App Partnerships Might Not Move ISP Revenue Needle

Most valuable and useful apps are no longer created internally by service or device providers, a fact with huge business implications.

Devices and Internet access, for example, are most valuable when people derive high usefulness from a huge multitude of apps and services. But few ecosystem participants are able to directly create and then control the value of their apps.

But that is not to say every part of the ecosystem benefits directly and incrementally from each incremental addition of most apps. Instead, it is the broad alignment of the whole ecosystem that creates the most value for each participant.

It would be accurate to say that a huge app ecosystem is what makes Apple and Android devices and Internet access services so valuable.

At the same time, revenue upside largely is indirect, with the clear exceptions of Google Play, iTunes and the Apple App Store, which get a 30-percent cut of app sales revenue (apps,  advertising and in-app transactions).

In that regard, at least some fixed network service providers in the United Kingdom believe business deals with Netflix have had positive financial impact, even if the impact remains relatively slight. “Netflix plays at least some--likely small--role as an upsell driver for some operators, whose customers can only access the app via their most advanced set-top boxes,” said Ted Hall, Research Director at IHS Technology.

Virgin Media and BT TV, for example, are paid when consumers activate Netflix subscriptions from the operator set-tops.

As you also would expect, other service providers remain wary, in large part because of concern that Netflix will reduce demand for premium movie packages and video-on-demand (VoD) offerings.

As always, the potential benefit from app provider partnerships hinges in part on service provider strategy, in part to partnership terms and in part on the perceived end user perception of value.

IHS analysts believe the number of service providers agreeing to partner with Netflix will grow beyond the 25 linear video providers who already work with Netflix.

“Many of the operators working with Netflix have seen customer satisfaction ratings improve under the partnerships, which have helped foster positive operational performances,” said Ted Hall, Research Director at IHS Technology.

Distributor partners typically receive a share of the ongoing subscription fees for customers that sign up using the operator’s set-top box. Generally, that means Netflix functions as one more premium service, or a substitute for operator video on demand services.

The downside of cannibalization is balanced by the upside of some incremental revenue. Strategically, working with Netflix might help linear video suppliers retain their “one stop shop” positioning.

That should become increasingly important as new competitors such as Apple TV, Google’s Chromecast and Amazon Fire Stick become more popular, and essentially themselves bundle over the top content sources. Indeed, in the U.S. market, Amazon already sells subscriptions to services such as Showtime and other traditional linear video premium services.

There likely is yet room for matters to change, in ways that do not benefit the linear video suppliers.

Recall that similar thinking once prevailed among telcos facing competition from Voice over IP services. Then, as with Netflix, the issue was whether to partner, create an owned alternative, or simply ignore the challenge.

That third option sounds silly, but experience has tended to suggest that partnering helps only marginally, while creating owned alternatives is not viable. Strategic indifference is not so dumb.

There might be little an incumbent can do but try and harvest legacy revenues as long as possible.

The other obvious implication is that it increasingly is hard for any single app partnership to "move the revenue needle" for any ISP.

CenturyLink to Test Metered Internet Access Plans

As do some leading cable TV operators, CenturyLink will test metered data plans in the second half of 2016. Such moves are contentious in some quarters, though an argument can be made that metered usage actually is a useful practice.

Few “for fee” products actually are sold on an “unlimited use” basis, with a flat fee, although usage of most Internet apps tends to occur on an “unlimited usage, no fee” basis.

For-fee products typically sold on an unlimited use, flat-fee basis typically are those for which incrementally-higher usage does not incur direct additional costs. Linear TV subscriptions provide one obvious example.

In other instances, even where historical practice has featured "unlimited" usage, such as mobile Internet access, there are quantifiable costs to supply incrementally-higher consumption, at peak hours. 

Though it often is missed, all communication networks are sized for peak usage, even if most networks are "underused" most of the time. So it is true that most networks have spare capacity most hours of the day.

None of that is relevant for network sizing. All networks are sized to handle the expected peak load, on any given day.

But most for-fee products do have substantial incremental costs for higher consumption, ranging from retail consumer products to taxi cab rides to electricity, natural gas, drinking water or bridge or expressway tolls.

Consumer Internet access is harder to classify, as it is harder to understand direct incremental costs for higher consumption created by unlimited usage policies. Nor is retail price directly proportional to wholesale cost.

But indirect costs (capital investments, energy consumption, interconnection costs) to support rapidly-growing consumption are substantial, at a time when revenue is flat or declining, overall.

CenturyLink anticipates slightly-lower operating revenues and core revenues in full-year 2016 compared to full-year 2015, for example. Operating cash flow also is expected to decline from full-year 2015, primarily driven by the continued decline in legacy and low-bandwidth data services revenues.

Beyond all that, unlimited consumption often has undesirable social impact. The whole point of carbon reduction is to “use less.” When consumers pay no extra costs to consume more, they tend to consume more.

source: CenturyLink

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)