Three Merger with O2 Faces Big Obstacles; Impact, If Successful, Not Clear

The proposed merger of U.K. mobile service providers Three and O2 faces serious opposition , including U.K. communications regulator Ofcom and the U.K. Competition and Markets Authority.

Sharon White,Ofcom CEO, has argued that markets with four leading mobile networks produce prices are 10 percent to 20 percent lower than markets with fewer providers.

French regulators seem to prefer consolidation to “three.” The U.S. Federal Communications Commission continues to favor “four.”

“These questions are related because they converge around the issue of how many facilities based networks are optimal in providing competitive services in the same geographical location, a report by the Organization for Economic Cooperation and Development says.

source: OECD

Some might argue that markets with four operators, such as the United Kingdom has had, produce lower prices. What is unclear is the impact of a reduction from four to three leading operators.

“It appears from the cases for revenue trends in Austria and the United Kingdom that fierce competition from four players, in a market, does not necessarily decrease overall revenues dramatically – at least for these countries,” the OECD report states.

Australia and Austria are among the very few countries that have reduced the number of leading operators from four to three. Results are rather more subtle than might have been expected.

“While price is only one element in assessing the value provided to a customer, others being quality of service, coverage and so forth, the clear trend in Australia has been for consumers to receive less included data in their mobile bundles,” OECD notes.

“Aside from indications on prices, it is not possible to assess the overall effects in the Australian market of the reduction from four MNOs to three,” OECD concludes.

In Austria, “prices tended to continue to decline for users with larger consumption patterns and rise for those with lower usage,” OECD says, both before and after consolidation from four to three.  

IoT Market Growing 17% Annually

The worldwide Internet of Things market spend will grow from $591.7 billion in 2014 to $1.3 trillion in 2019 with a compound annual growth rate of 17%. The installed base of IoT endpoints will grow from 9.7 billion in 2014 to more than 25.6 billion in 2019, hitting 30 billion in 20201.

With the caveat that growth is occurring from a low base, IoT network connections are growing at strong double-digits rates.

To be sure, adoption of some lead IoT apps has been driven by regulatory requirements, not necessarily end user demand. The U.S. Energy Act (2007) accelerated efforts to monitor energy consumption.

Nearly a decade later, the installed base of remote-capable meters with smart grid app support is expected to reach 454 million in 2016 and to more than double by 2020, making it a leading IoT device, Verizon notes.

Likewise, the Drug Supply Chain Act requires that  drug manufacturers by late 2017 create methods for electronically transferring and storing transaction histories for their prescription drugs, including shipment information across their distribution supply chain. That is expected to boost demand for IoT sensors to track shipments.

Similarly, the U.S. agriculture and food industry is deploying sensors on an ever-widening scale to monitor key production conditions, shipping time and other metrics as a means to comply with a new and comprehensive set of reporting requirements under the 2015 Food Safety Modernization Act.

But private sector driven demand is growing. The total market size for digital precision agriculture services is expected to grow at a compound annual growth rate of 12.2 percent between 2014 and 2020, to reach $4.55 billion, Verizon notes.

One of the biggest trends in farming today is precision agriculture, the practice of sensing and responding to variable soil, moisture, weather and other conditions across different plots.

Depending on the crop, the Precision Agriculture Service can help increase overall profitability by $55 to $110 per acre, Accenture consultants say.

source: Verizon

source: Accenture

U.S. Linear Video Subscriptions Drop, Revenue Grows

Despite its mature status, linear video subscription revenue grew three percent to $105 billion in 2015 and will reach $107 billion for 2016, according to Convergence Consulting. But linear video subscribers continue to dwindle.

OTT video service revenue (from CBS, HBO, Hulu, Lifetime, Netflix, Noggin, PlayStation, Seeso, Showtime, Sling, Starz, Tribeca) grew 29 percent to $5.1 billion in 2015 and will hit  $6.7 billion for 2016.

If correct, OTT video now represents about five percent of network-delivered video entertainment revenue.

Linear video subscribers declined by 1.131 million, following a  2014 decline of 283,000.

In 2016, subscribers will decline by 1.112 million, Convergence Consulting predicts.

At the end of 2015 the firm estimated 24.6 million U.S. households (20.4 percent) did not have a traditional linear TV subscription, up from 22.5 million (18.8 percent of households) at the end of 2014.

Convergence Consulting estimates 26.7 million (21.9 percent of households) will have no such subscription by the end of 2016.

