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Leadership in U.S. Telecom Market Could be Reshaped Over Next Decade

Something quite interesting is shaping up in the next generation networks business. For a number of reasons, leadership in the U.S. telecom industry could be reshaped over the next decade, displacing traditional leaders in a growing number of industry segments.

Consider only a few of the trends that could lead to a big shakeup in market structure, ranging from the new leading role of cable TV companies, the demise of satellite video providers, emergence of independent Internet service providers including, but not limited to, Google Fiber, the increasing integration of fixed and mobile access, fifth generation network standards and emergence of cloud computing and virtualized networks.

Each plays a part in creating the conditions for a reshaping of industry leadership. Cable TV firms already are the leading providers of Internet access services and are the low cost providers, as well.

Cable companies have emerged among the top ranks of “telecommunications service providers” and will eventually enter the mobile business, likely establishing themselves in that segment as among the leaders as well.

Many of the large legacy telecom companies increasingly get their revenue from mobile or business customers as well, raising the possibility that legacy telcos ultimately will be mobile and enterprise specialists, while other firms (cable TV, Google Fiber, independent ISPs) lead the consumer services market.

Other segments are essentially disappearing. DirecTV already is simply part of AT&T and Dish Network has made no secret of its view that it cannot continue on as a satellite TV provider, and must become a mobile service provider.

Google Fiber and scores of independent ISPS, many with local government sponsorship, meanwhile are springing up all over the United States, challenging both telcos and cable TV as the market share leaders in Internet access services.

Cable TV and some independent firms, meanwhile, are preparing to test the notion that a mobile business can be built using a mix of leased capacity and Wi-Fi assets. Aside from enabling new competition, at lower costs, the ability to mix fixed and mobile assets widens the range of business niches competitors can exploit.

Google Fi, meanwhile, is starting to test the notion of “access independent” mobile services, basing its mobile service on a “use the best access” approach (Wi-Fi, Sprint or T-Mobile US networks).

That will become a common capability of fifth generation mobile networks sometime after 2020, and could allow many new contestants to enter the “mobile” business with different business models and underlying costs.

Even the emergence of cloud computing will have an impact. Over time, Internet-based apps and services are becoming the dominant products used by consumers and businesses.

Voice and messaging still are essential features, but do not drive the revenue models.

So as devices and apps become platforms for voice, messaging and services, new combinations of device-app-access-computing become possible.

Google and Facebook already have become Internet access providers, while device suppliers might also eventually bundle access functions more tightly. In other words, device or app suppliers might become “access providers” as well.

Once access becomes a more virtualized capability, it is likely new providers are going to bundle access with some other core product.

All of that is made possible because the architecture of modern computing relies on cloud processes and Internet Protocol. Under those conditions, value shifts to the data centers that house the apps people want to use, as “any access” generally will suffice.

Much the same argument might be made about the edge devices that source functionality using cloud mechanisms.

Content companies are prime candidates for such reliance on cloud computing, and Netflix provides a good example.

Netflix is shutting down its last owned data center, making it a leader among large enterprises relying fully on public cloud computing.

Netflix has been 100 percent cloud-based for customer facing systems for some time.

About 12 percent of companies run information technology operations entirely in the cloud, according to a recent survey of 1,500 IT professionals by BetterCloud.

In five years almost 50 percent of respondents said they will be moving their IT entirely to the cloud; in 10 years, that number will climb to nearly 70 percent.

Nearly all of those companies are small or medium-sized businesses. By 2022, just slightly more than 20 percent of large enterprise companies are expected to operate entirely in the cloud.

source: BetterCloud

Not every business can run as Netflix can. But Netflix illustrates the importance of the shift to cloud computing as the fundamental architecture of most services. What matters are the capabilities of the edge device and the ability to reach the content servers.

But if that is so, the intermediary networks will struggle to define a role other than that of “dumb pipe,” especially as new competitors enter with the goal of providing that connectivity at lower retail prices.

In many ways, that is why the fifth generation mobile network standards are important for traditional service providers. The 5G standards are expected to rely on virtualized, programmable network cores that can tune features and capabilities to specific application scenarios.

