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In Europe or U.S., Investment and Competition Sometimes are Inversely Related

Predictably, AT&T has been criticized in some quarters for pausing gigabit access network investment until certainty about high speed access regulation is settled. To be sure, all participants in regulated, or potentially regulated markets, take actions to bolster their chances of winning an argument. That is as true for Google as it is for AT&T.

Uncertainty or regulations that reduce return on invested capital have a direct impact on deployment of next generation networks, many would argue. And it appears we need look no further than Europe for proof.

Incumbent market share across the EU-27 in 2010 was 38 percent. In other words, competitors had gained 62 percent share of the fixed network market.

But that degree of competition has come at a price. The EU is in danger of failing to make its announced goal of 30 Mbps by 2020, a target that originally was set before the launch of Google Fiber, which has changed market dynamics and investment in the U.S. market, for example.

So regulators should ease up on IT and telecommunications companies to allow them to compete with rivals around the world, said Guenther Oettinger, new European Union digital economy commissioner.

“So far, we have ensured that consumers benefit from the liberalization of telecoms markets,” Oettinger said.  From now on our actions must be more geared more toward allowing companies to make fair profits.”

That represents a huge change in thinking. The main point is not that the EU has decided to take a “North American” or “U.S.” approach. Instead, the big shift is the recognition that promoting competition and promoting investment can become rivalrous and mutually-exclusive goals.

In theory, regulators try to create regulatory frameworks that simultaneously promote both competition and expedited investment in next generation networks. In practice, almost any set of policies will be criticized.

That was the case in the United States prior to the Unbundled Network Element Triennial Review. Competitive local exchange carriers were thrilled about their ability to get wholesale access to incumbent telco switching and access facilities at healthy discounts.

The incumbent telcos predictably were unhappy.  As AT&T Chairman and CEO Michael Armstrong said in a 1998 speech, “no company will invest billions of dollars to become a facilities-based broadband service provider if competitors who have not invested a penny of capital nor taken an ounce of risk can come along and get a free ride on the investments and risks of others.”

After a rules change that eliminated mandatory access at highly discounted rates, competition in the consumer segment of the U.S. voice and high speed access market shifted to a war between U.S. cable TV operators and telcos, both of which owned and operated their networks.

Some competitive providers made incremental gains where they were able to focus on business customers, not consumer accounts.

Some will point to the Verizon FiOS upgrade as a direct response to the change in wholesale rules. Verizon Communications did not begin the massive investment in fiber-to-home facilities until after the 2003 rules change that ensured Verizon it would not have to sell wholesale access to FiOS except at negotiated commercial rates.

Others might note that the unregulated cable TV industry, by 2003, had gained a two-to-one advantage over telcos in high speed access market share, a development some observers attribute to the differences in regulation of telco and cable TV wholesale rules, between 1999 and 2003.

Simply, cable TV operators have never  been required to sell wholesale access to their networks. Between 1996 and 2033, telcos were required to do so at significant price discounts to retail. After 2003, when the mandatory wholesale rules were lifted, high speed access market share quickly equalized in two years.

To be sure, non-facilities-based competitors were not happy about the 2003 triennial review changes, as the switch in policy favored the cable TV companies, who had facilities in place, and essentially eliminated the profit for consumer service providers using wholesale access.

But some would say the switch to an emphasis on “facilities-based competition” has succeeded, as per-capita investment in U.S. access networks has been substantially higher than in the EC region; about twice as high, by some estimates.

It now appears that a decisive change in thinking has happened. EC authorities are worried about lagging investment in next generation networks, and are prepared to take steps to promote investment, not just competition.

The larger point is that policies matter. Both competition and investment in next generation networks are important. EC regulators now are thinking about how to promote investment, not just promote competition.

That remains a valid framework in the U.S. market as well, as the network neutrality framework is debated. Uncertainty jeopardizes investment. So do rules that jeopardize financial return from long-lived capital investments.

by Gary Kim

Why Telcos and Cable Companies are Relatively Sanguine About Dwindling Voice Revenues

The fact that few in the U.S. telecommunications or cable TV business are panicked (concerned, working on the problem, but not terrified) over continual declines in end user buying of fixed network  voice services or linear video is testament to the existing and future replacement products service providers have been able to create.

In the past, voice revenues have driven all, or most, communications service provider revenue. In many emerging markets, that remains the case. But voice has ceased to do so in the U.S. market.

