Rise of Multi-Purpose Networks Raises Questions Regulators Have No Intention of Addressing

Among the “hard to finesse” issues raised when single-purpose networks become multi-purpose networks is the matter of the bundling of content and distribution. Historically, “radio” content has been bundled with dedicated spectrum, as has “TV broadcasting.”

With the transition to “digital broadcast TV (high definition TV),” former analog broadcast TV has, in principle, been freed up for other purposes, including Internet access and mobile services. As one broadcast TV consultant and former regulator has quipped, “mobile companies would take all the spectrum if they could.”

Beyond the humor, there are broader issues raised by the creation of multi-purpose Internet Protocol networks of all types, especially the ability to deliver any content or communications.

At the same time, in many countries or markets, “most” television and video content already is consumed over a fixed broadband network or a mobile network.

Under such conditions, questions naturally are raised by the practice of using dedicated networks to deliver content, when most people already consume content using multi-purpose networks.

For other reasons, such as the need to remain relevant as content consumption moves away from linear delivery (“broadcasting”), broadcasters are looking at ways to distribute increasingly over the multi-purpose networks.

To matters as pointedly as possible, does it make sense to use communications spectrum to support unicast TV when all forms of TV and video increasingly are consumed using the multi-purpose IP networks?

Programming networks are just that. Their unique function is creation of compelling content. Whether they should also distribute that content over single-purpose, dedicated networks is the growing issue.

That is not to say there is any serious possibility that use of dedicated spectrum to support TV or radio broadcasting is in danger. No regulator anywhere has argued TV broadcasting should be suspended and TV content distributed only using the IP networks. Nor will any do so in the foreseeable future, and possibly ever.

Such a move would not be politically rational, even if some might argue, based on technology efficiency grounds, that is what makes more sense.

Political rationality will win, no matter what the business or technology logic might be.

TV White Spaces Faces a "Chicken or Egg" Problem

Even if he appears to believe TV white spaces has a reasonable enough business case, Google Access Principal Alan Norman nevertheless says some certainty would be needed before many private sector entities would invest money to use the spectrum. One measure that might help, said Norman, is if Ofcom, for example, could guarantee some number of channels (8 MHz each) would be available for use.

The present problem is that it is unclear how much bandwidth might be made available in the U.K. market.

The other problem, candidly illustrated by Rachel Clark, Ofcom director of spectrum policy, is that “we have to tell people who want to use TV white spaces that we cannot guarantee you will have access every single day. That is a business model challenge.”

That illustrates the element of uncertainty. Though some app providers could live with a “maybe the app can be used, and maybe it cannot, at any specific time of day, or day of the week, very few Internet service providers would be too comfortable trying to sell consumers an access service that might, or might not, work.

It might be fine if the access costs nothing. If it isn’t available, the consumer has risked no money in any case.

The problem will come from ISPs who charge for access, or device suppliers who say their gear will work (inside the home or as an access service).

Those are some of the issues that impede more rapid progress for TV white spaces authorization, then increase in equipment supply and service provider activity and use cases.

It’s a classic “chicken and egg” problem: Without a clear sense of business case, regulators might be cautious about releasing the spectrum. Without a clear sense of when, how much and how spectrum could be released, suppliers have less interest in creating gear, and app providers and ISPs will hold back on launching service.

T-Mobile US and Sprint Might be Taking Share Mostly from Prepaid Customer Segment

Sprint's most recent quarter provides yet one more data point about mobile market share and the impact of marketing wars. Though there is some evidence of lower average revenue per account, at AT&T and Verizon, there is nothing dramatic. Churn rates haven’t changed noticeably. Subscriber net additions remain stable.

T-Mobile US continues to add postpaid accounts at a rapid clip, but there again, it does not seem that net additions are coming at the expense of AT&T or Verizon. Tablet account additions might explain some of the net additions data. You might well argue that, were it not for tablet account additions, AT&T and Verizon’s net adds would look worse.

Sprint’s results offer a plausible explanation for what we see. Sprint lost a net 201,000 postpaid phone accounts during the quarter. Yet Sprint reported a net gain of 211,000 postpaid accounts, so one has to assume most of those were tablets.

