"Why Didn't Telcos Think of That?"

Over the past decade and a half, we have heard lots of noise, and significant spending, in support of innovation by telcos globally, despite the clear evidence that most innovation now happens in other parts of the ecosystem (think iPhone, or any mobile app).

While it might be useful for executives to talk about innovating “at Google speed,” there frankly is little evidence telcos have, can, or want to innovate at such rates. 

One might charitably argue large telcos should not bother with most "innovation" in the app space.

For any number of institutional reasons (scale, culture, need for global standards, sunk investments in legacy operating systems, regulatory issues, huge needs for investing capital in dividends and physical infrastructure), telcos arguably cannot move that fast, even when they want to do so.

Still, it is instructive to look at ways text message enabled  e-commerce is being enabled by U.K.-based FetchMe. Right now, FetchMe requires minimum transaction amounts (£20), presumably to cover FetchMe’s own costs of acting as a middleman retailer.

In the United States, “Magic” offers a similar feature, acting as a sort of texting-enabled concierge service.  

Of course, there is an obvious reason why a text-enabled concierge service would not be commercialized, even if innovators inside a telco operation wanted to do so. As with many other potential services, it is difficult to scale.

And scale normally is a key requirement for any proposed telco-delivered service. The reason is that processes have to be routinized enough that they are easily repeatable. A concierge service is, almost by definition, going to be “custom.” And that always is difficult for any industrial process, which is what any large telco operates.

So even if e-commerce enabled by text message seems like the sort of thing telcos themselves might have commercialized, they have not done so. One might argue they have good reasons for “not innovating.”

Repeated over enough instances, that reality suggests the fundamental limits to telco innovation. They can handle industrial scale, in fact require it. Customization kills scale advantages, so customization prevents telcos from acting.

The Pareto rule probably continues to operate: 80 percent of the results for telcos will flow from 20 percent of their activities. Those activities will continue to be anchored in “access” operations. Like it or not, that is the specific and unique role they occupy in the broader ecosystem.

Will Incumbents Win Gigabit War in Austin?

If Google Fiber was an effort to spur faster investment by major U.S. Internet service providers, that gambit is succeeding. In Austin, where Google Fiber announced in 2013 it was going to build a symmetrical 1-Gbps Internet access network, progress arguably has been slow.

“So far most of our installs are in apartments,” in two neighborhoods, said Mark Strama, head of Google Fiber Austin.

AT&T, Grande Communications and Time Warner Cable also have announced or begun to implement much-faster access services. Both AT&T and Grande have said they will offer gigabit services in some neighborhoods where there is demand.

So Google Fiber already is succeeding, to the extent part of its mission is to spur competitive upgrades. But Google Fiber might not be moving fast enough to head off preemptive moves by its main competitors in the Austin market.

Ironically, a company known for moving fast is not moving fast enough to gain market share before its competitors have crafted their own competitive offers.

For Google Fiber, which essentially offers only one retail offer, uptake of gigabit services matters.

For the other competitors, which offer packages at a range of speeds, what will matter is retained customer base, on any retail package, not the uptake of gigabit offers.

In other words, for AT&T, Grande or Time Warner Cable, if the upgrade projects simply allow the incumbents to maintain current share, they win, at some level, even if they have been forced to spend more money on infrastructure.

Consumers will win. Google Fiber will have achieved a strategic objective. And even the incumbent ISPs might “win” if their own competitive offers manage to stave off customer chrun to Google Fiber.

New Airtel Zero Program Perhaps Will Offer Use of 100 Apps Without Data Charges

Bharti Airtel has introduced a new program Airtel has launched “Airtel Zero,” offering users free access to certain mobile apps, with no usage deducted from data plans, or perhaps no requirement for a data plan at all.

Airtel now believes it will launch with 100 apps as part of the program.

Zero rating--the practice of offering consumers access to some Internet apps without requiring a data plan or deducting usage from a data plan--is viewed by some as a violation of network neutrality principles.

The fear is that zero rating creates more Internet service provider gatekeeper power and could therefore reduce innovation.

Others might simply see it as a useful way to provide value to consumers who haven’t begun using the Internet because they haven’t been able to sample it.

The analogy often made is that zero rating  is like toll-free calling: some businesses or organizations pay for calls on behalf of customers and prospects.  

