Escaping "Dumb Pipe" Value and Role Requires Embrace of Content

One can argue about whether telecom and banking are logical partners, as one can argue about the upside for mobile payments and other banking-related transaction businesses. Many have struggled to find sustainable partnerships around social media and messaging apps.

Fewer think entertainment and content are illogical areas that could drive service provider revenue growth.

There is one theme that underlies thinking about all those potential growth avenues. The logic is to make an information asset a “communications” asset.

The reason that is important: in an era where applications are logically separated from network access, the value of access and transport becomes something of a commodity, difficult to differentiate.

Information--especially that related to discrete individuals and firms-- as well as content, are highly differentiated and therefore much more “unique.” And uniqueness creates the foundation for value, and higher retail prices.

Between 1998 and 2015, for example, Internet transit prices fell about three orders of magnitude (by a factor of 1,000).

To be sure, transit prices are but one element contributing to final retail prices. But transit prices, and capacity prices more generally, suggest the direction of pricing trends.

Access networks, observers will note, are not “virtual” or as easy to replace or upgrade as chipsets or consumer devices. That suggests access costs should be sticky to the high side.

But even if “access” involves construction that cannot follow Moore’s Law, the actual trends for Internet access speeds and prices in the United States have nearly followed a path one would expect from Moore’s Law or  Kryder’s Law.  

In fact, if the trend continues, by about 2030, fixed networks and mobile networks will operate at the same speeds, an astonishing development, both technologically and in terms of business implications.

Since capacity increases that fast, but consumer discretionary spending power never does, the price per bit falls dramatically, even if retail prices drop marginally in developed markets, but rapidly in developing markets.

The implications are easy enough to predict: access--by itself--will become, and remain, a relative commodity, in the absence of value added other ways.

source: Fiber Optic Association

source: DrPeering.net

source: advancedsignalz.com

The implication, some of us would continue to argue, is that revenue growth, higher value and profit margins will require escaping the commodity-like “access and transit” function.

The threat posed by a “dumb pipe” role in the Internet ecosystem is precisely the commoditization of the function, and therefore the retail price, sales volumes and profit margins.

Content and information functions, on the other hand, remain capable of differentiation. Future winners in the service provider space likely will succeed in operationalizing that insight.

Verizon Wants to Sell Data Center Business

Verizon Communications is moving to sell its data center assets, reversing an earlier effort to  expand in hosting and colocation services after it acquired data center operator Terremark Worldwide Inc in 2011 for $1.4 billion.

The assets up for sale includes 48 data centers, generating annual earnings before interest, tax, depreciation and amortization of around $275 million.

The move comes at a time when a few U.S. tier one telcos appear to be rethnking their roles in the data center business.

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? Most larger U.S. telcos seem to believe they can obtain the benefits (services for their enterprise customers) without owning the facilities, and can deploy capital elsewhere.

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

Some would argue the large telcos also face issues of relevance in the cloud computing  business.

Will Netflix Shift to Focus on Profits After Big Global Expansion

Will Netflix do as Amazon did and shift from growth to reporting some level of actual profits? Possibly.

Netflix, already in more than 60 countries after launching in Japan, Australia and Southern Europe in 2015, might be at a point where it can concentrate on harvesting.

Netflix has estimated it would add about six million accounts domestically and 11 million outside the United States in 2015, reaching 74.3 million total.

Netflix might have net income of $137 million in 2016.

Some analysts project $535 million net income in 2017 and more than a $1 billion by 2018.

Separately, Netflix now has climbed into the top ranks of spending to create original content. Netflix will spend more than CBS, Viacom, Time Warner and Fox Networks on content in 2016, according to MoffettNathanson.

Netfli also will spend more than HBO, Amazon and Hulu.

source: Bloomberg

Business Insider

Why Content Will Drive Mobile-App Provider Partnerships

Even if they operate in different parts of the value chain, mobile service providers and app providers increasingly will partner, many now argue.

Beyond 2020 to 2025, the degree of collaboration might hinge on content services, SCF Associates has argued. “That may involve MNOs becoming much closer to the major web services players,” argued Simon Forge, SCF Associates analyst.

To be sure, the partnering recommendation is not new, nor a strategy mobile and fixed network service providers have failed to envision. Thinking--and some action--around OTT voice and messaging has been extensive.

Still, it has generally been hard for over-the-top challengers and service providers to make robust revenues or profits on OTT voice and messaging.

One analysis conducted for the International Telecommunications suggested that no OTT strategy would be able to arrest a major decline of voice roaming prices, and therefore revenue.

In that analysis, resistance to OTT voice (scenario one)r collaboration (scenarios two, three and four) all lead to vastly-lower voice roaming prices.  

Some might note that past successes or failures in the over-the-top messaging or voice areas is not a predictor of future developments, in large part because of the role content apps and services now are assuming in the “telecom” space.

For starters, content is “sticky” and “unique” in a way that voice, messaging or Internet access is not. That is why prices, profit margins and revenue for content services have not followed the almost-linear downward path seen for voice and messaging.

Uniqueness is why streaming and linear channels and services create their own unique content, and seek exclusive licensing deals. That offers lots of room for partnering between content apps, services, networks, studios and copyright owners and access providers (both mobile and fixed, but especially in the mobile realm).

source: ITU

Think of services such as Verizon’s Go90, Comcast Watchable and T Mobile's BingeOn. All provide examples of the role content services are expected to play in core mobile and fixed network revenue plans.

