Telco Execs Understand Their Problems; Solutions are the Issue

Decades ago, it would not have been unusual to hear skeptics argue that “telcos don’t get it,” when evaluating the magnitude of transformations that might be required for success in an Internet era.

One rarely hears such sentiments any longer. Rarely, if ever, can a telecom executive be found who does not recognize the need for transformation, and the need for partners to make that transition.

That should not be surprising. It has been nearly three decades since global telcos actually developed their core technology and core products "in house," for a variety of reasons. 

With the growth of the Internet, use of Internet Protocol for virtually all networks, the decoupling of apps from access and digital transformation of most retail and commercial processes, no telco actually has the ability to develop "in house." Nor is there time or money to do so 

Rarely, if ever, will any executive actually claim that core apps will be developed “in house.” And that applies as much to rearchitecting organizational processes and systems as to customer-facing app creation.

A recent survey conducted by IDC on behalf of Amdocs simply confirms those themes. Fully 64 percent of respondents believe that the communications industry will not be able to change fast enough, and will be outpaced by other industries, in making key shifts.

When asked broadly about “digital strategy,” 46 percent of service providers say they do not have a strategy in place.

One might question what “digital strategy” actually means, to each respondent, but it would be fair to say the concept refers more to “how” firms operate, as well as “what” products they create and sell.

But there seems near-universal agreement that partners are necessary. In general, IT services vendors are ranked as the most valuable partners for the execution of digital transformation projects, ahead of specialist digital consultants (second) and systems integrators (fourth).

Network equipment vendors and strategy consultants came in a distant eighth and ninth place, respectively.

The study surveyed decision makers at 81 service providers operating in Asia Pacific (26 percent), Europe (25 percent), Latin America (23 percent) and North America (26 percent). Nearly half of the respondents (46 percent) hold C-level roles.

When Private Equity Gets Involved, There Usually is a Problem

Private equity investors over the past couple of decades have mostly tended to get involved in ownership of telecom companies primarily during the Internet investment boom of the late 1990s, and generally in roles similar to that of venture capital.

Occasionally, private equity gets involved only in smaller or moderate-size telecom deals where there is distress of some sort. That has been the case for Portugal Telecom and Hawaiian Telcom.  

U.S. private equity firms Warburg Pincus and Apollo now are evaluating a bid to buy Deutsche Telekom’s T-Mobile Netherlands division, valuing the deal at more than 3 billion euros ($3.4 billion).

The lack of service provider bidders points to the nature of the issues. The Netherlands is a highly-competitive market with little room for growth, and which is consolidating.

One issue is that the Netherlands mobile market is saturated, with growth shifting to Internet access, especially as provided by triple-play providers lead by cable operator Ziggo and KPN, with cable operators gradually assuming a bigger role.

source: Telecompaper

KPN had about 50 percent of the mobile market in 2010, while Vodafone and T-Mobile each had

All markets in Western Europe, Ovum predicts, will see year-on-year revenue declines by 2019.

Western Europe will see a compound annual growth rates of -1.7 percent between 2013 and 2019.

All 17 Western European markets will see revenue decline over the next five years.

Casa Shows 4.5 Gbps Down, 400 Mbps Up, on Way to 70 Gbps?

Casa Systems demonstrated DOCSIS 3.1 with upstream speeds of more than 400 Mbps. Casa Systems is now one of the first suppliers of DOCSIS 3.1 to show multi-Mbps upstream traffic. Previously, Casa Systems had shown support of 4.5 Gbps in the downstream direction.

Although perhaps not originally envisioned, the cable TV hybrid fiber coax network has shown extraordinary ability to support hundreds of megabits to gigabit Internet access speeds using software upgrades, without requiring a fiber-to-premises upgrade.

That capability has allowed U.S. Internet service provider Comcast, now the biggest supplier in that market, to double the capacity of its network every 18 months.

In other words, Comcast has  increased capacity precisely at the rate one would expect if access bandwidth operated according to Moore’s Law.

U.S. telcos have generally not been able to increase speed at such rates. That, in large part, might account for Comcast’s leadership of the Internet access market.

That said, across the whole market, access bandwidth has grown at rates very close to what one would expect if Internet access were governed by Moore’s Law.

source: Arris

Gigabit Connections Likely Will Remain a Fraction of Accounts, Even When Ubiquitous

Deloitte Global predicts that the number of gigabit per second (Gbps) Internet connections will grow by an order of magnitude, to 10 million globally, by the end of 2016. About 70 percent of those connections will serve consumer locations.

