Mobile/Tablet Internet Access Surpasses Desktop for 1st Time

On a global basis, a majority of consumers access the Internet from a mobile device or tablet, though that is not the case in the United Kingdom, Australia, or United States, new data from StatCounter shows.

Separating mobile from tablet data, desktop instances still outnumber mobile sessions, though. Desktop sessions represented about 49 percent of Internet usage in October 2016, while mobile instances represented 47 percent. Tablet sessions added another five percent of access activity.

source: StatCounter

Facebook Developing Open Source Optical Transport

It is hard to argue, in any way, with the statement that “meeting the demands of increasing global internet usage requires a combination of wireless connectivity and scalable, cost-effective backhaul infrastructure,” Facebook engineers say.

You might argue that is correct, but not especially meaningful. You might be wrong, as Facebook engineers are working on a number of those fundamental technologies, looking to create open source gear and platforms for service providers.

Facebook is working on new open-source approaches to switching, routing and optical transport called Open Packet DWDM.

Open Packet DWDM uses combined packet and dense wavelength division multiplexing (DWDM) technology for metro and long-haul fiber optic transport networks. That is not surprising. What is different is Facebook’s determination to create open source--and therefore lower cost--platforms long haul networks can use.

Open Packet DWDM enables a clean separation of software and hardware--all open source--so anyone can contribute packet or DWDM systems, components, or software.

Facebook will contribute Open Packet DWDM to theTelecom Infra Project (TIP).

Already, Facebook has used Open Packet DWDM to develop a new transponder platform called Voyager. Voyager is described as the industry’s first “white box” transponder and routing solution.

“By unbundling the hardware and software in existing ‘black box’ systems, which include transponders, filters, line systems, and control and management software, we can advance each component independently and deliver even more bandwidth with greater cost efficiency,” Facebook engineers believe.

Facebook partners “have helped us successfully test Voyager and begin to build an ecosystem around it.”

The design will be contributed to TIP as part of the Backhaul: Open Optical Packet Transport (OOPT) project group, with the aim of encouraging more open and programmable network architectures.

Figure 2: Voyager transponder with 12 QSFP28 ports and 4 x200G DWDM line ports.

The first version of Voyager leverages data center technologies that Facebook implemented in Wedge 100, Facebook's top-of-rack switch.

Laboratory measurement results using Voyager early units configured for 200 Gbps per wavelength capacity using 16QAM modulation have reached up to 180 km distances.

“We believe that Voyager is powerful enough to support metro and long-haul data center interconnect applications,” Facebook engineers say.

“We successfully tested the packet-optical transponders in field trials with Equinix in the U.S. and MTN in South Africa, and we plan to open-source the Voyager software, similar to the FBOSS software for Wedge 100,” they say. “The open approach to development of optical packet systems will allow for faster time to market and a lower barrier of entry for new technologies.”

Carriers Want to Stop Selling Products Customers Do Not Want

In many markets and industries, suppliers can make their own decisions about what products to sell, based on what customers want to buy. Much of the telecommunications business is not that way. Often, service providers must ask for permission to discontinue selling legacy services that customers no longer wish to buy.

Former data protocols such as frame relay simply are not used anymore. AT&T, for example, has pointed out that it no longer has any customers for fractional T-1 services in many states.

So it is that CenturyLink wants to stop selling asynchronous transfer mode and frame relay services. Some of you will remember ATM. it was the expected next generation network until “legacy” IP displaced it in the market.

In the rather significantly regulated telecom business, providers cannot even stop selling products customers do not want, without asking permission.

Zero Rating of Video is Inevitable, Necessary

It long has been obvious that mobile video consumption--especially managed streaming services--would “break” the mobile data business model, without fundamental changes to the charging mechanisms.

In other words, mobile data consumption when customers used for-fee video services would have to be zero rated, the same way linear video services, broadcast TV, broadcast radio and other content services have been zero rated.

As the Internet increasingly has become a venue for content consumption, such changes in rating mechanisms have been increasingly inevitable, since pricing video data consumption at comparable rates (cents per megabyte) would quickly break the video streaming business model.

That is happening, as all the leading mobile carriers in the U.S. market have moved to some form of zero rating for consumption of at least some streaming video content.

The reasons for the change are simple enough. Video is the most bandwidth-intensive application typically used by consumers, by an order of magnitude or more. In other words, consumption of one minute of video consumes more bandwidth than one minute of web browsing, and up to a few orders of magnitude more data than one minute of texting, voice or messaging.

Revenue per bit metrics likewise are skewed. By some estimates, where voice might earn 35 cents per megabyte , revenue per Internet app might generate a few cents per megabyte. It gets worse. Mobile operators earn nothing when customers watch over the top services such as Netflix, beyond the typical bigger data buckets such behavior will drive.

