Verizon Plans to Provide Open Access

Per the FT at http://www.ft.com/cms/s/0/d72cea8a-9d1a-11dc-af03-0000779fd2ac.html
And the Wall Street Journal at http://online.wsj.com/article/SB119617188870905241.html?mod=telecommunications_primary_hs

It appears Verizon decision is probably in reaction to the Google Android plans. But then to come up with such a plan within such a short time without the possible thought of it before does not make sense – which makes me think that Verizon had something in process already and the Google decision just accelerated that process.

In a wireless world, the customer is owned by a service provider. Per this announcement from Verizon, devices one chooses to operate remains at the discretion of the end users. This will reduce the distribution costs of service providers at the same time reach out to users who were not their customers by providing them choice of handsets.(Not sure the revenue lost from giving away the distribution channel, as the operators will still distribute the most popular models.) This could result in increased competitive intensity and change in channel mix for mobile devices manufacturers.

By announcing the program it appears Verizon wants to control the user experience. Verizon could then use this to negotiate with Google and other application vendors to share the revenue from online advertising and usage of applications.

A better option would be for both Google and Verizon to work on a converging framework for the software that would be incorporated in the mobile devices – this would help reduce the investment needed by both Verizon and Google, reduce time to market for mobile devices, make available lot more innovative applications that could be accessible via the mobile device – all this is a possibility so long there is an agreement on the revenue split online advertising and use of other tools and applications. Depending on the perception of who owns the customer will shift the balance of power at the negotiating table. Android of Google and the ‘Open Access’ plan from Verizon is trying to do just that – prove that each has plans to own the mobile user. Time will tell who gets the better of the other.

AT&T and Echostar combo could be deadly for the cable operators in US

AT&T has been building capabilities for its video offering, U-verse that will offer IPTV. The acquisition of Echostar will add a lot of value to AT&T’s video offering. Specifically, Echostar will get the expertise of content negotiation and relationship that is so crucial for a successful video offering. The Echostar’s Direct to home (DTH) service will be a very good complement to the IPTV offering.

As a stand alone business Echostar may have limited options as they will need to partner to offer bundled services - broadband and phone (both wireline and wireless) services. And if the market direction is to offer bundled services, a pure play video services business will have its limitations.

Cable operators and Telecommunication service providers have been at war as each enters the forte of the other. Cable operators are already eating into the phone business. And the Telcos have been aggressively upgrading their networks to offer video services. With Echostar DTH, AT&T could potentially hurt revenue growth and profitability of cable operators. AT&T could also tier their video services – DTH and IPTV. DTH could be priced to mimic the cable operators business in region and IPTV could command a premium based on its interactivity and time shifted TV.

Also with the number of scribers of Echostar (approx. 13.7 Million as opposed to AT&T 126,000) will give AT&T additional room for bargaining with the content providers – could reduce cost.

Similar thinking must be going through the Verizon video services strategic team.

Radio spectrum freed could be a great win for the WiMAX proponents

The Financial Times and FT.com (http://www.ft.com/cms/s/0/2ece0dd2-962c-11dc-b7ec-0000779fd2ac.html) reported that radio spectrum 698-806 MHz will be available immediately for service providers to offer mobile broadband services immediately in America and much of Asia including China and India. In Europe, Africa and the Middle East it will be available after 2015. This was put together under a United Nations agreement on Friday, Nov 16, 2007 by governments of over 160 countries.

The article makes a great case for Ultra High Frequency (UHF),

1. Support for high speed mobile broadband connections – encouraging the development of new internet-based services

2. UHF signals can penetrate buildings and travel long distance, reducing the cost of rolling out wireless services

This is certainly great news for all the WiMAX proponents (Google, Clearwire, Intel, Motorola, Samsung etc.). The adoption and improved penetration of wireless services would also be of great benefit for end users as it is believed in a more connected world – individuals benefit through the dissemination of information and enable trade and commerce. This will directly add up to the GDP of a country. Improved GDP will further improve the lives of people and will surely be desired virtuous cycle for people in the emerging markets.

