Netflix Shows "Principles" are Not What Net Neutrality is About: Business Advantage is the Issue

Are zero-rated apps wrong? Are zero-rated apps a violation of network neutrality, or the principle that all consumer apps should be treated equally? Some do not believe that is the case.

Facebook, through Internet.org, or example, is offering a package of zero-rated apps, in partnership with mobile service providers, in a number of countries.

Zero-rated apps can be used, in such cases, even when a consumer does not buy a mobile Internet access plan. Netflix has complained about such practices, in the U.S. market.

Oddly, then, Netflix, a big backer of the strongest forms of network neutrality, including a ban on zero rating, is negotiating deals with Australian Internet service providers doing exactly that.

As part of that deals with Australian ISPs,  Netflix usage does not count against a usage cap. Netflix is, in other words, zero rated.

The issue is not consistency, though Netflix is being inconsistent. The issue is not the merit of zero rating, since Netflix is on both sides of that issue, in different markets.

The issue is that, apparently, a particular firm’s particular interests dictate the positions that firm takes. To be sure, that makes sense, to a large extent. One wouldn’t expect a firm to support business rules of the game that harm its core interests.

On the other hand, it is rather odious when such expressions of self interest (and I have no problem with expressions of self interest) are cloaked in the language of higher principles.

Network neutrality is no different than any other battle over business rules. It is not about virtue.

Which Way for Sprint?

Sprint’s “Cut Your Bill in Half” marketing campaign is getting attention. Whether it also is getting a commensurate rate of conversions is an important issue.

Of total Compete panel traffic to Sprint’s site in December 2014, 13 percent of visitors also viewed the “Cut Your Bill in Half” pages.

The visits did not necessarily immediately translate into Verizon and AT&T customers making a switch of provider.

Of all visitors to Sprint’s domain in December, only four percent started the process to become a Sprint customer by taking steps to upload their bill on the website. On the other hand, Millward Brown Digital suggests, making such a switch might be complex enough that many wanted to visit a retail store to complete a transaction.

Nor does it appear that the potential switchers are lower income, highly price conscious consumers. The analysis by Millward Brown Digital suggests more than 50 percent of AT&T and Verizon customers who visited Sprint’s “Cut Your Bill in Half Event!” page had an annual income over $60,000, with 22 percent of those customers earning $100,000 or more annually.

The suggestion is that people checking out the promotion might include some of the better customers Verizon and AT&T want to retain. That is a positive.

To be sure, some question whether Sprint strategy can work. Among the doubters is BTIG Research analyst Walter Piecyk. “We do not see a path by which Sprint can return to revenue growth, let alone EBITDA growth or positive free cash flow,” Piecyk said.

As one example, Verizon's mobile operating margin in recent quarters has been  24 percent. AT&T mobile operating margin was 17 percent. Sprint's operating margin was a negative 7.6 percent.

Sprint is doing better in terms of subscriber acquisition. But T-Mobile US, with its own market attack,  is likely taking big chunks out of Sprint's subscriber base.

For 2014, T-Mobile had a porting ratio of 2.2 versus Sprint, meaning for every subscriber that left T-Mobile US for Sprint, 2.2 subscribers left Sprint for T-Mobile US.

Against AT&T and Verizon, T-Mobile US has a porting ratio of 1.8 and 1.4 respectively.

Sprint lost over two million postpaid handset subscribers and T-Mobile US gained four million postpaid handset subscribers in 2014. In other words, the net swing between Sprint and T-Mobile is about six million.

Still, optimists argue that recent network upgrades, including 9,000 Long Term Evolution sites, plus the aggressive retail pricing cutting, plus some evidence its network coverage and quality  are starting to be seen, will allow Sprint to start adding net subscribers.

Also, Sprint CEO Marcelo Claure recently purchased five million Sprint shares, suggesting Claure, at least, sees equity price upside.

Will IoT Services Use Internet, or Managed Networks?

It remains to be seen whether U.S. network neutrality rules will survive court challenges, and what modifications ultimately will be made to any surviving portions of the rules.

Also unknown are paths of development for future services--including many Internet of Things apps with high reliability requirements--that can be created and offered by Internet service providers and telcos, as managed--not Internet--services.

