In Data Era, Will Revenue Match Costs?

Though--as always--different nations, regions and providers will face different business model changes in the next era of communications, a potentially disastrous possibility exists.

In the voice era, lower unit prices stimulated usage. That did not prevent voice prices--especially international and national long distance--from dropping by a couple orders of magnitude. But vastly-higher volumes sold partly made up for the retail unit price changes.

Some believe tougher problems await in the data era.

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.

In other words, demand will not match supply, in part because data revenue will not scale with capital investment, even if that was roughly the case with voice services. As voice prices dropped, usage exploded, so lower unit prices were somewhat balanced by more volume.

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.

Differential margin always has been a characteristic of the business. Universal service funds exist because it often is not possible to support universal communications in rural areas, for example.

Gross revenue and profit margin always has been higher in the business customer segments than in the consumer segments; higher in some geographies than others; higher in denser areas than in lower-density areas.

Gross revenues and profit margin also have varied by product line.

Sullivan’s argument is that there is something profoundly different about supply costs and revenue in the data era. Consider what mobile operators are doing in the U.S. market to accommodate burgeoning video content demand: they are zero rating content.

In other words, customer data plans are not charged when consumers view entertainment video. That is not an unusual practice, historically. It is the way linear video subscriptions, broadcast TV, broadcast radio and most other content businesses have operated.

But consider the capex implications: huge investments in capacity have to be made under conditions where the key drivers of demand (video) do not produce direct incremental revenue.

It is a huge challenge.

Is "Mobile Only" a Viable Long-Term Strategy at the Top of the U.S. Mobile Market?

One of the bigger strategic issues in the traditional telecom business is whether a “mobile only” strategy is sustainable, or whether ownership of both fixed and mobile assets, in the same market, is a better approach, if it can be achieved.

With some exceptions, only the legacy, monopoly-era service providers have an easy choice. Since they already own the fixed network, and want the growth mobile provides, it is an easy choice to embrace both.

Attacking carriers tend, in most markets, to be mobile-only providers, in part because additional spectrum and government policy allows them to enter markets as attackers, and because the cost of building a fixed network is prohibitive.

The exceptions are North America and Western Europe, where attacking carriers sometimes are able to acquire both mobile and fixed assets, allowing them to operate as “full service” providers out of market.

In the U.S. market, for example, half of the top mobile operators are “mobile only,” while two (the legacy providers) own both fixed and mobile assets.

At least some observers might argue that a viable “mobile only” role can be sustained, long term, in the U.S. market. Some of us doubt that.

The reason is that neither of the two mobile-only businesses appears to have the scale to survive as independent entities, for the long term.

While a merger of the number-three and number-four service providers is theoretically possible, U.S. regulators have vetoed two separate efforts to merge assets--AT&T and T-Mobile US; and Sprint-T-Mobile US--within recent years.

Beyond that, other providers have the means and motivation to acquire the mobile-only companies. As both Comcast and Charter Communications, the two behemoths of the U.S. cable TV industry, will be getting into the mobile business, and since the business now is a scale game at the top, both T-Mobile US and Sprint offer ways for those two firms to enter the mobile business in a major way, with national footprints.

Other potential suitors also might exist. Dish Network has to create facilities or sell its licenses. And any number of other firms in the internet ecosystem might have reasons to consider such acquisitions, though such moves do not make as much sense as acquisitions by Comcast and Charter.

So, at least in the U.S. market, the answer to the strategy question might be that a “own both” strategy will apply.

That does not rule out some specialized “mobile-only” business models based on use of unlicensed or affordable shared spectrum. But such approaches are not likely to seek leadership of the traditional mobile market. It will simply be too competitive a market for any such undertakings.

In the near term, the U.S. mobile service provider market is grinding ahead, with subscriber growth extremely difficult in the saturated market.

T-Mobile US added the most gross connections in the third quarter of 2016, adding two million gross accounts. AT&T added about 1.5 million gross new accounts.

The U.S. mobile market ended the quarter with about 5.2 million gross new connections gained by the top-four carriers, but a net connection gain of about 482,000 connections.

And many of those connections were lesser-revenue tablet or Internet of Things adds. A total of 1.3 million tablets were activated in the third quarter of 2016, for example.

AT&T and T-Mobile US both increased their overall service revenue, quarter over quarter. Sprint and Verizon experienced service revenue decline, quarter over quarter.

The bigger picture is that the question about grand strategy (mobile-only or mobile-plus-fixed) is likely to be settled in favor of “mobile-plus-fixed,” ultimately, at the top of the traditional mobile business.

What might happen with other specialized “untethered or mobile” business models remains unclear. Those approaches are almost certain to be employed by contestants in the internet ecosystem who have other roles, and see value in adding the access function.

 

source: Compass Intelligence

Will Access or Content Drive Consumer Internet/Media Revenues in 5 Years?

One way of illustrating why the strategies AT&T and Verizon now are following make sense is to look at consumer internet and media revenues over the next five or so years. In 2016, about 29 percent of total consumer internet/media revenues will be generated by the internet access function. Some 32 percent of revenues will be generated by third party spending (advertisers).

Paid-for content subscriptions (or on-demand purchases) will contribute about 39 percent of total consumer internet and media revenues in 2016.

In 2021, access might contribute 33 percent of total consumer internet and media revenues; advertising about 32 percent; paid content about 35 percent of total revenues. Relatively speaking, paid content contribution will drop, as a percentage of total, while internet access, as a percentage of total, will grow.

The point is that it makes sense for an access provider with scale to look at the paid content or advertising segments of the business. In 2016, paid content is the single largest segment.

By 2021, each of those revenue segments will represent about a third of total revenues.

source: Activate

Mobile Ad Revenues Grow 89%, Mobile Digital Video Revenues 178%

Verizon’s big move into mobile advertising and AT&T’s big move into content (especially mobile plans) remain controversial strategies, at least from the perspective of many investment concerns.

Right or wrong, there is a clear logic at work. Mobile revenues increased 89 percent from the first half of 2015 to the first half of 2016, the Interactive Advertising Bureau reports. Likewise, digital video, including mobile and desktop, grew 51 percent between 2015 and 2016.

Digital video revenues generated by smartphones and tablets grew 178 percent, year over year, IAB reports.

As audiences shift to mobile devices, digital video was the only ad format on desktop devices that had meaningful growth, increasing 13 percent, year over year.

The extent to which Verizon can succeed as a mobile advertising platform, or AT&T win as a mobile and over-the-top content distributor, remains unclear to many. What is clear is the strategy.

Both firms operate in content and advertising markets that are large and potentially sustainable. That is not the case in most countries, whose markets are too small to offer scale benefits.

AT&T already is the largest linear video distributor in the U.S. market. And though many have criticized AT&T for moving into linear video distribution in a big way, the company’s leadership is not dumb. They know linear is going to give way to over the top distribution, which is why OTT plans are being developed.

If one accepts the notion that large tier-one telcos will have to replace something like half their present revenue within a decade, and that gross revenue and profit margin protection requires moving “up the stack” and “across the value chain” towards applications and platforms, then both video content and mobile advertising are rational bets for Verizon and AT&T.

That is not the case for most smaller entities globally.

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.