Has Common Carrier Regulation Affected Large ISP Capital Investment?

It is hard to say for certain whether Internet service provider capital investment is up, down or flat since the imposition of common carrier regulation on consumer Internet access services.

Some claim investment is higher, across the board.

Others claim that investment is up at select ISPs such as Comcast, Time Warner Cable, and the wireless division of Verizon.

Still others claim that we should ignore changes to ISP capex in the first quarter of 2015, since that quarter’s activity does not represent on-going investment decisions.

Others say capex is down.

source: Hal Singer

Hal Singer, Progressive Policy Institute senior fellow, argues that large provider capex was down significantly in the first nine months of the Title II era for AT&T (-21 percent), Charter (-23 percent), and US Cellular (-11 percent).

On net, Singer argues, capex fell by $2.9 billion across the largest ISPs excluding Sprint, T-Mobile, and US Cellular (the pure wireless ISPs).

Including the pure wireless ISPs still results in an aggregate decline of nearly $2 billion relative to the same period in the pre-Title era.

That would appear to be a break in pattern. According to USTelecom, broadband capex increased every year since 2009. Indeed, broadband capex increased by nearly 10 and three percent in 2013 and 2014, respectively.

Some of us would not pin all capital investment trends on any single driver. Business strategy, need to reserve capital for other purposes, completion of upgrades and competitive threats (Google Fiber, for example) all are factors.

On balance, ISPs have to weigh investment returns with competitive threats. Sometimes, competition forces investments that might have sub-optimal financial returns, but are necessary for competitive reasons.

That long has been the case for smaller fixed network telcos, and might now be at work for all fixed network or mobile service providers.

In other words, asked to explain why fiber to the home investments were required, executives might privately have conceded that actual net revenue growth was not the driver. Instead, fiber to the home was a strategic investment; something necessary so firms could continue in business.

In essence, fiber to the home would allow telcos to trade market share with cable TV; gaining video entertainment market share while losing voice market share and splitting the Internet access market.

Telcos Face FANGS

Netflix, Amazon, Facebook, Google and Skype (FANGS) obviously illustrate both new ways to satisfy consumer and business needs, as well as the fundamental shift in communications ecosystems.

The reason service providers worry incessantly about over the top apps and products is that value largely has, in fact, shifted to third party apps. The reason carriers worry about becoming “dumb pipe” providers is that, by design, they have become layer one and layer two providers.  

So the health of legacy services are an issue for tier-one telcos and cable TV companies in both consumer and business segments. Declining fixed network telco voice revenues, declining cable TV video revenues and declining mobile voice and messaging revenues are symptoms.

But creating new roles in “next generation” services are the flip side of the legacy services decline. And it appears those twin issues--legacy decline and the effort to create viable new roles in next generation service ecosystems--also are driving asset decisions.

Enterprise revenues offer a mixed picture. “Next generation” and data services generally are the bright spots for all service providers. Legacy services are under pressure.

“Telco revenues from strategic ICT services are growing faster and, according to our calculations, will overtake legacy service revenues in 2018,” according to David Molony, Ovum principal analyst.

Most observers likely would agree that business customers remain a mainstay of tier-one service provider revenue streams.

What specific roles service providers can assume in the new ecosystem is the issue. And some of the revenue trends illustrate the changes.

Without much doubt, service providers are seeing the impact of changes in customer preferences. Enterprises are buying fewer legacy products and more IP-based and cloud services. That is why Verizon and AT&T routinely report margin pressure and gross revenue declines in their enterprise legacy long-haul and access businesses.

In the third quarter, Verizon global enterprise revenue declined 4.9 percent and on a constant currency basis was down about three percent. In the global wholesale business, revenues declined 5.1 percent in the third quarter.

“In both businesses we continue to see similar trends impacting growth, with secular declines in legacy transport revenue and competitive price compression in other services,” said Shammo.

At AT&T, third quarter results included weakness in legacy business services. “Business wireline revenues were down due to pressure from legacy services, said John Stephens, AT&T CFO. Business segment “strategic business services” (IP and data services) grew 12.6 percent, year over year.

In contrast, AT&T “strategic business services” revenue grew by more than 12 percent year over year.