As in other markets around the world, data growth is being driven largely by video streaming, a GSMA report says.

source: GSMA

Multiple Roles, Revenue Streams a Problem?

Some observers appear to believe it is somehow unethical or unsavory for an internet access provider to have multiple revenue streams, including simple access as well as content or application revenues.

It is an odd perspective, given that nearly all large contestants in the internet ecosystem now operate in multiple roles, and therefore have multiple revenue streams. Google operates in search, many other app roles, devices, connectivity and operating systems, for example.

Indeed, one might well note that some contestants have no option but to expand from their current roles, into new roles.

In 2015, connectivity represented perhaps 17 percent of internet ecosystem value. By 2020, connectivity might represent only about 14 percent of internet ecosystem value. In 2015, apps represented about 47 percent of internet ecosystem value. By 2020, apps might represent 52 percent of value.

That explains, simply, why connectivity providers constantly look for ways to move up the value chain, or “up the stack.” Value is shifting to apps, and away from simple connectivity. At the same time, profit margins generally are higher in apps and content.

Why the Mega-Mergers?

It would be logical if connectivity industry participants have wondered why, in the Internet era, retail prices for virtually all communications services generally fall, while video entertainment retail prices can climb.

The same sorts of questions are logical where it comes to market value of firms in various segments, or the prices paid by third parties to various providers of internet apps and services (advertising prices, for example).

Cable TV prices have risen every year over the past 20 years, and in each year, the rise in cable prices has outpaced inflation, virtually every analysis concludes.

That is part of a bigger story, namely the generation of value within the Internet ecosystem. Analysts at A.T. Kearny, for example, estimate that the total value of the internet value chain has almost tripled (up nearly 300 percent) from $1.2 trillion in 2008 to almost $3.5 trillion in 2015, a compound annual growth rate of 16 percent.

Revenue sources are diverse. The proportion of revenues of online services generated by advertising, for example, has grown to 29 percent in 2015. The majority of revenues still come from direct customer payments, whether they are one-off purchases, subscriptions, or pay-as-you-go services, but that seems to be changing.

In almost all online services categories, the proportion of spend that is online versus its legacy or offline equivalent has increased, as well. That illustrates the generally-disruptive impact of internet apps and services, which nearly always cannibalize some existing industry or revenue stream.

In terms of economic performance, the largest players in any given segment are able to deliver higher returns and profit margins, benefiting from the inherent network and scale effects of the internet.

At the same time, the larger providers are moving into internet adjacencies beyond their original scope of operations. Google might have begun life as a “search provider,” but now operates across a number of internet roles. Likewise, AT&T might have been a fixed network services provider, but now is the largest U.S. linear video services provider, and, if its acquisition of Time Warner is approved, will become a major participant in the content production business.

For regulators, a more-complicated industry structure has to be accounted for. “It is no longer appropriate to develop corporate strategies, or to assess policy situations, with a narrow focus on a single segment of the value chain,” A.T. Kearney argues.

Within the connectivity segment, there is a strong shift towards the use of mobile networks, which now generate more revenue from internet-related services than fixed networks. That probably is among the less-important trends. Longer term, value is shifting away from connectivity and towards the other parts of the ecosystem.

In 2015, connectivity represented perhaps 17 percent of internet ecosystem value. By 2020, connectivity might represent only about 14 percent of internet ecosystem value. In 2015, apps represented about 47 percent of internet ecosystem value. By 2020, apps might represent 52 percent of value.

That explains, simply, why connectivity providers constantly look for ways to move up the value chain, or “up the stack.” Value is shifting to apps, and away from simple connectivity. At the same time, profit margins generally are higher in apps and content.

Where connectivity earnings margins are in the 10 percent to 15 percent range, margins in operating systems are greater than 25 percent. App margins can range from 15 percent to 25 percent.

source: AT Kearney

source: AT Kearney

At the same time, live sports has been a key contributor to higher content rights costs for distributors. The shift to mobile screens likewise is placing a new premium on “live” or “interactive” programming, compared to store-and-forward prerecorded content (movies, for example).

As linear distributors shift to lower-cost bundles, and most distributors move to over-the-top streaming access, there now are new questions about whether such content increases can continue, and if, so, where.

One reason Disney equity is under pressure is concern about dwindling prospects for its flagship sports franchise, ESPN.

What is not easy to contest is the value apps and content have in maintaining value, and hence retail pricing power, in Internet markets where substitutes increasingly are available.

