In U.S. Market, Internet Access is Broadband; Phones are Smartphones

In many markets these days, there is very little functional difference between “internet access” and “broadbamd internet access,” as there is very little distinction between a “mobile phone” and a “smartphone.”

In the case of internet access, though, there is one important observation to be made, namely that buying of fixed internet access seems to have passed its peak, as mobile broadband continues to grow, suggesting there is product substitution going on.

For those of you who live in a developed market, when was the last time you met anybody who uses a dial-up connection to the internet? For most of us, the answer is that we cannot remember the last time we saw anybody using a dial-up connection, or actually know somebody who buys such a connection.

source: Pew Research Center,  source: Pew Research Center data

source: Pew Research Center

source: Pew Research Center

Smartphone Sales (Percent of Total, 4Q 2016)
China	96
India	50
US	96
Indonesia	68
Brazil	92

source: Gartner

"What if Computing and Communications were Free?" Still Are Key Questions to Ask

Though it is not something anybody really thinks about on a daily and routine basis, virtually every business, in every industry now operates in a context where “computing and communications are nearly free.”

Even if it is not yet true everywhere on the planet, for everyone, computing and communications are shaped by Moore’s Law, which means those products and capabilities ultimately will be so affordable people do not have to worry about using the tools.

That is a good thing, in a broad sense, if often challenging for suppliers of computers and other computing devices; as well as suppliers of communications services. Bill Gates and Reed Hastings, though, are among the executives who correctly figured out how to leverage those trends.

For Gates, the insight that free computing would be a reality meant he should build his business on software used by computers.

source: Deloitte University Press

source: plot.ly

Reed Hastings came to the same conclusion as he looked at bandwidth trends in terms both of capacity and prices. At a time when dial-up modems were running at 56 kbps, Hastings extrapolated from Moore's Law to understand where bandwidth would be in the future, not where it was “right now.”

“We took out our spreadsheets and we figured we’d get 14 megabits per second to the home by 2012, which turns out is about what we will get,” says Reed Hastings, Netflix CEO. “If you drag it out to 2021, we will all have a gigabit to the home." So far, internet access speeds have increased at just about those rates.

Not that often are huge businesses built on such bets.

The "original insight" for Microsoft was the question: "What if computing were free?" It was an apparently crazy question at the time.

“We saw that the power of these machines would go up very, very dramatically, and we felt we could write software that would exploit that power," Gates has said.

Hastings essentially asked a similar question: what would our business look like if bandwidth were nearly free?

Some might even argue that an understanding of Moore’s Law, in the 1980s, also “saved the cable TV business” from a disaster that would have been caused by high-definition TV with bandwidth requirements of up to 40 MHz per channel, in a business set up to support 6-MHz channels.

For telecom executives, as for computing hardware suppliers, the key insight is the absolute imperative of value-added services, content, transactions or retailing and advertising as drivers of revenue beyond access.

Nothing is Going to Prevent Internet Access Prices From Falling

It is helpful to remember some historical facts whenever a regulatory policy is changed in a way that critics argue “will lead to higher prices.”

And that lesson is that internet access prices decline over time. That seems to be the case for fixed or mobile internet access, and certainly has been true for transport prices. Sometimes observers focus only on retail prices, not consumption. That is important, as users tend to consume more data over time, buying tiers of service that are faster, and often have higher retail prices.  

In other words, in addition to retail price declines, quality of service keeps improving (looking only at speed) while volumes consumed keep climbing as well. So cost per megabyte or cost per gigabyte matter. Now is it crazy to argue that prices are going to fall further, as much more supply, and more-efficient platforms are introduced.

Such price changes are clear in both consumer and business realms, as well. Consider T1 prices, DS3 prices or Ethernet prices.

For some observers, maybe nothing matters but the absolute level of prices. That is nuts. Businesses used to pay a coupe of thousand dollars to many hundreds dollars for a T1 line. Now Ethernet connections running a couple of orders of magnitude faster than that sell for scores of dollars.

As with our computing devices, quality has to be accounted for. A given amount of money buys substantially more than it used to.

source: Extreme Networks

source: Deloitte University Press

Wi-Fi Offload Now Mostly is a Matter of How Mobile Usage Plans are Built

With the caveat that “being connected to Wi-Fi” is a different matter from “using Wi-Fi,” the incentive to use Wi-Fi offload obviously is directly related to consumer perception of the value of doing so. An analysis by OpenSignal finds that T-Mobile US customers (presumably the customers most likely to have unlimited-usage plans) shift to Wi-Fi access the least of customers of the top-four U.S. mobile service providers.

source: OpenSignal

In the coming 5G era, and assuming data tariffs remain affordable (no particular consequences for relying on mobile networks instead of offloading to Wi-Fi), customers might not find it useful to offload to Wi-Fi.

Assuming mobile data usage policies do not penalize video consumption, while usage charges remain affordable, the economic incentive to offload will be lessened. Also, given the speed fo 5G networks, offloading to Wi-Fi will not often result in better user experience.

source: Cisco  

Why Revenue Sources Beyond Mobile, Mobile Data, Must be Found

Some trends now are so well established they are a background issue, no matter how important. Revenue earned by mobile service providers, in developed markets, from mobile data, from human customers, has past its peak. In markets such as Japan and the United Kingdom, mobile data, no matter how important, is no longer driving growth.

