Connected Car is Probably the Best Vertical for Incremental Mobile Connections

The coming Internet of Things both illustrates the financial upside for many participants and the potential issues for Internet service providers. IoT, most assume, will eventually be very big.

In the 1990s, one billion people connected to the Internet with desktop computers and laptops. In the first decade of the 21st century, two billion people connected to the Internet with mobile phones.

By 2015, according to Cisco Systems, 25 billion things will be connected to the Internet, and to each other. Perhaps five years after that, in 2020, the number of connected things might double to 50 billion.

The issue is whether IoT also will produce big revenue opportunities for ISPs. Much depends on how the things get connected. If every automobile represents at $10 a month incremental mobile subscription, a sizable revenue stream could be generated.

If most of those cars connect using consumers’ existing smartphones, maybe less incremental revenue is generated. Other IoT devices might connect primarily using unlicensed spectrum, though, generating no direct incremental revenue.

In-home IoT sensors likely will use Wi-Fi. Other connected things might rely on Bluetooth or other short-range connection methods that likewise do not generate direct incremental revenue for an ISP or mobile service provider.

Of the enabling developments, one potentially worrisome issue for Internet service providers is that IoT will hinge on “cheap bandwidth” and “cheap sensors,” as well as ubiquitous Wi-Fi coverage usable “for free or at very low cost.”

Sensor prices have dropped more than 100 percent over the past decade, to an average of 60 cents. Processing costs have declined by nearly 60 times over the past 10 years.

The cost of bandwidth has declined by a factor of nearly 40 times over the past 10 years. That, in conjunction with affordable sensors, makes IoT feasible. But “cheap bandwidth” also suggests low connectivity revenue for ISPs and mobile service providers.

But big data is a directly intertwined opportunity as the IoT will generate huge amounts of unstructured data.

Automobile connectivity is one industry vertical where mobile networks should be the mainstay, however.

By some estimates, by 2018, half of all cars sold will have Long Term Evolution, 3G or Wi-Fi capability.  Audi Connect is one such program.

Audi is offering the first-ever in-vehicle 4G LTE data connection in North America. The data plans will be competitively priced, starting at $99 for a six-month plan and $499 for a 30-month plan.

The six-month plan comes with 5 Gigabytes of data usage. The 30-month plan supplies 30 GB.

AT&T has at least eight connected-car contracts, with Nissan (Leaf), BMW, Ford Motor Co., General Motors (OnStar), Tesla, Audi (A3 and Q3), Volvo and GM's operations in Europe.

Verizon’s Hughes Telematics acquisition in 2012 gave the telco an established vehicle information technology business, which in 2011 produced $71 million worth of revenue and a contract with Mercedes Benz.

AT&T has identified services for the connected car as including advanced diagnostics, family tracking, enhanced safe driving via telematics, ability to remotely warm, find one’s car in a parking lot or open locked doors, voice recognition for hands-free driving, automotive app stores, vehicle updates of firmware, rear seat entertainment and connected media.

Mobile Networks Generate 80% of All Internet Traffic

With access to unlicensed spectrum, mobile networks probably would collapse. 

Globally, about 80 percent of all Internet data is generated by the mobile network, says Robert Pepper, Cisco VP.

Wi-Fi offload is about 66 percent of all mobile data consumption, and will reach 71 percent within about five years.

Mobile service providers might still prefer to operate their businesses using licensed spectrum, but unlicensed spectrum now is necessary, since the mobile network likely could not easily support all the traffic people already use.

When AT&T introduced the Apple iPhone in June 2007, almost no AT&T customers used a smartphone, so AT&T had no firm idea of the impact adoption would have on its network.

By the the end of the first quarter of 2012, 59 percent, or 41.2 million, of AT&T's postpaid subscribers had smartphones, lifting AT&T mobile data traffic 20,000 percent in five years.

In fact, AT&T mobile data volume has doubled every year since 2007. “It’s been a challenging year for us,” said John Donovan, AT&T CTO, said in 2009.

“Overnight we’re seeing a radical shift in how people are using their phones,” Donovan said. “There’s just no parallel for the demand.”

