What Seems to Have Been Key Business Model Issue for Google Fiber?

To the extent that Google Fiber has found its business model unattractive, the issue remains “why?” Any number of issues could have been contributors, ranging from take rates to construction cost. But take rates are the most-likely source of trouble for the business model, both for the core internet access product and video services.

Expectations for Google Fiber once were much higher. A 2013 survey found that about a third of households had subscribed . A 2014 survey commissioned by Bernstein Research conducted a door-to-door survey of five Kansas City neighborhoods where Google Fiber was being sold, finding  take rates as high as 75 percent, in some neighborhoods.

In Wornall Homestead, the highest household median income neighborhood ($116,000 annual income) Bernstein surveyed in 2014, it found that 83.1 percent of respondents were taking Google Fiber service. About 15 percent were subscribing for the “no charge” 5-Mbps service, but all the rest were buying the gigabit service.

That is a historically-unprecedented take rate for an “overbuilder.” In the Community College, the neighborhood with the lowest median income neighborhood ($24,000 annually) 27 percent of respondents were taking Google Fiber service.

Some 26 percent actually bought the gigabit service, while seven percent subscribed for the “free” 5-Mbps service. That level of adoption, in the first year, would be in line with take rates seen when firms such as Verizon began offering FiOS, for example, and better than most overbuilders

have achieved in the first year.

Obviously such take rates were not widely replicated in other markets and neighborhoods. In fact, it appears take rates might have reached 20 percent in Kansas City, but far less than that in the additional markets Google Fiber entered. That is based on the assumption that

Assume Google Fiber had about 70,000 to 75,000 video subscribers by the end of 2016. Then assume those video accounts represented about 15 percent of total revenue-generating accounts.

That might imply that as many as 467,000 revenue-generating accounts, and perhaps 70,000 “free” accounts in service, for a total of 537,000 accounts in service. Some have estimated Google Fiber has about 450,000 internet access subscribers, for example.

At a 20-percent take rate, that implies Google Fiber passes some 2.68 million homes. Varying assumptions about video take rates as a percentage of total, one could derive paid accounts ranging from 318,000 to 638,000, or homes passed between 1.6 million and 3.2 million.

It’s guesswork, as Google Fiber never has released any information about either subscribers or homes passed.

One has to assume that adoption rates were less than 20 percent, or that costs were much higher than forecast, with the single most-significant sensitivity being the take rate.

A take rate of 20 percent in the first year would be considered a success by virtually any other internet service provider entering the market for the first time, and there is no particular reason to believe Google’s network and construction costs were too much different from any other ISP doing a new build.

While make-ready costs conceivably were lower, the business case is not so sensitive to those costs. Construction costs, and then materials (cable, customer premises gear) and drop activation are the dominant drivers of expense.

Canada Wants 50 Mbps Internet Access in Rural Areas

As has been obvious for some time, internet access now is the primary “basic” function of a fixed communications network serving consumers. So it is that the Canadian Radio-television and Telecommunications Commission (CRTC) has “declared that broadband access Internet service is now considered a basic telecommunications service for all Canadians.”

As a practical matter, that now means the CRTC is shifting its regulatory focus from wireline voice to broadband services, including shifting universal service funding from voice to internet access. In addition to focusing the annual $100 million universal service fund from voice to internet access, the CRTC also is creating a new fund that will invest up to $750 million over and above existing government programs, for a period of five years.

The CRTC also has set targets for the basic telecommunications services requiring speeds of 50 megabits per second  downstream and 10 Mbps upstream for fixed broadband Internet access services.

As you would guess, rural areas are where the problem is most acute.

About 82 percent of Canadian consumer already can purchase service at 50 Mbps to 99.99 Mbps, but only about 29 percent of Canadians can buy such service in rural areas.

Source: CRTC report

Source: CRTC report

Alphabet Now is a Big Spender on Federal Government Lobbying

It is common for telecom attorneys--in the context of any discussion of spending by AT&T on lobbying--to make jokes about "that's all they spent?" But lobbying is big business for any number of industries and associations whose members are directly affected by federal government decisions. Most recently, internet application firms have climbed into the top ranks of spenders, a reflection of the new importance national policies affect the core technology business.

Alphabet spent about $16.7 million lobbying the U.S. Federal government in 2016, a level that likely exceeds spending even by heavily-regulated telcos such as AT&T. Other leading technology firms also were in the top ranks of spending on lobbying, even if people more often assume it “must” be AT&T that is spending the most. AT&T and other access services firms also spend a significant amount at state levels as well.

Some argue that lobbying spending is even more intense in the defense, pharma and tobacco industries. That might be true for pharma, but trade associations and business groups also are big spenders.