Likewise, entertainment video has driven cable TV revenues. But all that is changing.

Many fixed network providers (cable TV and telco) already earn more money from Internet access than from voice services.

Already, AT&T earns $33.6 billion annually from its “data” category, which includes all U-verse video revenues. Voice services generate about $20.3 billion annually, for example.

In most markets, mobile voice revenues still surpass data. But few might contest the notion that, globally, mobile data revenue will exceed voice revenue by 2018.

Many might be surprised to learn that already is the case in a number of markets.

In 2012, Japan became the first country where mobile data revenues exceeded voice revenues. That also happened in 2013 in Argentina.

In the United States, mobile data revenue surpassed voice revenue in the first quarter of 2014.

That likely will happen in the United Kingdom in 2014 as well, according to the GSMA.

What might be more surprising, though, is that video might even surpass voice revenue, at least for some firms. AT&T provides a case in point. But European telcos including Vodafone and Telefonica are themselves growing the percentage of video revenue in their portfolios.

Assume video accounts generate $960 annually ($80 a month per video account), and that AT&T has 5.5 million such accounts. That implies annual revenue of about $5.3 billion in video revenue.

But DirecTV alone earned $31.8 billion in 2013.

Should AT&T succeed in its bid for DirecTV, video entertainment would possibly reach $37.1 billion, eclipsing even data services–at about $28.3 billion in annual revenue–as drivers of AT&T fixed network segment revenues.

After a DirecTV acquisition, voice would be only the trailing third most important revenue source for AT&T’s fixed network segment. Of $89.7 billion in total revenues, voice would represent 22 percent of fixed segment revenues.

Video would represent 41 percent of total fixed network revenues. Internet access and other data services would represent 32 percent of total fixed network revenues.

The picture at Verizon might be different. Verizon had $30.8 billion in first quarter 2014 revenue. About $18 billion was generated by mobile services, and though

About half of Verizon’s fixed network segment revenue comes from enterprise or wholesale sources.

So $17.3 billion is earned from “mass markets,” including small business. Removing small business accounts, the consumer business generates about $14.7 billion annually.

Verizon has about 5.3 million FiOS video customers. Assuming the same $80 a month contribution from a video account, Verizon might earn $960 per account, or about $5.1 billion from video services.

So video would represent about 35 percent of consumer segment revenue.

Assuming only $480 in annual revenues from Internet access, Verizon might generate about $4.3 billion from consumer Internet access, or 29 percent of consumer fixed network revenues. Voice might contribute about 36 percent of total fixed network revenues earned from consumers.

So, at Verizon, video entertainment and voice might be about equal contributors of revenue, while Internet access provides less revenue, in the consumer segment.

But keep in mind that the whole consumer segment is only half of fixed network revenue. Overall, voice and data revenues are much more significant at Verizon, than at AT&T.

It is a sign of how much has changed in the telecom business that voice might soon be the third largest revenue contributor, not the biggest.

A new study by Gallup illustrates why that is the case.

“One of the most striking cultural and social changes in the U.S. in recent decades has been the revolution in the ways Americans communicate,” says Gallup.

Texting, using a mobile phone and email messages are the most frequently used forms of non-personal communication for adult Americans, according to a new Gallup poll of communications behavior.

Between 37 percent and 39 percent of all U.S. residents said they used each of these “a lot” on the day prior to being interviewed. Perhaps the most-significant finding, however, is that just nine percent of respondents use a home landline phone over the same time frame.

About 15 percent of respondents reported using a landline phone at work the prior day.

All of that leads some to speculate that within a few decades, nobody uses a landline phone anymore.

That might be too extreme a prediction. As service providers already have discovered, bundling voice as part of a triple-play offer props up buying of voice, increasingly the least-in-demand service within the fixed network bundle. But the long-term trend is clear enough, since mobile phones now are the preferred way most people use voice communications.

So what comes after mobile Internet access, the present growth driver for mobile services, or video entertainment for fixed network telcos? What comes next for cable TV companies?

In addition to market share shifts, where cable TV providers have taken voice services revenue and more recently business customer “voice and data” share and telcos have been taking linear video share, the challenge of truly-new services remains.

In a broad sense, mobile and fixed network telcos and cable TV companies will grow by gaining scale across the whole business (mobile and fixed; domestic and international).

