Regulatory Impact on Capital Expenditure Remains Unclear, For Reasons

One never can be completely sure about how well any set of public policies related to telecommunications is working, or how much impact such policies might have, any more than it is possible to have complete clarity about the impact of any policies designed to affect the economy. There simply are too many independent variables.

Consider the matter of whether current U./S. federal policy encourages, discourages or has no impact on investment in core communications infrastructure. Some argue that new common carrier regulation has not lead to a decline in service provider investment, while others note there has been a decline.

But Dr. George S. Ford is Chief Economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, argues the motivating rationale for investment is driven by strategic and competitive concerns, even under an investment climate that might be deemed unhelpful.

The argument Ford makes is that service providers “continue to invest,” despite a more-difficult investment climate, for several reasons. Demand for high speed Internet access continues to grow, especially for higher-speed services that require additional investment.

But extraordinarily low interest rates have been crucial. When firms can borrow at nearly-zero rates, it makes sense to borrow to build, as it makes sense to borrow to acquire.

“Regulation is but one of many inputs into the investment decision, so what is needed to decipher the effect of regulation on investment is referred to in the scientific community as a counterfactual,” Ford argues. “That is, we need to know what would happen in the absence of (or but for) the regulation.”

In other words, it is not terribly helpful to note incremental increases or declines in investment. The issue is whether investment would have been higher or lower in the absence of the regulation. And that always is a hypothetical exercise.

Generally speaking, economic theory is ambiguous about the effects of regulation and investment, said Ford.

But one form of regulation unambiguously reduces investment:  regulation that is expected to reduce returns on investments made today, Ford argues.

Means and ends matter, he argues. “A rule that increases capital expenditures but has no discernible effect, or a diminished effect, on the deployment or adoption of Internet service in the U.S. is pointless,” Ford argues.

The bottom line is that it actually is not easy to tell, in the moment, whether capital expenditure actually represents net “investment” or not, whether policies are helping or harming investment.

Who are Greatest Competitors for Mobile Operators?

When the most-significant perceived competition comes from entities outside, rather than inside a “market,” it is a sure sign that a market is changing. And that arguably is the growing case for mobile and other telecom service providers.

A survey of 101 service providers sponsored by Openet Telecom, including respondents from every region, found “over the top” application providers were viewed as the most-significant competitors. In fact, app providers were deemed bigger threats than other mobile operators, mobile virtual network operators, Wi-Fi first MVNOs, fixed network operators or free Wi-Fi providers.

That might strike some of you--especially those of you who work at service provider organizations, or have done so--as discordant. Keeping in mind the difference in perspective between “C” level executives and mostly everybody else in an organization, actual behavior does not match the stated perceptions.

What C level telecom executive, on any service provider quarterly financial results call, actually spends much time addressing how the firm is faring against OTT providers? Seriously.

To be sure, the point of such calls is to report on how each firm fared, during the quarter, on its own financial and operating performance metrics. Comparisons to the competition tend to be scant.

But both the presentations and questions from financial analysts center on core results, or perspectives and strategies to support core results going forward.

Performance and especially revenue growth of new lines of business always will be highlighted, however. But when was the last time you recall a company’s leadership spending time pointing out new revenue initiatives that actually compete directly with Google, Facebook, Apple or Skype?

It doesn’t happen.

So we might indelicately suggest there is a disconnect here. As much as executives might say, when surveyed, that OTTs are the biggest competitors, they “act” on a recurring basis as though other service providers actually are the biggest competitors.

Some might say that is because actors really do not understand their businesses. But there is another way to view the apparent attitudes with the demonstrable behavior.

The way questions get asked shapes the responses in ways that can obscure the answers. In other words, OTTs represent a challenge, but not directly. The direct challenges come from other service providers.

When an executive suggests OTTs are the biggest competitive threat, what is meant--and understood--is the destruction of the service provider business model overall.

In other words, executives clearly understand that the revenue and margin-producing value of voice, messaging and other services is eroded by OTT alternatives.

But that does not make Skype, Apple, Google or Facebook the biggest actual competitor. OTT does rip value out of the service provider role in the ecosystem. In that sense, the separation of content and apps from access is the big strategic problem, and is well understood.

But, as a rule, the key competitors remain “other service providers” able to take market share and customers away from any particular provider.

In other words, there are two separate domains here. The first domain concerns the strategic shifts in value creation within the content and communications value system. That is not, per se, an instance of competition between actors in market segments, but an overall change of the ecosystem.

The second domain, of “what market are we in” is where actual competition occurs, and is measured.

