No Simple Way Forward for Access Providers

Communications service provider strategic and business model issues that were challenging before the Internet became far more acute afterwards. The widely-held notion that access providers were in danger of becoming “dumb pipes,” with application value migrating up the stack, is not misplaced.

The fundamental problem is that the historic, vertically-integrated voice model is difficult, at best, in the Internet era, where the fundamental model of computing is horizontal (layers) rather than vertically integrated.

That, in turn, has profound business implications. Of four major market positions examined by BCG analysts, though it is possible for a traditional telco to keep its legacy business model, some might say that will prove challenging, as it requires both vertical integration (apps and access) as well as the ability to maintain profitability with only incremental improvements to the key processes and services.

The problem is that the logical moves that could provide sustainability move in contradictory directions: towards a real focus on “hyper-scale” wholesale operations with massive scale, without worrying about innovation.

The other direction leads towards apps or platforms, both of which arguably are built on non-traditional telco skills and competencies.

The four types of roles “require different skills and motives, present different financial profiles to investors, and need to be managed on different time horizons.,” BCG argues. “A company can flourish in multiple layers—Amazon does it—but most organizations consistently underestimate the enormous challenges.”

Communities of users, professionals, and small entrepreneurs are typically found toward the top of the stack (application layer). “They flourish when uncertainty is high but the economies of mass are weak and where innovation comes through many small, seat-of-the-pants, trial-and-error bets,” BCG says.

Infrastructure organizations are typically found at the bottom of the stack. “They are most useful when uncertainty is low and economies of mass (specifically scale) are overwhelming,’ says BCG. “heir core competence is in long-term, numbers-driven capacity management.”

Curatorial platforms, narrowly defined as organizations that exist solely as hosts for communities, are a hybrid. In the stack, they lie immediately below the community they curate.

Traditional oligopolists occupy the broad middle of the stack. They have the advantage when uncertainty is high but not incalculable, and economies of mass (scale, scope, and experience) are significant but not overwhelming, BCG argues.

They exploit economies of scale and scope by placing big bets on technologies and facilities and make incremental improvements in products and processes.

Telcos and cable TV companies are “traditional oligopolists.” To sustain that role, they must sustain or create vertically-integrated services, continue to operate with economies of scale, and hope that incremental improvements are sufficient to sustain the business model.

That is a tall order, given the declines we continue to see in all the core legacy services. And that is why strategy now matters so much, and why Internet of Things now matters hugely. IoT might offer the best opportunity for creating a big, new vertically-integrated replacement business.

source: bcg

IoT Could Turn "Digital" Laggers into Leaders

The Internet of Things is going to be a big deal for a number of reasons, not least of which is the likelihood that IoT is the way “physical” industries, unlike “virtual” industries, will be able to leverage digital technology.

Up to this point, the industries that have been most able to take advantage of digital technology are based on intangible, or largely intangible (software) products, including information technology, media, finance and insurance.

It does not take much insight to suggest that manufacturing, trade, health care and other industries can benefit from IoT capabilities.

source: McKinsey

Content, Not Speed or Price, is How Mobile Ops Will Compete in Future

A very good rule of thumb, when assessing consumer or business behavior, is to watch what they do, not what they say. For example, telecom executives often tell researchers that their biggest competitors are over the top app providers.

But some would say they take action in ways that suggest the “real” competitors are in fact, other service providers, not app providers, as surveys often suggest is the case.

Not very often does any tier-one telco or mobile service provider actually take a concrete step--and back that with spending commitments--that suggest an app provider really is viewed as a key competitor.

As just one example, leading mobile service providers often adjust their own policies, prices and packages based on what some other major competitor just has done. At other times, actions are taken to distinguish one contestant from others in the market.

Cable operators are not upgrading their networks to gigabit speeds because of Facebook or Netflix, but because of Google Fiber, a facilities-based and direct Internet access and video entertainment competitor.

What executives might be signaling that the leading strategic concern is loss of value, revenue and profit margin from core services to OTT competitors.

That concern is legitimate, but does not conflict with the reality of direct competition from other leading service providers as the driver of real-world actions.

There is an important strategic implication: some app providers--particularly in content areas--will almost certainly emerge as key partners as mobile service providers look for ways to differentiate their offers in ways other than “speeds” and “prices,” the two major ways mobile operators have competed to this point.  

As Long Term Evolution networks--and coming fifth generation networks--are fully deployed by virtually all leading mobile service providers, and if spectrum allocations become more even, among the leading suppliers, “speed” will not be a differentiator.

At some point, neither will “price,” since competitors can match offers when they must. The main reason subscription video average revenue per user has not declined in decades, compared to every telecom service, is that entertainment video is content.

Good content is hard to produce and inherently limited, which has value--and therefore pricing-- implications. That means mobile operators often will bundle OTT video to create distinctiveness, and likely will find other content-related apps useful for the same reason.

Some would point to Netflix and Spotify, Binge On and other efforts as examples.

