Transit Pricing Illustrates "Near Zero Pricing" Conundrum

One of the few core assumptions I always have used in my analytical work concerning the connectivity business is near zero pricing is a foundational trend for all connectivity products, as it tends to be also for computing products. Consider internet transit pricing, for example 

Back in 2014, Cloudflare estimated the cost of wide area network bandwidth as being lowest in Europe, in large part because so much internet traffic used peering rather than transit. 

source: Cloudflare

Two years later, in 2016, costs had dropped. The Middle East has the lowest WAN costs, and costs in other reasons had dropped significantly. Where Australia’s costs were as much as 20 times higher than Europe’s costs, two years later the Australian costs were six times higher than Europe’s costs. 

source: Cloudflare

None of you would be surprised if transit prices continued to fall. Transit to Sydney, for example, had declined to about $5 per Mbps, where back in 2014 prices had been about $100 per Mbps. 

source: TeleGeography

Perhaps for every problem there actually is a solution, though perhaps sometimes the answer is not what we might prefer, expect or want. Back around 1995, I ran into one of those problems.

The context was voice pricing trends. To make a long story short, the problem was a confluence of trends that all seemed to suggest voice revenues were headed south. The process of deregulation and privatization of former monopoly networks was one such early trend.

But in addition to competition, technology trends all suggested prices would drop. Among those trends: optical fiber, microwave transmission, Internet Protocol, client-server architectures, Moore’s Law and declining microprocessor and storage costs. I cannot recall whether I believed at the time that mobile communications would put pressure on voice pricing as well.

The phrase near zero pricing came to mind. The imponderable, at the time, was what would become of telecom service providers if their core product--voice--actually reached a point where retail prices were very low, very close to “zero.”

The concept would reappear about 1999 and 2000, when the phrase “bandwidth wants to be free” was bandied about. The key concept is that prices do not actually have to drop to actual zero; prices simply have to drop to “nearly zero.” If that happens, the revenue model for nearly every business has to shift. 

What was once a revenue driver becomes something more accurately described as a “feature.” The whole point is that technology makes “near zero pricing” in any number of contexts a foundation for business strategy. The key point is not that prices actually hit zero, only that they drop so precipitously that access to computing and memory no longer are constraints to what can be done.

But that’s a problem for incumbent providers who have built substantial businesses on scarcity, either scarcity of bandwidth, processing or memory. And that was the conundrum when asking what impact near zero pricing would have for telcos.

So far, the industry has dodged a bullet by creating new core revenue drivers to supplant voice services that no longer can support the industry’s business models. Mobility and internet access are key cases in point. But prices for bandwidth show the same drift to near zero that we originally saw in long distance and voice pricing. 

Marginal cost pricing is an important principle in many markets, including growing parts of the telecom business. 

Products that are "services," and perishable, are particularly important settings for such pricing. Airline seats and hotel room stays provide clear examples. Seats or rooms not sold are highly "perishable." They cannot ever be sold as a flight leaves or a day passes. So it is rational for an airline to price seats at whatever price it can get shortly before a flight departs. Or at least, that used to be the case.

These days, airlines are more likely to attempt to raise “just before departure” revenue in other ways, such as selling upgrades to roomier seats. 

Whether marginal cost pricing is “good” for traditional telecom services suppliers is a good question, as the marginal cost of supplying one more megabyte of Internet access, voice or text messaging might well be very close to zero.

Such “near zero pricing” is pretty much what we see with major VoIP services such as Skype but also increasingly for bandwidth products in general.  Whether the traditional telecom business can survive such pricing is a big question.

“Forward pricing” is related to marginal cost pricing, where suppliers price at the incremental cost of producing the next unit (marginal cost) or at some future cost when scale is obtained (forward pricing). 

In some part, the value of becoming a platform is precisely a solution for “pipe” sales in many industries. Platforms are alternative business models. They are not necessarily built on selling a particular product, much less products whose prices tend to trend inexorably towards zero.