At a large level, value within the internet ecosystem is shifting to apps, content and other app-layer services, diminishing in the connectivity segment, and growing in some other segments of the ecosystem (such as operating systems and app stores) and declining in a few segments such as personal computers and cloud computing.

source: Cordcutting.com

source: PwC

 

source: PwC

In a clear sense, linear video prices only illustrate a broader trend within the internet ecosystem.

That noted, linear video prices have escalated in what many now believe are unsustainable ways. Back in 1995, cable cost an average of just $22.35 a month. Now it’s up to an average of $69.03, a 208.9 percent rise.

Inflation alone can’t account for nearly so much change, as inflation has changed by just 55.8 percent over that same period.

On average, cable prices rose 5.8 percent each year, while inflation rose at an average of 2.2 percent per year.

That is why linear providers are moving to “skinny bundles,” and why consumers buy affordable services such as Netflix. Consumer perceptions of value are shifting. So far, though, it is generally true that “content” is being revalued, not necessarily devalued, though ESPN might be a salient exception.

None of that is going to obstruct the bigger trend. If value, equity value, revenue and profit are shifting to apps and other places within the internet ecosystem, and away from connectivity, connectivity providers must seek new roles in those growing parts of the ecosystem.

That is why Comcast bought NBCUniversal, and why AT&T wants to buy Time Warner. Even within the connectivity segment of the ecosystem, higher revenues and profit margin are why CenturyLink wants to buy Level 3 Communications.

CenturyLink's "Problem" is a Problem for Regulators as Well

CenturyLink’s proposed acquisition of Level 3 Communications illustrates as well as any recent development how much high-level strategy requires that tier-one service providers dramatically outgrow their legacy revenue streams and lines of business.

For an industry as highly regulated as local telecommunications is, that eventually will have--or should have--key regulatory consequences as well.

Consider that CenturyLink has fixed network operations across 33 U.S. states, a footprint that arguably is more extensive than the footprint of AT&T, which operates a fixed network across 18 states.

Founded in 1968 and headquartered in Monroe, Louisiana, CenturyLink has 11 million fixed network voice accounts, six million Internet access accounts and 285,000 linear TV accounts, in 37 states.

The problem is that its consumer business is bleeding away.

Some will argue, increasingly persuasively, that “CenturyLink's legacy landline phone business is beyond saving.” Keep in mind, voice accounts are nearly twice as numerous as Internet access lines. In principle, CenturyLink eventually could lose half its current access lines.

That would pose enormous, possibly fatal problems for the consumer portion of the fixed network business that already contributes most of the connections, but relatively little of the revenue.

Even as it invests in gigabit and faster speeds to serve consumers, CenturyLink is exposed to huge account losses that will strand most of the assets being deployed. In other words, of 100 percent of upgraded next-generation network facilities, perhaps 66 percent could eventually be stranded, meaning there is no revenue generated by the assets.

You might argue the problem is “copper access lines.” The real problem is “access lines,” namely the growing likelihood that too few customers will be served by the new networks.

The big regulatory problem then becomes universal service on a wide scale, not confined to rural areas. It might increasingly become impossible for CenturyLink to operate fixed access lines of any type for many consumers.

Nor can CenturyLink simply decide to stop serving consumers. Landline phone service remains a regulated utility--even if that whole industry is disappearing--and requires states to change laws before CenturyLink could discontinue voice services.

There is clear risk that CenturyLink will be forced to continue offering an obsolete service producing almost no revenue and stranding assets on a massive level.

LIke many smaller service providers, CenturyLink has made a pivot to becoming primarily a business services provider, though it is saddled with huge regulated service operations that are a huge drag on the business.

Prior to the acquisition of Level 3 Communications, CenturyLink earned 64 percent of its revenue from business customers, an astoundingly-high percentage for a firm that once was a rural service provider.

After the acquisition of Level 3 Communications (if approved), CenturyLink would generated 76 percent of its total revenue from business customers, certainly the highest percentage for any tier-one service provider in the U.S. market, and second only to AT&T in that regard.

AT&T, by way of comparison, generates about 17 percent of total revenue from business customers (enterprise, medium and small business), while Verizon earns about 13 percent of total revenue from business customers, according to CenturyLink.

The larger point is that many service providers--tier one and smaller service providers--have concluded that the way forward is as specialists serving the business customer. What is new, in this case, is the size of the required pivot by a tier-one service provider.

One might argue it makes little sense for CenturyLink to serve most consumer accounts at all, but it is a highly-regulated firm that has no choice to easily stop doing so. Like a crab molting its former, too-small shell, CenturyLink essentially is shedding its former identity and business model, under conditions where regulators might attempt to prevent that molting.

This is eventually going to have huge implications for regulators. What if the whole fixed networks business becomes unsustainable, across most of the country? CenturyLink might be the best example, but hardly the only example, of the problem. Old rules are not going to work.