Is Openreach a "Natural Monopoly?"

A study group anchored by U.K. members of Parliament wants full separation of BT Openreach, arguing that the current “functional” separation has not worked.

Since the functional separation from BT, Openreach “claimed in 2009 that 2.5 million homes would be connected to ultra-fast Fiber to the Premises (FTTP) services by 2012, which is 25% of the country,” the report says. “Yet by September 2015 they had only managed to reach around 0.7 percent of homes,” despite receiving £1.7billion in taxpayer subsidies.

That is perhaps not an uncommon problem. The report uses the term “natural monopoly” to describe Openreach, which is an accurate way to describe the supply of wholesale “telco access” capacity to retail partners for about half the U.K.’s homes.

What the report does not address at all is the face that cable TV operators are successfully taking market share and upgrading access speeds, using their own facilities, and able to reach about half the U.K. homes.

So Openreach is not, perhaps, actually a “natural monopoly” everywhere, where it comes to the supply of Internet access and other services. In fact, Openreach has a monopoly across perhaps half of all U.K. homes.

As early as 2006, the U.K. Internet access market was dominated by six companies, with the top two taking 51 percent. Virgin Media with a 28% share, while BT had 23 percent.

At the end of 2010 48 percent of U.K. homes were passed by Virgin Media’s cable broadband network, largely in the urban areas.

Virgin Media’s cable services are available to 30 percent of UK television homes, the company now says.

Virgin Media passes 12.7 million homes out of a total of 25 million homes. So Virgin Media can reach a bit more than half of all U.K. homes.

So Openreach functionally is a monopoly for access to about half of U.K. homes.

Making good policy always is difficult under such circumstances, where facilities-based competition already is a reality for half of U.K. homes, but the other half have no facilities-based choices.

Rapid SMB Cloud SaaS Adoption Since 2011

How has small and medium-sized business adoption of cloud services changed over the last several years? By some estimates, the answer is rapid adoption, with annual adoption rates as high as 40 percent.

In 2011, a Spiceworks survey of cloud adoption among SMBs found that smaller SMBs were more aggressive when it comes to cloud adoption than their larger SMB counterparts.

At least in terms of expectations, 38 percent of SMBs with fewer than 20 employees used or planned to use cloud solutions within six months.

Some 17 percent of organizations with between 20 and 99 and 22 percent of organizations with more than 100 employees planned to use cloud services over the same time period.

SMBs in emerging markets were especially active. Some 41 percent of small and medium businesses in Latin America/South America (LASA) and 35 percent of SMBs in the Asia/Pacific region are adopting cloud services.

That  was well ahead of the 24 percent of SMBs in North America and 19 percent in Europe that are adopting cloud services.

In 2015, North American cloud services adoption had grown to perhaps 37 percent, growing at about 40 percent annually. At such rates, by 2020 about 78 percent of U.S. small businesses will be using cloud computing.

Some other surveys suggest 64 percent of U.S. SMBs are already using cloud-based software, using an average of three apps. As you likely would guess, software as a service is what small businesses tend to buy.

source: Rackspace

Eliminating Digital Divide: 1/2 of the Gap Will be Closed in India and China

Some problems--ensuring that every human being has access to communications, clean water and sanitation, freedom from violence or hunger or disease often seem intractable.

The difficulties sometimes can obscure genuine progress. Fewer people than ever can remember when “people unable to make a phone call” was a major problem. That remains a problem in some population segments, but largely has been solved.

The new problem is how to give everyone access to the Internet. The barriers are formidable, but there is every reason to believe that problem also will be solved, and in relatively short order. Major advances in access technology, costs of access, value of Internet apps and device costs all are helping set the stage for a prodigious advance.

For example, rates of mobile broadband, which virtually everyone assumes will be the way most humans get access to the Internet, globally, have the fastest rates of growth precisely in the areas that need access most.

