Mobile Supply and Demand Changes: Incremental Now, But Watch Out

If greater supply of a ny product tends to produce lower prices, and lower prices tend to lead to greater consumption, then one can predict that mobile prices are headed lower, and mobile data and voice consumption is headed up, as vast new changes in the supply chain take place.

South Asia and Southeast Asia will be affected more than the U.S. market, initially. Eventually, the U.S. market will face greater disruption than seen in South Asia and Southeast Asia, though.

Those greater supply will come from  the issuance of additional spectrum for communications, more-efficient use of existing spectrum, lower-cost platforms and market entry by a mix of large and small new competitors.

In some cases, though the immediate changes are incremental, the longer-term changes could represent an order of magnitude (10 times) or even two orders of magnitude (100 times) more capacity.

It is hard to see how anything other than business model disruption will happen, as a result of those changes. In fact, J.P. Morgan equity analyst James Sullivan believes mobile business models are unsustainable across parts of South and Southeast Asia.  

In the near term, the challenges are likely to be incremental, rather than market shattering.

In Southeast Asia, spectrum allocations in the second half of 2016 will intensify telecom competition in Indonesia, Singapore and Malaysia, as regulators are preparing to reallocate spectrum for mobile data services, Fitch Ratings says.

Though additional spectrum does not always lead to greater competition, it appears regulators will allocated the new spectrum in ways that do so. In Singapore, some spectrum will be set aside to support a new competitor. In Indonesia new spectrum likely will be allocated to allow some contestants with less spectrum to gain greater parity with the spectrum-rich firms.

In Indonesia, it will be crucial for fourth-largest telecom operator PT Hutchison 3 Indonesia (Hutch) and the largest mobile operator PT Telekomunikasi Selular to win  new spectrum in the upcoming assignment.

Hutch has the smallest spectrum holding among the four largest Indonesian telcos. Meanwhile, Telkomsel still serves a large 2G market and will require additional spectrum to cater to its growing 4G subscriber base.

Some 48 percent of Indonesian mobile subscribers are still on the 2G network. Indonesia's Ministry of Communications and Information Technology is scheduled to announce the spectrum assignment of two 5MHz blocks of 2100 MHz, and two 15 MHz blocks of 2300 MHz later in 2016.

In Singapore, the Infocomm Development Authority's decision to lower the reserve price of the total 60 MHz spectrum set aside for a new mobile network operator (MNO) and double the allocation in the 2.3 GHz band to 40 MHz, are expected to increase the amount of competition.

An October 2016 auction will set aside 2x10 MHz in the 900 MHz band, and 40 MHz in the 2300 MHz band for a new operator.

Fitch believes the smaller spectrum allocation in the 900 MHz band for the incumbents Singapore Telecommunications Limited, StarHub and M1 will result in the companies boosting their capital spending over the next two years, as the new operator is expected to compete on price to gain market share.

The spectrum reassignment by the Malaysian Communications and Multimedia Commission in 2016 also is likely to intensify competition in Malaysia.

As in Singapore, the emphasis for new spectrum seems to be to support smaller competitors. The third-largest mobile operator DiGi and mobile virtual network operator U-Mobile will benefit from a larger allocation of the coveted 900 MHz spectrum.

Fitch believes this will enable them to challenge the market leaders Celcom and Maxis, whose allocations for 900 MHz and 1800 MHz have been reduced.

Celcom and Maxis also are likely to build more cells, and densify their networks, to make more-efficient use of their spectrum, as a result.

Fixed-line operator Telekom Malaysia also will enter the mobile services business with unlimited data, SMS and voice plans.

Bringing stakeholders together to understand changing supply and demand issues, and the business model for Internet access, is a key focus of the Spectrum Futures conference. New lower-cost platforms and huge increases in spectrum supply are among the issues to be discussed.

Here’s a  fact sheet and Spectrum Futures schedule.

Verizon Wireless 4G Leadership is Not "Sustainable"

Sustainable advantage in any competitive market is difficult to impossible, some would argue. In the U.S. mobile business, that might be seen in a recent OpenSignal 4G speed test that had T-Mobile US edging past Verizon Wireless.