That also is true of Dish’s Sling TV, Sony PlayStation Vue, Alibaba TBO and Youku, Showtime’s carriage on Hulu, YouTube’s Red subscription service, and now the ability to buy OTT subscriptions from HBO, Showtime and others on Amazon’s Prime service.

Smaller networks, in particular, may ultimately need OTT carriage to survive, and therefore have incentive to eventually partner with mobile firms.

Recent research indicates that 15 to 20 prominent niche services will rise by 2018 to eat into share now held by Netflix, and the premium OTT market as a whole will total $8-10 billion by that time, notes Forge.

In the same vein, networks, pay TV providers, and mobile carriers are all looking at strategic ways they can make the most of their content and infrastructure to create compelling consumer service offerings, particularly for Millennials, Ooyala argues.

AT&T partnered with Hulu for mobile and Internet customers, and Time Warner has a new Internet TV service.

Cablevision has a cord-cutter package linking broadband, over-the-air digital antenna and in some areas, Wi-Fi-based phone service.

The Verizon Fios Custom TV bundle omits some high-cost networks, while Comcast also sells a  “mobile-first IPTV service,” Stream TV.

source: ITU

App Providers Lead Equity Value Gains, Access Providers Generally Fall

There is one very good reason why practitioners in the traditional telecom industry are riveted on value creation, as much as they have to focus on revenue growth and profit margins. With the shift to Internet Protocol, value created by applications is logically separated from access.

In that sense, the layered software model also illustrates the change in potential business models: an app provider does not need to own access assets to prosper. The reverse likely is less true: access providers will have a much-tougher time creating value that drives margins.

“The traditional telecom industry (and their partners such as IBM and Accenture) is losing to new entrants at a rapid rate: first in applications, then in voice-over-Internet protocol and managed hosting, and now in cloud services,” says Jim Patterson is CEO of Patterson Advisory Group.

“Wireless services have produced tens of billions of dollars in value, but that pales in comparison to the value created over the last decade by Facebook, WhatsApp, Skype, YouTube, Chrome, Android, iOS and iTunes,” Patterson notes.

Note simply the divergence in access provider and app provider equity prices over the last year. Amazon’s equity value was higher by 118 percent. Google’s equity value grew “just” 44 percent. Facebook’s equity value was higher by 32 percent over the last year.

By way of contrast, Verizon was lower by one percent, AT&T up just two percent, Sprint down 13 percent, and just T-Mobile US up by 45 percent. CenturyLink dropped by 36 percent; Frontier Communications dipped 30 percent.

source: RCR

CES, AT&T Shift to Internet of Things, Connected Cars

The Consumer Electronics Show once was lead by televisions as the key product category. Then CES became a show focusing on personal computers. Then came mobility. Now CES is about connected cars, part of the Internet of Things category.

AT&T signed more than 300 Internet of Things connected devices deals in 2015, in the United States and internationally, to connect sensors and other telemetry devices across the automotive, shipping, industrial, health care, home security and smart cities sectors.

In the United States, about 25 million connected devices are now on the AT&T network, a year-over-year increase of more than 25 percent when compared to the third quarter of 2014.  

In the third quarter alone, AT&T added a record of more than 1.6 million connected devices. Of that number, one million--fully 63 percent--were connected cars.

Also, AT&T is introducing a new family of Long Term Evolution modules to meet the needs of a broad range of Internet of Things applications. The modules are designed to simplify and lower the cost of IoT device designs globally, while improving device performance.

The new modules can run over the AT&T 4G LTE network. An LTE-only option offers low current to improve device battery life, which is important for some IoT applications.

Other module variants include built-in GPS, voice and data. Modules are available that support both 4G and 3G networks for IoT devices that need the ability to use either technology.

AT&T worked with Wistron NeWeb Corp. (WNC), a module and device manufacturer, to design the new LTE modules. They use an industry standard surface-mount package specified by the European Telecommunications Standards Institute (ETSI).

The M14A2A – LTE Only Category 1 can limit the amount of battery drain on an idle device compared to other LTE modules. Where 3G fallback is needed, WNC offers options such as the M14Q2 – Category 1 and M18Q2 – Category 3.

The IoT modules are expected to become available from WNC at prices planned as low as $14.99 each, plus applicable taxes, starting in the second quarter. Samples will be available for testing in the first quarter.

"Four" Versus "Three" in U.K. Mobile: Will Prices Rise if Consolidation Happens?

“Four” and “three” remain the most-important numbers in the global mobile service provider business. As European Commission regulators review the proposed merger of Telefonica-owned O2 and Hutchison Whampoa-owned Three, there is concern in some quarters that reducing the number of leading mobile service providers in the United Kingdom would lead to higher prices.

The merger would reduce competition from four leading providers to three, with the new company having 40 percent market share.

In Austria, the cost of running a mobile has gone up by an average of 15 percent following a 2012 merger between two of its four telecoms operators, another recent example of market consolidation from four to three.

Many financial analysts would argue that is precisely the point. Four national mobile service providers has proven to be a difficult structure, in terms of long term sustainability, some would argue, since the level of competition reduces profits below levels consistent with long term and continual investments.

U.S. regulators likewise have argued that four is a better number than three, in terms of competition and consumer benefit.

The issue is whether that is sustainable, long term. One might note that the share of revenue within the mobile service provider industry (separate from revenues earned directly by app providers) has been shifting in the direction of device and app suppliers since 2000.

At the same time, one might argue that the U.S. four-provider market has become a duopoly, with AT&T and Verizon at the top, and Sprint and T-Mobile US struggling to catch up.

source: Phil Wilson & Geri C. Gibbons

source: Seeking Alpha