7.7 Billion Mobile Broadband Subscriptions in Service in 2021, Ericsson Says

Mobile broadband subscriptions will reach 7.7 billion globally by 2021, according to Ericsson, and will account for an overwhelming share of all broadband subscriptions globally, even if mobile broadband will complement fixed broadband in some segments.

By 2021, there also will be some 4.1 billion 4G subscriptions in service, out of 9.1 billion total mobile accounts, or 45 percent of total.

source: Ericsson

source: Ericsson

There are Times When Even Lower Prices Do Not Drive Higher Consumption and Revenue

It might seem obvious that lower prices stimulate more demand for Internet access, mobile services and other products. In many cases--but not all--that is the case.

That could have important implications for service provider behavior and regulatory activity.

If lower prices do not lead to higher demand, then all lower prices do is diminish ability to sustain availability of the services. Some might call that a death spiral. That disconnect between consumption and price happens especially when markets reach saturation.

You might think, for example, about pricing for dial-up Internet access. No matter how low prices go, those price declines are unlikely to lead to higher consumption.

Also, in a growing number of instances, there is no direct price mechanism, since there is no direct incremental cost to use many communications-related apps and services. So end user behavior is not directly affected by price mechanisms.

That does not mean there are no underlying buyers and sellers. Though there might be no incremental direct cost to the end user (though “cost” in terms of exposure to advertising is “paid”). In such cases, the “customer” in such cases is a third party, not the end user.

As such, the causal relationships between price and consumed volume are shifted.

But even where there is a direct customer cost, it is not always true that lower prices drive higher usage, or higher levels of buying.

The tricky issue is that once markets reach saturation, they can become inelastic and resistant to price changes. In such markets, raising price does not lead to less demand, while lowering prices does not lead to more demand. 

Neither mobile voice nor carrier text messaging have reached a point where prices and consumption are not related. But they are trending in that direction.

One reason for the inelastic effects is that even lower prices might not stimulate incremental demand for a product that is technologically obsolete or for which newer and preferred substitutes exist.

That might be the case for dial-up access, compared to high speed access, in many markets. In the United States, by 2013, just three percent of Internet access customers used dial-up services.  

source: Pew Research

Consider that messaging, often available without any incremental direct cost,  represents vastly more traffic volume than carrier text messaging, which does have some direct cost element.

source: Analysys Mason

source: Analysys Mason

Those are examples of changing consumer preferences for talking, texting or messaging. In many ways, voice demand is declining, with replacement products (messaging) taking the place of former voice demand.

Most studies show marked preferences for texting and messaging, and a fall in usage of voice services. In many cases, such behaviors happen even when the user cannot determine the actual direct cost for using messaging, carrier text messaging or voice usage.

That is the case when a flat recurring fee allows unlimited numbers of text or voice messages, for example. It is not clear that an even lower fixed price actually stimulates more usage.

Also, when it is possible to make some calls for prices at zero or close to zero, prices already arguably have ceased to be relevant determinants of behavior.

source: New York Times

By 2012, U.S. mobile phone users in every age category already were sending and receiving many more text messages than calls.

In a similar way, It is not clear that demand for fixed network voice lines can actually be stimulated if prices drop. Some might note the impact of bundling policies that make purchase of Internet access, linear TV and home phone service a package featuring lower prices.

The problem is that many consumers will buy the bundle because they save money overall, and not because they “want” the home phone service much, if at all.

The point is that determining the direct impact of lower prices on demand for fixed network phone service is difficult to determine, since the purchase often is tied to purchase of other products (Internet access and entertainment TV) that consumers seem to want.

Generally speaking, demand for communications services is elastic in markets that are not saturated. That might not be the case when everybody who wants to buy a product already has done so.

In a saturated or declining market, not even lower prices will drive usage that translates into higher revenue.

AT&T Finds Scale Does Matter

In the linear video business, scale really does matter, in part because it is easier to amortize marketing expenses and operations, but also because programming contracts have a volume element to them. That is one reason why small providers of linear video have had a tough time making a business case.

Consider the difference between what AT&T had been paying to support its U-verse video business, representing about 5.9 million customers, and its DirecTV asset, with 19.6 million customers.  According to AT&T CEO John Stephens, U-verse video customers pay $17 more each month in programming costs than those on the company's newly acquired DirecTV platform.

Below 2 GHz, Spectrum Sharing is the Biggest Source of Mobile or Untethered Spectrum

Spectrum matters because communications matters, and wireless and mobile communications now dominate all communications globally.

Spectrum sharing matters because communications spectrum is a scarce asset, and demand is growing very fast, both because billions of new Internet access users will come online, and because new Internet apps and devices consume vastly more bandwidth.

There is, for example, almost no uncommitted communications spectrum available in the sub-2-GHz range.

Today, the U.S. government, for example, possesses almost 60 percent of radio spectrum and possesses over half—1500 MHz—of the valuable 300 MHz to 3 GHz spectrum useful for terrestrial wireless and mobile communications.

Much of that spectrum is lightly used or even not used. At a time when most observers believe people, organizations and businesses will need vastly more Internet and communications capacity, that is a waste of scarce resources.

Though there is an expectation that much spectrum in millimeter bands (3 GHz to 300 GHz) can be allocated for communications purposes, most of that spectrum will be severely “short range,” and hence best suited for indoor or small cell applications.

The promises of spectrum sharing is more efficient use of communications capacity with the best propagation characteristics, suitable for longer-range communictions.

Somewhat ironically, "sharing" long has been a major pattern for communications usage between a couple hundred MegaHertz and 300 GHz.

source: NTIA

source: NTIA

Mobile Taxes and Fees Grow 2.5 Times Faster than All Other U.S. Sales Taxes

Increases in federal, state, and local fees drove the national average wireless tax and fee burden to its highest level ever of nearly 18 percent of the average U.S. wireless customer’s bill, according to a new study by the Tax Foundation.

The increase over 2014 levels and is almost 2.5  half times higher than the general sales tax rate imposed on most other taxable goods and services.

Mobile services consumers pay about $5.8 billion annually in what the Tax Foundation terms “excessive” state and local taxes and fees, defined as taxes and fees in excess of the normal state and local sales taxes imposed on the purchase of other goods and services.

Over the last decade, tax burdens on wireless consumers grew more than four times faster than general sales taxes on other taxable goods and services.

In addition, mobile services consumers also pay about $5 billion in Federal Universal Service Fund surcharges.

The combined federal, state, and local burden on wireless consumers increased from 15.27 percent to 17.96 percent, or nearly three percentage points.

Florida was the only state to buck the trend toward higher wireless taxes between 2014 and 2015. The governor and the legislature reduced the state Communications Services Tax from 9.17 percent to 7.44 percent, which will provide over $100 million in tax relief for Florida wireless consumers and businesses.

Though competition has led to significant reductions in average monthly mobile bills, at the same time usage allotments have increased, the “tax and fee” burden has grown.

The average monthly wireless bill dropped from just under $49.94 in 2008 to $46.64 in 2015, a price decrease of nearly seven percent. At the same time, the tax rate increased from 15.5 percent to nearly 18 percent, according to the Tax Foundation.  

source: Tax Foundation

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.