Archive for the ‘Big Bell Dogma’ Category

The box mobile operators find themselves in

Thursday, March 16th, 2017

I joined Sprint in 2003. Until then, my entire career had been in wireline telecom. In previous roles, I’d cared about wireless because it could be either an opportunity (driver of growth) or threat (substitution). But 2003 was the first time I had really looked at the world as a mobile operator.

One of the first questions I asked was “what applications really require licensed spectrum?”

I was surprised that no one inside the company seemed to understand my question. In 2003, WiFi really wasn’t a threat to mobile operator core revenues (primarily voice in 2003). While I had been talking about a future where everything would be connected to the network for years (I called it “bandwidth built in”), very few people were really thinking about an “internet of things.” The only smartphones with any commercial success (and tiny at that) were Palm and Nokia/Symbian. In fact, in my first few years at Sprint, there was real resistance to including things like Bluetooth and WiFi in our handsets. Can you imagine?

What I was seeing was the first side of the box that mobile operators find themselves in.

Over the next 11 years in strategy roles at Sprint I began to see the other sides of the box. I wish I could claim that I’d been successful helping my fellow executives to see them and to either build the best possible inside-the-box business or launch and fund outside-the-box growth businesses. But Big Bell Dogma rules.

So what are the other sides of the box?

The four sides of the box can best be seen by asking four questions, starting with the one I mentioned above:

  • What applications require licensed spectrum? (e.g. what won’t work on WiFi?)
  • What applications/services work best using network vs. device intelligence? (e.g. GPS/location based services)
  • What applications can best be met by a single operator? (e.g. RCS/joyn vs. WhatsApp)
  • What applications are best served via carrier billing? (i.e. What could never be offered for free?)

There is no question that mobile operators offer an incredibly important infrastructure that has enabled innovation that has literally changed every aspect of our lives. I’m proud to have been a part of that. Unfortunately, telecom companies move slowly and have expensive operations. Innovators can’t afford to wait for, or pay for, the mobile operators to provide what they need, so they have innovated around them and increasingly pushed operators back into their box.

To be successful, operators need to figure out either how to be the best inside-the-box (nimble, low-cost commodity transport and related services providers) or… (I tried to find a hopeful way to end that sentence, but each option I thought of I could shoot down. There’s nothing in the nature of a telecom company that positions it to prosper outside the box.)

For today, mobile operators can have some level of success selling voice and data connectivity services to consumers. That’s clearly inside the box. Will the box shrink to squeeze even those services? What options do operators have for growth? Those are great and important questions.

AT&T’s de la Vega confirms glorious payment failure

Monday, July 13th, 2015

Way back in December 2010, when AT&T, Verizon, and T-Mobile had just announced their mobile payment joint venture (then called Isis), I participated in a panel discussion which then led to a post on this blog that I titled “Glorious Failure.”

That post included this observation:

I responded by explaining that Isis is a perfect example of Big Bell Dogma. Carriers think they can do a better job than Visa, Mastercard, American Express, and others in the payments ecosystem, so they invest billions to try to replicate capabilities and compete with existing players rather than focusing on what carriers actually do well and enabling the existing players and nimble startups to leverage the carrier’s infrastructure to bring real value to consumers. Carriers have been trying to do that for over a hundred years in different industries. Sometimes they get lucky and succeed, but most of the time it’s a miserable failure.

That’s when Jim corrected me and said “it’s not a miserable failure, it’s a glorious failure.” The billions they invest may not actually generate financial returns for the participating carriers, but it will help put in place (either directly or by spurring competition) infrastructure (e.g. near field communications point of sale terminals) and standards (cross-carrier NFC standards) that Sprint and the payments ecosystem will benefit from.

I’ve got to admit – he’s got a point there.

Last month, Ralph de la Vega, CEO of AT&T’s mobile business, commented on that glorious failure. He said that mobile payments “seems like a more natural fit for [an] OS manufacturer.” Carriers have proven time and again that they can’t innovate fast enough. Google, Apple, and startups are where innovation happens. Carriers can help enable it, but shouldn’t try to control it.