Still, those 10 million subscribers will represent a small proportion--about four percent--of the 250 million customers on networks capable of gigabit connections as of end-2016.

Though that will grow, over time, there is an important marketing principle at work here: headline speed remains mostly a marketing tactic.

Never, it seems, do “most” consumers buy the top speed, when there are choices offering less speed, meeting consumer needs, at less price. That has been the case for most cable TV and telco providers of Internet access, for example.

Gigabit access availability and marketing has primarily lead to increased sales of 20-Mbps and 40-Mbps accounts, CenturyLink has said.

One example of demand dynamics:  In my own neighborhood in Denver, I can buy a gigabit access service for $110 a month, 100 Mbps for $70 or 40-Mbps service for $30 a month (Granted, all those are one-year promotional prices, so an increase would be expected after 12 months).

All those prices are for stand-alone service, with no phone service.

In that sort of environment, many consumers are going to conclude that 40 Mbps is “good enough,” and provides a better price-value relationship.

Having recently upgraded one connection from about 30 Mbps to 100 Mbps, I have to say I haven’t seen web page load speed advantages at all. There might, or might not, be any improvement in network stability. Content streaming has not been improved.

Granted, that particular connection normally is a one-user connection, so there is no contention from other users. The point is that 40 Mbps per user seems to work as well as 100 Mbps per user. For that reason, I cannot see any advantage to buying a gigabit connection, which I can do.

Google Fiber might test such demand characteristics as it activates its Atlanta gigabit network. There, for the first time, Google Fiber will offer, in addition to the standard “gigabit for $70 a month,” 100 Mbps for $50 a month.

It will be interesting to see how demand sorts out, between the gigabit and 100-Mbps offers.

Deloitte further predicts that about 600 million fixed network Internet access subscribers may be on networks that offer a gigabit tariff by 2020, “representing the majority of connected homes in the world.”

Deloitte predicts that between 50 and 100 million broadband connections may be of the active gigabit variety, representing take rates between five and 10 percent.

There are good reasons to expect such take rates, now and in the future. Historically, only a fraction of consumers actually have bought the “fastest” tier of service marketed at any specific point in time.

“At each point in time much faster speeds have been available, but were only chosen by a minority,” says Deloitte.

It is likely the historic patterns will remain in force: multi-user accounts, and accounts where video consumption is high, will be the scenarios where the fastest speeds offer the greatest value.

Shockingly, consumer Internet access speeds have increased, since the time of dial-up access, at nearly Moore's Law rates. Price-value relationships likewise have gotten better.

source: IP Carrier, Rod Tucker

At the end of 2012, the average entry level price for service was over $400, according to Deloitte.  By the third quarter of 2015, the average had fallen to under $200, and the cheapest package was priced at under $50. Typical prices in the U.S. market range from $70 a month up to about $130 a month in early 2016.

Equally shocking, and perhaps more disruptive, will be the availability of gigabit speeds on mobile devices, a development truly shocking for a market used to typically speeds ranging from hundreds of kilobits per second to a few megabits per second up to perhaps 15 Mbps, on average.

By 2020, the first commercial mobile networks capable of gigabit per device mobile connections should be in operation.

LTE advanced currently offers up to about 500 Mbps in trials, and up to 250 Mbps in commercial offerings. Fifth generation networks are expected to boost typical top speeds to a gigabit or more.

It appears that coming millimeter wave platforms will shatter all past expectations of mobile bandwidth, which historically have been at least an order of magnitude lower than fixed network speeds.

Video Turns Business Models Upside Down

If policymakers want new networks to develop as functional substitutes for existing networks, some structural realities will have to be addressed. 

Mobile services already have become functional substitutes for fixed network voice, much Internet access and some portion of entertainment video viewing.

But the future is entertainment video, especially over the top, on demand video. And that sort of entertainment video poses huge problems for any number of wireless and mobile networks.

For starters, video is a media type that places unusual stress on networks, especially wireless networks that have clear bandwidth limitations, compared to modern fixed networks.

Entertainment video also is a media type with very-low revenue per bit characteristics.

In other words, video is expensive to deliver, and yet generates very low--if any--direct revenue for an ISP.