Beyond scale–across fixed and mobile domains–service providers are looking to Internet of Things or machine-to-machine opportunities, including vehicle communications, industrial sensor applications and potential consumer appliance connections (tablets connected to the mobile network are an immediate case in point).

Though there still is some work on creating applications that compete directly with over the top applications, the likelihood is that more money will be made supporting communications for billions of new devices, as an extension of today’s main revenue driver, Internet access.

Telecom executives are relatively unperturbed about dwindling voice revenues in large part because other replacement revenues already have been identified, while the next generation of new services and apps already are within sight. It will be hard work. But the roadmap is in place.

by Gary Kim

More Millimeter Wave Spectrum for Mobile Operators?

A frequent prediction about mobile bandwidth demand is that 1,000 times more capacity will be needed. How that can happen is the issue.

A rough list of solutions suggests that about 10 times more capacity will be gained by new bandwidth allocations, another 10 times increase will be gained by changes in network architecture and a final 10 times improvement will be gotten from applying better signal processing, using better antenna solutions and other operational efficiencies.

So the Federal Communications Commission now is looking at whether 24 GHz spectrum can be released for mobile communications applications, part of an overall effort to free up more licensed, unlicensed and shared spectrum for communications applications.

The Notice of Inquiry occurs at the same time that Google has asked for permission to test communications across different high-frequency spectrum bands, including millimeter-wave systems operating in the 71 GHz to 76 GHz band and the 81 GHz to 86 GHz range.

Ironically, as networks get faster, consumers respond by consuming lots more data, as well.

Long Term Evolution 4G networks have a rather predictable impact on mobile data consumption: the amount of data consumed each month grows, compared to data consumption on 3G networks.

In fact, some studies also suggest that access to LTE networks also increases use of Wi-Fi.

A study of Android smartphone users by Devicescape, conducted over six months, found that 4G LTE users consumption of Wi-Fi and mobile data doubled, compared to data consumed by 3G users.

On average, 4G smartphone users consume 2.1 times more mobile data per month and twice as much Wi-Fi than their 3G counterparts.

This is due to the fact that 4G customers use their mobile device about 40 percent to 50 percent more than 3G users and consume richer content. Also, as a practical matter, one minute of use of LTE results in more consumption than one minute of 3G usage simply because more data can be transferred in the same amount of time.

A September 2014 report by Citrix found that video accounted for 52 percent of all mobile traffic, on both 4G and 3G networks.

But 4G users were 1.5 times as many requests for video over 4G LTE networks than on 3G networks, and those requests resulted in five times as much video data traffic on 4G compared with 3G.

Ironically, the more the supply, the more the demand.

But advances in computing capabilities now make possible more extensive use of spectrum that in the past has been unusable for communications purposes.

“Years ago, engineers and policymakers debated the feasibility and practicality of using spectrum above 2 GHz for mobile wireless services,” FCC Chairman Tom Wheeler noted.

More recently, 3 GHz has been seen as the highest frequency that could be used to support mobile operations.

The difference now is signal processing that allows practical communications at frequencies traditionally unusable. But cheaper signal processing now means it is possible to overcome propagation issues that have prevented use of millimeter waves for mobile or fixed communications apps.

So there now is optimism that frequencies above 24 GHz could be used to support mobile service, a previously-unthinkable option.

This matters for obvious reasons. More spectrum is needed. Also, the basic trade off–capacity and distance are inversely related–means very-high capacity is possible at millimeter wave frequencies, even if distance is limited.

Physics dictates the higher bandwidth possible at millimeter wave frequencies, even if coverage is more limited than at frequencies below 2GHz. Despite digital coding, potential bandwidth still is dictated by the number of oscillations a radio wave makes in a single unit of time.

In other words, at the peak of the cycle, coders might represent a positive bit, at the trough, a negative bit. So the total number of possible symbols depends on the frequency, or number of instances in a given unit of time that the waveform crosses between high and low states.

As the name implies, higher frequency signals have many more oscillations than lower frequency signals. Hence, more potential bandwidth, using any particular coding and modulation scheme.

The trade off is the effective distances at which such waves are useful for mobile or fixed communications, as millimeter waves are attenuated by water and, in some cases, oxygen. The trick is to use frequencies where attenuation is relatively lower, as is the case for optical communications as well.

Still, it seems highly probable that new frequencies, best suited for use in dense population areas, will be released for service, at some point.

by Gary Kim

Is U.S. Telecom Market About to Get Tougher?

