Airline Prices Really are Not "High," Neither are U.S. Telecom Prices

Some might argue telecommunications and airline service are analogous sorts of industries. Both are extremely capital intensive, both originally were operated as monopolies or oligopolies, the assets often owned directly by the government. Both have been privatized and become competitive industries.

Both industries have been profoundly affected by new technology and have become suppliers of products widely used by consumers, where once they were largely used by wealthy users.

Where both industries might once have competed based on quality, now both industries must compete on price. Both industries routinely rank at or near the bottom of consumer satisfaction surveys.

Both often are criticized by consumer advocates for offering low quality and high prices. Both arguably are tough industries, however. Consumers want (consistent with safety and consistency) low prices. But low prices are an issue for suppliers, in terms of sustainability.

Over the last 60 years of commercial aviation, airlines have not come close to recovering their cost of capital, much less actual profits In fact, airlines have had average profit margins of less than one percent on average over that 60-year period.

In fact, so bad have airlines performed that the traditional investment advice for investors was “don’t buy airline stocks, ever.”

In 2012 airlines made profits of only $4 for every passenger carried. In 2014, airlines might have unusually “high” margins of 2.6 percent.

Adjusting for inflation airfares are lower in 2014 than they were a decade ago. In 2011, airfares were about 40 percent lower than in 1980, adjusted for inflation, even when baggage fees and other ancillary charges are included.

Observers often complain about nominal U.S. prices for Internet access or mobile service as well. One might make the same observation about Internet access, mobile service or mobile Internet service as well. In developed nations, including the United States, cost as a percentage of household income ranges from half a percent to 1.7 percent of household income.

Costs are far higher than that in the developing world, for example.

People likely will continue to complain. But neither industry will have an easy time providing low prices, high quality and also geneate sufficient profits to continue to invest in the business. Airlines historically have had a harder time doing all three. But telecom providers increasingly are finding themselves in the same fundamental situation.


source: AEI, Carpe Diem blog

Bhari Airtel Tries Higher Prices for OTT VoIP Bandwidth

Bharti Airtel prepaid customers, under a new pricing regime, will not be be able to use discounted mobile Internet access rates when using an over-the-top voice over Internet protocol app such as Skype, Viber and similar services.

The move is reminiscent of pricing policies some mobile service providers adopted when VoIP services first emerged as a threat to voice revenues.

To be sure, there is a nuance. The new policies mean usage of mobile Internet access for VoIP apps does not qualify for prepaid data discounted rates, effectively raising the cost of using an OTT VoIP app.

Bharti Airtel can continue to claim that formal prices for use of VoIP bandwidth have not been raised; VoIP usage simply uses a “standard” rate, not a discounted rate that applies to other Internet apps and usage.

Effectively, it is a price increase. Starting in January 2015, Airtel customers using a prepaid data pack will be charged a higher rate for VoIP calls.

Bharti Airtel says use of VoIP apps will be charged at “standard” data rates of 4 paise per 10 KB on 3G networks and 10 paise per 10 KB on 2G networks.

The discounted rate is 0.25 paise per 10KB of usage.

Based on standard rates, usage of one gigabyte of data for VoIP on 3G network will cost about Rs 4,000 and while the same on 2G network will cost about Rs 10,000.

Such practices have been controversial in the past, and Indian regulators already are looking into the practice. TeliaSonera, for example, planned something similar in 2012, but eventually raised mobile data rates across the board, instead.

TeliaSonera, like Bharti Airtel, primarily was concerned about lost voice revenues when it considered the differential pricing plans.

Taking a slightly-different tack, Bharti Airtel says the move is necessary so Bharti Airtel can continue to make investment in expanded data services. In a broad sense, that is correct.

OTT voice shrinks the carrier voice business that represent the bulk of Bharti Airtel revenues, making that larger investment task harder.

Some argue the pricing moves violate network neutrality principles that allow people use of any lawful app, without blocking. That isn’t directly the issue here.

Nor does Bharti Airtel seem to be engaging in any effort to “speed up” or “slow down” VoIP packets or otherwise favor any class of apps. So the issue is less any potential violations of network neutrality principles and more an instance of supplier retail policies.

Whether the new move is the wisest course is the issue. In the past, similar practices have generated ill will. Still, in 2013 perhaps a quarter of all mobile service providers levied some sort of additional charge for use of mobile VoIP services.