But it might not be the case that self-driving cars use communications covered by network neutrality, any more than some medical monitoring or other sensor services might. A good argument can be made that such services will be supported by quality-assured networks, not the unmanaged Internet.

"There are some services that simply require a different level of connectivity," said Suri. He believes there are some networks that "you can't do in a best effort network," naming driverless cars and healthcare communications with doctors and hospitals connecting to patients. "You need this differentiated quality of service," he said.

No doubt, ISPs will have financial incentives to create managed services in such cases, and thus would not be covered under any surviving network neutrality rules.

Are Mobile Firms Devoting Too Much Effort to Internet of Things?

Are mobile service providers spending too much time on Internet of Things and too little on their data roaming businesses? Some think so.

So it is that a study by Strategic Economic Engineering Corp (SEEC), underwritten by Syniverse, suggests mobile service providers distracted by growth initiatives might be sacrificing chances to earn as much as $30 billion in roaming revenues, including a loss of about $16 billion

in roaming revenues earned for communications in the United States, United Kingdom and Germany, for example.

SEEC pegs the opportunity cost of neglecting roaming revenues at $46 billion. That is based on an assumption that roaming revenues will generate an incremental $30 billion, with potential losses of $16 billion in revenue.

On a country-by-country basis, this works out at risk values of $13.4 billion in the U.S., $1.7 billion in the U.K. and $1.7 billion in Germany due to subscribers switching service providers to benefit from better roaming offers.

Some might downplay the estimate of “opportunity cost,” as it assumes mobile service providers cannot or will not craft offers that generate the incremental revenue, as they are distracted by other concerns.

Others might argue mobile service providers can, and will, accomplish both. But data roaming fees might be a substantial revenue generator.

How important might data roaming fees be in 2018? They might represent $90 billion in roaming revenues by 2018, up from $57 billion in 2014, according to a March 2014 report from Juniper Research.

The GSM Association pegs the numbers at the same level, estimating roaming represents 4.4 percent of $1.3 trillion in total mobile revenues in 2015, according to the GSM Association, and could rise to 6.4 percent of total revenue by 2018.  

Data roaming represented 36 percent of global mobile roaming revenues in 2013, according to Juniper Research.   

Mobile data roaming could represent as much as $32 billion, if data roaming is 36 percent of total roaming revenue, at such levels.

At such levels, roaming will represent over eight percent of global mobile service provider billed revenues in 2018.

The global roaming market is worth in excess of $57 billion today. It is expected to rise to an estimated $90 billion by 2018 if mobile operators implement the right pricing strategies to unlock increased roaming demand, according to Juniper Research.

Most organizations facing challenges in its core revenue model will spend some amount of time or effort trying to create new revenue streams. But there always is a risk that effort expended on growth initiatives comes at the expense of effort spent to defend the existing business.

PayPal Acquires Paydiant in Bid for Bigger Role in Retail Mobile Payments

PayPal is acquiring Paydiant, a provider of a white-label platform that allows retailers to create their own mobile wallet apps, including payment, loyalty card, and digital coupon support.

The move shows PayPal’s commitment to acquire a bigger role in retail payments, since Paydiant's customer base includes Subway, CapitalOne and MCX, the consortium of major retailers that plans to launch a mobile payments platform called CurrentC later in 3025.

MCX's backers include Wal-Mart, Target, Kmart, Best Buy, Dunkin' Donuts, CVS, Shell Oil (for its network of convenience stores and gasoline stations), 7-Eleven Inc. and Sunoco.

With the Apple Pay launch, Samsung's acquisition of mobile payments platform LoopPay, and Google's deals with U.S. carriers to pre-install Google Wallet on their Android phones, it is clear that activity in the mobile payments space is heating up, even if the leading contenders now seem to include the retailers, Apple, Samsung, possibly Starbucks and potentially Google, even if the leading mobile service provider (SoftCard) essentially has withdrawn from active contention.

Network Neutrality Misconceptions

Of the many “myths” about net neutrality, perhaps five most are most widespread, according to Brent Skorup, Mercatus Center research fellow.

They are:

• The Internet is, and has been, neutral
• Net neutrality is the only way to promote the open Internet
• Neutrality promotes access competition
• Packet prioritization harms end users
• Neutrality rules will lead to lower prices, better video experience

Packet prioritization has been built into Internet protocols for years, says Skorup. One might point to widespread use of content delivery networks as one example. Peering and transit are different interconnection models that are not “equal.”