Unless something rather unusual happens, it is likely that U.S. Internet access providers–and by direct implication cable TV and telco service providers–will in the future face tougher business models.

There are a few reasons. For starters, competition in the mobile and fixed segments of the business has heated up, and likely will get more intense.

That is going to cause pressure on gross revenue as well as profit margins, right at a point where access providers must invest heavily in their core networks to accommodate must-faster access speeds (gigabit fixed network speeds and fourth generation mobile network investments).

At the same time, new potential rules related to network neutrality will shape access provider revenue models, most likely in a more-limiting way. Regulating Internet access services using a common carrier framework also is a live issue, and likely would be worse, for ISPs.

The consumer impact could be substantial, though industry participants differ significantly on the direction of the impact. App providers think consumers would be better served under either net neutrality or common carrier rules.  ISPs take the opposite view.

In addition to reimposition of net neutrality rules for fixed operators, extension of “best effort only” access rules for consumer mobile services could be imposed for the first time. That arguably would make harder the task of maintaining quality of service in the mobile realm.

The net effect of possible future rules will be that “brute force” bandwidth upgrades will remain the dominant way of providing quality of service, compared to potential alternative network management methods.

Up to a point, that would be case under any scenario. But physical upgrades likely would be more important under either a common carrier or strong network neutrality regime.

Just how much bandwidth upgrade investments might be affected is unclear. A compelling argument can be made that major ISPs must now upgrade, for core business reasons, unrelated to policy changes.

In that sense, new network neutrality policies might be viewed as an irritant, at the margin. Common carrier regulation could have quite more impact.

It isn’t surprising that cable TV companies, telcos or Internet service providers oppose common carrier regulation, while ecosystem partners sometimes favor such regulation.

Common carrier regulation implies, and often imposes price controls, as well as shaping permissible features, terms and conditions of service.

When value in the Internet ecosystem is highly uncoupled–app providers can reach any customer so long as those customers have Internet access–”access” is an input to an app provider’s business.

For an ISP, access is the business. That explains the prevalence of past debates about dumb pipes and  smart pipes.

Current efforts by the Federal Communications Commission to shape regulation of Internet access inevitably will affect revenue models for app providers and access providers alike.

There is a larger context that might sometimes be lost, namely, whether it is socially useful to institute policies that arguably make it harder for a challenged and essential industry to invest in its business.

No matter how well intentioned, it ultimately matters whether our policy agenda reflects not only ways to solve perceived current problems, but also reflects the ways the policy context might soon change.

Of course, at the moment, contestants paint very different pictures of current reality. App providers say there is a danger access providers could behave anti-competitively. In other words, a few ISPs have such market power they need to be restrained.

Access providers, with an arguably harder case to make.  “Treat all apps equality” is an easier argument for someone to understand than “Some apps require quality of service mechanisms.”

“Freedom to use any app” is a more-appealing slogan than “Freedom to provide bundled or featured or better-performing apps.” It doesn’t matter if important nuances are lost.

“Freedom to choose and value for users” might be the outcome all contestants promise. But “app freedom” arguably is more appealing than “freedom to promote apps.”

Historically, regulatory disputes were relatively confined to a small number of market contestants and policy groups. What is different this time is the relatively higher profile of “app access” issues in the general public.

And by most accounts, public opinion has been mobilized extensively in favor of strong versions of network neutrality, with some attempting to push the debate into a “common carrier” direction, with unclear success.

So here is a potential danger. As logical as some believe network neutrality or common carrier regulation is, there always are implications for investment and business strategy whenever a significant change in regulation occurs.

And there almost always are shifts in competitive fortunes within the ecosystem. The Telecommunications Act of 1996 opened up competition in the local exchange market for the first time. AT&T, MCI and scores of new competitive local exchange carriers believed they would .  as a result.

Major changes in wholesale discounts–not to mention the acquisition of both AT&T and MCI by former Bell operating companies–eventually reshaped competitive fortunes. Facilities-based cable TV companies emerged as the single biggest beneficiary in the consumer market, even if many CLECs were able to sustain themselves in business customer markets.

Dynamics in the ISP–and therefore broader telecom business–likewise will be affected once the current regulatory reset has occurred.

That is not to say the outcome is ordained. But under the best of circumstances (from an ISP point of view), restrictions are going to increase.