U.S. Network Neutrality Rules Will Set Back Service Provider Hopes for 2-Sided Business Models

Sometime early in 2015, the U.S. Federal Communications Commission is going to issue its long-awaited network neutrality rules. Just as certainly, no matter what the FCC does, there will be lawsuits challenging the rules.

All of that, plus a possibility the Congress will eventually step in and provide direction, mean we still will have no resolution of network neutrality rules in 2015.

In the end, some compromise solution is likely, with consumer access remaining a “best effort only” service, and business users free to buy or create services featuring prioritized access.

If, as likely, consumer services remain based on  “best effort” access, at least one logical way for service providers to create a “two-sided” business model in the consumer Internet access business will fail.

Service providers continue to hope that other methods of selling services for third party business partners might yet emerge.

In fact, some hope 5G mobile networks will embed precisely such features into the fabric of the eventual standard.

But content delivery networks, acting all the way to a consumer account premises, will not be among those features.

5G is Likely to Fulfill Promises if the Business Architecture Succeeds

Many fifth generation network proponents are fond of saying 5G is not about faster speeds or network performance, but “heterogenous” network access or lead applications. In other words, the expectation is that 5G will represent not just a “faster network” but a network characterized by its application focus.

That said, proponents now say a minimum of 50 Mbps in the mobile environment, and up to 1 Gbps in fixed indoor environments, is a baseline. So “faster networks” might not define 5G, but speeds will grow.

Though 5G networks will feature “much greater throughput, much lower latency, ultra-high reliability, much higher connectivity density, and higher mobility range,” 5G networks also will feature the ability “to control a highly heterogeneous environment, and capability to, among others, ensure security and trust, identity, and privacy,” the Next Generation Mobile Network Alliances argues.

Many suggest that Internet of Things or machine-to-machine applications, for example, will be key characteristics of 5G, as will on-demand provisioning. To be sure, the desire for a flexible network able to shift “on the fly” has been a service provider goal for decades.

One might say all of those are reasonable extrapolations of current trends in thinking about next generation networks in general. The “highly heterogeneous environment” includes a mix of fixed, mobile and untethered access, all sorts of devices and types of user interactions.

The whole network virtualized functions and software defined network philosophy emphasizes flexibility and on-demand control of network resources.

In other words, the network itself should enable “flexibility to optimize the network usage, while accommodating a wide range of use cases, business and partnership models,” NGMN argues. That implies a network able to support on demand bandwidth and features, in an agile and cost-efficient manner.

The NGMN association argues that new revenues can be generated by providing third party application providers higher quality and lower latency access, as well as proximity, location, quality of service or authentication services.

In the current vision, services are available anywhere, anytime ; with consistent experience across time, space and networks; on multiple devices and access technologies; supporting multiple interaction types;  contextually and personalized; securely; reliably and responsively.

Proponents believe that sort of network will enable new revenue streams earned from providing third party app providers with wanted features.

The problem. as the network neutrality debate has proven, is that app providers are well aware of the “two-sided” (revenue earned directly from end users and from business partners) revenue strategy, which makes service provider revenue a cost to the app provider. So the issue is whether app providers can replicate those functions themselves, or actually believe the access provider value proposition really is so valuable.

You might say hopes for 5G are congruent with an industry hope to add more value and avoid becoming a commodity supplier of bit transport and access. In other words, the hope is that 5G will create a platform for higher application content.

The debate over network neutrality already shows one side of the expected resistance from app providers to the whole notion of “network-provided services that cost money.”

The issue is whether the 5G vision ultimately develops as planned. Next generation network architectures proposed by the telecommunications industry have a way of failing, or developing in unexpected ways.

In the case of 5G, so much of the vision relies on “business architecture,” not “network architecture.”

IoT Might Be Very Big, But Few Can Say What the Business Models Will Be

With the “Internet of Things” at the peak of its hype cycle, we will all be hearing predictions of non-linear growth. Many forecasts, for example, call for deployment of 20 billion or 30 billion IoT units by 2020.

Of course, a recent survey of executives watching the market admit they lack a clear perspective on the concrete business opportunities. That isn’t as flaky or fuzzy as it might seem. Few would have been able to predict the many revenue models and businesses created by the Internet, either.

On the other hand, any predictions of IoT installed base are close to pure conjecture, if the actual business models cannot yet be fully defined.

A few years ago, some analysts had predicted that, by 2020, the market for connected devices would be between 50 billion and 100 billion units.