In 2014, 1.27 million more households abandoned linear TV (including both abandonment and new household formation without buying linear TV . In, 2015 2.1 million homes did so, while 2.08 million will do so in 2016.

source: Convergence Consulting

Google Fiber Drops "Free" 5-Mbps Service in Kansas City

Whether you consider the original Google Fiber offer of “free 5 Mbps Internet access” an unsustainable gimmick, a marketing platform to grab attention or an offer that puts additional pressure on other Internet service providers, Google Fiber appears to have concluded that the offer no longer serves a purpose.

The lowest level of service now offered by Google Fiber in Kansas City, Mo. and Kansas City, Kan. is 100 Mbps, symmetrical, at a retail price of $50 a month. Current users of that product presumably are "grandfathered" and will continue to receive the original service.

That change undoubtedly signals a full-on focus on competing with telco and cable TV offers in that or lower ranges that consumers might still conclude offers sufficient value and lower price.

In other words, Google Fiber might have concluded, or might have planned all along, to more nearly match existing ISP offers from its main competitors, as well as offering a “best in class” symmetrical 1 Gbps service selling for $70 a month.

In fact, as a symmetrical service, the Google Fiber 100 Mbps offer remains “better than cable TV or telco” in the market, based solely on return bandwidth and complete absence of any usage caps.

Google Fiber first introduced the 100-Mbps tier in its new Atlanta market.

In Atlanta, Google Fiber dropped the  “free” 5 Mbps offer (after the customer paid a $300 connection fee) and replaced its new basic offer to a 100-Mbps symmetrical tier of service, sold for $50 a month.

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 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.

Ruinous Competition, in Healthcare or Telecom, Can Destroy Industries

In the telecom, as in any other business, markets “seek” equilibrium, where a relatively stable balance of supply and demand exists. Policies that distort either supply or demand will upset equilibrium.

In Texas, for example, reimbursement rates for services such as Medicaid arguably are simply too low, causing health care workers to be paid less than they might, which in turn causes people to avoid working as health care workers.

As a result, some nurses and staff are quitting their jobs at Texas nursing homes for more money working at McDonald’s.

Texas has one of the lowest Medicaid reimbursement rates, which makes it difficult for nursing homes and service providers to offer competitive wages.

Similar distortions can, and arguably do occur, in the telecom business, where retail prices can be too low to sustain either long term robust investment or investments in human capital. That can happen in any market, be it India, the United States or Western Europe.

Arguably, some policies aimed at increasing competition might have perverse impact, such as removing most of the incentive to upgrade facilities.

You want competitive benefits, but not "ruinous" levels of competition, which eventually drives suppliers out of markets, and reduces competition.

You want competitive benefits, but not ruinous competition, which eventually drives suppliers out of markets, and reduces competition, creating sick industries and markets.

In the aftermath of the “Internet bubble,” that was evident in the global telecom business, which unwillingness to invest on a massive scale, as suppliers lost 65 percent of their value, or went completely bankrupt.  

The point is that efforts to spur competition arguably are good, but policies that promote ruinous competition are to be avoided. We always tend to overshoot the mark, both in terms of deregulating or over-regulating. Both can be destructive.

Some might argue that new regulations on the legacy special access market pose danger.

Cable TV companies--not just telcos--might be subject to special access wholesale rules, under new proposed Federal Communications Commission regulations that are “technology neutral.”

That phrase normally means all suppliers--not only “dominant” telco suppliers--might be covered by rules.

Ignore for the moment the wisdom of applying more regulation to declining services, or extending regulation to all providers instead of loosening regulation for all providers.

One large issue is whether removing profit from any service is likely to spur investment in such services. We probably all know the answer to that question.

What are the Major MVNO Opportunities?

Where are the most-significant mobile virtual network operator niches? The answer might hinge on what sort of market the MVNO operates in, as well as existing assets the MVNO can exploit.

There are six common market entry strategies, according to Peppers and Rogers Group.  