But the program is expected to be popular, and experience elsewhere suggests Bharti Airtel will find that the program encourages non-users to try mobile Internet apps, and will drive faster mobile Internet adoption.

That clearly was the experience in the Philippines, where Globe Telecom launched a program offering “no data plan required” access to Facebook.

Over the course of the first phase, the number of data users on Globe’s network doubled, and the portion of Globe’s prepaid subscriber base who were active on mobile data expanded from 14 percent in September 2013 to 25 percent in November 2014, Facebook and Globe say.

Globe’s Free Facebook campaign (and similar internet outreach efforts by other players in the market), led to a six million  increase in the number of active mobile internet users in the Philippines.

During the first phase of the trial, Globe’s user base increased by 17 percent. Along with continuing to use data, these users also shifted core telco spend over to Globe’s network, growing voice and text messaging revenues by five percent.

By the end of the first campaign, prepaid mobile data users grew from 4.8 million to 9.7 million, more than a twofold increase.

Whether zero rating is bad or good for innovation is debatable. Zero rating does increase use of the Internet. And for some, that is the point.

Google Mobile Service Wants to Offer Free International Voice, Text, Data Roaming

Google reportedly is in talks with Hutchison Whampoa about roaming agreements allowing its U.S. mobile customers to talk, text and use the Internet internationally, erasing the difference between local and international tariffs.

The deal presumably would be reciprocal, allowing Hutchison Whampoa Three customers to roam on Google’s U.S. network without additional charge.

If that is correct, it is likely Google would seek additional agreements with other carriers willing to forego international roaming revenue to gain market share.

Google also is expected to experiment with other innovations, possibly including the ability for a customer’s mobile device to register on a local Wi-Fi network or pick the best mobile operator signal (Sprint or T-Mobile US) available at the moment.

All past mobile virtual network operator and facilities-based mobile networks have used only a single network for access.

Economic Rationality Is Not Political Rationality

Economics is a very useful discipline for figuring out how to allocate scarce resources. In fact, economics virtually assumes scarcity. Consider the severe water drought in California, a problem that other states across the American west also have been grappling with for more than a decade.

Some 60 percent of domestic use goes to watering landscape, it often is noted.

That almost always leads to calls for reducing lawn irrigation, which is useful enough advice. But all domestic use only makes up one percent of overall water use. Most water is used for irrigation and power generation.

Agriculture alone accounts for 80 percent of California water use. So simple economic rationality would call for reducing five percent of agricultural water use, which achieves the same savings as cutting 25 percent of urban water use.  

Though it is politically difficult, it makes more sense, in terms of economic rationality, to deal with inefficiency related to the 99 percent of water usage in California, not the one percent.

That does not appear to be what is happening. Instead, California will try to reduce urban water usage (the one percent) by 25 percent. Other western states that have implemented similar policies have indeed found it is possible to make gains. People do replace lawns with xeriscapes.

You might wonder why more is not done about any similar policies related to the 80 percent to 99 percent of water users.

The political reality is that agriculture now is built on “cheap water.” So raising agricultural or industrial water prices necessarily causes higher agricultural or industrial product prices. So far, that has made some logical choices difficult to impossible to implement, one might argue.

So it is politically rational --if not terribly economically rational--to make urban users bear the burden.

That is not to argue agriculture is unimportant. But Pareto optimality still matters. Less than 20 percent of actions produce 80 percent of the results.

But this is water, and water rights have shaped the history of the American west. That hasn’t changed.

Oddly enough, in Colorado, where we have been grappling with life in a virtual desert for some time, it is illegal to collect rainwater in a barrel, for example. The theory is that the water would otherwise enter the aquifers, and somebody else already has superior rights to the water in aquifers.

Someday, not even entrenched political interests will be able to ignore economic logic. But not yet, it appears. Though political rationality is not economic rationality, it is "rational."

Are OTT App and Content Terminating Charges Coming?

India’s Telecommunications Regulatory Authority of India is asking serious questions about the regulatory framework for over-the-top applications, questions that are bound to become more pointed as 4K TV becomes more common for streaming.

And the questions suggest TRAI seriously is considering a broader application of traditional traffic termination frameworks, especially the charge for landing traffic on a receiving network.