That could mean not only more optimized transmission service, but lower-cost feature support as well.

Taken all together, the underlying trends create at least an opportunity for market share leadership to change in fundamental ways.

It’s a big deal.

The Future is Coming Into View: Services for Machines Drive Revenue Growth

Some key trends pointing to the future of the global communications business are coming into view. The most prosaic developments are growing mobile Internet bandwidth capabilities, for the simple reason that mobile is the way most people globally get access to the Internet and its apps and services.

Some 422 operators have commercially launched Long Term Evolution 4G networks in 143 countries, according to data released this week by GSA (Global mobile Suppliers Association).

Also, 106 operators commercially launched LTE service in the past year, bringing the total of LTE operators to 677 across 181 countries.

LTE-Advanced deployments have taken hold in all markets around the world, as well. More than 30 percent of operators are investing in LTE-Advanced system deployments while 88 operators have commercially launched LTE-Advanced service in 45 countries.

Some 15 LTE-Advanced networks support Category 4 devices (above 100 Mbps up to 150 Mbps peak downlink speed) while 73 networks support Category 6 devices (above 150 Mbps up to 300 Mbps).

Several operators are trialling LTE-Advanced technology capable of supporting Category 9 (above 300 Mbps up to 450 Mbps) devices and beyond.

And 5G is coming, promising speeds between 1 Gbps and 10 Gbps per connected deivce.

The more-important developments are illustrated by reports that large enterprises are investing in–and profiting from–Internet of Things apps and services.

Big firms investing in Internet of Things products and services report significant revenue increases as a result of IoT initiatives, with an average increase of 15.6 percent in 2014. Some nine percent of survey respondents saw a rise of at least 30 percent in revenue, says Tata Consultancy Services.

That is important for one key reason: future revenue growth in the global mobile business will be driven by services sold to enterprises operating sensor, monitoring and control networks.

In other words, we will soon be leaving the period when services sold to people were key, and enter the period where services sold to enterprises operating sensor and control networks are key.

Beyond a shift to applications and content, that will be a defining characteristic of the coming market.

Already, of AT&T’s 2.1 million net adds in the second quarter of 2015, 410,000 were postpaid accounts,  331,000 were prepaid and one million were from connected cars.

In other words, in the second quarter, connected cars drove AT&T net account adds.

AT&T also added 1.2 million branded (postpaid and prepaid) smartphones added to its base.

Comcast also now has more Internet access customers than video customers. That shift has long been underway.

But the point is that the long shift to Internet access as the strategic service already is starting to show signs of the next transition, to IoT services as the revenue driver.

The Tata Consultancy Services report shows some 12 percent of respondents at the 795 companies surveyed identifying a planned spend of $100 million in 2015. Some three percent of respondents expected their firms would invest a minimum of $1 billion.

The 795 survey participants mostly hail from very large companies, with an average revenue of $22 billion and a median revenue of $6.4 billion.

Respondents also believe IoT budgets will increase by 20 percent by 2018 to $103 million.

In all, 3,764 executives took some part of the survey. Of this group, 79 percent said their companies had IoT initiatives in place today.

Of the 21 percent of firms that don’t have them, 64 percent plan to launch one by the year 2020, which means 92 percent of the 3,764 survey participants will have an IoT initiative by the end of the decade.

The top eight percent of respondents, based on return on investment from IoT, report a 64 percent average revenue gain in 2014 as a direct result of these investments.

The most frequent use of IoT technologies is tracking customers using mobile apps, used by almost half of all businesses (47 percent).

More than half (50.8 percent) of IoT leaders use IoT to track their products and how these were performing. About 16.1 percent of the respondents with the lowest ROI from IoT report doing so.

The report found that the three biggest factors holding companies back were:

  • Corporate culture: respondents identified the ability to get employees to change the way they think about customers, products and processes was a major barrier;

  • Leadership: having top executives who believe in IoT and are willing to invest time and resources is critical;

  • Technology: Big Data; internal vs. external development; integrating IoT data with enterprise systems; and ensuring security and reliability.

