Younger Users Have Shifted from Facebook and Google to Alternatives

Ignoring for the moment issues about privacy and content fairness and accuracy, there already are signs that web giants such as Facebook--facing mounting calls for antitrust action--already are losing favor.

And some might point to changes in the search business to show that even Google’s dominance is being challenged.

A new study by Pew Research finds Generation Y (the generation after Millennials) already largely has abandoned Facebook. The most-often used app platforms among U.S. teenagers include Snapchat, YouTube and Instagram.

source: Pew Research

Over the last three years, teen social media preferences have changed dramatically.

In the Center’s 2014-2015 survey of teen social media use, 71 percent of teens reported being Facebook users. Some 52 percent of teens said they used Instagram, while 41 percent reported using Snapchat.

That clearly has changed. Facebook usage dropped 20 percentage points. More significantly, Facebook is “most often used” by just 10 percent of teens.

There have been major changes in search, as well, since so much search activity now centers on e-commerce. Where looking for products to buy, users are as likely to use Amazon as all other generalized search engines.

source: Raymond James

As with use of Facebook, younger users are highly likely to turn to Amazon first when looking for something to buy.

source: Geekwire

Such rapid changes in app preferences are one reason hasty antitrust action might best be avoided. In fast-changing markets, it arguably does not make sense to apply antitrust to businesses that already are being supplanted by rivals.

Far Lower Cost Per Bit is Among Chief Advantages of 5G Networks

As arguably was the case for 4G networks, the chief consumer benefit of 5G, where it comes to bandwidth, is a big change in cost per bit. If one assumes bandwidth growth will be an order of magnitude greater in the 5G era, then much-lower costs to deliver the additional bandwidth have much to do with business models when consumer propensity to spend is limited.

The ability to create substitutes for fixed network internet access obviously hinges on creating mobile cost per bit capabilities on par with fixed internet access networks.  

In fact, lower cost per bit  has been a key trend for each successive mobile generation in the digital era. In the 5G era, we can expect an order of magnitude (10 times) to two orders of magnitude (100 times) improvement in delivered cost per bit.

That is essential if mobile streaming is to become a replacement product for fixed video delivery, and also essential if fixed and mobile 5G are to become effective substitutes for fixed internet access.

source: Wavelengths

Does 5G Network Deployment Produce Device, App, Platform Success?

U.S. mobile service providers might invest $275 billion over about seven years to create new 5G networks, estimates CTIA. By some estimates, that could be about a 37 percent increase over what was spent to create 4G networks. Other estimates, including those by Verizon, suggest that might be a high forecast, as Verizon predicts flat capital investment levels over the next few years, even as it builds 5G.

Other elements of thinking about 5G might also differ from expectations. Consider the argument that early deployment of 5G access networks is directly related to the health of device and app markets.

Though there is an obvious indirect effect--new networks create the means to satisfy demand for new devices that take advantage of those networks--one might argue other forces explain supplier results.

Research in Motion flourished because its device was uniquely optimized for mobile email. Nokia flourished because its devices were optimized for voice and text. When demand shifted to mobile internet access, Apple’s iPhone gained ascendancy, as mobile email, voice and text became necessary features, but not the drivers of new use cases.

European Commission officials clearly believe that network deployment and industrial success (devices) are causally related. The DU spokesman for digital economy and society said that in the “ mobile equipment industry, we had 80 percent of the market in 2008 and because we were not ready for 4G mass deployment, the EU industry lost almost its entire market share for mobile phones.”

That might not be accurate. Nokia arguably was slow to recognize that web browsing and application experience had become the key driver of device demand, while Apple was first to capitalize on that trend.

The rise of Chinese smartphone suppliers likewise was more related to ability to produce quality devices at lower prices, not the existence of China’s 4G networks, directly.

Deployment of 5G networks arguably is important for other reasons, such as creating a similar infrastructure platform allowing new applications and use cases to be created. But “leadership” in 5G devices, applications and platforms is not directly propelled by such deployment.

