Reliance Jio Earns "Profit" in Less than 2 Years (Arbitrage, Accounting Rules Help)

It has been two decades since I’ve seen anything like the apparent regulation-assisted business model changes that apparently have helped Reliance Jio earn a profit within two years of launching its attack on the India mobile market.

The profit also is based on accounting rules, as Jio still has negative cash flow. In other words, Reliance Jio is able to capitalize some operating expenses.

Still, it is fair to note that some regulatory changes have simultaneously harmed Reliance JIo’s biggest competitors, and helped Jio reduce its own operating expenses.

The last time I saw this sort of regulatory arbitrage was back pre-2000, when incumbent and upstart telecom firms sparred over reciprocal compensation fees paid to firms for terminating calls on their networks from other service providers.

Basically, because such fees were very generous in a few locales, long distance conferencing services started businesses in those areas, charging very-low calling fees and essentially making their money on the earned reciprocal compensation fees paid by the calls inbound to the conference calling centers.

The same idea was used by call center operations, where most of the traffic, by definition is inbound, rather than outbound.

The same arbitrage could be used by dial-up internet access providers, since--again by definition--the customer traffic was inbound from other networks (customers dialing in to create an access session).

Essentially, disparities in traffic flow also underpin the economics of rural and other small telecom companies as well, where long distance calls (disproportionately important in rural areas) generate an originating access fee that is paid by the long distance carrier to the originating call network.

The point is that, at crucial times, regulatory arbitrage can provide a bit of breathing room while erstwhile upstarts sprint to gain market share and reach sustainability. Arbitrage likely is not a sustainable strategy for Jio, anymore than it has proven to be sustainable for many other service providers.

But, at least in principle, such arbitrage can help in the formative years.

FCC Definitions are Floors, Not Ceilings

Defining what broadband means now is an arbitrary exercise, if a necessary task to measure progress. According to the current minimum definition--on fixed networks--of 25 Mbps in the downstream, many internet access services actually cannot be marketed as “broadband,” using the Federal Communications definitions.

People, app experience and markets are not affected by any such definitions, of course. It probably does not matter at all that fixed network 10 Mbps Ethernet is not “broadband,” using the FCC definition.

The definitions do not apply to other wireless or mobile networks, though, a nuance that often is missed.

Still, for most users, it does not matter that most of their Wi-Fi and mobile internet access sessions are not “broadband,” using the fixed network definition. What matters is that user experience is good enough to provide satisfactory interactions.

“Satisfactory” often hinges on the actual use case, of course. Relatively modest speeds are required for most consumer apps, including video, somewhere between 5 Mbps and 25 Mbps. “Twitch” gamers mostly will need more.

Also, floors are not ceilings. Availability is not usage. In fact, U.S. consumer internet access speeds double about as fast as Moore’s Law would predict, and grow by an order of magnitude about every five years.

By some measures, U.S. average speeds are in the range of 19 Mbps. By other tests, even mobile access speeds are in the 23 Mbps range. Some other tests show 2017 average speeds of 55 Mbps.  

source: Speedtest

Though we tend not to pay much attention, U.S. fixed network internet access speeds used by consumers have grown about as fast as Moore’s Law would predict, at least on cable TV networks.

Cable One Offers Gigabit Internet Access to 95% of its Passings

Cable One’s “GigaONE” gigabit internet access service is now available to residential customers across more than 95 percent of its U.S. footprint, representing more than 200 communities.

The primary impact likely will be that more people buy access at lower speeds, ironically. The reason is that when gigabit services are offered, the price of lower-speed tiers tends to drop. And, as you would guess, consumers buy more of a product they like when the price is lower. Verizon, for example, introduced its new gigabit per second at a retail price half that of the former 760-Mbps service, for example.

Gigabit services launches tend to reduce prices of services in the 100 Mbps or hundreds of megabits per second range to drop about  $27 per month, or about 25 percent, according to an Analysis Group study.

In markets where gigabit service has been introduced, prices for internet access in the 25 Mbps and lower speeds also tend to drop, by 14 percent to 19 percent.

Likewise, when two providers sell gigabit services, prices for that service tend to decline by $57 to $62 per month, or 34 percent to 37 percent less.

Actual revenue upside might also be complicated. On one hand, gigabit sells for a higher price. But gigabit availability also tends to mean prices for lower-speed tiers fall. So net incremental revenue is tough to evaluate.

Take rates are part of the equation. Some believe adoption of gigabit services could range between five and 10 percent, in markets where lower-speed tiers also are available.

"Price anchoring" is the reason most consumers able to buy gigabit internet access will not do so. Price anchoring is the tendency for consumers to evaluate all offers in relationship to others. As the saying goes, the best way to sell a $2,000 watch is to put it right next to a $10,000 watch.

Anchoring is why "manufacturer's suggested retail pricing" exists It allows a retailer to sell a product at a price the consumer already evaluates as being "at a discount." Price anchoring is why a "regular price" and a "sale price" are shown together.

In the internet access business, price anchoring explains why gigabit access speeds are priced in triple digits, while low speeds are priced in low double digits, while the tiers most consumers buy are priced in between those extremes.

Service providers who sell a range of internet access products differentiated by speed and price might “typically” find that a minority of customers actually buy the “fastest” tier of service. That is largely because of price anchoring.