Big Bell Dogma in my backyard

Tuesday, April 14th, 2015

Over the years, I’ve probably driven by or through Chanute, Kansas hundreds of times. Little did I know that it would become a key case of Big Bell Dogma. Apparently, the town wants to offer it’s 9,000 residents modern Internet service by building a fiber network. AT&T offers DSL which it thinks citizens should be happy with, even if their DSL costs 40% more than the gigabit service the city would offer, so the company has brought it’s mighty regulatory machine to bear to make every attempt to halt this dangerous technology progress and protect the citizens of Kansas. Read the story here.

Net Neutrality: The Anguish of Mediocrity

Saturday, February 28th, 2015

It is rare for me to be on the same side of an issue as AT&T and Verizon and on the opposite side of Sprint and T-Mobile, but I think the new Net Neutrality rules that the FCC adopted this week are a mistake that will hurt consumers and the telecom industry.

I won’t take the time to go point-by-point through the various elements of the new rules. Plenty of people smarter than me on regulatory topics have written about that elsewhere. The two aspects that really have me concerned are:

  1. the inability to prioritize paid traffic
  2. the inability to impair or degrade traffic based on content, applications, etc.

I believe that these restrictions will lead to networks that will perform much more poorly than they need to.

The Importance of Prioritization

Thirteen years ago, while I was chief strategist for TeleChoice, I wrote a whitepaper using some tools that we had developed to evaluate the cost to build a network to handle the traffic that would be generated by increasingly fast broadband access networks.

In the paper I say “ATM, Frame Relay, and now MPLS have enabled carriers to have their customers prioritize traffic, which in turn gives the carriers more options in sizing their networks, however, customers have failed to seriously confront properly categorizing their traffic. There has been no need to because there was no penalty for just saying ‘It’s all important.’”

With the new rules, the FCC ensures that this will continue to be the case.

Think about it. If you live in a city that suffers from heavy highway traffic, if you’re sitting in slow traffic and you see a few cars zipping along in the HOV lane, don’t you wish you were allowed into that lane? Of course you do. Hopefully it even gets you to consider making the change necessary to use that lane. Why do HOV lanes even exist? Because it was deemed a positive outcome for everyone if more people would carpool to reduce the overall traffic. Reducing overall traffic would have many benefits including reducing the amount of money needed to be spent to make the highway big enough to handle the traffic and at the same time improving the highway experience for all travelers.

Continuing the analogy, if you’re sitting in slow traffic and you see an ambulance with its lights flashing driving up the shoulder to get a patient to the hospital, do you consider it an unfair use of highway resources that you aren’t allowed to use yourself? Hopefully not. You recognize that this is a particular use case that requires different handling.

Finally, extending the analogy one more time, as you’re sitting in that traffic (on a free highway) and you look over and see traffic zipping along on the expensive toll road that parallels the free highway, do you consider whether you can afford to switch to the toll road? I bet you at least think about it.

Analogies always break down at some point, so let me transition into explaining the problem that the new rules impose on all of us. Networks, like highways, have to be built with enough capacity to provide an acceptable level of service during peak traffic. Data access networks, unlike highways, have traffic levels that are very dynamic with sudden spikes and troughs that last seconds or less. While all telecommunications networks have predictable busy hour patterns, just like highways, unlike highways, the network user experience can be dramatically impacted by a sudden influx of traffic. This requires network operators to build enough capacity to handle the peak seconds and peak minutes reasonably well rather than just the peak hour.

Different network applications respond differently to network congestion. An e-mail that arrives in 30 seconds instead of 20 seconds will rarely (if ever) be noticed. A web page that loads in 5 seconds instead of 4 seconds will be easily forgiven. Video streaming of recorded content can be buffered to handle reasonable variations in network performance. But if a voice or video packet during a live conversation is delayed a few seconds, it can dramatically impact the user experience.

Thirteen years ago, I argued that failing to provide the right incentives for prioritizing traffic to take into account these differences could require 40% more investment in network capacity than if prioritization were enabled. In an industry that spends tens of billions of dollars each year in capacity, that’s a lot of money.

