third quarter of 2014, according to Akamai.  

On an annual basis, average mobile Internet connection speeds globally were up 25 percent from the third quarter of 2013, though. That implies a doubling of speed about every four years.

Most people would likely agree that usage grows faster than that.  Based on traffic data collected by Ericsson, the volume of mobile data traffic grew by approximately 10 percent between the second and third quarters of 2014, implying annual growth of more than 40 percent. But that’s usage, not average speed.

The global average fixed Internet connection speed saw a slight decline in the third quarter of 2014, dropping 2.8 percent to 4.5 Mbps. Global average peak connection speeds declined slightly in the third quarter, dropping 2.3 percent to 24.8 Mbps.

Those sorts of figures are hard to square with the notion that typical speed doubles about every 18 months to two years.

Logic seemingly would suggest that is unlikely. Communications networks--especially those of the fixed variety--are expensive construction projects. Such networks also are subject to local, state and national regulations, interest rates, economic conditions, changes in tax laws and changes in demand curves, all of which should slow rates of change, compared to rates of change for semiconductor products that follow Moore’s Law.

Shockingly, then, some studies have shown that even on twisted-pair copper telephone networks, speed doubled about every 1.9 years.

Other studies show similar results: some say an Edholm's Law shows that Internet access bandwidth does increase as Moore’s Law would predict.

Of course, experts have argued for decades about whether Moore’s Law would end. That debate still hasn’t been settled. But some argue that communications bandwidth would continue to improve on a Moore’s Law pattern, even if classic Moore’s Law slowed or flattened.

That’s a foundational assumption. If access bandwidth really does grow at Moore’s Law rates, then gigabit access networks are inevitable, no matter how crazy that seems.

But that is going to obvious first in the developed regions that have been at it the longest, in North America, some portions of Asia (Japan, Korea, Taiwan, Singapore) and parts of Europe.

Other regions with tougher economics might still be on the curve, but will start at slower speeds, as did Internet access in the more-developed regions.

The global broadband adoption rate (at least 4 Mbps) edged up slightly in the third quarter, gaining one percent and growing to 60 percent.

The global adoption rate of access at speeds of at least 10 Mbps was up 22 percent in the third quarter, following 65 percent increases seen in both the first and second quarters of 2014.

South Korea had the highest average connection speed at 25.3 Mbps but Hong Kong

again had the highest average peak connection speed at 84.6 Mbps.

Demand is going to grow as well, given both streaming popularity and new video formats including 4K video. With 4k adaptive bitrate streams generally requiring between 10 Mbps to 20 Mbps of bandwidth, markets where 4K streaming is widespread will face new investment requirements.

Though it seems improbable, and even when quarterly or annual statistics do not fully show the progress, Internet access speeds do grow about as fast as Moore’s Law would suggest. It’s astounding, really.