Verizon Will Not Wring Blood from a Stone

You cannot, as the aphorism suggests, wring blood from a stone. Neither, history suggests, can an industry in fundamental decline afford to boost its own costs of operation. To have any hope of maintaining cash flow as long as possible while the business declines, firms have to control costs.

And, as always within any ecosystem, one segment’s “costs” are another segment’s “revenue.” That is rarely pleasant, for workers, suppliers, collaborators, investors or managers, in a declining business or industry.

The new Verizon contract that ended a strike might provide an example. The new contract adds 1,400 jobs and provides a 11-percent wage increase. Union officials argue that Verizon has been understaffing fixed network workforces, a charge that resonates.

Verizon has been moving spending towards mobile, and away from fixed network operations, to match its revenue generation.

And wages for U.S. workers have been depressed for quite some time. Workers think they deserve more of the surplus. Verizon management knows it has to "harvest" the business. Both have a point.

Only in context do those developments make sense.

If you wanted a one-sentence description of how the U.S. fixed network business has been transformed over the last 15 years, here it is: “Wireline now accounts for less than 30 percent of Verizon’s total operating revenues, down from 60 percent in 2000, and less than seven percent of our operating income,” noted Verizon Communications CEO Lowell McAdam.

In other words, from 2000 to 2014, revenue from fixed networks was cut in half, while profit dropped more than that. At a very high level, that means any business in a similar situation would have to chop at least half its costs. And, unfortunately, enterprise cost includes employee headcount,  wages and benefits.

In the first quarter of 2016, Verizon fixed network revenue was down, while earnings were flat. To be sure, weakness in wholesale and global enterprise were bigger problems than the mass market segment, lead by FiOS revenue.

The point is simply that fixed network operations are generating a small, and likely ever-smaller, portion of Verizon revenue and profits. Under such conditions, harvesting is a rational strategy.

There is nothing nefarious about this. It is simply what a business must do when it is in decline.

In that light, a 10 percent or 11 percent hike in wages and benefits, plus the addition of more employees, will create greater pressure in the fixed networks business.

Indeed, some might speculate that selling or spinning off most of the fixed network business might make sense, if willing and able buyers can be found, and if regulators allow such dispositions.

Verizon would be better off as a smaller, mobile-focused entity, the logic suggests.

Some entities can operate FiOS or fixed networks more efficiently than Verizon can. Some entities might have different business models as well, allowing them to wring more value out of assets such as Verizon's, if they are free to tweak the cost model.

Unfortunately, employee prospects in a declining industry are a zero sum game, at best. Most often, negative growth is the requirement. If one accepts that Verizon's fixed network business is in decline, then more employees and higher wage bills are not sustainable.

It will not be pleasant. It never is.

More Cloud Means Fewer Moves, Adds, Changes: Bye Bye MAC Revenue

Disruption across the information technology and communications businesses is a virtual certainty as cloud-based computing grows.

And that applies equally to sales channels, software platforms, hardware suppliers and services operations. For decades, revenue models in some parts of the business have been built on “moves, adds and changes.”

As enterprises, mid-market and small business customers move operations to cloud-based alternatives, the revenue formerly earned by MACs can diminish.

Hutchinson Networks, a U.K. systems integrator and professional services provider, provides a case in point.

The fundamental problem: enterprises won't need systems integration and professional services if they shut down their IT operations and move to the cloud.

One example: Hutchinson used to support SMEs with their own data center operations, to support Microsoft Exchange, Active Directory, Sharepoint and phone services.

Increasingly, those businesses are going to Office 365, and don't need on-premises computing. That also means they do not require the support for owned facilities and systems that Hutchison Networks used to support.

The fundamental problem for some IT support operations is that more cloud computing means fewer MACs. And that means a diminished  business role for IT services companies.

Android N IVI for Connected Car

source: GSMA

Leverage in the connected car market is not at all obvious, and a new move by Google shows why. Any “in vehicle infotainment” system requires an operating system or platform that allows in-car systems to communicate with mobile networks.

source: Business Insider

As you might guess, there are many rivals in that area. Google and Apple, BlackBerry, Linux, GENIVI and Tizen are among the proposed OS approaches. Auto OEMs can build their own or source a platform.

Google already offers Android Auto. But it also offers Android N IVI, which allows the Android smartphone itself to supply the mobile network link and intelligent car functions.

Android N adds support for AM/FM radio, HVAC controls, Bluetooth links between the OS and the car’s dialing system, similar controls for media streaming, and the option for digital dashboard instrumentation clusters.

source: GSMA

Of course, and Android N IVI system will work closely with Android Auto, but that same functionality could presumably be achieved by simply syncing the driver’s Google accounts between the phone and the car, to share contacts, bookmarks and media.

To the extent that Android N IVI enables tethering, the size of the tethered and smartphone-based market segments will matter.

Why Google is in the Internet Access, Mobile, Linear Video and Voice Businesses

In addition to Google Fiber, which has Google operating as a fixed network provider of Internet access, linear video entertainment and soon, voice, Google Fi is a commercial mobile virtual network operator in the U.S. market.

But those efforts are not the only initiatives Google parent Alphabet has under way. After dabbling in municipal Wi-Fi and other Wi-Fi networks (train stations in India, for example), Alphabet also has several wireless initiatives under way.