Why The New Rules Hurt Consumers and the Industry

Is the industry going to continue to invest in capacity? Yes. But the amount of revenue they can get from that capacity will place natural limits on how much investment they will make. And, without prioritization, for any given level of network investment, the experience that the user enjoys will be dramatically less acceptable than it could be.

Let’s just quickly look at the two approaches to prioritization I called out above that the new rules block.

Paid prioritization is a business mechanism for ensuring that end applications have the right performance to create the value implied by the end service provider. This is the toll road analogy, but probably a better analogy is when a supplier chooses to ship via air, train, truck, or ship. If what I’m promising is fresh seafood, I’d better put it on an airplane. If what I’m promising is inexpensive canned goods with a shelf life of years, I will choose the least expensive shipping method. Paid prioritization enables some service providers (e.g. Netflix or Skype) to offer a level of service that customers value and are willing to pay for that requires better than mediocre network performance, and for the service provider to pay for that better network performance to ensure that their customers get what they expect. The service provider (e.g. Netflix or Skype) builds their business model balancing the revenue from their customers with the cost of offering the service. This approach provides additional revenue to the network operators enabling them to invest in more capacity that benefits all customers.

Impairing or degrading traffic based on content or application is a technical mechanism that enables the network to handle traffic differently based on the performance requirements of the content or application. An e-mail can be delayed a few seconds so that a voice or video call can be handled without delay. This allows the capacity in the network to provide an optimized experience for all users.

Obviously, these mechanisms provide opportunities for abuse by the network operators, but to forbid them outright, I believe, is damaging to the industry and to consumers, and a mistake.

Is the Mobility Revolution Deadly for Big Bells?

Wednesday, April 23rd, 2014

Please see my follow-up note on this post here.

Craig Moffett of Bernstein Research recently published a very informative report titled

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“The Long View: U.S. Telecom – The End of the Line(s).” In it, he shares his learnings from very detailed analysis of the cost and revenue models of wireline businesses.

Mr. Moffett is a very smart guy. I can’t possibly fairly represent the depth of analysis he has provided in this 40+ page report. I recommend you consider becoming a Bernstein client so that you can read this full report and to follow what he has to say about the industry. He won’t always be right, but his analysis is always worth considering.

And after considering this report, I think it’s clear that the Mobility Revolution, and the resulting displacement of wireline services by wireless services, may prove deadly for the Big Bells.

To give you a sense for the challenges they face, here are some quotes from the report:

  • “The Wireline business – encompassing both the TelCo and Enterprise segments – still accounts for more than half of Verizon’s revenues (after adjusting for Vodafone’s 45% ownership of Verizon Wireless), and a similar amount of AT&T’s. Similarly, Wireline accounts for a majority of assets – at Verizon, about 69%. And Wireline accounts for an even larger portion of costs – the best measure of activity, or what these companies actually do – at about 65%. Indeed, if one were to also include the in-region wired portion of the wireless network as part of the broader wired picture then these companies’ still-overwhelming dependence on their wired franchises becomes even more striking, with what is almost certainly three quarters or more of the revenues and assets depending on the wired infrastructure.”
  • “The TelCo (or regional Wireline segment) represents a larger share of profitability than it does of revenue within the Wireline business. Although not disclosed in Verizon’s and AT&T’s published financial reports, both companies are quick to concede that the TelCo segment is significantly more profitable than Enterprise, even if the TelCos’ trends are deteriorating. At both AT&T and Verizon, we estimate that TelCo accounts for approximately 40% of total EBITDA.”
  • “The combination of competitition, technology, and regulation is a potent brew, and fifteen years after “Being Digital,” the world of the TelCos is a far different place. Consider that, at the time of the ’96 Act, local residential phone service was essentially ubiquitous, with 97% of households connected to the wired ‘grid.’ Nearly 30% of those homes had a second line, either for their AOL dial-up connection, their fax machine, or perhaps for their chatty teenage daughter. That’s an ‘effective’ penetration rate of ~125%. Fifteen years later, more than a quarter of all homes have ‘cut the cord,’ and a quarter of those remaining have left for cable voice. Second lines have dropped to 11%. That’s an effective penetration rate of ~60%; effective residential penetration has been cut in half. And if we look forward just five years from now, we are on a trajectory for more than 40% of homes to have gone wireless-only, for cable to have 40% of what’s left, and for second lines to be a thing of the past. Do the math. Five years from now, in the residential market the TelCos will preside over 60% share of just 60% of homes… an effective penetration rate of just 36%. That’s close to another halving, but this time in five years. That decline rivals that of the film business at Kodak.”
  • “The rate of margin compression appears to be accelerating. Two things have happened in the two years since the end of our ARMIS data set (ARMIS reporting was discontinued afer 2007). First, the rate of access line losses has dramatically accelerated; the country is no longer averaging -4.8% total access line losses as it was from 2000 to 2007. This year, the average has been north (or south?) of a -10% annual decline. Second, broadband growth has slowed dramatically. Indeed, DSL growth tipped slightly negative for the first time ever in Q3. As a result, operators can no longer count on offsetting gains in ARPU to lessen the impact of a declining access line base.”
  • “There is a troubling tendency to dismiss this progression as ‘yesterday’s news,’ to view the big TelCos as wireless operators, or to assume that the wired phone business will decline gracefully. It won’t. The Wireline phone business is a quintessentially fixed cost business. When fixed cost businesses decline – and especially when they decline rapidly – they leave huge and intractable costs in their wake.”
  • “…Intuition suggest, however, that Wireline costs are primarily fixed, and this intuition can be empirically confirmed by the steep slope of correlations between access line losses and cost per access line – drawn from our extensive analysis of state-level FCC ARMIS data through 2007. The correlation suggest an overwhelmingly fixed cost structure for the Wireline business (in a ratio of roughly 50 to 75% fixed and 25 to 50% variable).”
  • “Importantly, it is the nature of fixed cost businesses like telecommunications that ‘threshold effects’ become increasingly pronounced over time. As volumes decline, variable costs are shed. The remaining cost structure is therefore, by definition, more fixed and less variable than it was before. In any high-fixed-cost business, it is always the case that initial unit cost escalation yields even greater sensitivity to further unit cost escalation; as the margin ‘cushion’ gets smaller and smaller, it requires a smaller and smaller subsequent change to volumes to trigger a larger and larger subsequent change in profitability. If this ‘negative operating leverage’ dynamic is at work – as it appear to be – then it is plausible to expect that Wireline margin compression will not lessen; it will accelerate.”
  • “The combination of falling revenues and falling margins is a noxious combination; the dollar amount of EBITDA generated by the U.S. Wireline industry has dropped from an annualized run rate of $52B seven years ago to an annualized run rate of just $38B in the just reported Q3.”
  • “The implications of our analysis of the Wireline segment are troubling for the industry going forward. That access lines will continue to decline from here is a foregone conclusion. That Wireline margins will decline with access lines is more controversial, at least to judge by consensus estimates.”
  • “Our AT&T model projects a decline from 31.8% in 2009 to 26.3% in 2013 in overall Wireline margins. … As a context, each 100 basis
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    point decline amounts to about $650M in reduced Wireline EBITDA or operating income. Our 550 basis point variance from today’s margins amounts to a $3.6B gap by 2013, equal to 17% of ‘consensus’ EBITDA and 54% of ‘consensus’ operating income.”

  • “Our Verizon model projects an even steeper decline, as Verizon’s costs appear somewhat more fixed and less variable than AT&T’s. We project a decline in Wireline margins from 24.2% 2009 to 17.0% in 2013. … Every 100 basis points of margin contraction at Verizon translates to about $460M in EBITDA or operating income. Our 720 basis point variance from implied consensus amounts to a $3.1B gap by 2013, equal to 30% of ‘consensus’ EBITDA and 153% of ‘consensus’ operating income, putting income firmly in negative territory.”

Mr. Moffett is a very smart guy. I can’t possibly fairly represent with this tiny sample from his report the depth of analysis he has provided. I recommend you find a way to read this full report and to follow what he has to say about the industry. He won’t always be right, but his analysis is always worth considering.