Also, adoption rates are increasing non-linearly. In part, that is because smartphone prices are dropping fast, allowing more people access to mobile devices they can afford. In part, the prices of mobile Internet access are plummeting fastest in the areas where the need is greatest.

Significantly, Internet adoption increasingly is at an inflection point, promising rapid adoption in the near future. Granted, at the moment perhaps 60 percent of humans remain unconnected. But change is coming fast.

India and China are important, since they represent such a large percentage of the unconnected. Those two countries represent 54 percent of all the people remaining to be connected.

Given the expected growth rates in China and India, half the world's Internet access gap will be closed quickly, as the adoption curves in those countries now have the same rate of change as earlier was the case in the United States and many other developed countries.

source: Mary Meeker, Hillhouse Capital

McKinsey

Singtel Moves Up the Stack, and it Still is Very Hard

You would be hard pressed to identify any single "telco" that is having more success in the application realm than Singtel, even if app success is arguably still dwarfed by success in the "access provider" realm.

Long term, app success will prove crucial for "access" providers, for the simple reason that access revenues and profit margins will continue to face pressure. It will not be easy.

It always is harder to move "up the stack" than "down the stack." And as we already are seeing, many app providers are proving they can successfully move down the stack. 

Google is the single biggest brand to demonstrate that trend (Google Fiber, Wi-Fi and other access initiatives; as well as a big role in "transport, data centers and cloud computing." But there are others. Facebook, Amazon and Microsoft have shown they can master key skills lower in the stack.

Moving up the stack is much harder. If you are looking for some evidence that can be successful, one almost always finds oneself looking at Singtel or Softbank. Singtel might be the better example, as Softbank started as an app company and then become a big communications services provider.

Singtel remains primarily a "communications" company, though it is pushing aggressively to create competence and scale in digital apps.

Singtel has business advantages and disadvantages based on its small domestic market. Larger service providers might rationally build growth strategies on capturing more of a large domestic market.

Singtel cannot do that, as its domestic market is limited. But inability to grow domestically also means the strategy of expanding internationally makes fundamental sense.

So it is that Singtel owns 100 percent of Optus in Australia, 47 percent of Globe in the Philippines, 35 percent of Telkomsel in Indonesia, 23 percent of AIS in Thailand, 32 percent of Bharti Airtel in India, as well as minority stakes in a number of mobile firms in Africa.

More significantly is Singtel’s strategy of investing both in “access” assets (mobile service providers) but also digital content and app assets.

Singtel’s digital life division focuses on its Amobee digital marketing business, HOOQ regional premium video, and DataSpark advanced analytics and intelligence capabilities.

Singtel also makes investments in many firms through its Innov8 corporate venture capital fund.

Singtel also owns digital lifestyle services AMPed, Dash, HungryGoWhere, Insing.com, and NewsLoop in Singapore.

Though it is true that scale matters for most telecom business opportunities, Singtel has proven that even a relatively small operator can create scale. Singtel also is among global leaders in trying to leverage related applications that build on its core telecommunications assets.

That is among the most-difficult challenges any telecom services company faces. Now that nearly all applications are created “over the top,” telecom service providers have limited ability to influence, control or own the application layer.

And yet, strategically, nothing might be more important than creating a viable role in the application layer, for at least some leading apps.

It Is Not that People Do Not Talk, It is That They Talk Using OTT

Like it or not, over the top apps now are becoming the standard way most applications are created and consumed on all networks.

The key issue, for mobile or fixed network service providers, is not whether that is trend, but more appropriately whether access providers participate in some way in the revenue generated by those apps.

In other words, whether access providers have any participation in  revenue is the issue, not whether OTT apps increasingly will dominate usage. The ideal scenario is that the access provider owns some percentage of the equity in important and leading OTT apps.

The more likely scenario is that an app provider has clear incentive to partner with a distributor, and is willing to consider some form of revenue sharing.