Other factors explain why China and the United States, for example, seem to be producing more leading applications and platforms.

Merged Sprint and T-Mobile US Might Reduce Switching Between Them about 4% Per Year

Most T-Mobile US and Sprint customers who actually make a service provider change go to AT&T or Verizon.

Only about four percent of switchers moved from Sprint to T-Mobile US, or T-Mobile US to Sprint, HarrisX says. One might argue, based on that bit of evidence, that the reduction in mobile service provider competition in the event of a T-Mobile US merger with Sprint would be rather minimal, at about four percent per year.

You might have expected that. In virtually all telecom markets, when churn happens, the losses disproportionately accrue to the leading providers with the most market share, as they simply have bigger customer bases to lose.

In a recent survey, 52 percent of current T-Mobile US customers came from AT&T and Verizon, about 17 percent from Sprint, the rest from other suppliers. Roughly the same percentages apply for current Sprint customers.

Some 49 percent defected from AT&T or Verizon. About 17 percent came from T-Mobile US, and the balance from other service providers.

source: HarrisX

source: HarrisX

The study was conducted online between February 9-12, 2018, among 2,517 adult (18+) U.S. mobile consumers.

Mobile Operators Fare Better Than Fixed Networks in Europe

In Europe, it can be argued, mobile-only service providers have done better, financially, than service providers that sell both fixed and mobile network services, according to Rewheel.

Some might say that means mobile-only is the preferred business strategy, assuming a particular company can afford to do so.

Others might say the data only show that in markets where there is but one fixed network supplier, the results mostly show the relative market positions of attackers and defenders (incumbent telcos).

Though both segments have growth challenges, fixed network operators arguably face the tougher challenges, because of stranded asset issues.

The problem is that as more customers abandon the fixed line network, capex per customer and operating cost per customer go up, since all fixed costs must be spread across a smaller base of actual customers.

Some might argue such losses will be compensated by gains in other product areas. One hears about the need for backhaul for small cells, which could emerge as a bigger enterprise or wholesale opportunity.

Video services appear an answer for some service providers. And most are hopeful about prospects for internet of things connections.

The issue is whether the magnitude of the new revenues will compensate for the loss of legacy revenues.

source: Rewheel

5G Will Drive Mobile Data Costs to Fixed Network Levels

In the 5G era, lower costs to deliver a gigabyte to any given user will change the addressable revenue market in key ways. For the first time, mobile will become a  functional substitute for fixed network internet access across a much-broader set of use cases.

In the U.S. market, for example, between 15 percent and 20 percent of customers use mobile internet access exclusively, according to consultants at Deloitte.

source: Deloitte

Historically, fixed network retail costs per gigabyte were an order of magnitude (10 times) to two orders of magnitude (100 times) more expensive than mobile data costs. Where fixed networks could deliver a gigabyte for cents, mobile network prices were dollars.

But mobile costs per gigabyte keep falling, and finally will reach levels in the 5G era that make mobile substitution for fixed internet access a reasonable product substitute for a broad array of users.

source: Mobile Experts

Iliad Italy Attack Shows Marginal Cost Pricing (Near Zero Pricing) Issues

Iliad, the French firm that launched a disruptive attack on pricing of communications services, now has launched a similar attack in Italy. Iliad is offering a “price for life” of about six euros a month (about US$7) for use of 30 gigabytes of internet data; unlimited domestic calling, unlimited domestic texting, unlimited calling to 60 countries and voice and text roaming allotments that are unlimited within Europe and include 2 GB of mobile data while roaming.

Competition, the internet, Moore’s Law, changes in consumer demand and above all the shift of value from access/transport to applications, platforms and devices is pushing access provider retail pricing towards “zero.” Some might call that an illustration of marginal cost pricing.

Many would rightly argue that mobile operator marginal cost to provide the unit of supply on a network that already is built is close to zero. But there is a problem with the sustainability of such a model. Pricing at marginal cost does not recover the full cost of the upfront and sunk investment required to build the full network.