EU Commissioner Worries about Netflix Impact on Traffic

It is not yet clear whether people staying home from work and school will break the internet, in the sense of causing meaningful congestion, slower speeds and higher application latency. That does not yet seem to be an issue, but at least some voice in Europe believe European Community networks might not be as resilient as networks elsewhere. 

European Union Commissioner Thiery Breton, for example, is urging people to switch to standard definition quality when streaming Netflix. That noted, Cloudflare reports no negative impact on experience, though usage is up in most markets. 

Networks in Spain, though, report large increases in traffic of between 40 percent to 50 percent. 

That noted, higher-speed consumer connections (above 100 Mbps) are most prevalent in North America, compared to Europe, Africa and Latin America. Asia speeds are not too far from North America levels. 

Region	Greater Than 100 Mbps
	2018	2019	2020	2021	2022	2023
Global	11%	20%	24%	29%	34%	39%
Asia Pacific	14%	20%	26%	33%	42%	53%
Latin America	1%	1%	1%	1%	2%	2%
North America	16%	23%	31%	37%	40%	46%
Western Europe	10%	13%	15%	17%	19%	22%
Central and Eastern Europe	3%	3%	4%	4%	5%	6%
Middle East and Africa	0%	1%	1%	1%	1%	2%

source: Cisco

That might be the source of concern expressed by Commissioner Breton. European networks might be challenged and less resilient in the face of unexpected demand shifts.

When Facts are Not "Truth"

A recent report states that the “average household cable package is now $217.42 per month.” Some will interpret that finding as a case that video subscription prices are too high, or that a “cable package” is too high, compared to other “utilities” consumers purchase. That is a case of facts and truth not aligning. 

The key phrase there is “package.” Perhaps 50 percent to 60 percent of buyers of “cable services” buy some form of bundle. 

So while it might be factual that the “average household spends $205.50 per month on all major utilities combined (electricity, gas, water, sewage, garbage),” this is not an apples-to-apples (a comparison of services on a like basis) comparison. 

source: Decision Data

A cable “package” can include two to four different services: internet access, linear video subscription, voice service, mobile service. So one might argue that, truthfully, the cost of three or four cable-delivered services are about the same as three of four other “utility” services, and not much more than that. 

Also, “average” might mean half of customers pay more, while half pay less, for any of the products (median) or that, considering all bills, the blended costs are as stated. It is not clear which definition is used, in this case. The big point remains that the “package” represents two to four services. 

Crudely assuming that half of the cable packages include three services suggests a single component cost of about $71 each. But that is an attributed cost. One derives different numbers assuming just two services per bundle or four services per bundle. 

A more plausible estimate is to value internet access at $40 to $50 per month; video at $80 to $100 per unit; voice at about $35 to $40 a month and mobile service at $40 to $50 a month. That would explain the $217 cable bundle “average.”

The analysis of cable bundle prices is plausible and factual. It is not, strictly speaking, “truthful.”

Verizon Says Gaming Traffic up 75%, Presumably Because of Covid Keeping People at Home

Verizon says it has seen a 75 percent increase in gaming over its networks in recent weeks, presumably because workers and students are working and playing from home. Video streaming increased by more than 12 percent and overall web traffic by just under 20 percent.

Full network impact will be hard to predict, as the increase in at-home usage will be accompanied by a near-zero level of usage from school and business locations. Still, it appears that total usage is up, especially in areas hard hit by Corona outbreaks. 

But Cloudflare says South Korea internet usage went up about eight percent, while up perhaps eight to 10 percent in the United States, as a result of social distancing policies that keep people at home. Peak hour usage might up 10 percent to 20 percent in some U.S. locations. 

source: Verizon

Traffic seems to be substantially more--perhaps 30 percent--in northern Italy,

AT&T, Nokia Collaborate on 20-Country Managed IoT Network

AT&T will be using Nokia’s Worldwide IoT Network Grid (WING) for enterprise IoT customers. The deal includes the core network, dedicated IoT operations, billing, security, and data analytics.