Perhaps the clue is that Sprint’s net additions were heavy in the prepaid category.

Sprint reported adding a net 546,000 prepaid phone, and 349,000 net prepaid tablet accounts.

T-Mobile US, in its most-recent quarter, added 991,000 postpaid phone customers and 134,000 postpaid mobile broadband customers. Since neither AT&T nor Verizon seem to be especially challenged in the postpaid account area, one might suggest the customers are coming from the prepaid segment, including prepaid accounts that became postpaid accounts, and prepaid accounts that switched to branded T-Mobile US postpaid accounts.

T-Mobile added 73,000 branded prepaid customers quarter, as well as 620,000 wholesale customers in the period, including 479,000 mobile virtual network operator  customers and 141,000 M2M connections.

So maybe T-Mobile US and Sprint mostly are eroding market share of prepaid providers, as prices dip towards levels prepaid customers had been used to paying.

Aside from raising the possibility that U.S. mobile market share is being more concentrated among the “big four” mobile carriers, the danger is that Sprint and T-Mobile US are spending lots of marketing effort and money to increase their share of prepaid customers.

In one sense that is helpful. In another sense, though T-Mobile US is gaining postpaid market share, Sprint might still be slipping.

"Lease Versus Buy" Decisions Rarely, if Ever, Indicate Core Business Strategy

With the caveat that any firm involved in a commercial dispute with another firm will use all lawful tools at its disposal to get its way, sometimes language gets a little heated. Florida Power and Light, for example, has a rather normal dispute with Verizon about pole attachment rates.

Buyers and sellers have disagreed about rates for pole attachments or inaction on requests for as long as pole users have wanted access to utility or telephone poles.

But it goes too far when FPL attorneys suggest “Verizon has made clear that it intends to be out of the wireline business  within the next 10 years.”  The stated reason for that belief is that Verizon “no longer wants to be a pole owner.”  

But Verizon has sold its tower network. Does that mean it does not want to be in the mobile business, or is that just a prudent business decision related to use of capital? Sprint, T-Mobile US  and AT&T  have made the same decisions.

Does anybody really believe any of those firms really wants to get out of the mobile business (with the exception of T-Mobile US, whose owners already have said they want to exit the U.S. market).

That is not to make any assumptions about what Verizon might prefer to do, long term, about any of its lines of business or assets. Some of us would make the argument that, most places in the world, one would choose to be in the mobile, rather than fixed networks business, if possible.

If a service provider decides to lease, rather than build, any particular asset, that is not a clear statement about its interest in competing in a particular line of business.

Many could speculate about what fixed network telcos might do, in the future. It wouldn’t be at all unusual to argue that the eventual course, for many companies, is to exit a business by selling assets. That is true for most small and independent U.S. telcos, both U.S. satellite video companies, nearly all application providers and most equipment suppliers as well.

The point is that, in and of itself, leasing an asset instead of building does not necessarily or even usually provide clues about a firm’s interest in a business.

AT&T Access Lines Fall, Only Issue is How Much, and What it Means

Lots of observers are quite worried about the gatekeeper power wielded by some access service providers. Others might argue the whole fixed network business looks challenged.

The number of access lines generating revenue for AT&T’s fixed networks business fell as much as 49 percent between 2010 and 2014. That doesn’t directly equate to “lost voice revenue” since some of the shrinkage is caused by a shift of customers to the U-verse category.

In 2012, AT&T reported having 15.7 million voice accounts supplied over legacy switched access lines. By 2014, that had dropped to about 9.2 million, a drop of nearly 41 percent in two years.

On the other hand, digital voice accounts grew from 2.9 million in 2012 to nearly 4.8 million in 2014, a gain of about 24 percent. Still, on a net basis, AT&T lost about 4.6 million voice accounts.

AT&T has a similar issue as it reports Internet access subscriptions, as many legacy digital subscriber line accounts are being displaced by the similar function on U-verse. In 2012, AT&T had about 7.7 million U-verse Internet access accounts in service. In 2014 AT&T had about 12.2 million U-verse Internet access accounts.

Digital subscriber lines in service in 2012 were about 8.7 million. By 2014 those lines had dropped to about 3.8 million.