That is why hopes for internet of things are so important. Growth prospects for all human uses of mobile services--with one possible exception--are largely negative, in developed markets, even if growing in developing regions.

That possible exception is entertainment video. If some mobile operators can shift enough market share from traditional fixed network linear video services to “owned” mobile video services, that access revenue segment still could grow.

The other important shift is indirect. Or, one might say, what happens with telco diversification efforts. Put simply, the access business is declining, in mature markets. To keep growing, service providers will have to hope IoT really is as important as many believe.

Even so, IoT access revenues might only replace lost “revenues generated by services to humans.” To truly grow, access providers will have to transition to new sources of revenue based on content, platforms, transactions, advertising or other sources.

That is a very tall order for an industry that has struggled for success in most business lines outside the network services domain.

However difficult, that is what has to happen. Among the most-successful access provider transitions has been made by Comcast, which made the leap from video distributor and provider of other access services to owner of major content assets, ranging from studios to theme parks to content networks.

That’s the essence of the strategy: move to revenue sources beyond access, both consumer and enterprise. Be it connected vehicle or other services and apps, the key is to own the assets that are used by customers who need the access networks to do so.

That noted, the next wave of new sources also will come from sensor connections--or machine-to-machine apps and services--or might not come at all.

source: Telco 2.0

source: Telco 2.0

Unlimited Data Changes Verizon Customer Addition Trajectory

Verizon’s launch of unlimited mobile data plans definitely showed that when the price of a desired commodity is lowered, demand goes up.

“The launch of Verizon Unlimited positively changed the trajectory of customer additions in the quarter,” Verizon says. The new plan lead to a net decline of 307,000 retail postpaid connections in first-quarter 2017 included 289,000 phone losses. You might wonder why that was a positive change.

Consider that, prior to the launch of unlimited plans in mid-February, Verizon had a retail postpaid phone net loss of 398,000. After the launch, Verizon added 109,000 retail postpaid phone connections. In other words, the new plans accounted for a positive net swing of about 90,000 accounts.

For the entire first quarter of 2017, Verizon added a net of 49,000 smartphones to its retail postpaid phone base.

Verizon's retail postpaid connections base grew 1.2 percent year over year to 108.5 million, and retail prepaid connections grew 0.5 percent to 5.4 million.

Retail postpaid churn was 1.15 percent in first-quarter 2017.

Total revenues were $20.9 billion in first-quarter 2017, a decline of 5.1 percent compared with first-quarter 2016, due to decreased overage revenue, lower postpaid customers in the quarter and continued promotional activity, Verizon said.

Trends in the fixed network segment were unsurprising. Total fixed network revenues declined 0.6 percent, to $7.9 billion, comparing first-quarter 2017 with first-quarter 2016.

On a comparable basis (excluding XO Communications results), the decline was 3.2 percent.

Total Fios revenues grew 4.7 percent, to $2.9 billion, quarter over quarter. Revenue growth of 0.7 percent in consumer markets and 2.3 percent in business markets was part of the increase.

In first-quarter 2017, Verizon added a net of 35,000 Fios Internet connections and lost a net of 13,000 Fios Video connections. At the end of first-quarter 2017, Verizon had 5.7 million Fios Internet connections and 4.7 million Fios Video connections, year-over-year increases of 3.3 percent and 0.1 percent, respectively.

Spectrum Barriers are Going to Fall

In a business where barriers to entry matter, spectrum policy is evolving in a direction that will dramatically lower such barriers. So, as competitive as the mobile industry tends to be, it is likely to get more competitive.

Spectrum costs for virtually all providers will fall as new access methods, and huge amounts of new spectrum, are brought to market.

On one hand, the lower spectrum costs will help traditional operators in both the capital investment and operating cost areas.

On the other hand, those new ways of using spectrum will enable new entrants, as barriers to entry will fall.

Though Wi-Fi offload will continue to be a key method for using unlicensed spectrum and networks as a support for mobile data access, 31 network operator executives surveyed by Tolaga Research finds executives executives also believe they will be using a number of new techniques.

The TIA study found executives believe their firms will be using techniques that essentially bond unlicensed spectrum with mobile licensed spectrum, including License Assisted Access, LTE-WLAN aggregation (LWA), LTE Wi-Fi integration or MulteFire.

Other techniques, including licensed shared access (LSA, the idea behind the Citizens Broadband Radio Service) also might be used, but respondents were not asked about every other option that might be used.

Though the role of Wi-Fi offload continues, the newer techniques go further in making access across owned and third-party assets more seamless, as well as enabling more-effective use of unlicensed spectrum to support services traditionally offered only on networks using licensed spectrum.

About 55 percent of respondents plan to deploy Licensed Assisted Access (LAA) and prefer the notion of operating LTE in unlicensed spectrum. Wi-Fi offload solutions, such as LTE + Wi-Fi Link Aggregation (LWA) and LTE Wi-Fi Integration, (a forerunner to the LWA), were both favored by 41 percent of respondents, the TIA report says.

A possible wrinkle is that the survey seems to be weighted towards “mobile” industry executives, not executives from other industries that might eventually wind up competing with the traditional mobile providers. Some of those potential competitors--especially those with large hotspot assets--might well favor use of MulteFire at levels most traditional mobile operators would not do.

source: TIA