Tipping in WiMAX favor

It appears that there are two things that tip the balance in WiMAX’s favor,


1. Internet’s open-standards approach - This will allow them to address a sizeable internet ready market instantly.

2. Popularity with Infrastructure vendors - Intel – Montevina chips (also called Centrino Duo) to get to the next billion users, Motorola offering WiMAX modems, PC Cards, and multimode phones. And am sure there are other vendors with similar intentions. It is the investment by the vendors that drives the next round of infrastructure upgrade.

The game changer for WiMAX could be Google since Sprint has its own problems and Clearwire may not have the deep pockets to go on their own. Google is using negotiating tactics to get to the wireless operators who do not want to open up their network (and making it difficult for Google to make money). By bidding for the wireless spectrum Google’s motivation would be either to

1. Increase the price of spectrum for the wireless providers. This would surely be an aggravation for the mobile operators, OR

2. If they win spectrum, then use that to provide WiMAX to promote the mobile Internet and other service plans they may have based on the Android platform. In this case, Google will monetize the mobile internet the way they did it with the wire-line internet.

Clearwire will need a partner and for a really win-win situation, this partner could be any of the Internet companies with deep pockets - Google is what comes to my mind.

Business case for WiMAX?

The WSJ had a good article on WiMAX prospects but however did not convince me of the real benefits of WiMAX. http://online.wsj.com/article/SB119498643110891751.html?mod=todays_us_page_one

Per the article ‘Clearwire is trying to cobble together a network to give customers fast, affordable Internet access for laptops and mobile devices in their homes, cars, commuter trains -- almost anywhere’. The key word is “affordable” – not sure how can someone make it affordable without cost advantages compared to competing technology and its deployments.

My understanding of the cost advantages for WiMAX are as follows:

1. Lower CAPEX from Open standards and Clean Intellectual Property Rights (IPR) – leading to lesser expensive equipment

2. Lower OPEX from less expensive spectrum and more advanced technology

Let’s look at CAPEX - Open standards and clean IPR are only marketing terms. Open standards would surely reduce cost but then there has to be so much adoption that economies of scale becomes an advantage. However, if the technology is open standards, then vendors may not be able to differentiate (and earn profits) and hence their motivation to increase scale. Clean IPR or better negotiated royalties could help. But then most of the Orthogonal Frequency Division Multiplexing (OFDM) will come from Qualcomm and few other vendors like Motorola, Intel. Qualcomm has been buying up companies like Flarion, AirGo and TeleCIS that have great Intellectual Property assets. The motivation of Qualcomm remains to maximize their earning potential. And then Qualcomm already has plans for the EV-DO rev C that would be based on OFDM instead of CDMA. For WiMAX one still needs the base stations, the long haul networks, the softswitches, chipsets for both transmitters and receivers as is needed for other mobile technology – in other words am not convinced there would be CAPEX savings.

Now let’s focus on OPEX – if spectrum license is cheap now, it is because there are not enough bidders to drive the price up as was done with the auction of 3G licenses. So not sure the spectrum licenses will be any less once there is excitement in the market. And with respect to more advanced technology requiring less power, space, remote manageability etc, surely this is something that would reduce the cost of operations.

Then the case for WiMAX is that it provides more bandwidth – now if this is a function of the digital technology like OFDM, this advantage will also go away soon.

I liked what Mr. McCaw (Craig McCaw, Chairman of the Board for Clearwire) had to say "There's always been this sort of messiness that's created opportunities." I too remain optimistic but am having a hard time justifying the economics for WiMAX.

What am I missing?

70 -70 FCC (yet to be published) Report may be good news for Telecom Operators

Based on the 1984 Cable act – the FCC could now regulate the Cable too. Per the Wall Street Dated Nov 12, 2007, the Cable companies have become too dominant in the ‘Pay-television industry’. The cable act also called - The 70-70 rule states if Cable penetration exceeds 70% of households in the U.S. and that 70% of those households take out a subscription, then the FCC would have additional rights to regulate them. This surely is some good news for the Telecom operators, who have been investing heavily to provide more video services called IPTV to the US users.

The National Cable & Telecommunication Association (NCTA) does not think additional regulations by the FCC would be in their best interests and believe the FCC is twisting statistics.