In many cases, iPhone users were consuming an order of magnitude more data than users of other smartphones and 24 times more data than feature phone customers.

Nigerian Mobile Retailer Loans Minutes of Use

Sustainable business models are a challenge for mobile and Internet service providers in South Asia, Southeast Asia and Africa where many would-be customers are hard to reach and cannot afford to pay too much for service.

As with products such as laundry detergent, mobile minutes of use are sold in bite-sized quantities. 

Mobile usage typically is sold on a prepaid basis. So customers limit use when their prepaid cards approach the limit. That will tend to reduce consumption.

But Channel IT, a Nigerian mobile operator, allows customers to borrow about $1 in airtime when their prepaid cards approach spending limits. 

Customers pay back $1.10, even if the loan is only for a day. That increases usage dramatically.

The default rate is less than one percent, since customers aren't allowed back on the network until they've repaid the loan.

That is the type of retail pricing innovation other mobile service providers might think about, as the program apparently generates about $2.4 million in annual revenue for Channel IT.

How Much Market Share Will AT&T Mobility and Verizon Wireless Lose?

It isn’t yet clear how much market share Verizon Wireless and AT&T Mobility are willing to lose to Sprint, T-Mobile US and other contestants, undoubtedly including Google, in the near future.

Verizon and AT&T already say the customers they are losing to Sprint and T-Mobile US are the “least attractive,” financially, and there likely is much truth in such statements.

Offers based on price--which is how T-Mobile US and Sprint are attacking the market, are likely to be most attractive to price-conscious customers.

Verizon historically positions at the “premium” end of the market, and often is willing to lose customers rather than compete vigorously on price.

For that reason, some believe Verizon could lose 10 percent market share to other fixed network providers of gigabit Internet access services, unless Verizon decides to compete at the “gigabit for $70 to $100” price-value point. Some think Verizon will not do so.

But some also believe Google Fiber will keep the pressure on the other major ISPs with less investment than some might have predicted.

Instead, some think mobile and wireless now is the new focus. By some estimates, about 10 percent of U.S. consumers buy service from a mobile virtual network operator, as Google will be.

So is it reasonable to think Google, all the rest of the MVNOs, Sprint and T-Mobile US might be able to take up to 10 percent additional share from AT&T and Verizon?

It’s hard to say, as it also is possible Sprint, T-Mobile US and Google might take share from the other MVNOs as much as from AT&T and Verizon.

Maybe five percent from each service provider is a more reasonable expectation of potential AT&T or Verizon share loss.

The point is that AT&T and Verizon, while moving to protect the core of their customer bases, are not going to try and protect 100 percent. Some attrition at Verizon and AT&T therefore is going to happen.

How Will Mobile Operators Respond to Elon Musk, Google, Richard Branson, Greg Wyler Satellite Efforts?

With the potential launches of two brand-new satellite networks to deliver Internet access to unserved populations across three continents, mobile service providers in developing regions are going to have to make hard decisions about their own strategies.

The reason: mobile networks now are the primary way most people in developing markets use the Internet, and get their access. But there remain billions that cannot buy the service because they are not reached by the networks.

Facebook and Google, among others, have been thinking, and now are acting, to provide such access by new satellite networks that presumably will offer far-lower retail prices than have been possible in the past.

Elon Musk will be part of a new battle between global satellite fleets intended to bring Internet access to underserved people around the globe. SpaceX, Musk’s satellite firm, just got $1 billion from Google to help build a new satellite fleet.

Just days ago, Musk talked about a new project aimed at putting up to 4,000 satellites into low Earth orbit to provide low-cost Internet access. The satellite system could start providing data services by 2020, though the full constellation could be in place by 2030, possibly. The cost of the venture could amount to $10 billion or more, Musk said.

Separately, WorldVu Satellites Ltd. has raised funding from Virgin Group and Qualcomm for a proposed global satellite internet company focusing on potential users in developing countries that cannot be reached by fixed or mobile networks, as well as to supply Internet access to flying aircraft.

The potential launch of two new huge fleets of satellites essentially will force mobile service providers to choose between accelerating building of networks to areas that have been deemed non-economic, or risk losing all that subscriber growth to satellite providers.