It is a bit perverse, but one obvious result of concentrating regulatory power at the national level (even for the best of reasons) is that the targets for lobbying are highly visible, and the returns also relatively easy to ascertain.

source: Open Secrets

source: Center for Responsive Politics

source: ibisworld

source: U.S. House of Representatives

source: Open Secrets

Windstream to Discontinue DSL Service for a Few Accounts

Windstream plans to discontinue local exchange and digital subscriber line (“DSL”) services for some 300 residential and small business customers in the states of Alabama, Arizona, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, New Mexico, North Dakota, Ohio, Oregon, South Dakota, Tennessee, Texas, Utah, Washington and Wisconsin, because “the services are being provided on equipment that is at the end of life, it is no longer supported by vendors and replacement would be cost prohibitive.”

It would be wrong to imply too much more than that Windstream has concluded it simply cannot earn a profit from serving those 300 customers. Any consumer customers served by Windstream in those “out of market” areas virtually certainly do not generate a profit.

Few competitive local exchange carrier operations using leased access could do so, either, which is why so few CLECs (except for cable TV companies) serve consumer accounts anymore. That has been the case since about 2005 when wholesale rates upon which the CLEC business rested were raised.  

Many small business accounts likewise generate relatively scant revenues, and at low volumes almost certainly also are unprofitable. Those 300 customers imply an average of 25 accounts per state, and are served on all-copper lines leased from another carrier. As you can well imagine, there is scant to any profit in such low-volume ventures, with no owner economics from the network.

That is why competitive service providers mostly have switched to facilities-based services on their own fiber networks.

400 Million M2M Modules to Exceed 400 Million in 2021?

Mobile machine-to-machine module shipments--including modules using the narrowband Internet of Things (NB-IoT) platform--will exceed 400 million in 2021, ABI Research forecasts.

DT, Vodafone, China Mobile and China Unicom, for example are planning NB-IoT network availability as early as 2017,

Tracking, as well as simple thing monitoring and control, will be the primary application segments for NB-IoT, ABI Research estimates. Those apps likely will include parking and supermarket checkout apps.

KPN, Orange, SK Telecom, and Softbank also are building rival LoRa networks first, though not on an exclusive basis, as those carriers likely also will support Category M Long Term Evolution or NB-IoT standards.

North American mobile operators are focusing on Cat M platforms. Longer-term forecasts for M2M deployment have been robust. As typically is the case, the forecasts will prove too optimistic in the near term, but possibly even too conservative longer term.

source: Connected World

source: M2M Daily

Google Fiber: A Case of "Good Enough" Beating "Best?"

Most of the opinion about Google Fiber is that “it failed.” Some of us are not sure about that. Much hinges on what one expected. If the objective was to spur existing ISPs to upgrade faster, Google Fiber succeeded. If the objective was to create a big new revenue-driving service, Google Fiber has not yet achieved that goal. Also, much hinges on whether this is a case of “iterate, iterate, iterate.”

The first iteration has failed to dislodge enough consumers and win Google Fiber enough market share to sustain itself in current form, that is certain. But unless Google Fiber assets are sold, or the whole business simply is shuttered, another effort likely will be made.

So far, it is fair to note that Google Fiber does not seem to have taken significant share away from the existing leading ISPs in the target markets.

“Why” Google Fiber has not been able to take share is the question, and “answers” have ranged from permitting issues to competitor lawsuits; lack of marketing to higher-than-anticipated costs or harder-than-expected construction. All of that seems plausible.

In addition, there are other reasons.  In the competitive access services business, attacker actions always are countered with incumbent counterattacks. That is why there is no “sustainable advantage” in the access business, just  relatively-temporary advantage that competitors eventually erase with rival offers.

Acknowledging that all the aforementioned issues might also have contributed to a slower-than-expected rollout, the cable operator and telco response might also have blunted the Google Fiber value proposition. The “symmetrical gigabit for $70 a month” offer was disruptive, to be sure. On a megabit-per-cents basis, it completely reset the value proposition, in downstream and upstream performance terms.

But that is where the competitor dynamics--and consumer demand--come in. One might argue that the competitor response was “good enough” to blunt Google Fiber’s appeal. It is no accident that Comcast announced its nationwide--to every home--gigabit upgrade after Google Fiber was launched. As skeptical as Comcast and others might have been about demand, once they determined there was a conceivable challenge to their “leadership,” upgrade programs were announced.

At the same time, even in advance of the gigabit upgrades, existing tiers of service were bumped to higher speeds as well, for the same price. In Charlotte, N.C., Time Warner Cable upgraded service substantially, for no additional cost. Customers who had TWC's standard 15 Mbps or 30 Mbps were upgraded to 200 Mbps. Customers on the 50 Mbps tier were upgraded to 300 Mbps, without charge.

Comcast made similar upgrade moves in Provo, Utah, where Google Fiber also was building. AT&T did so in Austin, Texas, offering to match the gigabit offers made by Google Fiber.

The point is that competitors responded by changing their own offers by boosting value. The changes did not match the Google Fiber offer, but apparently represented enough incremental value to convince consumers to stay with their current providers, even if Google Fiber represented an offer with “significantly-more” value.