Some critics like to argue that unlimited access to such networks is justified because the marginal cost of supplying the next unit of consumption is so close to zero. But that ignores the need to recover the capital it took to build the full network in the first place, and secure capital to rebuild the whole network in about another decade.

For example, mobile data traffic on Elisa's Finnish network has grown by more than 20 times over the last six years, while capital investment and operating expense was flat.

source: Rewheel

That, some suggest, does mean that--once built--the marginal cost of supplying the incremental demand is close to zero.

But that is precisely the problem: marginal cost pricing never recovers the cost of the network; only the cost of supplying the incremental demand. Near-zero pricing is not sustainable.

The big unsettled question now is whether marginal cost now represents capital recovery cost. That would be possible if the actual sunk costs of networks are dropping fast, pushing to levels where marginal cost is roughly equivalent to replacement cost pricing.

That is a huge and vital question. If, in fact, the cost of mobile networks can be driven down enough that marginal cost is somewhat close to recovery cost levels, then the mobile business model is made more sustainable, without reliance on major new revenue sources, and if the underlying business model remains stable.

That means subscriber counts remain high, average revenue per user does not drop too fast, new competitors do not enter the market and take significant share, capex ratios continue to fall and opex costs likewise continue to drop.

Smartphones Now the Main Way Japanese Interact with Internet

A majority of Japanese consumers and business users (54 percent) used smartphones  to access the internet compared with 49 percent using PCs and 19 percent tablets, a survey by Japan’s Ministry of Internal Affairs and Communications finds.

That does not mean they “only” use smartphones. Nor does it mean most of the bandwidth consumed happened on smartphones, or necessarily that the amount of time spent on smartphones necessarily was greater than on  PCs and tablets. But that is suggested by other data.

source: eMarketer

In Japan, mobile devices now are used more than desktop devices to use the internet. And such statistics might not show the full story, as use of mobile apps often is not counted as "internet web" use, even if such apps virtually always require use of the internet.

Few would be surprised if told that the cost of using fixed communications services dropped in almost any market, over almost any time period. That was true within countries of the Organization for Economic Cooperation and Development from 1930 to 2005, for example, looking at the cost of international phone calls.

source: OECD

Broadband prices dropped 75 percent  globally between 2008 and 2011, according to the International Telecommunications Union.  The price of ICT services dropped by 30 percent globally between 2008 and 2011.

That was true for the five-year period between 1999 and 2004, in Japan, for example.

Most would likely not be surprised to find that spending on mobile alternatives has grown. That was true in Japan between 1999 and 2004, according to the Ministry of Internal Affairs and Communications.

Since 1999, spending by households on mobility services has grown 247 percent, while household spending on fixed communications has declined by 37 percent.

That does not speak to the cost per unit; only the amount of the product purchased. Obviously, mobility service is purchased by people, while fixed telephone service is purchased (generally) per household. So there are many more potential mobile accounts to be sold than fixed accounts, if only for that reason.

Nor would you be surprised to hear that younger age cohorts buy more mobility services and features than do older age cohorts, and that also is true in Japan.

source: Ministry of Internal Affairs and Communications

Spectrum Valuation Growing More Uncertain

Uncertainty now is growing in almost every part of the telecom and service provider business model, as end user demand changes, as products mature and prices drop and competition grows.

That is evident in the area of spectrum value as well, where recent spectrum auctions have diverged from expected sales values. In the past, mobile operators also have paid too much for spectrum.  

Recent U.S. spectrum auctions show mobile service providers being much more cautious about what they are willing to spend on buying spectrum licenses. The same trend was evident in recent spectrum auctions in India as well.  

In part, that is likely due to a perception that there are other ways of sourcing additional capacity, from aggregating unlicensed spectrum to use of smaller cells to shared spectrum or acquiring assets already awarded, but not yet in use. In some markets, spectrum trading also is a solution.  

But it also is possible that the perceived value of spectrum--still high--also has to match with expectations about the amount of revenue incremental spectrum can generate. If operators believe 100 new units will not drive the same amount of revenue as in the past, then their willingness to invest in spectrum will be less, on a per-unit basis.