Verizon “Global Enterprise” revenue was down 4.9 percent in the third quarter 2015, year over year.  Global Wholesale revenue declined 5.1 percent year over year in the same quarter.  “In both businesses we continue to see similar trends impacting growth, with secular declines in legacy transport revenue and competitive price compression in other services,” said Fran Shammo, Verizon CFO.

Those trends simply point to a market that has changed. Networking arguably has become more vital. How networking is done, and the products and services sold to satisfy networking needs, have changed.

And those changes increasingly make possible new sources of value supplied “outside” the traditional telecom ecosystem. Or, more accurately, the telecom ecosystem now is part of the Internet ecosystem.

Decades ago, reasonable people could argue about whether the next generation network “would be the Internet” or not. Today, though managed services persist, it is hard to escape the logic that the Internet ecosystem is the big picture and the former telecom ecosystem is part of the Internet ecosystem.

That probably tells you most of what you need to know about where value lies.

source: Wall Street Journal

U.S. Telcos Exiting Data Center Business?

Several developments confirm a shift of strategy by large U.S. telcos and the apparently-secure role of specialists in the data center business.

Digital Realty Trust, the second-largest data center REIT after Equinix, is adding more capacity, bringing online a two-million-square-foot property in Ashburn, Va.

At the same time, the large U.S. telcos either have concluded that data center ownership no longer is a “core” asset, and have sold, are trying to sell, or might sell, their data center portfolios.

It is a truism that communications service providers are in a race to replace declining legacy revenues with earnings based on next generation services that largely center, one way or the other, on Internet apps, services and devices.

Along the way, some approaches that seemed appealing in the past are being revised. For the most part, few large telcos, cable TV or other service providers have had much luck creating big new businesses in consumer over the top services, even if that effort continues.

Most large U.S. service providers, for example, also seem to be concluding that data center operations are not “core assets.” They understand that data center services must be bundled with other enterprise and business customer offers.

But they also seem to be concluding that capital is better deployed elsewhere, and that data center services can be supplied on a “lease rather than own” basis.

Verizon might be the first large U.S. service provider to conclude that its extensive global network assets might also be “not core assets.”

Verizon Communications now is said to be exploring a sale of its “global enterprise assets” built on the former MCI-Worldcom global network plus the data center business (Terremark).

Verizon Chief Financial Officer Fran Shammo said, during the company's third-quarter earnings call on Oct. 20, 2015, that it continues "to work through secular and economic challenges" with its global enterprise division, which posted a 4.9 percent decline in revenue in the quarter ended Sept. 30, 2015.

In many ways, that trend speaks to changes in the ways enterprises globally have changed “what” they buy in the connectivity arena, as well as “from whom.”

There is declining demand for legacy connectivity of every sort, and growing demand for IP connections and bandwidth. Need for data center support also is changing as cloud computing becomes mainstream and public computing resources from Amazon Web Services and others become viable options.

Verizon spent $8.4 billion to acquire MCI-Worldcom in 2006. Verizon bought Terremark Worldwide in 2011 for $1.4 billion. Altogether, that represented $9.8 billion in acquisition costs.

Some think the assets could be sold for $10 billion. Some estimate the assets produce about $2 billion in annual revenue, implying a sale price about five times annual revenue.

Of course, Verizon has a revenue profile distinct from other large U.S. service providers, as 85 percent of its total revenue is earned from its U.S. mobile segment. All consumer operations and fixed network enterprise together represent just 15 percent of revenue.

Still, the trend to divest data center assets, mostly acquired over the past decade, suggests a belief on the part of large service providers that sustainable advantage cannot be gained by owning such assets.

If so, we might also conclude that large U.S. telcos no longer see the data center business as a path to future growth, in the same way that most large telcos have had scant success creating large new businesses in the consumer over-the-top domain.

In addition to the possible sale of Verizon data center assets, AT&T and CenturyLink likewise are trying to sell their data center businesses.

Windstream already has divested its data center business.  

So what is going on? There appears to be nothing fundamentally “broken” with the data center businesses. But most larger U.S. telcos seem to believe they can obtain the benefits (services for their enterprise customers) without owning the facilities.

CenturyLink appeared to believe colocation center hosting would provide a boost several years ago when it bought Savvis.