By about 2014, data services generated about 35 percent of mobile service provider revenues while consuming 54 percent of the network resources, according to Nokia (Alcatel-Lucent).

That is based on an analysis of capital investment for incremental Internet access megabytes that in 2009 already had climbed to a range of 6.6 to 35 cents per annual incremental megabyte, or about $6.60 per gigabyte up to as much as $35 per gigabyte. That’s the access provider incremental capex cost.

Subscribers watching a movie on their mobile device at standard definition might consume a gigabyte per hour. For a two-hour movie, that could be as much as 2 GB, for data consumption alone.

High-definition content consumes perhaps 3 GB per hour. In that case, viewing a two-hour movie consumes 6 GB.

Assume a retail mobile data plan cost of about $10 per gigabyte. You see the problem. Viewing a single standard-definition movie “costs” $20 in data usage, in addition to the actual content cost. Watching eight hours a month could cost $80 a month, per device.

Watching eight hours of high-definition TV could cost $240 in mobile data plan charges.

In 2016, U.S. mobile subscribers will spend about 30 minutes a day watching video, or perhaps 15 hours a month.

That implies use of at least 15 GB a month, if all that consumption happened using the mobile network. Obviously that is not the case, as users are shifting most of that viewing to Wi-Fi. In fact, by 2015 about half of all mobile device data was consumed using Wi-Fi.

Still, mobile video in 2015 already represented 55 percent of all viewing, according to Cisco. By 2020, 75 percent of all mobile network traffic will consist of video.

If policymakers want to encourage both innovation and mobile or Wi-Fi platforms as functional substitutes for existing networks, ability to support entertainment video will be necessary.

How that can happen unless zero rating, or very low cost rating happens, is not clear.

source: Cisco

source: Nokia (Alcatel-Lucent)

In Video Era, Mobile Zero Rating is Essential

Some people do not like zero rating, the policy of allowing consumers to watch video without incurring any usage charges on their data plans.

As with many other issues in life, this a matter of competing values, philosophies, benefits and policies.

Allowing consumers to watch entertainment video on their devices is a “good thing,” as it avoids the huge data charges those consumers might otherwise incur.

On the other hand, some argue, such policies do not “treat all apps or bits the same.”

T-Mobile’s Binge On, Verizon’s zero rating of go90 or Walmart’s Data Saver are examples of such practices.

Policy, in this case, is bumping up against business economics, specifically, the bandwidth intensiveness of video. Put simply, if people are to be able to consumer entertainment video the way they want, at prices they can afford to pay, then zero rating, or at least “very low costs,” are essential.

If policymakers really want robust competition between platforms, industries, networks and competitors, they must recognize the video is quite different, in terms of network load, supplier cost and end user willingness to pay.

It is easy enough to explain why video entertainment consumption poses a huge--some would say nearly fatal--challenge to mobile operators: there if a fundamental mismatch between revenue and bandwidth required to deliver narrowband services (voice, messaging) and that required to support full-motion video.

Simply, revenue per bit for messaging and voice can be as much as two or more orders of magnitude higher than for full-motion video or Internet apps.

The revenue per bit problem is easy to describe, for fixed, mobile or untethered networks.

Assume a fixed network ISP sells a triple-play package for a $130 a month retail price, where each component--voice, Internet access and entertainment video--is priced equally (an implied price of $43 for each component).

How much bandwidth is required to earn those $43 revenue components? Almost too little to measure in the case of voice; gigabytes for Internet content consumption and possibly scores of gigabytes for video.

By some estimates, where voice might earn 35 cents per megabyte, revenue per Internet app might generate a few cents per megabyte. At one level, a network engineer might argue that such fine distinctions do not matter. The network has to be sized to handle the expected load.

Business strategists do not have that luxury. Entertainment video simply generates too little revenue per bit to support gigabit networks, especially in all wireless domains.

McKinsey analysts have argued in the past that a 3G network costs about one U.S. cent per megabyte. The problem, in many developing markets, is that revenue could drop to as little as 0.2 cents to 0.4 cents per megabyte, for any mobile Internet usage, before we even load on extensive video consumption.

That implies a strategic need to reduce mobile Internet costs to as little as 0.1 cent per megabyte, or an order of magnitude. Tellabs similarly has warned about revenues per bit dipping below cost per megabyte, leading to an "end of profit" for the mobile business.