Some 26 percent of global smartphone customers in developed markets will make no traditional phone calls in a given week in 2016, predicts Deloitte. That provides one example of the important role now assumed by OTT apps.

It is not so much that smartphone owners do not talk at all, but that, when they do, they increasingly use an OTT app. Likewise, when messaging, that activity often will take place using an over the top social network.

90% of All People Will Have Mobile Internet Access by 2021

By about 2021, more than 90 percent of all people on the planet will have access to Internet access provided by mobile operators, Ericsson estimates.

That is significant for several reasons, not the least of which is that we need to keep focused on where we are going, and how fast, rather than where we have been.

Many observers have a vested interest in arguing that the digital divide remains wide and an intractable problem, even if the “problem” is being rapidly solved.

That is not a criticism, only an observation institutional bias exists. To gain resources to “solve” a problem, one must first convince decisionmakers that a problem exists. When a particular problem is solved, most agencies then seek a new problem to solve.

Though we have not yet completely solved the “access to voice and messaging communications” problem, we can confidently say we will do so, and in the near future. In a similar manner, we are making rapid progress on the Internet access front, despite the distance to be covered.

Coverage of 90 percent of the world’s people is quite an achievement.

That is not to say access speeds will universally be appealing. Much of the access will be provided by GSM Edge networks that are not so fast. But coverage of 3G networks will reach 90 percent, while 4G will reach about 75 percent of people in about five years.

In telecommunications time, that is really fast.

Verizon Losing Small Business Share to Cable TV

Verizon’s fourth-quarter financial results were consistent with a recent trend: higher reliance on consumer revenues and relatively rapid decline in the small business segment that is accounted for in the “mass markets” category.

That means cable TV providers really are taking market share in the small business market.

In the fourth quarter, where consumer revenue grew 2.6 percent and for the full year grew 3.5 percent, small business revenue declined 5.6 percent in the quarter and 4.6 percent for the full year. So one might conclude there is a possibility that share gains by cable TV providers are accelerating, in Verizon markets.

That noted, be watchful when any firm says its customers are “rightsizing.” That is a euphamism for “spending less.”

Shammo says a “change in the consumer revenue growth trajectory continues as customers right-size their existing bundles and core voice services decline.”

At the same time, high speed access revenue is increasing, while demand for linear video is dropping.

“At the end of the quarter, more than 70 percent of our consumer Fios internet customers subscribe to data speeds of 50 megabits per second or higher, and we have shifted our introductory offers to 50 megabits,” said Shammo. We are also seeing an increasing number of customers opting for higher speeds.”

That noted, Verizon still had higher net additions for linear video than for high speed access. Verizon added 99,000 net FiOS accounts, representing 42 penetration. Net broadband accounts grew just 5,000 in the quarter.

In linear video, Verizon added 20,000 net customers in the quarter and 178,000 for the year, hitting 35 percent penetration.

Those market share figures are worth noting. In any competitive market where two or more competitors are relatively evenly matched, in terms of skill, financial strength, marketing and network quality,

Recall that in a monopoly market, a rational operator could expect to deploy a full network and then get 90 to 95 percent adoption of lead services. That was the case for cable TV and telcos in the “monopoly” era.

Cable TV executives used to quip, off the record, that they enjoyed the best of all possible worlds: an unregulated monopoly. And local telcos once boasted 95 percent or higher market share in voice.

Competitive markets fundamentally change the dynamic. Now, cable TV and telco have to build full networks that actually have stranded asset rates as high as 65 percent.

Verizon’s enterprise business also is declining. Global enterprise revenue declined 3.3 percent, 2.1 percent on a constant currency basis

For the full year, global enterprise revenue declined 5.2 percent, 3.5 percent on a constant currency basis. The global wholesale business declined slightly in the fourth quarter and 3.4 percent for the full year.

Total operating revenues for the fixed segment declined of 0.9 percent in the quarter and down 1.8 percent for the full year.