None of that is at all unusual. If IoT does wind up becoming a major technology with wide application, the impact will be as profound as observers predict. But big new markets typically grow far more slowly than expected, at first, before eventually becoming ubiquitous.

Of course, IoT hopes are so large because it would propel growth in a range of industries from semiconductors to sensor applications to fixed and mobile communication networks.

Semiconductor executives surveyed in June 2014 by McKinsey said the Internet of Things will be the most important source of growth for them over the next several years—more important, for example, than trends in wireless computing or big data.

Those hopes might be misplaced, though. “For players in the traditional semiconductor market, the Internet of Things may spark some growth, but it certainly will not change two percent industry growth today to the 10 to 15 percent growth we had in the 1980s,” one industry executive says.  

Global Mobile Revenue Growth Slows to 0.5%, Search for Industry Revenue Growth Intensifies

Though mobile services have been the clear growth driver for the global telecommunications industry over the past decade or two, and though mobile data has taken the growth leadership from voice and text messaging, mobile revenue growth rates are slowing, globally.

Global mobile service revenue in the first half of 2014 grew  just 0.5 percent, compared to the same quarter of 2013, to $385.5 billion, according to Infonetics Research.

At the same time, voice usage slightly slowed, caused by an increase in use of over-the-top communications alternatives.

Also, mobile Internet access overtook SMS as the largest revenue generator of mobile data, Infonetics Research reports.

Mobile Internet access revenue rose 26 percent in the first half of 2014, compared to the first half of 2013, and mobile Internet access now drives mobile data services revenue growth.

Despite the growth of mobile data revenues, average revenue per user continues to fall, but at a much slower pace in every region, including developing Asia Pacific, says Infonetics Research.

That is one reason why we now are hearing so much about the Internet of Things, machine to machine communications and connected cars. The next wave of revenue growth, beyond mobile, mobile voice, text messaging and mobile Internet access, must now be discovered and realized.

Does Apple Pay Have to Catch PayPal or Starbucks?

Apple Pay in November 2014  was responsible for one percent of digital payment transaction volume (measured by dollar amount), according to ITG Investment Research.

Google Wallet, which launched in 2011, accounted for four percent of digital payment transaction volume in November 2014.

Apple Pay could pose a major threat to market leader PayPal's current dominance of the mobile payment space, according to Steve Weinstein, ITG senior Internet analyst. PayPal was used by close to half of online consumers in 2012, so the trick is to leverage that position in the proximity payments business (retail store checkout).

In September 2014, excluding Starbucks, PayPal had about 60 percent share of mobile wallet share, followed by Google Wallet at 43 percent.  

In the near term, it is Starbucks that Apple Pay might have to displace, even though Starbucks presently is a “captive” system, while Apple Pay aims to be a general purpose payment system.

“In 2013, payment for purchases by use of all mobile devices in the US totalled $1.3 billion, that was the entire market,” said Starbucks CEO Howard Schultz. “With over 90 percent of those purchases taking place in a Starbucks store, that means we had 90 percent share of mobile payments in 2013 while brick-and-mortar commerce in 2013 totalled more than $4.2 trillion.”

That language suggests Starbucks might eventually leverage its mobile payment system on a larger scale. “Starbucks Coffee Company has cracked the code at tying mobile payments to loyalty and we are now receiving great interest in partnerships from mobile payment companies who see the value of our rewards program and the mobile payment behaviour we established,” said Schultz.

“I can assure you that Starbucks will have a major role to play, both inside and outside of our stores, as the nascent mobile payment industry evolves,” Schulz said.

About 60 percent of new Apple Pay customers used Apple Pay on multiple days through November.

New PayPal customers used the service on multiple days during the same time period just 20 percent of the time, ITG notes.

Apple Pay customers used the service roughly 1.4 times per week and used Apple Pay at the same merchant for future transactions roughly 66 percent of the time.

Apple Pay users employ the service for 5.3 percent of all card transactions and 2.3 percent of all future card transaction volume, the study found.

Apple Pay Retailer Share of Apple Pay Activity
Rank	Merchant	Transaction %	Dollar %
1	WHOLE FOODS	20%	28%
2	WALGREENS	19%	12%
3	MCDONALD'S	11%	3%
4	PANERA BREAD	6%	2%
5	SUBWAY	3%	1%
	Top 5	58%	45%