Of course, all of that analysis occurred under conditions where it was web browsing that largely represented Internet bandwidth demand.

Streaming video is another order of magnitude or two orders of magnitude sort of problem, though, in part because it is so hugely bandwidth intensive and because it will represent as much as 70 percent of all Internet bandwidth consumption, in a few short years.

Consider the wide variance in revenue per bit represented by a few different potential mobile Internet use cases.

One use case is a $20 a month smartphone data plan and 2GB of usage, representing retail revenue of $10 per gigabyte.

A Netflix subscription generates no direct revenue for a mobile operator but could represent network consumption of between a few gigabytes and  30GB of traffic, if usage approaches fixed network levels. Revenue arguably is zero dollars per gigabyte.

A work environment might represent $100 a month revenue and consumption of between 10 GB and 50 GB. So revenue might range between $2 to $10 per gigabyte.

And that’s the problem with video: much of it does not actually represent revenue for the ISP. But even if it does, what is the revenue and cost per gigabyte?

Even if one assumes consumption of just one hour of standard definition video, and that product is owned by the ISP, revenue might be $1 to $2 per gigabyte. But most video content is not owned by the ISP. It simply has to be delivered, at prices the consumer will pay.

Some would argue the cost per gigabyte for a mobile ISP is higher than $1 to $2 per gigabyte.

And it is almost nonsensical to think that as video moves from linear to on-demand and streaming, mobile consumers are going to pay for bandwidth representing multiple gigabytes per day, per device, at $5 to $10 a gigabyte.

If today’s linear video consumption were instead viewed on mobile devices, consumers might really expec to pay $200 to $400 a month--or more--in mobile Internet access charges, to say nothing of the actual retail price of the content service.

That is unworkable, and explains why zero rating, or very low cost rating, will be necessary.

Marketers might argue that revenue per account is what matters, for a multi-product business.

That is true, up to a point. An ISP might fare okay if providing a mix of products with disparate revenue per bit values.

The revenue earned from text messaging is almost arbitrarily high, as SMS is a byproduct of using the signaling network. Voice revenue might be moderately high, if users can be coaxed or compelled into paying for access to the feature, rather than for usage.

Ericsson hs calculated the cost per bit for a mobile network at about one Euro per gigabyte. So total revenue per bit has to exceed that cost.

Heavy video consumption--especially of third party content-- is likely to exceed cost per bit under almost any scenario, unless zero rating, or very low cost rating, is allowed.

Google Fiber to Introduce First-Ever 100 Mbps Tier of Service in Atlanta

As would any competent Internet service provider, Google Fiber takes note of what has worked in the past, and the local characteristics of each new market. In Atlanta, for example, Google Fiber will make two changes to the packaging and pricing plans it originally offered in Kansas City and other markets.

In Atlanta, it does not appear there is a “free” 5 Mbps offer (after the customer paid a $300 connection fee). In Atlanta, there will be a new 100-Mbps tier of service, sold for $50 a month.

The $130 video plus gigabit access, as well as the $70 a month gigabit Internet access plans will be available as well.

The new $50 plan will likely be quite important, for several reasons. For starters, many users will understand that 100 Mbps suits all their requirements, even if a gigabit is deemed “better.” But “better” also costs more.

As other ISPs have found, consumers often do not buy the most-expensive tier of services, instead choosing other moderate-speed options that satisfy their requirements. That might be 20 Mbps for some, 40 Mbps for many, or 100 Mbps for lots of people.

Up to this point, Google Fiber has not been able to gauge the extent of demand for speeds far lower than a gigabit, but in triple digits. Atlanta will be its first chance to find out how important that tier is, in terms of customer demand.

Significantly, the $40 tier, offering 100 Mbps, is going to compare favorably, one might argue, with Comcast and AT&T offers in the Atlanta market.

Comcast sells a 2-Gbps symmetrical service for $300 a month. Comcast also sells service of 150 megabits for $130 a month and 250 megabits for $150 a month.

AT&T sells (on an initial promotional basis), U-verse 1 Gbps starting as low as $120 a month, or speeds at 100 Mbps as low as $90 a month, at least for the first year.

Since potential buyers typically will compare local offers, Google Fiber’s new $50 for 100 Mbps offer might appeal to many consumers who see Comcast and AT&T selling that level of service for triple digits.