As part of a public inquiry, TRAI is asking whether a regulatory framework for OTT services is needed now, or is a decision that can be deferred. That would be a rather necessary precondition for considering application of terminating traffic rules to OTT providers.

TRAI also is asking whether OTT players offering communication services (voice, messaging and video call services) through applications (resident either in the country or outside) should be brought under the existing licensing regime. Though, in principle, TRAI could remove regulatory burdens from incumbent suppliers, giving them the freedom now enjoyed by OTT apps, that seems unlikely.  

Though it is a contentious question, TRAI asks whether OTT competitors are affecting communications service provider revenue streams. If so, “is the increase in data revenues of the telecommunication service providers sufficient to compensate for this impact?

Among the contentious questions also is the matter of whether OTT app suppliers should “pay for use of the telecom service provider’s network, over and above data charges paid by consumers. “If yes, what pricing options can be adopted? Could such options include prices based on bandwidth consumption?” TRAI asks.

The answers to those questions will determine, in part, whether TRAI acts to “level the playing field” or change business models in ways that compensate access providers for OTT app provider imposed network costs.

The consultation might lead to hugely-important changes in regulatory regime that increase access service provider revenues and impose new costs for OTT app providers.

Among the other important implications, TRAI could move to shift revenue shares within the Internet ecosystem, supporting access provider revenue streams to some extent, while essentially raising OTT app provider costs of doing business.

TRAI asks whether “imbalances exist in the regulatory environment,” and if so, “can the prevailing laws and regulations be applied to OTT players.”

Any such rules would not necessarily shift revenue directly, but would raise OTT provider costs, indirectly protecting incumbent services because price differentials between OTT and incumbent services would narrow.  

In India, TRAI asks for input on whether termination charges should be applied to OTT app providers. That would be a huge change from current practice.

In such a new framework, sending networks (content providers, OTT services and other application providers) would pay compensation for delivering traffic to the terminating networks.

India Telecom Regulators Looking at OTT Regulatory Framework

A decade and a half after its widespread emergence, over the top VoIP and messaging continue to raise sustainability issues for regulators and business model issues for service providers in a “redefined market” that has separated “carriage and content; ” applications and access; and revenue from usage.

Whether telecommunications regulations must change to reflect the fundamental changes is an issue India’s Telecommunications Regulatory Authority of India now is considering.

The dimensions of the problem are easy enough to illustrate.

Revenue earned by a communications service provider providing one minute of traditional voice is 50 paisa (one paisa is 1/100 of one rupee) on an average, compared to data revenue earned for one minute of VoIP usage which is of 4 paisa.

The average revenue earned by a service provider for a single text message is around 16 p, when compared to 1p of data usage charges when an OTT app is used, instead.

So the fundamental problem for service providers is an order of magnitude reduction of revenue.

Still, In India, service provider overall revenue is expected to reach $46 billion to $49 billion

by 2020, up from $28 billion in 2013, TRAI reports.

Data revenues will grow from 10 percent to 12 percent in 2013 to 35 percent to 40 percent of total by 2020. That implies data revenues of about $16 billion to $20 billion in 2020.

Voice might then represent between 56 percent and 61 percent of total revenues.

Other revenues from text messaging, traditional value added services and new services are expected to remain at $2 billion between 2013 and 2020, representing four percent of total revenues.

The cloud services market in India especially the public cloud stood at $632 million in 2014, which is expected to touch $838 million by 2015 end and $1.9 billion in 2018, growing at about 33 percent, TRAI notes, perhaps representing four percent of total revenue by 2020.

In a broad sense, TRAI is tackling the tricky issue of whether robust, healthy communications networks can exist if the revenue to support investment continues to migrate away from network operators and to app suppliers.

Service providers no longer profit from most apps, and generate revenue “solely from the increased data usage,” says TRAI. The revenue implications are profound.

App providers, On the other hand, app providers require use of the communications networks and therefore impose most of current network costs, while competing directly with services sold by the service providers, TRAI also notes.

In a profound understatement, TRAI notes that “It is thus becoming clear that, in future, the provision of services by OTT players will impact revenues of network operators insofar as their current business models are concerned.”

Perhaps the biggest issue is the ever-present dilemma of how to equalize the regulatory framework. Two fundamental approaches exist: lighten regulations on incumbents or increase regulations on new providers.