Whether that is dangerous or not depends on one’s view of industry health. Up to this point, at least some U.S. providers have defied downward revenue trends, despite growing competition and maturation of key services.

So the issue is whether the U.S. access provider market is robust and profit rich, or becoming less robust and less able to afford investment in new facilities.

That is important, long term, since any government policies that limit some important ways of boosting revenue, at a time of product maturation, will consequently lead to lower investment. That is an issue European telecom regulators are dealing with.

On that score, there is some disagreement about growth prospects for future telecom global revenue. Some predict slow but rather steady growth. Others think a slowdown could happen.

The conventional wisdom arguably is for modest continued U.S. industry revenue growth. But none of the current forecasts have incorporated the potential impact of significant new revenue-reducing regulations.

Ironically, the worst situation is what we have now, namely uncertainty. Uncertainty tends to cause investment to lag. Certainty at least allows rational planning.

Service provider executives undoubtedly expect heightened competition and pressure on gross revenues and profit margins in any case.

Common carrier regulation might have significant long-term effect on investment decisions. Network neutrality arguably would have less near-term impact.

The one scenario virtually nobody believes is that, after the new regulations, whatever the outcome, ISPs will have an easier time growing revenue, creating new products and innovating.

by Gary Kim

Why M2M, IoT are So Important for Mobile Service Providers

“Connected cars” have recently become a key AT&T new product initiative, for perhaps obvious reasons: AT&T wants to fuel growth (revenue and subscriptions) for its mobile business.

And connected cars might well be a big business. The global connected-car market is estimated become a $49.5 bllion (39 billion euros) industry in 2018, up from $16.5 billion (13 billion euros) in 2012, according to forecasts in a forecast report from research firm SBD and the GSMA.

That report suggests $5.2 billion (4.1 billion euros) will be earned suppling mobile connections to vehicles. There are other plausible ways mobile service providers might benefit, however.

SBD forecasts that almost 21 million of the cars sold in 2018 will be fitted with smartphone integration systems (18 percent penetration) that rely on all or some of the intelligence being hosted on the owner’s smartphone.

That at the very least, will be another way to increase the value of mobile service from suppliers able to support that feature.

SBD further expects 10 million of the cars sold in 2018 to be fitted with tethered solutions (nine percent penetration), up from 2.6 million cars in 2012.

These tethered systems rely on intelligence embedded into the car, but use the owner’s mobile phone for connectivity. That wil both provide higher value, and also consumption of Internet access connectivity, allowing mobile ISPs to sell bigger service plans.

Over the next five years there will be an almost seven-fold increase in the number of new cars equipped with factory-fitted mobile connectivity designed to meet demand among regulators and consumers for safety and security features, as well as infotainment and navigation services.

By 2025, GSMA hopes, every new car will be connected in multiple ways.

AT&T expects meaningful subscriber growth for its connected car services in the next three to five years, and already supplies connections for almost two million vehicles already.

About 500,000 accounts were added in the third quarter of 2014.

In 2015, AT&T expects to serve nearly half of new mobile-connected U.S. passenger vehicles and also expects to serve more than 10 million vehicles by the end of 2017.

AT&T expects revenues from its connected cars to be driven initially by wholesale customer relationships with auto manufacturers, with the opportunity to develop a direct retail relationship with drivers.

Wholesale average monthly revenue per subscriber, paid for by auto manufacturers, is expected to be in the low single digits and retail ARPU, paid for by the car owners, is expected to be similar to that of a tablet on an AT&T Mobile Share Value Plan, or abouit $10 a month.

Beyond the connected car, there are other opportunities in the machine-to-machine and Internet of Things markets.

ABI Research, the installed base of active wireless connected devices will exceed 16 billion in 2014, about 20 percent more than in 2013. The number of devices will more than double from the current level, with 40.9 billion forecasted for 2020.

“The driving force behind the surge in connections is that usual buzzword suspect, the Internet of Things (IoT),” according to Aapo Markkanen, ABI Research principal analyst, who predicts that 75 percent of the growth between today and the end of the decade will come from non-hub devices: sensor nodes and accessories.”

And that is why mobile service providers, among others, are so interested in machine-to-machine applications and the Internet of Things. After connections serving people of all ages and their phones, tablets and PCs, the big growth will come from connections supporting sensors and other devices that communicate with servers.

Connected car is only the start

by Gary Kim