Although Verizon and AT&T are clearly being very successful in benefitting from the growth in mobility, they are undoubtedly also carefully weighing how to slow the impact of mobility on their core wireline economic engine.

Some of us, however, would rather mash the accelerator to the floor and say – bring on that Mobility Revolution – full steam ahead!

Even the FCC is fighting Big Bell Dogma

Tuesday, December 11th, 2012

Big Bell Dogma is the entrenched mindset that seeks to solidify the status quo and inhibit the mobility revolution in order to protect legacy positions of power.

FCC chairman Julius Genachowski has written a letter to the FAA asking that outdated rules limiting the use of mobile devices in flight be lifted.

The chairman’s letter provided an admirable defense of the mobility revolution:

This review comes at a time of tremendous innovation, as mobile devices are increasingly interwoven in our daily lives.

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They empower people to stay informed and connected with friends and family, and they enable both large and small businesses to be more productive and efficient, helping drive economic growth and boost U.S. competitiveness.

Vive la revolution!

Telco Thought Leader Explains Big Bell Dogma Thinking

Thursday, April 19th, 2012

In an interview in Network World, Roberto Saracco, director of the Telecom Italia Future Centre, said “the major reason carriers are placing data caps on their LTE services is to prevent users from going exclusively with wireless data services

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and ditching their landline connections.” (Note, the quote is from the article in Network World and not a direct quote from Saracco.)

Network World’s article included this direct quote from Saracco: “You’re always going to want to make the maximum amount of value, and you don’t want to have your fixed-line network being cannibalized by mobile.”

This is a great example of Big

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Bell Dogma: Do what you can to slow the mobility revolution in order to protect the status quo.

Four Drivers of the Mobility Revolution

Sunday, November 13th, 2011

Just over a week ago, I presented “Seismic Shifts in the Mobile Ecosystem” at Sprint’s Open Solutions Conference. The session was well attended and seemed to be well received, so I’d like to share some of the content here. I’ll set up the topic in this post, and then dive deeper in additional posts over the coming weeks.

The basic premise of the session was that there are four key drivers of change that have resulted in ten seismic shifts in the mobile ecosystem. These changes reflect the Mobility Revolution and create opportunity for businesses that can understand and capitalize on these shifts.

So, what are the four drivers?

The first one is

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mass market adoption of smartphones.

The second is mobile bandwidth being built into all kinds of products.

The third is ubiquitous broadband (wired and wireless).

The final driver is the emergence of real world interfaces between mobile devices and the real world, including NFC, compass, gyroscope, cameras, and other sensors.

Accelerating the Mobility Revolution

Thursday, August 18th, 2011

It’s been a long time since I last posted. I’m also very behind in responding to comments, I apologize for that and hope to get caught up in the next few days. Between a lengthy overseas vacation and a full

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plate of work, it’s been hard to carve out time for this blog.

But, there are a few news items that are worth commenting on.

The first few items point to Sprint’s commitment to continuing to accelerate the Mobility Revolution. This shows up in a number of ways – Sprint has been scoring well in RootMetric’s network comparison tests demonstrating our commitment to the network investments that are necessary to support the Mobility Revolution.

According to Chitika, we’ve also been increasing our share of the Android market (see graph below). Note that Android sales from our prepaid brands (Virgin and Boost both have Android handsets that are selling well) are not included in Sprint’s numbers and probably are a meaningful part of the growth in “other”. This demonstrates our commitment to the open development environment which is key to customers integrating mobility into all aspects of their lives.

This commitment to the network and platforms necessary for the Mobility Revolution is reflected in how our customers use their devices. According to a Consumer Reports study, Sprint’s smartphone customers use about twice as much data as our competitors’ customers – proving the point that Sprint’s customers are way out ahead in the Mobility Revolution – making mobility integral to everything they do.

The final news item I can’t pass without commenting on is Google’s proposed acquisition of Motorola. This deal is a clear demonstration of the Mobility Revolution in action. Google, perhaps the most powerful company on the planet, has put their money where their mouth is. For a couple of years Google has been saying that mobility is their top priority and now they are proving it. As with any big deal, this one’s not a simple black and white, good or bad news story. I think I can best address it in terms of what’s good, what’s bad, and what’s ugly about the potential tie up.