Though not the only measure of network quality--Verizon still had better 4G signal availability, for example--T-Mobile US performance shows how competitors can, over a period of time, close gaps.

Sprint, for its part, now touts network reliability within one percent of Verizon and AT&T.

source: Sprint

To maintain its marketing position of “having the best network,” Verizon Wireless will have to respond in 4G, while shifting from leadership in 4G “quality” to an emphasis on 5G leadership.

AT&T also enjoyed a brief period when it had--starting in 2007--exclusive rights to sell the Apple iPhone, something virtually everyone believes helped AT&T measurably, before the other service providers gradually also got rights to sell iPhones.

That exclusive, some argue, boosted average revenue per user more than $5 a month, reduced churn by a few tenths of a percent and reduced AT&T’s cost per gross addition by $300.

Others might argue the iPhone exclusivity boosted AT&T revenues and profit margins, especially compared to key rival Verizon Wireless. In fact, AT&T iPhone customer revenue was arguably boosted far more than $5 a month.

But determined competitors eventually close gaps. All the top four carriers eventually got rights to sell the iPhone.

The point is that advantage in the mobile market, as in virtually all others--is not “sustainable” over time. Competitors catch up. To keep a lead, contestants need to keep innovating. And that is why Verizon will push so hard to lead with 5G.

Average U.S. Internet Access Speed Should be 200 Mbps or Higher by 2018

Up to a point, consumers might not care whether the prevailing headline speed for high speed access--where they are able to buy it--is 100 Mbps or 1,000 Mbps (1 Gbps).

In some important ways, a symmetrical connection is “better” than an asymmetrical connection, while “more” bandwidth is “better” than less bandwidth.

For suppliers, who must make the capital investments, it matters whether 100 Mbps or 1,000 Mbps is the ubiquitous offering. But if the market standard is set by a competitor offering 1 Gbps, the upgrades simply must be made.

Of course, headline speed is not the only issue. Lots of consumers will conclude that 100 Mbps at a lower price is preferable to 1,000 Mbps at a higher price.

But it wasn’t so long ago that government policymakers and Internet service providers were talking about building ubiquitous 30 Mbps “ultra-fast” connections, so rapid progress is being made, in some markets and nations.

The typical fixed broadband consumer in the U.S. saw average download speeds greater than 50 Mbps for the first time ever during the first six months of 2016, topping out at 54.97 Mbps in June. That represents a 42 percent increase in download speed year-over-year, according to Ookla.

According to the U.S. Department of Commerce, 59 percent of U.S. population in 2013 could buy service of at least 100 Mbps download speed, according to the Department of Commerce.

About eight percent could, three years ago,  choose from at least two 100 Mbps providers, and one percent could  choose from three.

With Comcast, AT&T, CenturyLink, Google Fiber and others now rolling out gigabit access service, those figures likely are far too conservative. In fact, U.S. Internet access speeds have been doubling or tripling every five years.

So the U.S. Department of Commerce figures are, by now, quite out of date. At the usual rates of development, the average U.S. consumer should have access to 200 Mbps or more by about 2018.

U.K. Business, Consumer Spending on Communications Fell from 2010 to 2015

Spending by U.K. businesses and consumers has fallen from 2010 to 2015, Ofcom says, though industry revenue was up slightly in 2015, driven by higher consumer spending on high speed access, but offset by flat business and mobile spending.

Total UK telecom revenue grew by £0.2 billion (0.5 percent) to £37.5 billion. The big change was significantly lower roaming revenue, down nine percent.

source: Ofcom

Revenue from corporate data services fell in 2015, declining by one percent.

Average monthly household spend on telecoms services increased by £2.52 (3.2 percent) to £82.17 in real terms in 2015, driven largely by higher spending on faster Internet access services.

The total number of fixed voice lines decreased by 0.3 million (one percent) to 33.2 million in 2015, while the total number of mobile subscriptions, including handset, dedicated mobile data and machine-to-machine (M2M) connections, increased by 1.6 million (1.8 percent) to 91.5 million during the year.