That is not to say some entities operate in multiple segments of the ecosystem. Some firms actually do have significant “access” and “content creation” businesses, and therefore operate across several parts of the ecosystem, for example.

The matter is complicated because the way competition happens redefines markets. Netflix is an entertainment video distributor, is an OTT provider, and does compete, in some meaningful way, with linear video distributors including satellite, cable TV and telecom providers.

Google Fiber and other entities do compete directly, in some instances, with core services provided by cable TV and telco ISPs.

So OTT providers that originally represented a “hollowing out of the business model” can, in fact, become direct competitors.

Even when executives identify app providers as their greatest competitors, on a day-to-day basis, most mobile operators operate as though the main competition comes from other mobile operators; fixed network telcos and cable TV operators tend to see each other as the biggest competitors, on an on-going basis.

One never should assume leaders in any market “do not understand” their challenges, or understand “in what markets” they operate. So maybe there is another way to interpret the results.

LTE Broadcast Might Generate $14 Billion by 2020

LTE Broadcast might initially generate $14 billion in global revenue by perhaps 2020, a report produced by Innovation Observatory for the GSA now predicts. In a global business generating $1.1 trillion, that is not too much, but might yet be significant for some operators, in some countries.

LTE Broadcast, also known as LTE Multicast, is significant for the same reason TV, radio and other linear video delivery systems are important.

Where linear media content has a sustainable business model (one copy, millions of potential viewers), “broadcast” or “point to multipoint” or “multicast” is the most efficient network delivery system.

For mobile operators, LTE Broadcast is interesting because it offers a platform to boost revenues by providing new services, important since “average revenues per user have reached a plateau” in many countries, according to the GSA.

LTE Broadcast is viewed as one new platform for creating incremental new services that give customers a reason to buy new services, thus creating new revenue models. At least so far, the concept has referred to multicasting over relatively targeted areas such as sports venues, where demand for unicast content is expected to be quite high.

The tradeoff, of course, is that LTE bandwidth used to support other applications is reduced as bandwidth is shifted to multicast use.

source: GSA

source: GSA

source: GSA

Competition From Customers A Potential Problem for Long Haul Transport Providers?

In many parts of the telecommunications business, enterprises have often been "competition." In other words, enterprises often have chosen to build their own private networks instead of buying from telecom services providers, opting to do it themselves. 

That remains a service provider challenge. The large app providers essentially are enterprises that have elected to build their own data centers and long haul networks. It started with the data centers, then moved to the undersea networks realm. 

Now Facebook and Google are experimenting with unmanned aerial vehicles to supply backhaul for retail Internet access. Google is preparing to launch a network of balloons for the same purpose. And then there is Skype. 

App providers have nibbled at the edges of the device business as well, bringing to market branded game players, tablets and occasionally a smartphone. 

It doesn't appear the "build versus buy" tradeoffs have diminished. 

Mobile is the Only Way to Create an Integrated National Quadruple Play in U.S. Market

We sometimes hear talk of mobile-fixed convergence, or “quadruple play bundles” more often in context of Western European strategy than U.S. service provider strategy. There are good structural reasons for that divergence.

In Western Europe, it often is possible to assemble assets that provide mobile and fixed network coverage of nearly a whole country.

In the United States, the Federal Communications Commission and Justice Department historically have prohibited any single provider of mobile or fixed service from gaining more than about 30 percent market share.

For a fixed services operator, that means a key geographic limitation. A fixed network service provider cannot operate networks that pass or serve more than about 30 percent of potential customers.

Mobile operators, on the other hand, are free to build national networks, but cannot get more than about 30-percent market share.

That makes impossible the task of selling a quadruple play package (voice, entertainment video, Internet access, mobile) on a national basis.

One reason AT&T’s DirecTV acquisition helps, in that regard, is that it allows AT&T to create a functional quadruple play, with a national footprint linear delivery and then national ability to sell mobile services with voice, Internet access and mobility. In essence, AT&T is the first supplier to be able to sell a national quadruple play of sorts.

And other issues aside, that is why U-verse video marketing will remain limited to only some parts of the country. U-verse cannot, by definition, be a nationwide service.

For other service providers, creating and selling a true quadruple play, on a national basis, is not possible. “Integrated” quadruple play offers cannot be sold everywhere, but only to a fraction of potential buyers.

Only mobility and satellite TV are possible fully-owned, facilities-based “national footprint” services in the U.S. market. All other fixed network footprints, for legal or financial reasons, will be local or regional.