While it plans to continue offering colocation services, CenturyLink says it is looking for alternatives to owning nearly 60 data centers around the world that support colocation, managed hosting, and cloud services.

Cincinnati Bell also is monetizing its data center assets, selling ownership shares of its CyrusOne data center business and raising cash to reduce debt.

CenturyLink business segment revenues might be “driven principally by increased market penetration of our network, hosting, cloud, and IT solution service offerings,” as CEO Glen Post said.

But capital might be better deployed elsewhere, CenturyLink suggests. “We expect colocation services will continue to be a service our customers will look for us for, but we do not necessarily believe we have to own the data center assets to be effective in delivery of those services,” said Post.

CenturyLink’s revenue for the cloud and hosting  business is about $600 million annually, and the company says it seeks to sell or otherwise restructure the data center operations, not the cloud and hosting businesses that use data center real estate.

Experimentation is to be expected. Large service providers must expect to replace half their existing revenue sources about every decade, and the diminution of all the legacy core services implies a future revenue base build nearly completely on “new” services.

Finding big new revenue sources will be complicated by changing value and roles within what we used to call the “communications” ecosystem. Simply, value and revenue growth are migrating to cloud apps and software products, and away from managed communication services.

One is reminded of moves many large telcos made, in past decades, in the “computing” industry, again without long-term success.

That is just part of the continuing evolution of the business. Many efforts will prove disappointing. And it appears we now can add “owning data centers” to the avenues that have proven disappointing. No matter. The search will continue.

iPass Customers Can Use Fon Hotspots

Hotspot suppliers iPass and Fon Technology, the two largest Wi-Fi networks in the world, have formed a partnership to allow iPass customers to use nine million Fon hotspots.

The agreement will provide iPass with additional Wi-Fi capacity to offer its enterprise customer base.

The companies also say they are in further discussions to provide members of the Fon community with access to iPass hotspot network at airports, hotels and other public areas.

In combination with other recent network partnerships, iPass enterprise users will have access to 50 million Wi-Fi hotspots worldwide by the end of 2015.

Cisco and Ericsson Create Global Partnership

Cisco and Ericsson have announced a global business and technology partnership across routing, data center, networking, cloud, mobility, management and control, and global services capabilities to support Internet of Things and mobile enterprise capabilities.

The firms will create reference architectures and joint development, systems-based management and control, a broad reseller agreement, and collaboration in key emerging market segments.

The parties have also agreed to discuss patent licensing policies and enter a licensing agreement for their respective patent portfolios, enabling unfettered joint innovation and providing certainty for customers of both organizations.

The agreement already calls for Ericsson to receive license fees from Cisco.

The combination will face all the typical execution challenges of big collaboration agreements, but some might argue the effort is, in large part, a response to the Nokia purchase of Alcatel-Lucent, against the background of vigorous competition from China-based technology suppliers.

The partnership is expected to drive incremental revenue in calendar year 2016 and $1 billion or more in annual revenue for each firm by 2018.

"Ad Blocking" Threat Appears in Facebook 10-Q

For the first nine months of 2015 and 2014, advertising accounted for 95 percent and 92 percent , respectively, of Facebook’s revenue, which is why ad blocking could eventually be an issue.

“Technologies have been developed, and will likely continue to be developed, that can block the display of our ads, particularly advertising displayed on personal computers,” Facebook says in a Securities and Exchange Commission filing.

Up to this point, Facebook says, “revenue generated from the display of ads on personal computers has been impacted by these technologies from time to time.”

“If such technologies continue to proliferate, in particular with respect to mobile platforms, our future financial results may be harmed,” Facebook notes. Of course, such statements, made in the “business risks” section of quarterly 10-Q filing are not unusual.

Those sections typically outline all the possible ways management believes the business could be negatively affected. Still, the specific mention of ad blocking is significant.

Any business reliant on advertising would be harmed by widespread consumer ability to block the majority of such ads.

Data Center Operators Expect SDN Cost Savings Within 24 Months of Adoption

A study of data center operator views of their software defined network investments shows most expect operating cost savings related to their data center networks within the first 24 months.

Opex savings and capex savings are among the reasons data centers are adopted SDN in the first place.