And that means partnerships between OTT app providers and mobile service providers, as a long-term trend.

source: Openet

The issue is how much differentiation is possible. The answer might vary, market by market, based on regulatory rules enabling or prohibiting certain promotions or policies, such as exempting video consumption from data plan usage, pre-processing video for better bandwidth efficiency, allowing free access to video services or other measures that create differentiated offers.

At the January 2016 AT&T Developer Summit and Hackathon, Tom Keathley, AT&T SVP for wireless network architecture and design, pointed out that video generated between 40 percent and 50 percent of data traffic on the AT&T mobile network and more than 50 percent of traffic on its wired network.

Keathley suggested it would be not unreasonable to expect that entertainment video would grow to perhaps 70 percent of mobile data traffic by 2018.

AT&T would consider efforts such as limiting of video stream quality to match a device screen’s capabilities, perhaps at 480p resolution, as a possibility.

That will enrage some policy advocates who insist “all bits be treated equally.” Whether that is possible, or desirable, is the issue.

But such pre-processing also illustrates why content bundling will be more strategic in the future. It is content that now drives mobile data consumption, while content remains a key means for differentiating one carrier's offer from another's.

Between 2011 and 2016, Revenue per Gigabyte Prices Will Drop 300 Percent

Wi-Fi now has become an important input for mobile operator access cost containment. As usage continues to climb, revenue per gigabyte keeps dropping. 

Offloading traffic allows users to consume lots of data without excessive stress on their data plans.

That offloading also means network capacity investments to cope with usage growth can be delayed longer than otherwise might be the case.

Oddly enough, the bind is real: mobile operators arguably cannot afford to invest enough in their own networks to support all the usage and still have a sustainable business model.

Even if there is some "lost revenue" because users shift to Wi-Fi, and therefore the mobile operator loses usage, the upside is that the operators avoid huge capacity investments.

source: Analysys Mason  

                Average wireless network traffic per connection

source: Analysys Mason

Why Content is a Logical Mobile Service Provider Opportunity

There is a very good reason many mobile service providers now are turning their attention to mobile video, and might also eventually participate in other app efforts: mobile is going to be the dominant screen used to watch video content, mobile is the access platform and the revenue opportunity is large enough to affect earnings.

Even if consumption of digital media is growing, mobile consumption is growing faster, according to comScore.

By 2030, U.K. regulator Ofcom suggests, as much as 60 percent of video content might be viewed on a smartphone screen.

Also, content is at the heart of mobile app usage, daily.

In 2015, U.S. service provider mobile data revenue was $144 billion. TV revenues were $185.3 billion. Mobile has the screens and the delivery mechanism. It simply needs to create a sustainable role in the content and advertising part of the ecosystem.

Marketing and Operating Costs Might Provide the Difference for Small ISPS Deploying Gigabit Internet Access Networks

At a macro level, the consumer telecom business relies on scale. That is why any examination of market share (fixed or mobile) in virtually any country shows a very-small number of names with 80 percent to 90 percent market share.

But there are ways small local providers sometimes can create a sustainable business model.

Odds have proven to be best when operating in smaller markets (not dense urban, not rural).

Prospects arguably are especially picking markets where the dominant providers (cable TV and telco) are bigger “national” names who know their financial results do not hinge on what happens in the smaller markets.

In other cases, the dominant competitors are smaller providers without deep pockets, but also higher overhead and operating costs. You might argue that a small Internet service provider building its own fiber-to-customer facilities will not enjoy any cost advantages over a large tier-one provider, in terms of material costs.

It is conceivable there are some labor cost savings, but permitting, “make ready” and other costs should not be materially different from what other service providers have to pay. The possible exception is the rare instance where another entity is laying new conduit and the ISP can place cabling inside that conduit without paying the cost of digging.

The point is that the business model sensitivity likely hinges on marketing and operating costs.

Consider subscriber acquisition costs, a figure that typically includes attributed marketing costs, including discounts and other promotions, per subscriber, for linear TV and mobile service.

Dish Network and AT&T’s DirecTV (prior to acquisition by AT&T) subscriber acquisition costs were about $868, on average. Comcast incurred SAC costs of $1980 per new account, while CenturyLink had $2352 per new account.

It has been estimated that some independent third party suppliers, such as Ting, spend only about $125 to acquire a new video customer.

The same sort of disparity exists for mobile service provider subscriber acquisition costs. Verizon invests about $484 to get a new mobile account. AT&T invests about $583 to get a new mobile account, while T-Mobile US invests only about $169.

Sprint, on the other hand, has to spend a whopping $1440 to get a new account, while Ting spends perhaps $80.

There is, in other words, an order of magnitude difference between Ting SAC and costs for tier-one competitors.

And that, one might argue, accounts for the ability some small ISPs could have in the new gigabit Internet access market, in some markets, even when new facilities have to be deployed.

source: Seeking Alpha

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.