So U-verse Internet access accounts grew 17.6 percent between 2013 and 2014, while DSL accounts shrank about 37 percent over the same time period. On a net basis, AT&T Internet access lines shrank about 2.4 percent.

To be sure, linear video subscriptions, which amounted to about 4.5 million in 2012, grew by 2014 to about 4.8 accounts.

That is why entertainment video, in the form of accounts potentially added by DirecTV, make sense to AT&T management. In addition to other potential value, the acquisition would help AT&T maintain customer account growth at a time when its other lines of consumer services are shrinking.

On a net basis, AT&T accounts dropped from 27.2 million in 2012 to 18.2 by 2014.

In a great many cases, an argument can be made the the local telco is the number-two provider of fixed network services, behind the cable TV operator.

It isn't so clear how powerful a gatekeeper function can be exercised, if these trends continue. To use the old regulatory language, it isn't so clear who the "dominant provider" is in any specific market.

Nor is it clear whether other gatekeeper functions are exercised in other parts of the ecosystem, or how the relevant markets ought to be defined.

Screen Size Matters

Though many initially were skeptical, smartphone screen size matters in many markets. In the first quarter of 2015, phablets were 21 percent of all U.S. smartphone sales, for example.

In the first quarter of 2014, phablet share was about six percent, according to Kantar Worldpanel ComTech.

Apple's iPhone 6 Plus represented 44 percent market share. Screen size was cited as the main reason for buying a particular phone by both 43 percent of all iOS buyers and 47 percent of Android buyers.

Google Fi has "Nailed It:" "Pay Only for What You Use" is Both Fair and Efficient

There are some profound implications for retail Internet pricing as communities across the thirsty U.S. west grapple with “water shortages.” Substitute “usage caps” for that phrase. They are the same sorts of economic issues.

In both cases, a product “essential for life” has pricing mechanisms that encourage “excessive use” by some, and there is serious intent now to align “fair use” either by market incentives or “rule by fiat” to “reduce consumption” (“ensure fair access”).

The key: “Tiered pricing offers a balance between fairness and efficiency,” said Kenneth A. Baerenklau, associate professor of environmental economics and policy at the University of California, Riverside.

In other words, consumers who use more, pay more. That simple pricing structure encourages people to act as stewards of their money.

In the case of water, it is because higher use incurs higher rates--the charges are non-linear.

In the case of internet access, those who advocate “unlimited” or “effectively unlimited” service plans are like water utilities that charge low, uniform prices. In other cases, there are higher rates for higher consumption, but not significantly higher rates.

In the case of Internet access, Google Fi encourages what it says is a simpler and fairer way to charge customers for using mobile Internet access services: there is a flat fee based on usage. The more you use, the more you pay.

To be sure, Google also would argue that it is “pay only for what you use.”

That goes further than does T-Mobile US or AT&T, both of which offer “roll over” of unused data. Those efforts are ways of providing some end user value for purchased data allotments.

Allowing users to “roll over” unused capacity is helpful, up to a point. It is more like a offering consumers protection against overages, though. The roll over usage allotment acts like a cushion against sudden spikes in monthly usage “over plan.”

Fi’s policy is much more transparent and “fair:” you really only pay for what you use. That is the way people pay for water consumption. Ironically, “pay only for what you use,” with linear pricing, is precisely the way service providers likely prefer to charge, and an approach few “consumer advocates” support.

The point: charging for an important commodity based on usage encourages people not to waste the resource. And even if we are going to be getting “abundance” in terms of speed, and “better pricing” for Internet access, we still are not tapping self interest. Our pricing policies do not encourage people to think about their usage.

Fi is a major advance, in that sense. It not only is drop dead simple, it encourages users and customers to think about their consumption. Some might argue it is not important to encourage people to “waste” capacity or bandwidth.

Of course it is. We always should be efficient and have a “low impact” whenever any major resource is used. There always are environmental and other costs (direct and indirect) incurred when we use any major resource.

Fi has proposed a better way: not only “fairer” but also designed to encourage people to think about their usage, even when the direct “value” pitch is “pay only for what you use.”