The only other provider potentially poised to replicate that footprint is Dish Network, which owns both nationwide mobile spectrum and the last independent satellite TV operation with national scale.

In that regard, you might regard “Binge On,” the T-Mobile US service that allows customers to stream video from 24 services without incurring data plan charges, as an attempt to create a functional quadruple play service.

That is why there also has been some interest in LTE-Broadcast, which although not a full-fledged way of replicating linear video services, offers support for point-to-multipoint “broadcast” video or content.

In the U.S. market, at least, mobile is strategically important for a number of reasons, including its status as the sole nationwide platform able to support all media types, if not yet every business model.

As entertainment video breaks from the traditional “broadcast” model, and becomes an on-demand medium, mobile service providers will be able to attempt becoming full functional substitutes for fixed network entertainment video.

"Binge On" is a Harbinger of Things to Come

Nobody yet knows whether the T-Mobile US “Binge On” feature, allowing customers to stream entertainment video without incurring usage on their mobile data plans, is going to crash the T-Mobile US network, or not. T-Mobile obviously believes it can handle the traffic.

But the move, in some ways, only presages an inevitable evolution of the mobile business and networks. Recall that the reason Dish Network has assembled a mobile spectrum portfolio is that it wants to be a player in the mobile business, specifically wit competence in entertainment video.

Verizon is spending so much effort on mobile streaming (Go90 service, purchase of AOL) because it also believes the future of entertainment video is mobile.

T-Mobile might be early. T-Mobile might encounter network congestion issues. But T-Mobile likely is not at all wrong about the direction of mobile revenue growth, and the services that drive it.

If there is anything like a “killer app” for smartphones and Long Term Evolution, it is video. That is not to downplay the importance of carrier messaging and voice, instant messaging, music, games, email  or Internet access in general.

It is simply to say LTE was the first generation of networks to have the ability to support lots of consumer video streaming, in terms of quality of experience.

So far, mobile has become a substitute for fixed voice and Internet access. What comes next is the ability to substitute mobile for entertainment video access, a product that fixed networks continue to excel at providing.

The cost of mobile bandwidth (dollars per gigabyte) has been a major barrier to fuller substitution of mobile for fixed service consumption. “Binge On” is an early step towards erasing a goodly part of the fixed network advantage.

To the extent that Internet access drives the immediate next phase of revenue growth for fixed and mobile networks, Binge On is a concrete step by a mobile operator to operationalize mobile video as a fuller competitor to fixed network linear video.

And T-Mobile US is not alone in believing this is where the market is headed. Broadband services--especially video and Internet access--now drive revenue growth across mobile and fixed networks.

So the key longer term issue posed by Binge On is how successful the offer will be in leveling the playing field with fixed network entertainment video providers. It remains early, and few would yet say Binge On is a head-on challenge to fixed network linear video.

But it clearly is the biggest challenge, yet.

Legacy Revenues Ultimately are "Toast"

Legacy communications will continue to shrink, analysts at Ovum maintain, even as content, advertising, video services, devices, Internet access and enterprise services continue to grow, globally.

Enterprise technology spending will claim 32 percent of the total “digital enablement” market in 2025, almost doubling to more than $1.5trillion by 2025, according to analysts at Ovum. That might not mean quite as much as the forecasts for discrete segments.

Notably, revenue for “traditional communications” is forecast to shrink eight percent by 2025. Virtually every other category grows revenue.

The other salient angle, one might argue,  is “where” growth will occur. Most analysts continue to forecast growing revenue in Asia, Africa and elsewhere, for example, with revenue declines in Western Europe and possibly the developed nations of Northeast Asia as well as North America.

You might simply say the divide is between growth in emerging economies and decline in the developed nations. Over the near to intermediate term, the other certainty is continued disruption of the voice revenue stream, everywhere, not just in developed countries, as hard as that will be to accept in many markets where voice continues to drive 80 percent of total revenue.

The reason for pointing to such trends is merely to emphasize the absolute centrality of efforts to discover or create brand-new revenue sources with enough scale to displace the loss of legacy services.

The other important implication is that it is crucial to make continued progress on fixed and operating costs. The reason is brutally simple: in a highly-competitive and low-margin business, the low-cost competitor wins. 

Think grocery stores, where profit margins routinely are one percent to two percent of sales. That is not to predict communications service provider profit margins necessarily are headed to that level; just to point out that lower costs really are going to matter as the amount of uncertainty and competitiion in communications continues to grind higher.

Source: Ovum

source: makethenetwork.eu

source: Telco 2.0