People often evaluate a "best quality offer, at highest price" one way against the "lowest quality offer, at lowest price, before concluding that the "best" value is the mid-priced quality, at the mid-tier price.

That was true in the past when the top speed was 100 Mbps as well. Most consumers did not buy the "highest quality" offer, whatever it was.

So it can be argued that gigabit internet access speeds have complex effects on internet service provider business models. Most customers will not buy the top speeds, but will upgrade to faster tiers of service. At the same time, prices generally fall, on a “cost per Mbps” basis.

Consider that Comcast internet access average revenue per account is about $40 a month. Given that Comcast gigabit offers, where it faces little competition, are as high as $160 a month, and perhaps as low as $70 where Comcast faces gigabit competitors, that $40 average suggests uptake of the fastest tiers of service remains less robust than some would imagine.

Against that ISPs must balance the capex to build the faster networks, as well as evaluate the upside from any new apps and services that might be enabled by the faster networks, top speeds or rising average speeds.

The new wrinkle is that ISPs often make gigabit service available in neighborhoods where demand is highest. Doing so might lead to 30 percent take rates in those neighborhoods, as AT&T claims.

Telcos Developing Practical AI Apps

As exotic as artificial intelligence and machine learning might seem, they are becoming routine tools for optimizing networks, discovering and preventing problems on networks, and supporting consumer interfaces and third-party AI aps.

Telefonica is working with Juniper Networks to develop its “Self-Driving Network” solution, which uses machine learning to enable self-configuration, self-monitoring and self-diagnosis. THe idea is to give the network the ability to identify potential problems and correct them--without human intervention--before they cause issues.

Vodafone has been working on artificial intelligence trials in Germany and Ireland with Huawei and Cisco on ways to create a “centralized self-organising network” (C-SON) that identifies the optimal conditions for voice-over-LTE.

AT&T, for its part, also is creating a platform for supporting artificial intelligence apps that run on its networks, in addition to using AI to virtualize its network.

Verizon, among other apps, is looking to use AI to support voice interfaces.

Will WAN Business Exist in 20 Years?

Product substitution has been a big trend in the global communications business, for decades. As customers have deserted fixed voice for mobile voice; over the top video for linear video, OTT messaging for carrier messaging, they might increase substitution of mobile internet access for fixed access.

Eventually, in business markets, large app and content providers might largely rely on their own networks for bit transport across wide area networks.

That is a bit ironic. Logically, cloud computing, which presupposes wide area communications, should underpin communications service demand. That arguably has been the case, historically.

What also is clear is that consumption of data only partially results in revenue benefits for access service providers. What is even more unclear is the eventual role of service providers in the long haul data business.

In the access realm, much of that consumption flows over Wi-Fi connections that generate no direct incremental revenue for access providers. In the transport realm, only some of the increase accrues to transport service providers, as the major content providers increasingly move most of their own traffic over their own global backbones.

Google, for example, will build  three new trans-oceanic optical cables in 2019. By some estimates, Google alone moves about a quarter of all global internet traffic across its own networks.

“Within the next 20 years,the whole concept of the telecom carrier as the provider of the network is going to disappear,” ” says consultant Julian Rawle. In other words, large app providers will replace telecom carriers as the leading suppliers of wide area network data transport.

Those trends should slow enterprise spending on telecom services, to the extent that the largest app providers now are the very firms driving global data transmission demand.

source: Economist

Worldwide IT spending is projected to total $3.7 trillion in 2018, an increase of 4.5 percent from 2017, according to Gartner. Notably, communications spending is predicted to grow 2.4 percent.That, however, is half the rate at which other information technology spending will increase.

Worldwide IT Spending Forecast (Billions of U.S. Dollars)
	2017	2017 Growth (%)	2018	2018 Growth (%)	2019	2019 Growth (%)
Data Center Systems	178	4.4	179	0.6	179	-0.2
Enterprise Software	355	8.9	389	9.5	421	8.4
Devices	667	5.7	704	5.6	710	0.9
IT Services	933	4.3	985	5.5	1,030	4.6
Communications Services	1,393	1.3	1,427	2.4	1,443	1.1
Overall IT	3,527	3.8	3,683	4.5	3,784	2.7
Source: Gartner (January 2018)

source: Gartner

On the other hand, other trends are at work. Major app and content providers now build and own their own facilities. Google, for example, has invested at least $30 billion in its own infrastructure, including its own  undersea networks. So, yes, cloud computing increases the role of communications.

Between 2015 and 2020, tier-one app providers are likely to double their spending on owned undersea facilities, for example.

source: TBR

On the other hand, large app providers now can justify the business case for building and owning their own transport networks.

source: Google

source: platformonomics.com/

source: platformonomics.com/

source: platformonomics.com/

Total telecom revenue in the 60 biggest markets to fall by two percent in U.S. dollar terms, to US$1.2 trillion in 2018, according to the Economist Information Unit.  

Projects in digital business, blockchain, Internet of Things (IoT), and progression from big data to algorithms to machine learning to artificial intelligence (AI) will continue to be main drivers of growth, Gartner predicts.

Enterprise software continues to exhibit strong growth, with worldwide software spending projected to grow 9.5 percent in 2018, and it will grow another 8.4 percent in 2019 to total $421 billion.

The devices segment is expected to grow 5.6 percent in 2018.