Project Loon entails use of a balloon-based mesh network in the sky, using Long Term Evolution 4G signals to directly reach end user mobile devices. That approach necessarily entails working with mobile operators who are willing to allow Project Loon to use licensed frequencies.

At the very least, that entails Project Loon becoming a wholesale customer of one or more mobile operators in a market, and then acting as both backhaul and access network.

The precise nature of retail relationships might change over time. Initially, Project Loon might function mostly as an infrastructure partner for branded mobile operators who would have the retail relationship. But other business models are feasible, so it is just too early to say what might evolve later.

So far Project Loon  has tested such services  with Vodafone New Zealand, Telstra in Australia, Telefónica in Latin America, all three mobile operators in Indonesia and with Sri Lanka as well.

Since Google has asked for permission to test the concept in the United States as well, there is some speculation that Project Loon might actually operate over rural parts of the United States as well as many countries in the southern hemisphere.

Project Titan is the unit of Alphabet working on unmanned aerial vehicles, and Alphabet also is an investor in Elon Musk’s SpaceX, presumably because SpaceX plans to launch a huge fleet of low earth orbiting satellites for Internet access.

Some might be skeptical about how much success Alphabet might have in all of its various ISP and service provider roles.

But the fact remains that Alphabet is investing serious amounts of capital in a variety of programs that involve competing with cable TV, mobile, fixed network telco, satellite and ISP interests on a possibly substantial level.

Though some might question the priorities, Google cares about Internet access and app or web page loading speed for very practical reasons. Every incremental Internet user is a potential user of Alphabet and Google apps.

And the faster content loads, the happier users are, while increasing ad inventory at the same time. For a company that earns the bulk of its revenue from advertising, that matters. Facebook cares about universal Internet access and access speed for the same reasons.

OTT Revenue is Growing Fastest in the Mobile Ecosystem

Us wireless market_q1_2016_update_may_2016_chetan_sharma_consulting from Chetan Sharma

By 2020, Mobile Service Providers Will Have Lost 10% of Ecosystem Revenue; App Providers Will Have Gained 10% More

It is getting harder and harder, all the time, to describe what is happening in the mobile ecosystem, for the simple reason that the ecosystem now includes truly-significant revenue from application, device and service providers.

Mobile service providers generally earn about 60 percent of identifiable mobile ecosystem revenue, including network infrastructure; components; apps, content and advertising; devices as well as access.

Over the top app providers earn about 10 percent of ecosystem revenue while device suppliers earn about 22 percent of ecosystem revenue.

GSMA believes that mobile access provider revenue share will decline to perhaps 50 percent of ecosystem revenue by 2020, while device share remains about the same and app revenue might grow to 20 percent of total ecosystem revenues.

In other words, GSMA predicts that the biggest changes will have mobile operator share of ecosystem revenue share declining about 10 percent, while app providers gain about 10 percent share.

The caveat is that the percentages could change more drastically should one or more app providers also become key factors in the access business.  

source: GSMA

80/20 Has Many Implications

One should not underestimate the importance of the Pareto theorem, commonly known as the “80/20 rule,” where 80 percent of results come from 20 percent of instances.  

One example are financial returns from the Standard and Poors 500 index, over the period 1989 to 2015, when just 20 percent of stocks accounted for 100 percent of index gains.

Put another way, 80 percent of stocks in the index actually had a collective return of zero percent.

source: A Wealth of Common Sense

In communication or other markets, the Pareto theorem matters because it tends to describe the broad structure of markets, as well as the generation of revenue and profits within each market.

In the Indian mobile services business, just 17 percent of customers generate 60 percent of revenues, for example.

The fundamental principle is that effort and outcomes are non-linear. A small number of inputs or instances drive most of the outputs or results.

The practical implication for communications or app providers is that a relatively small number of decisions and priorities actually matter, where it comes to making a transition from legacy to next generation business models.

The corollary is that there are a many “good” or “useful” or “helpful” things any service or app provider can do, but which should not be done, to concentrate on the few areas where breakthroughs are possible.

source: Rype

The Pareto rule can guide resource allocation, the principle being that there is some allocation or resources that makes a person or an organization better off, while not harming existing persons or the organization itself.

In other words, at some point, additional effort will produce diminishing returns.

The Gini coefficient essentially follows Pareto distribution patterns as well, and describes national income inequality patterns as well.

In the United States, the number of homes without a broadband connection follows a Pareto distribution.

It illustrates the law of diminishing returns. The cost of building access loops generally follow Pareto rules, for example. The inverse of the Pareto distribution is that a small number of instances produce most of the “per-line” access cost.

In other words, a small number of remote locations represent a disproportionate share of network cost, based on cost per mile.

source: National Broadband Plan

source: National Broadband Plan

In practical sense, the Pareto theorem suggests that a small number of actions actually drive most of the actual organization results. 

In other words, the temptation to “do” any number of helpful things actually can be detrimental to strategic success, which requires intense concentration on a relative handful of decisions, investments and effort.

There are always lots of useful or helpful things a company might do, to support its business. Many of those things actually will deliver a measurable result. But most will fail to help a company make a strategic breakthrough.

So saying “no” to most of those helpful things can be a prerequisite for focusing effort on a few matters that can decisively change a company’s future.