U.K. Mobile Market: Four to Three at the Top

Four and three are the key numbers for contestants and regulators in many markets, but particularly in Europe, where the numbers describe the leading mobile service providers in a market.

In the highly-competitive U.K. mobile market, the key number will drop from four to three as a result of Telefónica’s sale of its U.K. mobile operation to Hutchison Whampoa, previously the smallest of the four leading service providers.

Not often does any single provider jump from last to first in market share, in any industry.  

Hutchison’s acquisition of the Telefónica subsidiary O2 UK for £10.25 billion in cash will vault smallest mobile operator with 7.5 million customers to the largest with 31.5 million customers.

At the same time, the BT acquisition of EE will give Hutchison and BT market share of about 38 percent each.

Vodafone would drop to third place with 24 percent market share.

The conventional wisdom is that reduction of the number of leading providers from four to three would allow all the firms to firm up profit margins and reduce the amount of ruinous competition. That of course raises concerns about whether there will be enough competition to restrain predatory behavior.

Some would argue pressure from application providers is the new restraint. Google, for example, sees lower prices for Internet access, mobile services and devices as helpful inputs to its own business, and Google will not stop putting into place operations that help drive such cost reductions.

Google will emerge in precisely that role in the U.S. mobile market soon.

Windows 10 Makes Voice a Feature of the Operating System

Windows 10 unifies end user experience across devices (PC, tablet, phone), but also illustrates a trend long underway, namely voice communications that are a feature of an application, rather than a discrete service.

In Windows 10, Skype comes built in as a communications suite. In other words, Skype will be directly built into messaging, calling and video experiences, with no need to download an app.

That obviously has implications for telcos and cable TV companies that sell public network voice communications and messaging. Perhaps the biggest effect is a decline in usage of traditional long distance calling services, even if, globally, long distance calling volume continues to grow.

Some amount of volume growth, and some amount of profit margin, have been lost to over the top voice and messaging services, however tough it might be quantify.

And voice as a feature of widely-used apps--and now even operating systems--points to some longer-term strategic issues for telcos selling retail services to end users.

The way telcos and cable TV companies have combated declines in volume and profit margin for their core legacy services (voice and entertainment video) is to shift to the “bundle of services” (voice, video entertainment, high speed access) as the core offer.

To get the best prices, consumers buy all three products, even if actual demand for each constituent product varies. Over time, however, the perceived value of two of the core components--voice and entertainment video--is going to be challenged even further.

That doesn’t necessarily mean customers will stop buying, only that fewer will do so. Consider for example take rates for legacy voice, text messaging or linear video subscriptions. Some might argue there is a zero-sum dynamic at work.

If consumers want more on-demand access to video, on all devices, at lower prices, then OTT video has to displace linear video. That ripples back through the ecosystem.

Some might point out, for example, that if linear video demand dwindles, then satellite services built on point-to-multipoint architectures are dangerously exposed, since that architecture is ill suited to on-demand services.

But demand can be shaped by retail packaging. Assume many consumers face a situation where the services they really want to pay for amount to $80 a month (linear, Netflix, HBO, Amazon Prime and other streaming services).

Assume distributors decide they want to keep offering linear services, but also make on-demand streaming access available at modest incremental prices. In such cases, at least some consumers will conclude--as they do for triple play offers--that buying the bundle costs less than purchasing each discrete service on a stand alone basis.

In that case, linear demand might not fall as much as one might predict. And, in fact, demand for linear distribution architectures (satellite, for example) might last far longer than otherwise would seem to be the case.

For the same reason, bundling public network voice, messaging and other services props up demand for services that might otherwise fare worse. That might be the good news for today’s distributors.

The bad news is that profit margins are likely to keep falling, as greater inducements will be needed to entice consumers to keep buying services they otherwise might decide to abandon. Some consumers, for example, buy triple play services including fixed network voice even if they don’t use the phone line.

The point is that, long term, the triple play bundle, today’s fundamental strategy, will come under increasing margin pressure. On the other hand, the bundle could be shaped in ways that prolong the value of the bundle, overall, beyond an expected product life cycle that is mature and declining.