Also, coming physical supply is disruptive, to say the least. All presently-licensed mobile spectrum, plus all Wi-Fi spectrum, plus new shared spectrum, amounts to about 2,600 MHz in the U.S. market. The actual mobile and Wi-Fi spectrum is closer to 800 MHz to 1,000 MHz.

But the Federal Communications Commission is releasing an order of magnitude more physical spectrum; much unlicensed; with possibly two orders of virtual capacity increases; plus spectrum sharing; plus small cells; plus better radios, is bound to be disruptive.

source: Deloitte

Supply and demand is at work, in other words. And if supply increases by

So how much will 5G change service provider spectrum valuation and asset models? Quite a lot. In fact, say consultants at Deloitte, “5G changes everything,” they say. That might be a bit of hyperbole, but the point is that there is greater uncertainty, for several reasons.

For starters, it is an underestimated fact that the value of spectrum licenses is part of the equity value of any public mobile service provider company.

source: Deloitte

Spectrum licenses account for “an average 35 percent of the assets of US WSPs (wireless service providers), and close to 20 percent of WSPs elsewhere, according to consultants at Deloitte.

But present valuations are assigned at original purchase value, and therefore might actually be different in an era of growing spectrum need and supply. At one level, the potential mismatch is easy to illustrate.

The value of assets for which an operator overpaid represents more value than similar assets for which an operator paid less, even if the assets acquired at lower cost might be equally, or more, valuable. So accounting “fiction” is at work.

Still, historically, rights to use mobile spectrum have been fundamental drivers of the ability to be in the business and earn revenue. But there are new questions in the 5G and coming eras, as the supply of spectrum (physical and virtual) is changing by orders of magnitude.

source: Deloitte

And how does one account for the value of being able to offload traffic to Wi-Fi? That avoided capital investment is worth something, but how much? And even if valuable, can it be reflected in an assessment of equity value?

Scarcity also matters. Historically, mobile spectrum has had value in two or more ways. It has been the necessary precondition for conducting business and satisfying demand. But it also has been a means of denying competitors access.

Licensed spectrum has been a driver of scarcity, and therefore equity value.

Deloitte argues the value of spectrum is presently undervalued. On the other hand, one might argue that so much new spectrum is coming, and the ways to use unlicensed spectrum also multiplying, that old rules of thumb about value and pricing do not work so predictably.

Cable operators, for example, clearly see lots of value in using their distributed public Wi-Fi nodes as infrastructure for their new mobile services. The “Wi-Fi first” access model does reduce either capex or wholesale capacity purchases or both.

And though the correlation is not linear, since mobile operators can increase capacity in other ways, the amount of spectrum a mobile operator can deploy is linked to the amount of revenue it earns. But each contestant has other assets to deploy (capital, brand, scale), so the relationship is not linear and causal.

In each market, some operators earn more revenue than others, for reasons including, but not limited to, the amount of spectrum they can deploy.

The point is that it is no clear whether spectrum presently is undervalued or not. The harder question is how to value such assets in the future, when the amount of supply--ignoring quality issues--is going to increase by an order of magnitude, and the effective capacity is going to increase by possibly two orders of magnitude.

Qualitative changes also will matter. Most internet of things apps will not require much bandwidth. And much bandwidth presently consumed across the backbone might in the future be cached and processed at the edge of the network. That will shift the bandwidth demand curve in significant ways.

On the other hand, if mobile networks are to challenge fixed networks as platforms for consumer internet access, then lots of cheap new bandwidth will be necessary, so mobile alternatives can offer comparable bandwidth and prices. Lower bandwidth costs are coming, in the mobile area, driven by platform improvements, more and more-efficient spectrum assets, use of small cells and shared, unlicensed and aggregated spectrum options.  

If mobile bandwidth traditionally has been an order of magnitude more expensive than fixed network bandwidth, then it is obvious that, to compete, mobile bandwidth has to be as capacious and affordable as fixed network bandwidth.

source: Mobile Experts

Up to this point, mobile cost per gigabyte has been as much as an order of magnitude more costly than fixed network cost per gigabyte. That is going to change.