Fixed-to-mobile substitution in voice calls continued in 2015, when fixed voice call minutes fell by seven billion minutes (9.2%) to 74 billion minutes in 201551 and mobile voice call minutes increased by five billion minutes (2.0%) to 143 billion minutes.

Falling mobile voice prices are likely to have contributed to these trends, as well as the increasing prevalence of mobile tariffs offering unlimited voice minutes, and the convenience of smartphones.

The total number of outgoing SMS and MMS messages continued to fall in 2015, down by eight billion messages (7.6 percent) to 101 billion messages.

2.5% of U.K. Household Spending is for Communications, Mostly for Mobile Services

About 2.5 percent of U.K. household spending each month goes to purchases of communication services, Ofcom, the U.K. communications regulator, says. Of that spending, nearly two percent is for mobile services, with combined fixed network voice and Internet access accounting for about a half percent of monthly spending.

That suggests total communication spending is less than 2.5 percent of household income, and could be as low as one percent of household income.

Since 2010, spending on fixed voice and mobility services have dipped slightly, while spending on Internet access has grown.

source: Ofcom

Average monthly household spend on communication services has decreased in real terms over the past five years (adjusted for inflation), Ofcom says, from £121.15 in 2010 to £118.90 in 2015, representing a monthly decrease of £2.25, or £27 per year.

At the same time, the average U.K. fixed broadband connection speed has climbed from 6.2 Mbps to 28.9 Mbps from 2010 to 2015, an order of magnitude increase.

However, monthly household spend rose between 2014 and 2015, with telecoms spending rising £2.52 per month, driven by a 12% increase in fixed internet spending: from £13.44 to £15.05 in 2015.

This is largely a result of consumers switching to faster high speed access services.

There also has been  a steep increase in the proportion of adults going online on a mobile phone: with 66 percent of users 16 or older saying they used their mobile phone in 2016 to access the internet, up from 61 percent in 2015.

But U.K. mobile users increasingly are shifting their messaging activity to Instant messaging (IM), and away from text messaging.

The proportion of people using IM services such as WhatsApp is up from 28 percent to 43 percent, and photo or video messaging (MMS) has risen to more than 20 percent of adults in a given week. Both SMS text messaging and email use are dropping.

Still, 70 percent of mobile users use email every week, while 63 percent use text messaging.

Why IoT is Directly Related to Rural Internet Access

It might not be self evident that there is a direct relationship between Internet of Things revenues and profits earned by mobile and other service providers, and rural Internet access services. Simply, one day IoT revenues will be necessary to support rural Internet and other communications services.

The reason is simple enough. At some point, after voice, texting and mobile data revenue growth has ended, some big new sources, likely including IoT, will be needed to generate financial surplus that can be tapped to provide rural Internet access.

How to subsidize rural communication networks is a problem for service providers, regulators and policymakers in most countries, except for some small city-states that essentially have no rural areas. .

In developed or developing nations, mobile or communications network rural coverage is an issue. In the United Kingdom, for example, two percent of road miles have zero 2G network coverage, while 12 percent of road miles have only partial 2G coverage, the RAC Foundation says.

On six percent of road mileage, there is no 3G coverage, while 45 percent of road miles have only partial 3G coverage.

Some 56 percent of road miles have no 4G coverage, while 27 percent of road miles have only partial 4G coverage.

	Miles (%) of road in Britain with…
	Full network coverage	Partial network coverage	No network coverage
2G	211,753 (86%)	28,975 (12%)	4,561 (2%)
3G	119,057 (48%)	111,679 (45%)	14,554 (6%)
4G	43,070 (18%)	65,950 (27%)	136,271 (56%)

source: RAC Foundation

As a general rule, networks serving such areas are not sustainable on their own, meaning that potential revenues never will justify building facilities. Instead, such investments must be subsidized either from surplus generated elsewhere on the network, or by direct government subsidies.

In the past, rural service has been subsidized both by profits earned from customers in urban areas, by business users and by government support programs. That will continue to be necessary.