Use of the public Internet for voice, conferencing and video entertainment makes the need greater, as those apps are intolerant of packet delay. Telemedicine and other industrial and commercial apps coming as part of the Internet of Things likewise will require more quality of service than the “best effort” Internet is likely to provide on a consistent basis.

Nor are neutrality rules the only way to promote the open Internet. The FCC already had committed to openness principles assuring consumers access to all lawful applications, for example. On the two or three discrete instances where an ISP had tried to block lawful apps, the FCC acted quickly to discipline the offenders.

Every ISP now knows they cannot block a lawful app. And where it comes to consumer protection, the Federal Trade Commission and Department of Justice all have authority to take action, as well.

Whether neutrality rules enhance competition is hard to assess. The rules apply to all consumer Internet access--mobile and fixed--so no provider has an advantage, or can get an advantage.

Neutrality rules arguably reduce or limit ISP profit margins and products, and might therefore make the industry less attractive to new entrants.

Nor is “packet prioritization” automatically harmful to retail end users. Though as a slogan “treating every bit equally” sounds great, different apps have different exposure to packet latency. That is the principle behind content delivery networks that reduce packet latency and jitter.

That is why email and most web browsing works just fine with best effort access, but video conferencing, voice sessions or video can be unpleasant, when networks are congested.

Some possibly related concepts, such as zero rating some apps, also have value for end users.

Zero rating is a way to allow consumers--especially consumers in the developing world--a way to use and sample Internet apps when they cannot afford a mobile data subscription.

Some might argue that network neutrality will make end user services cheaper, in part because the rules will prevent some possible costs for app providers. But net neutrality--and the coming litigation over it--will add costs for ISPs that certainly will be recovered from end users, one way or the other.

Neutrality rules do not directly allow video entertainment services to operate more pleasantly (lower latency) or load faster. In fact, packet prioritization does those things. In a best effort scenario, congestion will degrade performance for all apps, but especially video, voice and conferencing.

The argument that investing in more capacity solves all problems is not completely correct. But the incentive to invest more arguably is reduced by new neutrality rules.

So what parts of the Internet ecosystem are helped by neutrality rules? Only some app providers who now are creating the biggest traffic demand on any consumer ISP network, namely suppliers of streaming video.

In that sense, the broader “television content” segment of the industry wins, as it is protected from the cost of any content delivery network capabilities that reach all the way to consumer homes, and which might be necessary as a competitive investment if one or more leading competitors were to opt for such prioritization.

As always with any regulatory action, there are economic winners and losers. Network neutrality is no different in that regard.

Law of Unintended Consequences Now Will Play Out in Internet Access

“Managed services,” or “specialized services” now might emerge as a key development for service providers, should network neutrality rules become more popular, or survive legal challenge. The reason is that such services are exempted from the rules.

Oddly enough, the argument that network neutrality is needed so the “Internet doesn’t become cable TV” will have the perhaps-unintended consequence of increasing the value of such managed services for Internet service providers.

In other words, it is likely a rational Internet service provider, with the requisite scale, can make higher profit margins on a managed service than from commodity high speed access.

It therefore makes sense that rational actors will shift effort towards managed services.

Consider that, from 2010 to 2013, U.S. mobile data pricing (per unit sold) declined by only single digits year over year. In the first nine months of 2014, data pricing dropped by 77 percent, according to industry analyst Chetan Sharma.

Whatever profit margins might once have been, one can argue those margins are dropping, even if suppliers are selling more units.

Average (mean) mobile data consumption increasedto about 2 Gb a month in 2014. That single-year increase is unusual.  Sharma notes it took 20 years for consumption to reach 1 Gb per month usage levels.

In addition to plunging prices (less revenue per unit sold) and higher usage (more network cost), marketing costs have grown as competition has become more intense.

Overall U.S. operating expense rose 20 percent, year over year. Income was flat while earnings grew three percent.

That is likely to convince larger ISPs to create new products where bandwidth is simply an enabler of a service, and not the actual product sold to an end user. Linear video services and carrier voice services or text messaging require bandwidth and network services, but the product purchased by the customer is not “bandwidth.”