As for the consumers – this would be good news and result in

1) Potentially reduction of subscription rates,
2) Get access to channels that they really want to pay for (a la carte pricing), and
3) Have more choices, since the regulation will ensure more independent programmers have access to this market.

Of course the intensity of competition would increase for the service providers – but then this should be a good thing for all. As to thrive, they will need to constantly innovate. Didn’t somebody say “Innovate or Die”?

Need more info -

On the Financial Times http://www.ft.com/cms/s/0/43ff9cd8-90bf-11dc-a6f2-0000779fd2ac.html

On the Wall Street Journal http://online.wsj.com/article/SB119483049023089622.html?mod=todays_us_page_one

Average Revenue Per User (ARPU) Comparisons

It is interesting to note that ARPU for cable, Satellite and Telco service providers have so much of variations. Comcast and Cablevision are the cable operators offer triple pay service bundles so does Verizon, a telco. DirectTV offers only video services via satellite. DirectTV seem to be doing well without having to offer bundled services but surely are at a disadvantage to improve ARPU (unless they look at acquisitions/partnerships or advancement in technology so that they too can offer triple play services). However, if you observe the APRU of Comcast, Cablevision and Verizon, Cablevision appears to be making most in terms of ARPU. This could be the reason why Verizon have been targeting the Cablevision territory as they offer IPTV and HSI services - 25% of the homes Cablevision serves are exposed to Verizon’s FiOS service compared with about 4% for Comcast and Time Warner Cable Inc., according to a Citigroup Research estimate.

Also it also appears that Comcast is pushing to increase their High Speed Internet (HSI) penetration - 27% of "available homes’ and Comcast thinks it can get that number up as eventually 80% of homes in the U.S. will have broadband, up from the roughly half of homes that do now. Of the 450,000 HSI additions, only 25% of Q3 net adds came from dialup, while 61% came from DSL (telco) and 14% came from other cable companies. I am sure the telco are making note of the 61% number and their motivation to provide higher bandwidth internet services.

Other upside revenue potential from Comcast is their phone services - only 9.4% of the 40.3 million homes offered phone service have subscribed, leaving considerable room for growth. They are further targeting the Small and Mid-sized businesses - Comcast has hired roughly 750 sales people and trained about 1,200 technicians for its nascent plan to offer services to small and midsize businesses. Both these targets are aimed at the strongholds of telcos. As the Pali Research report puts it ‘the cable industry is now looking at an all-out war’ (with the telcos).

Market entry into the Mobile marketplace by Google

It is interesting that Google is getting so much of coverage as they unfold their mobile marketplace strategy – similar capable phones have already been announced by Nokia, Microsoft and Apple. Difference being - Google calls is open technology standard and for other vendors it is ‘closed technology’. Wonder how the likes of Apple, Nokia and Microsoft deal with this – will they too may give their software away for free and call it ‘open technology’ to instill greater collaboration leading to more innovation.

To understand the implications for each – let’s look at what constitutes the biggest source of revenue and their current position of strength.

Apple: The real incentive is to push more gadgets like iPod, IPhones etc. They would build software to make their devices more user-friendly. But the goal remains to sell more devices.

Nokia: They are market leaders in providing handsets for GSM services worldwide with market share of over 36% worldwide. Their motivation is to make money on device and will give away software if it can help them sell more mobile phones. They of late have introduced a new platform for services ‘Ovi’ to benefit from the revenue sources from applications and services.

Microsoft: Makes a big chunk of their revenue from providing software and are focusing on the web 2.0 technologies to improve their earnings potential from internet based advertising.

Google: Makes a big chunk of their revenue from Internet advertising and wants to aggressively defend this position of strength. Their goal is leverage this strength to enter the wireless marketplace and this is the reason for their intentions to create an eco-system for the mobile market place - ‘Android’.

It is in Google’s interest to protect their turf and look for additional revenue sources that leverages their core strength – Internet advertising and not get locked out of the mobile advertising market. So it should come as no surprise of their intentions to enter the mobile marketplace. This is a novel market entry tactics. They could not go to the market and create another ‘closed system’ and ask their alliance partners to pay for the software they build. Rather they want to give this away for free so that they can make money on the advertising – which is their strength. The software developed would potentially be paid by these alliance partners to get real-estate space on a mobile phone. This Google tactics would surely hurt Microsoft.