But profits from sales of voice services or text messaging services are becoming more difficult. Mobile data services are the current driver of surpluses in most developed nations, and will become the key drivers in most developing nations, eventually.

But what happens when mobile data revenues have reached saturation? What comes next?

Internet of Things is the big answer many believe will develop. In other words, revenues and profits earned from IoT will drive supplier business models, generating enough surplus to keep extending service to rural areas.

That is one reason why IoT is a key focus of the Spectrum Futures conference this year. Here’s a  fact sheet and Spectrum Futures schedule.

At some point, after mobile data access has reached saturation, IoT services and revenues will be required to sustain the mobile business model in general, and pay for money-losing services in rural areas.

That is why work on new platforms, more affordable and therefore potentially able to close the business model gap between revenues and cost, are so important.

Put simply, costs must drop much more, consumers must perceive the value of Internet services and be able to pay for such services, or alternative methods of subsidizing end users must be created.

Some of us would argue all of those developments are required. That is why developments such as Telecom Infra Project, Free Basics, Project Loon, unmanned aerial vehicles, unlicensed and shared spectrum, use of millimeter wave radio and creation of new apps and services that drive value are so important.

Without serious innovation in the access networks business, it might literally not be possible for many service providers to continue operating.

Spectrum Fees, High Incremental Capex, Lower Value in Ecosystem Mean Historic Changes Might be Necessary

Mobile operators in India pay fees for use of spectrum. For spectrum acquired in the upcoming 2016 auctions, the spectrum usage charge will be three percent of of service provider adjusted gross revenue (AGR) on spectrum acquired in forthcoming auction in 700, 800, 900, 1800, 2100, 2300 and 2500 MHz band.

Bharti Airtel, India’s largest telecom operator will pay 3.8 percent. Reliance Jio Infocomm will pay about 3.05 percent.

Those charges might be seen as a small part of a much larger problem: high capital investment and regulatory risk that makes the business model unsustainable.

And at least some now question whether there is truly enough potential revenue in at least some emerging markets to sustain robust investment in traditional mobile network bandwidth. An open question: whether a dramatic reduction in access network costs is feasible.

By the same token, one might question whether there is enough demand to support gigabit Internet access in many countries without key subsidies from government.

Nearly 40 percent of South Korea’s broadband network build between 2005-2014 was provided by the government, for example.

Few countries are able to support--or even consider--that level of support to create high-performing Internet access facilities for their citizens.

It gets worse.

To a large extent, one might argue, access providers are capturing a smaller share of overall ecosystem value. Bluntly, one might say, access providers really are becoming commodity dumb pipe providers while value and revenue shift to app providers, device suppliers and others.

“Even after accounting for Wi-Fi and new technologies and alternate business models, there will be still significant global wireless data demand that is not economically possible to serve,” says James Sullivan, J.P. Morgan head of Asia equity research. .

Declining value capture is paired with a significant, and ongoing, increase in capital intensity. In at least some cases, that will mean possible nationalizing of networks. In other cases, competitors might be forced to consider sharing network facilities, to stave off such intervention.

That would overturn nearly a half century of moves to privatize assets and introduce competition.

“Emerging market telcos have no choice but to fundamentally change the structure of industry assets through the unification of networks via nationalization, centralization under a regulated return utility, or more aggressive commercial network sharing,” argues James Sullivan, J.P. Morgan Chase Head of Asia Equity Research.

Simply, between now and 2024, telco capital investment and operating expense will climb, while revenue growth lags. But there also is regulatory risk. India, the Philippines, Thailand, Malaysia, Indonesia and Turkey are countries where capex pressures are the big problem.

Regulatory risks exist in Indonesia, Brazil, South Africa and Malaysia, he argues.

Markets with the potential for the most extreme margin compression include the Philippines, India and South Africa; while more defensive margin markets are Nigeria and China, says Sullivan.

Bringing stakeholders together to understand changing supply and demand issues, and the business model for Internet access, is a key focus of the Spectrum Futures conference. Here’s a  fact sheet and Spectrum Futures schedule. Sullivan will be sharing his perspective at the event.