That happens frequently in all parts of the access business. “Good enough” value propositions often beat “the best” value propositions, since absolute cost matters to most consumers. In this case, it appears that most consumers remain satisfied with hundreds of megabits for less money, rather than buying gigabit service for a bit more money.

Perhaps that is a prime example of price anchoring, where consumers evaluate all offers from a reference point. A 50-inch TV might be priced at $1,000, where smaller models in the 24-inch to 36-inch range might cost only hundreds of dollars. Then a model with a 48-inch screen is priced at perhaps $600. That is a “gold-silver-bronze” pricing strategy that creates perceptions of value for the 48-inch model.

The other angle is that consumers might be rational in another sense. The primary value of any higher-speed internet access connection is typically that it tends to ensure reasonable speeds for multiple users at a location. How much “speed” any single user requires depends on the applications to be supported, but for most users an actual speed of 20 Mbps or so is likely enough to support all applications any consumer presently requires. Even assuming a requirement for occasional speeds of 40 Mbps per user, that still means a “hundreds of megabits per second” connection is all a single account might require.

Likewise, symmetrical gigabit as a headline speed is eye-catching, but far more than a typical multi-user household requires.

It is not yet completely clear that Google Fiber has “failed.” Access speeds are dramatically higher, and continuing to climb at significant rates. In that sense, Google Fiber already has succeeded. Whether Google Fiber will also prove to be a sustainable business remains to be seen.

What does seem clear is that most consumers have chosen to buy “good enough” offers, not the “best possible” offer. What cable companies have done is counterattack by creating a “better” offer that is “good enough” to satisfy consumers.

More than anything else, that might be what has limited Google Fiber success.

Telcos Losing Ability to Compete in Consumer Fixed Network Segment?

Though every market will be different, some important trends can be seen in firm strategies related to the business customer segment. In the U.S. market, an argument can be made that cable TV companies are, and will be, the leaders in consumer services, though such firms also will gain business segment revenues.

The largest U.S. firms--with the exception of AT&T--are moving towards greater reliance on business customer revenues, though all of the three largest firms have a major reliance on business accounts.

Potentially, the most reliant on business customers will be CenturyLink, formerly a rural telco whose revenues were driven by consumers.

If the CenturyLink acquisition of Level 3 Communications is approved by shareholders and regulators, its revenue will be 76 percent derived from business customers. Prior to the deal, CenturyLink already was earning 64 percent of total revenues from business customers.

Verizon earns about 66 percent of total revenue from business customers, while AT&T earns about half its revenue from business customers.

Other firms that formerly were rural telcos, with revenue driven primarily by consumer accounts, also now derive at least half of total revenue from business customers. Frontier Communications earns more than half its revenue from the business customer segment, while Windstream earns about 78 percent from business customers.

That “business segment” strategy now emerges as the key business model for virtually all of the largest U.S. fixed network providers. It also the strategy followed by metro fiber specialists and competitive local exchange carriers. Small independent suppliers of fixed network services are not going to be able to replicate that strategy, as there are too few business customers in most rural areas to underpin the approach.

Eventually, all the leaders of the U.S. market will be integrated carriers with both fixed and mobile assets, even if half the U.S. mobile leaders are “mobile only.” In the fixed network segment, though, cable is likely to emerge as the clear leader, as it will be tougher every year for a fixed telco to maintain a business model based on consumer services.

Consider CenturyLink, the third-largest U.S. telco, with 11.2 million total access lines at September 30, 2016. At September 30, 2016, CenturyLink had six million broadband subscribers and approximately 318,000 Prism TV subscribers, implying some 4.88 million voice lines and no mobile operations.

But most of the actual revenue is generated by business customer services (about 64 percent in 2016).

Also, CenturyLink revenue growth has been basically flat since 2012, which explains the importance of the Level 3 Communications acquisition, which will add about $8 billion or so of additional revenue to the $18 billion or so CenturyLink has been earning in recent years.

The problem is that revenue is expected to decline at CenturyLink, absent this or other acquisitions.

Taking an average of four research analyst forecasts, CenturyLink annual revenue will dip to about $17.4 billion from 2017 to 2020.

CenturyLink Revenue Forecast Without Level 3 Acquisition
	2017(E)		2018(E)		2019(E)		2020(E)
	(In $ millions)
Revenue	$	17,381	$	17,358	$	17,390	$	17,490
EBITDA	$	6,450	$	6,424	$	6,396	$	6,391
Capital Expenditures	$	2,965	$	2,900	$	2,874	$	2,838

For the medium term, telcos are going to continue to lead in business and mobile revenues, but will continue to lose leadership in all fixed network consumer services. That explains the extraordinary challenge telcos face in the consumer segment. It is difficult to maintain high levels of investment in a segment of the business that is steadily declining.