The Good:

  • Google gains Motorola’s patents, which help in the patent wars in which Big Bell Dogmatists have been trying to slow down the Mobility Revolution by impeding Android-based innovation.
  • Google gains a better appreciation of the complexities OEMs face in building Android handsets, likely leading to improvements in the operating system.
  • Google likely gains traction with Google TV through Motorola’s Set Top Box business, potentially bringing additional value to the Android ecosystem and encouraging some pretty interesting cross-platform innovation (imagine a Netflix or Hulu app with your smartphone as remote control and the STB as video player).
  • Motorola’s strength in low-cost feature phones may provide Google with insights into how to expand the Android ecosystem into emerging markets.

The Bad:

  • Motorola is obviously a strong competitor to Google’s other Android OEM partners. Samsung, LG, HTC, and others are likely to pause and consider their level of commitment to Android going forward.
  • Google gains leverage in the Android and overall mobile ecosystem, making all other players work harder to earn their fair share of industry profits.
  • The deal will require regulatory approval, which will take months, potentially slowing down innovation at Motorola, Google, and other ecosystem players.

The Ugly:

  • Google has to convince everyone that they won’t unfairly favor Motorola over other handset OEMs.
  • RIM, Microsoft, and Nokia are all in unstable positions in the mobile industry. Microsoft potentially has the opportunity to win the hearts of Motorola’s competitors, but if they fail to do so, they may find themselves with an unsustainable market position. Microsoft may also succumb to the urge to keep pace with Google by acquiring Nokia or RIM. And RIM’s only hope (other than being bought) is if enough of the ecosystem shifts from Android to Windows to keep RIM within sight of the pack.

What do you think – did I miss anything?

Big Bells Use Usage Based Pricing to Slow the Mobility Revolution

Wednesday, July 6th, 2011

Yesterday, Verizon confirmed their elimination of unlimited data plans for smartphones and revealed the details on their new tiered usage-based pricing plans. In doing so, Verizon followed AT&T’s lead in adopting usage-based pricing as a weapon in their fight against the mobility revolution.

Since T-Mobile also started punishing heavy data users earlier this year, that leaves Sprint as the only national carrier still encouraging customers to embrace mobility for more than just talk.

Usage-based data plans can be a very effective baricade to hold back the mobility revolutionary masses trying to storm the status quo fortress (Bastille Day is a week from tomorrow…). If the Big Bells can get people to stop and question “Should I view/download that now on my mobile device, or should I wait until I get home and use my fixed broadband?” then they’ve turned the tide in the battle for the freedom that mobility promises.

Why are the Bells so set on slowing the revolution? I think there are two answers: money and power. Some financial analysts have observed that the U.S. wireline industry has already lost about $15B in EBITDA (a measure of profits) and that Verizon and AT&T are on track to lose another few $billion each over the next few years due to cord cutting. It’s also a natural response for a historical monopolist to oppose any threat to the status quo, to do everything possible to retain or grow market dominance so that they can dictate the pace and nature of innovation.

Of course, the Bells want to have their cake and eat it too. They don’t really want to kill the growth in mobility – that sector is their best hope for revenue growth. But they’d love to squeeze as much profit as possible by dominating the ecosystem and dictating how business models unfold.

How are other ecosystem players likely to respond to usage based pricing? If I run a business that depends on delivering high bandwidth content (e.g. YouTube), these Big Bell moves threaten my business model. If people are scared to watch my content, they’ll watch less and my value will be destroyed. What can I do? Well – I could go to the Big Bells and negotiate. I need my customers to know that they can continue to watch my content without worrying about data overage fees. In exchange, the Big Bells will exact their pound of flesh.

Of course, it’s handy that the Big Bells can point to the reality of rapidly growing data use to explain the need for usage-based pricing. Unquestionably, there’s a need for mobile operators to find ways to cover the rapidly growing costs of supporting

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smartphone users. But, it is my hope that we at Sprint will continue to find ways to do so that are fair, equitable, and continue to power the mobility revolution to the benefit of all!

Vive La Revolution!