It is interesting to see players like Motorola, Samsung, LG and HTC in the alliance – together these vendors have a market share of over 50% globally. But then the Google software will be available on new handsets only – makes one wonder of the real motivation for these vendors.

However, it appears Google’s real motivation could be to reduce cost of handsets which in turn would reduce the barrier to adoption of cellular services. Also given that huge market opportunity exist in Africa, East Europe and other emerging countries in Asia, thought that service providers in those economies would be more willing to take the subsidy to improve market adoption as a benefit to be part of the alliance. It was surprising that those providers have not been included or maybe the list is still growing. Also not sure the real motivation for the likes of Motorola - Motorola has a good penetration in North America and a relatively ok position in Europe. What is their expectation from the alliance? Maybe they are targeting the Japanese operators or trying to further improve their market position in North America and Western Europe.

Other thoughts/opinions?

Future mobile handsets maybe powered by Google?

The Internet companies like Yahoo and Google rode over the network investments of the likes of AT&T and Verizon to provide access to their service and made lots of money. The big telcos did not see (or maybe they did and did nto have other options) this coming and the Internet companies with minimal investment monetized the technology the best - making lots of money through Internet advertising.

Now the same story may repeat on the Mobile Internet. The initial drawback of the mobile internet was the speed and that has been taken care of with advancements in technology. But the mobile internet is controlled by the service providers who from past experience of the wireline experience will not give in without negotiating something for themselves. This will be true for the likes of AT&T and Verizon. However, given the state of business at Sprint and T-mobile - these operators may be more willing as they could ride the Google marketing wave, acquire customers and benefit. This in turn would put pressure on AT&T and Verizon. So not sure how this would play out – maybe AT&T and Verizon would partner with Microsoft to balance the power?

However, this may work if Internet companies and the operators figure out how to share the loot which would be fair based on the investments each makes, then Google powered phones will be a hit. The key word is ‘Fair’ but then who says one needs to fair to be successful in business.

Differentiating products will help telecom equipment vendors out of the vicious cycle

Nothing new and we all know it. Let’s look at a very simplistic telecommunication value chain.

Value flows from the vendor to the service provider to the customer: Equipment vendor provides the infrastructure. A Service provider uses this equipment to provide service that the end user is wiling to pay.

Money flows from the customers to the serve providers to the vendor: The end user pays the service that was delivered to them by the service providers. And the service provider pays for the equipment to the vendor. The timing may be little different though.

If you look at the power in the value chain – customers want services that they will value and have the option to go to a service provider who would provide this service with the best value. Without collective bargaining, customers may not have a whole lot of power in the value chain.

Now let’s look at the number of vendors (there could be lots of them) and then service providers (there are significantly fewer in numbers in each region). And based on the recent M&A activity in the service provider space, they have the power because of the economies of scale and access to end user customers, service providers play the volume game and expect major pricing reduction from the vendors. Without much differentiation in the product offerings, vendors tend bow to such pressures and use pricing as a differentiator and this differentiator is not sustainable. This is a vicious cycle that the equipment vendors cannot win without a differentiate offering.

Content providers facing problems too

WSJ reported that operating profits of Asian unit of Star Group dropped by 30%. Paul Aiello, Chief Executive at Star Group sums it up pretty well "our content needed to be refreshed across the board, and a lot of the ways that we monetize that content needed to be updated, too...we have to go local and deep."

TRANSLATION – ‘we are behind in content creation that our target market needs and because of that advertisers are not ready to invest in us.’

Let’s look at the sources of revenue of the content providers and the cable/Direct to home operators. Cable/Direct to home operators make money through the subscription that the end users pays them. These operators in turn pay for subscription to the channels to the content owners – in this case Star Group. Star content group has two revenue sources – subscriptions from the cable/direct to home operators and advertising revenue from advertisers who like the content and want to advertise during the advertising breaks.

Now the problem with Star Group is really that their content needs to be more relevant to the regional masses. Once they have this part covered, the advertisers will follow. Then they have to deal with competitive intensity that is heating up in India. As for China, they have regulators to deal with as content is very controlled in that country.