Business Week and S&P are now publishing reasonable analysis of the cable/telco competition. The recent work concedes that cable will likely take some market share from the telcos in voice services, but that telcos will take share in both data and video services. As we’ve said many times, it’s better to be stealing customers with high ARPU than those with lower ARPU, and wireline voice services are clearly not going to be profitable for long, as Skype and Vonage show. Another problem for the cable operators is that the competition with satellite and telco video will likely force them to increase capex and reduce pricing. The current cable voice popularity is driven in part by bundle pricing that the cable companies had hoped to raise at the end of the contract, but it seems likely that such a move will not only increase churn but also create media awareness of the relatively high cable voice cost. Finally, fixed-mobile convergence is now arriving with bundled wireline/wireless services from AT&T and Verizon, and it’s likely that both companies will soon introduce active convergence at the feature level. This will force the cable companies into either partnership (which is what Sprint hopes) or capitalization of their own mobile services. Either way, their ROI will suffer.
Research is casting doubt on the notion that consumer demand will explode bandwidth needs, a story promulgated by Cisco and others. Skeptics note that in mature markets where high speed is available, traffic grows at about 18% per year. We agree with the notion that traffic explosions are highly overrated, but we believe that some of the conclusions that the more conservative camp draw from their numbers are also off the mark. There is little doubt that the growth in Internet traffic alone will not drive bandwidth growth by much more than 20% per year in most markets, and will likely do less in many. There is also little doubt that consumers will increase their consumption of non-Internet (meaning content video) traffic through substitution of downloading or streaming video versus traditional TV viewing. The question not yet resolved is how these truths will balance over time. We also note that the current rate of revenue-per-bit decline is faster than the rate of traffic growth, which is what apparently leads some to the conclusion that providers should be encouraging more bits to be used. That’s not a reasonable assumption; commoditization of bit pricing is the problem even today.
Google continues to drive speculation that it will launch a mobile device, less likely to be a handset than to be something more content-friendly and thus more a portable unit. The speculation we’ve heard most recently is that the platform will be larger than an iPhone and will work both with WiFi and with 3G provider networks. Google is hoping to use the upcoming spectrum auction for “open access” spectrum as a driver to do a deal with one or more major providers. The reports that the device would be partly ad sponsored appear to be correct at least in that Google is looking at ad sponsorship as a means of paying for the usage charges, but we hear that they are also looking to do some subscription price deals as well.
AT&T has reportedly announced that it will be substituting VoIP for circuit-switched voice in its U-verse service offering. The move is not yet posted as a press release on the AT&T site, but if true, it raises some interesting issues. The company does not propose to lower the price, and it appears that the customer has no choice. Given that our research shows considerably higher service complaint levels on VoIP versus PSTN voice, the change could create some challenges with customers, and we are not sure there is no regulatory impact to such a move. There is speculation that this is linked to a goal of FMC via IMS, but AT&T has not indicated such a policy and we are doubtful that a step toward an FMC goal would be made with so little PR ballyhoo. Certainly VoIP could lower costs for AT&T if support exposure could be controlled, and it may be that the decision is linked to cost overruns on U-verse. In any event, a decision to deploy VoIP as a part of U-verse might have the effect of validating other VoIP providers, which might be practical now that it appears that independent VoIP competitors will not be successful.
Pyramid Research has released a report that indicates that cable companies enjoy more synergy in triple- and quad-play services and as a result, telcos are losing margin in their multi-tiered services. While we agree with some of this, we think it misses some key points. First, the best competitive strategy is to be moving from a low-margin, low-growth area to one of higher margins and growth. That’s what the telcos are doing with their video offerings. Second, cable companies started with high-capacity delivery in video, o it was logical that their infrastructure was able to manage lower-bandwidth service needs. However, the telco modernization of their plant threatens the cable companies’ ability to match data bandwidth and video, particularly VoD and FTTH broadband, and the recapitalization of the cable plant would be (as CableLabs itself has noted) very expensive. Finally, the internal rate of return for telcos is historically very low, making it easier for them to embark on low-ROI projects, while the cable guys have higher IRRs and less tolerance for poor returns. It is also interesting that cable is not a strong competitor elsewhere in the world. There are too many issues not covered here for us to be fully comfortable with the results.
More angst about the state of the Internet is reported in the WSJ as key players in the development of the Net step up and talk about the directions things are taking, including the “parallel universe” approach that we have advocated since the middle 1990s. The notion is that commercial pressure for profit and traffic growth will combine to create parallel networks that will tap off premium handling for premium fees. This model is very similar to one that network operators worldwide are developing through mechanisms like the IPsphere Forum.
Wall Street Journal
Bain, a private equity firm, and Huawei will combine to purchase 3Com in a move that seems to have outlasted many of the analysts who covered the firms. Huawei and 3Com had long been in a partnership that the former hoped would give it an entre into the high-end US network equipment market, but there was more difficulty in getting the new venture moving than had been expected. We think that the acquisition is financially strong and that the combined company may finally make 3Com into the threat to Cisco that everyone involved had wanted it to be from the first. Cisco’s greatest vulnerability in networking is not competition in a market share sense, but rather competition in a margin erosion sense. However, it seems likely this deal has been underway for some time, visible to Cisco for some time, and is likely linked to Cisco’s recent push into software and collaboration, which could help the company shore up margins and defeat price-competitive players.
Wall Street Journal Online
In a rare show of joint Internet discontent, a group of tech pioneers that included Bob Metcalfe, Don Proctor of Cisco, Jim Bidzos of Verisign, and John Cioffi of Stanford commented that the Internet was “sufficient” which was hardly a ringing endorsement, and noted that difficulties with attitudes about the pricing and privacy of the Internet have hamstrung solving performance and reliability problems. The notion that “free market” was to be interpreted literally was the most cited problem. Interestingly, the IPsphere Forum, a global body dedicated to bringing commercial principles to pan-provider NGN infrastructure, has completed an deal that will involve at least five providers worldwide in what may be the first trial of a commercially linked but consumer-targeted IP service structure. The activity will develop through this fall and some testing is likely on the IPSF’s Pre-Commercial Testbed network this year.
Nokia is in discussions to purchase Navteq, a leading company in GPS and mapping software for navigation. The move is certainly linked to the increased interest in building GPS navigation capabilities into high-end phones, and this is we think an important indicator that the mobile operators and handset vendors are increasingly aware that entertainment will not drive increased ARPU outside the youth generation. We also heard last week in Europe that operators there were already concerned about the demands that youth-generated video content placed on 3G networks, and (contrary to the US view) were looking at WiFi as a desirable way of unloading some bandwidth from 3G to reduce capital costs and free up bandwidth for truly mobile applications. Navigation is an interesting application because it can be linked to location search services and to retail advertising as well, and would give the operators an advantage versus over-the-top players like Google.
Wall Street Journal
September 13 2007: Alcatel-Lucent has cut its revenue guidance for 2007 to essentially flat to slightly up versus 2006. The change is attributed to softness in North American wireless spending, which suggests that the wireless industry may be concerned about increased capex for new concepts (including IMS) when revenues from customers are not growing. The announcement also says that wireline remains strong, but it is widely believed that Alcatel’s wireline deals were made at steep discounts and thus don’t contribute as much revenue or profit. A major problem we hear from insiders is the unusually acrimonious nature of the merger itself, which has decimated many organizations with layoffs and created tension between the two former organizations right down to the sales level.