Respondents at healthcare firms indicate their firms plan to spend 0.3 percent of revenue on IoT in 2015, but will increase investment by at least 30 percent by 2018.

Executives in industrial manufacturing report the largest increase in revenue from IoT, with an average of 28.5 percent, followed by financial services (17.7 percent) and media and entertainment (17.4 percent). The automotive industry has the lowest revenue gain, with just a 9.9 percent increase.

 

The report, which looks at trends across 13 key industries, suggests the travel, transportation and hospitality sectors are planning to spend 0.6 percent of revenue in 2015 on IoT, while media and entertainment companies will devote 0.57 percent of their revenue.

 

This is significantly more than the 0.4 percent average and the 0.44 percent spend in banking and financial services, Tata Consulting Services says.

Revenue increases are reported globally, with all regions reporting double-digit growth in 2014.

U.S. firms report the largest gains of 18.8 percent. Europe as a whole is seeing a 12.9 percent increase, while Asia-Pacific reports a 14.1 percent increase and Latin America an impressive 18.3 percent growth.

In 2015, European firms plan to spend $93.9 million on average, with French firms spending $138 million on average, ahead of Germany ($86.2 million) and the United Kingdom ($80.9 million).

North American companies will spend 0.45 percent of revenue this year on IoT initiatives, while European companies will spend 0.40 percent.

Asia-Pacific companies will invest 0.34 percent of revenue in the IoT, and Latin American firms will spend 0.23 percent of revenue.

Razorsight CEO Charlie Thomas Sees Agile, Innovative CSPs’ Unique Position in Cloud Market

July 20, 2015 — Razorsight CEO Charlie Thomas said communications service providers in the cloud that are agile and innovative could be well positioned to meet their clients’ requirements, ExecutiveBiz reported Friday.

“With mobility and cloud becoming ever more ubiquitous, I see security and protection such as proactive fraud monitoring being the sorts of applications that CSPs will be in a unique position to offer,” Thomas told VanillaPlus magazine in its latest edition.

“CSP’s ownership of the network and access to the data that passes through networks provides a substantial opportunity to benefit from being at the epicenter of all the data.”

Charlie-ThomasLink to Article: http://www.govconwire.com/2015/07/razorsight-ceo-charlie-thomas-sees-agile-innovative-csps-unique-position-in-cloud-market/

About Executive Mosaic: Founded in 2002, Executive Mosaic is a leadership organization and media company. It provides its members an opportunity to learn from peer business executives and government thought leaders while providing an interactive forum to develop key business and partnering relationships. Executive Mosaic offers highly coveted executive events, breaking business news on the Government Contracting industry, and delivers robust and reliable content through seven influential websites and four consequential E-newswires. Executive Mosaic is headquartered in Tysons Corner, VA. www.executivemosaic.com

Contact: David Smith
(703) 226-7002
david.smith@executivemosaic.com

Will WiredWest Destroy Cable TV, Telco Business Models?

“Disruption” has become an important concept for most businesses in the Internet age–and definitely for cable TV and telecom firms–for profound reasons.

In some ways, vigorous competition itself disrupts legacy markets, and the global telecom business has been deregulating and introducing competition almost continuously for four decades.

And most observers would agree that the advent of the Internet has been a game-changer for any number of industries ranging from media to retail and distribution.

But we might not appreciate how much more disruption could be possible in the telecom business.

To be sure, we already have experienced such disruption early in the long distance calling business, and more recently in the messaging and access businesses, with further disruption of the video entertainment business now coming.

Even when markets have not actually gotten smaller–though many have–profit margins have been slashed.

More than “mere competition” is happening, though. The application business increasingly is driven by marginal cost pricing, which is to say, pricing that is close to zero, if not actually zero.

And “zero” is a tough price against which to compete. In fact, many large companies successfully have used marginal cost pricing or even zero price to redefine whole markets.

The “zero billion dollar business” is an established business strategy for an application-based business. That strategy is simple enough: a challenger based on Internet fulfillment radically attacks legacy pricing.

If successful, the challenger rules over a smaller overall business that still is attractive.