Wing is  expected to be available in more than 20 countries by the first quarter of 2020. That means the company’s enterprise IoT customers will be able to manage connectivity across all those networks.

Worldwide IoT Network Grid (WING) is a cloud-native, globally-distributed, IoT core network managed service compatible with 3G, 4G, NB-IoT access networks, allowing operators to accelerate time-to-market, at lower costs and risk, 

The managed service includes four initial offerings, two horizontal and two vertical,  for agriculture, livestock management, logistics and asset management. 

• Smart Agriculture as-a-Service: Sensors capture environmental, soil and crop data that is then analyzed to provide insights that help farmers manage crops more effectively, potentially saving costs on irrigation, pesticides and fertilizers.
• Livestock Management as-a-Service: Tracking devices and biosensors monitor animal health and welfare to provide ranchers with early alerts if abnormalities are detected, protecting valuable livestock and improving yields.
• Logistics as-a-Service: IoT sensors enable tracking of the global movement and condition of goods through the complete supply chain to help enterprises instantly identify incidents and even predict future events to optimize delivery and logistics process efficiency.
• Asset Management as-a-Service: Connecting products anywhere in the world enables their status and performance to be monitored centrally, helping enterprises provide a better service to their business and consumer customers.

Will Corona Virus Stress Networks?

We might soon get a good test of internet service provider network resiliency, as Corona virus precautions keep more people at home. In Spain, IP networks have experienced increases of nearly 40 percent,  while mobile use has increased by about 50 percent in voice and 25 percent in data, Telefonica says.

But service providers have generally not seen congestion issues, at least not yet. Most likely believe core networks are up to the challenge. App providers might face some greater challenges, though.

Is Carrier Billing an Opportunity?

“Low profit margin” and small revenue opportunity generally are good reasons for a service provider to avoid offering any particular service, and direct carrier billing provides a reasonable example of both drawbacks, despite periodic efforts to popularize the service.

Direct carrier billing has been a low­-margin opportunity and might, perhaps best case, account for less than one percent of total mobile service revenue, according to Mobile World Live. So even if successful, most service providers might simply find they have more-important priorities. 

One can make the argument that the opportunity is greatest in emerging markets, as banking system inclusion is generally underdeveloped there. But there are other alternatives, including mobile money services, mobile banking and internet-based payment apps as well.

A tier-one service provider simply cannot afford to chase every conceivable revenue opportunity. In fact, for the largest tier-one service providers, any potential opportunity generating less than $1 billion in annual revenue is too small to tackle. Even success does not move the revenue needle. 

For that reason, many service providers will continue to look elsewhere for revenue growth, since even carrier billing success generates too little incremental revenue, compared to other possible alternative growth initiatives. 

source: Mobile World Live

The shortcomings have been clear for purchases of  physical goods, where carrier billing costs to merchants have been so high that other alternatives are preferable. Nor is it clear most service providers can get costs down low enough to compete with other alternatives. 

To compete, carrier billing charges to merchants would have to drop to no more than three percent of sale value, but “their cost structures simply aren’t set up for this.”

Carrier billing also comes with  increased risk of bad debt exposure, and also could shift prepaid customer purchasing away from connectivity services.

In many markets, that simply makes carrier billing a non-starter as a payment mechanism for physical goods. 

Digital goods possibly are another story. In 2018 Apple accounted for 10 percent of global carrier billed digital goods and services revenue while Google represented 19.3 percent, according to Ovum.

Still, Mobile World Live still says the value of carrier billing might not be “direct revenue.” In fact, that could be the least valuable outcome. 

“Enhanced customer lifetime value, higher ARPU and improved customer loyalty” arguably are the chief benefits. That might not be sufficient to convince many operators to enter the business.