1. Low price: These companies offer frugal plans, often with only simple voice and SMS services, limited data, and inexpensive devices. MVNOs selecting this strategy target price-conscious customer segments with a limited marketing budget, utilizing traditional sales channels such as physical stores rather than alternative channels.
2. Content and applications: The focus here is on exclusive content offerings, such as music, videos, games, or certain sports content bundled with mobile plans or devices. They target customers who are active in digital channels and interested in specific content. The main differentiation point among these MVNOs is the ability to provide content and applications that are not available from other operators.
3. Convergent services: Some MVNOs offer all-in-one services encompassing service lines such as fixed Internet or pay TV, along with mobile service. They are also referred to as XVNOs, stressing the variety of their service lines. Customers receive one combined bill for all the different services provided by the XVNO, which has a positive effect on the customer satisfaction level.
4. Segment-focused: These MVNOs serve very specific segments, such as expats, youth, business customers, migrants, or others. The main differentiation point among segment-focused providers is their narrow focus on customers who may not be covered by other operators in the market.
5. Retail presence: These operators have retail background and rely on strong distribution channels offering cheaper plans and easy accessibility. They focus on customers who are already part of a retail network, so marketing efforts mainly consist of in-store activities.
6. Service differentiation: Looking beyond products, these MVNOs integrate telecom products and services with loyalty programs, financial services, or other services related to a company's or group's assets and resources. For example, a technology retailer integrating its customer loyalty program with a group's MVNO can allow customers to earn points as they talk on their mobile phones and use these points in the stores to upgrade their phones. MVNOs selecting this strategy tend to create a closed loop network with group-level synergies offering customers a unique proposition.

Some might say common niches include segmentation based on:

1. Ethnic group (often anchored by cheap long distance calling)
2. Lifestyle (most often, younger users)
3. Discount
4. Subsidized, ad supported or zero rating, at least in part

Note that three of the four major approaches involve price discounts in a direct way.

McKinsey has identified five key success factors for MVNOs. Companies that launch successful MVNOs often make use of existing marketing assets like media and telecoms brands, customer databases, and channel infrastructure.

They strive to create a unique brand positioning and value proposition in order to attract target clusters such as specific ethnic groups or demographic cohorts like millennials.

This typically means identifying emerging niche markets that lie beyond the reach of traditional marketing approaches or are too costly to serve or address using a conventional business model.

source: McKinsey

There are eight major opportunities exploited by MVNOs, according to GSMA Intelligence:

• Discount
• Telecom
• Media/entertainment
• Migrant
• Retail
• Business
• Roaming
• M2M

“Discount” and “telecom” approaches account for 47 percent of the global MVNO market, perhaps in large part because the MVNO approach so often is taken by a facilities-based telco to compete out of region.

Some 18 percent of MVNOs are operated by companies from adjacent industries (retailers, banks, TV or media organisations).

Some 35 percent of the MVNO market ois focused on segments such as business, migrant, M2M and roamers.

For example, in the media/entertainment sector, Virgin Mobile reported more than three million connections for its UK brand in the third quarter of 2014, while in retail, Italy’s PosteMobile had 3.2 million accounts.

source: GSMA Intelligence

GSMA Intelligence has also recorded 260 MNO sub-brands spread across 56 countries.

Sub-brands differ from MVNOs in that they are wholly-owned and operated by their facilities-based mobile operator  parent, despite being marketed independently of that MNO.

Some MVNO brands also operate as MNO sub-brands; those that have international presence include Virgin Mobile, which is a sub-brand in Australia, Canada, India and the US, and Red Bull Mobile, which can be found in Austria, Belgium, Hungary, Poland, South Africa and Switzerland.

Some 48 percent of sub-brands offer prepaid tariffs only, while the proportion that are contract-only stands at 21 percent.

Sub-brands tend to be focused on prepaid tariffs as, like MVNOs, they are used by operators to attract new customers in lower price segments without diluting their core brand proposition or exposing it to excessive price competition.

As such, the use of sub-brands is a strategy that tends to be limited to mature, saturated markets in Europe, Northern America and Asia Pacific – the average penetration rate for countries that feature sub-brands stands at 127 percent.

In terms of categories, discount, media/entertainment and retail take the largest share of the sub-brand market with 38 percent, 23 percent and 16 percent respectively.

No "Telco QoE Trading Model" Can Emerge if Network Neutrality Stands

Consultant Martin Geddes has argued for some time that service provider platforms essentially could be likened to resource trading platforms, where, “rather than selling raw mechanisms, telcos can sell (proxies for) different levels of QoE outcomes and associated business risk.”

Network neutrality rules obviously are a challenge to such roles, as the ability to create different products hinges on the ability to clearly create performance distinction. Network neutrality rules bar the creation of such distinctiveness.

“This demand-centric service model allows for managed user QoE risk, with tiered QoE levels linked to ability to pay,” says Geddes. “The billing model evolves from pure quantity to variable “quantities of quality” with different resilience levels.”

In this model, what is traded are “quality of experience” products. And network neutrality rules make creation of such products unlawful.

Antitrust protection is a reasonable issue. But QoE is not such a problem, one might argue.