Think about Craigslist. Because it could rely on a fraction of the revenue that newspapers needed to operate profitably, it also was able to change the retail cost of placing “classified” advertising.

Media executives have a saying about the revenue potential of their businesses in an Internet age: revenue is a matter of “analog dollars, digital dimes and mobile pennies.”

In other words, the marginal cost of many Internet-based businesses actually destroys markets, making them smaller.

That accounts for the fortunes of newspapers, magazines, travel agencies, physical forms of recorded music or video, bank branches, the postal service, long distance calling and most other products where digital substitute products are possible.

The thing about zero billion dollar business strategies is that they are highly disruptive.

Firms able to successfully use the strategy can vastly reshape wholesale costs and retail prices; features and benefits; and so capture leadership of new markets that are vastly smaller than the markets they displaced.

Hence “analog dollars, digital dimes, mobile pennies.

So here’s the big question: to what extent can near zero pricing strategies be applied to disrupt the Internet access business, and then, by extension, further disrupt the associated voice and video entertainment businesses?

Almost by definition these days, a fixed network telephone company, cable TV or independent ISP requires two, three or maybe four discrete bundled services to compete effectively.

So what happens if one of those key sources is fundamentally disrupted by a competitor willing to “destroy” market pricing. Can the other contenders remain viable?

In other words, if a new competitor can effectively destroy pricing for at least one of the constituent services in the core bundle, is the broader business model imperiled?

Consider the growing phenomenon of various governmental or third party and “close to non-profit” Internet access ventures in the United States.

WiredWest is a telecommunications cooperative designed to bring broadband to rural communities in Western Massachusetts.

Some 22 WiredWest communities have passed bond authorizations totaling $34.5 million for their towns’ portions of costs to build a fiber-optic network.

So far the WiredWest Coop has received over 6,700 deposits for service, representing a third of potential subscribers, and 15 towns have more than 40 percent of premises presubscribed.

WiredWest hopes to eventually wire a total of 32 towns in the state. If successful in gaining a big share of the Internet access business, does WiredWest also effectively destroy or just impair the business models of cable TV and telco providers in those markets?

Zero billion dollar markets are transforming many other industries. One has to wonder how much of that effect eventually will affect the access business as well.

Net Neutrality Begins to Shape Service Provider Revenue Models

These are, in many ways, trying times for many telecom, mobile and cable TV service providers, both within the United States and internationally.

Virtually all of the major legacy products are maturing, including mobility services, high speed access and video entertainment services that have driven recent revenue growth.

Network neutrality rules are being applied in ways that directly affect profit margins, revenues and costs.

In many markets, competition is growing. South Korea, which has had a rather stable mobile business, now likely will face the addition of a fourth mobile operator, In many markets, including the United Kingdom, India and the United States, new competitors also are entering the market, will enter the market or new leaders are created as firms merge.

In China, all three mobile companies, for example, recently have had negative revenue growth and negative income growth. That has been the case in many European markets as well.

Globally, some analysts expect, mobile industry revenue will begin declining in 2019.

It therefore is fortunate that a number of potentially-significant new revenue streams, ranging from connected cars to machine-to-machine applications, healthcare, home security and monitoring services seem to be developing in the broader Internet of Things realm.

But even in the near term, many firms find that newer “strategic” services, typically involving IP and Ethernet services for business, consumer Internet and TV, are driving growth.

Firms such as CenturyLink, for example, already find that strategic services comprise a majority of total revenue. For CenturyLink, strategic revenue includes MPLS and Ethernet services, high-speed Internet and “PrismTV,” CenturyLink’s linear video subscription service.

Legacy revenue almost predictably declined in the first quarter of 2015, due primarily to access line losses.

Still, service providers are counting on creation of big new revenue segments now expected to flow from the broad Internet of Things trend. That is a big “if.”

Competition and regulatory trends also are troublesome. Across the globe, regulators are considering or implementing rules about network neutrality that have a direct impact on future Internet service provider revenue models, retail packaging methods and profit margins.

In fact, though the initial impact is in the consumer Internet access business, where packet prioritization and zero rating (sponsored data access) are forbidden, there now also is impact in the carrier interconnection area.