At the Right Price, There is Lots of Demand for Any Useful and Advanced Product

Much of the time, internet access, mobile or transport executives make statements that are correct, but also missing the qualifying adjectives. People do that because it is a faster and simpler way to speak. But is is a bit misleading.

One hears it said that mobile and fixed service providers do not want to be “a dumb pipe.” The unsaid qualifiers are that service providers do not want to be providers of “low-value, commodity-priced, low profit margin dumb pipe services.”

There is no problem with supplying internet access or data transport if that is not the only thing a business does.

Likewise, when internet access provider execs used to say “there is no demand for gigabit services,” what they meant was that there is little demand for gigabit services “priced much higher than standard tiers of service.”

When gigabit services are priced at a small premium to standard services, or when the standard service is sold only at gigabit levels, with some price premium over other “standard” services,

That is worth keeping in mind.

Internet service providers are a practical bunch. They tend not to invest too far ahead of demand, but customer demand for internet access speed demonstrably changes, in almost linear fashion, over time, and for some providers, at Moore’s Law rates.

The generic form of the ISP argument is that “there is no demand for X bandwidth at Y price. Over the last decade, that has been the argument advanced by many ISP execs about gigabit internet access. But demand is a function of price.

So when ISPs lower prices, consumers respond by buying more of the “faster-speed” services. Typically, this takes the form of boosting speeds, but keeping price constant, as was the case for most of personal computing industry history.

So there is no real contradiction between arguing “customers do not wish to buy service at X rates and prices, and prefer services at Y rates and prices.

In other words, as you would expect with price anchoring, most customers will buy neither the most-economical, nor the most-expensive tiers of service.

"Price anchoring" is the reason most consumers able to buy gigabit internet access will not do so, when lower-price tiers of service at lower speeds are available.

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.

Price anchoring explains why gigabit access speeds are priced at one level, while low speeds are priced affordably, while the tiers most consumers buy are priced in between those extremes.

So price anchoring will continue to be relevant even when “top speeds” start climbing to multi-gigabit levels. Most buyers will avoid the absolute-fastest tiers. They will buy the medium-range tiers that will still be correspondingly fast.

And prices might not be too different from today’s prices. Internet access turns out to have retail pricing principles that are similar to the pricing of personal computers.

20% of U.S. Homes Already "Mobile Only" for Internet Access

Not everyone believes 5G will be that significant as a driver of wireless or mobile substitution for fixed network internet services. Pricing, speeds and existing competition all matter, of course.

But Deloitte Global already predicts that 20 percent of North Americans with internet access will get all of their home data access from mobile networks in 2018. Granted, most of those users likely are lower-income, lighter users with good access to Wi-Fi they can use without extra charge.

But there is growing awareness that 5G is a functional substitute for fixed network internet access, just as mobile has mostly replaced consumer voice purchases and is believed by many to be a next-generation video entertainment product.

Verizon, for example, believes 5G fixed wireless could be a relevant option for 30 percent of U.S. homes. Boost Mobile in Australia also believes 5G will be a direct competitor to fixed line internet access services.

Many will remain skeptical that so much mobile substitution can happen, but trends already show that even when mobile is not competitive with fixed access for heavy users, it might well be a reasonable option for most lighter users.

source: Deloitte

Consultants at Deloitte believe mobile 5G could compete for, and win, as much as 30 percent to 40 percent share of consumer internet access accounts now served by fixed networks.

In most developing countries, mobile already is the way most people get internet access. The bigger change, though, will come as 5G potentially offers faster speeds than the fixed network in developed and developing countries.

In most cases, even when 5G offers only comparable speeds to fixed internet access, and comparable prices, that still opens up a huge possible shift of market share.

Deloitte Global further predicts that a mixture of mobile and fixed wireless access technologies could lead to 30 percent to 40 percent of the population relying on wireless for data at home by 2022, an increase from 10 percent in 2013.

source: Deloitte