Where traditionally interconnection reflected volume of exchanged traffic, it increasingly is difficult for retail-facing Internet domains to negotiate bilateral interconnection agreements that reflect the volumes of delivered traffic.

The biggest disparities occur when content domains interconnect with retail end user domains (Netflix and any other retail ISP).

Regulatory rules related to network neutrality also direct limit retail packaging models.

The Indian Department of Telecommunications, for example, is highly likely to recommend that zero rating (sponsored apps) should not be lawful in India.

That would ban Internet app practices that are functionally equivalent to toll-free calling. Any such bans would mean that entities such as Internet.org could not provide access to some key Internet apps without requiring purchase of a mobile Internet access plan.

Likewise, it would be unlawful to offer an Internet app form of toll-free calling, where a sponsor pays for a consumer’s use of network resources.

The Indian agency apparently will adopt a policy banning zero rating under network neutrality rules that ban all paid prioritization or app throttling.

All such rules of course shape and condition the retail plans ISPs can offer.

Bharti Airtel, for example, had proposed and then withdrawn its “Airtel Zero” program that w allowed application providers to underwrite usage of their apps.

Google has a similar zero rating initiative called Google Free Zone that has been offered in a handful of countries like Kenya, Sri Lanka, Thailand and the Philippines.

“Zero rated apps” such as provided by Internet.org  have proven effective ways of introducing non-Internet users to the benefits of using the Internet. Under the Internet.org program organized by Facebook, mobile customers can use apps without paying for a data plan.

But such policies are viewed as a violation of network neutrality principles by some.

So here we have an issue of “good things” in conflict. One is the notion that innovation is promoted when every app has an “equal chance” of being discovered and used (even if, in practice, that rarely is true, or possible).

The other good thing is the ability to provide people access to useful apps without those people having to pay. That is especially useful for encouraging non-users to sample the Internet, and useful for people who have not, in the past, purchased mobile Internet access plans.

And it appears one or the other of those good things will not be lawful, eventually.

Should such a framework remain in place for a long time, more new apps are going to move away from “Internet” delivery, though. Some apps work better when quality of service measures are available. And some apps might have life-threatening consequences if absolute low latency or bandwidth is unavailable.

Such apps will move away from the public Internet and into “walled gardens.” That might be useful, in some instances. Medical apps, driverless cars and other automated processes arguably would benefit from higher performance guarantees than can lawfully be provided using the consumer Internet.

Altogether, service providers face a challenging environment. Their core legacy revenues are mature or maturing. They face new limits on retail pricing and packaging. Promising new replacement services are visible.

But lots of hard work remains before service providers can assess how important those new revenue sources might be in the future.

But service providers are hopeful. By 2020, Business Insider Intelligence estimates that 75 percent of cars shipped globally will be built with the necessary hardware to connect to the internet.

In other words, those vehicles will be connected cars, equipped with internet connections and software that allow people to stream music, look up movie times, be alerted of traffic and weather conditions, and even power driving-assistance services such as self-parking.

Those connections will virtually certainly rely on mobile networks.

The overall connected-car market is growing at a five-year compound annual growth rate of 45 percent, Business Insider researchers say.

In 2020, that will mean 69 million connected vehicles, and an installed base of perhaps 220 million total connected cars on the road globally in 2020.

Perhaps 88 million of these vehicles will represent sales of connected services to vehicle-based systems, rather than tethering in the cars to user smartphones or other devices.

Embedded connections will win, Business Insider Intelligence argues, since those sorts of capabilities also allow auto companies to collect data on cars’ performance and send updates and patches to cars remotely, avoiding recalls related to the car’s software.

Separately, Research and Markets has forecast the connected car machine-to-machine services market in the United States will grow at a compound annual growth rate of 14 percent.

The firm also forecasts the connections (access) market for the U.S. connected car M2M will grow at a 28.5 percent compound annual growth rate between 2015 and 2019.

The connected car M2M services market includes driver assistance, safety and security, infotainment, vehicle management and on-drive management, for example.

Such is the magnitude of the opportunity. Service providers will need plenty of such opportunities.