The Next Revolution

January 14th, 2015

I wrote this article last August for Christian Computing magazine as the first in a series. This month I’m wrapping up the series, so thought it was timely to start sharing the articles here. I hope you enjoy. In a recent press release celebrating 25 years of publication, Christian Computing described themselves this way: CCMag is the foremost Christian publication to provide information about constantly changing technology tools and how they could apply to church business and ministry.

Last month I was asked to give the keynote address at the Nemertes Navigator 360 event near Tampa, Florida. The topic of my talk was “The Next Revolution” and I’d like to take the next few months of my column space to talk about what I see coming and how it may impact our churches and ministries. When I talk about the “Next” revolution, I’m talking about the fourth technology revolution in our current information age.

So, what were the first three revolutions?

Arguably, the information age could be said to date to the invention of the telephone in 1876 or the electric telegraph in the 1830s, or even back to Gutenberg’s press in the 1450s. All of these are incredible inventions that radically transformed how we interact with the world around us (especially information) and how businesses operate. However, since this is Christian Computing magazine, I will focus on the information age spawned by the advancement of computer technology.

The first revolution is sometimes called the PC Revolution, or more accurately the Microprocessor Revolution. This focus on the computer itself is understandable. Driven by the exponential improvements in processing power density and cost reflected in Moore’s Law, computers moved from filling a room, to sitting on a desk, to being built into virtually everything with a power supply. However, I think the real revolution was in what those technology advances enabled, so I refer to this first revolution as the Digital Revolution. The truly world-changing transformation that began with the Digital Revolution was the digitization of the world. Prior to this revolution, the real world existed in physical form that we could only perceive with our senses. Through this revolution, the real world was captured as ones and zeros. Music, and images, and videos, and books, and financial transactions, and weather measurements, and vital signs all became data that could easily be stored, copied, and manipulated.

The second revolution is known as the Internet Revolution, and this is appropriate. While the name Internet describes a vast collection of inter-connected computer networks, the transformational change follows directly from that inter-networking. The Internet revolution made it easy for digital information to cross boundaries. Before broad adoption of the Internet, it was hard to move data from one company to another, or from one family to another. Companies could pay for proprietary Electronic Data Interchange network connectivity and work through complex implementation plans to connect with other companies, and individuals could copy up to 1.4MB onto a floppy disk and carry it to their neighbor (sneaker-net), but virtually overnight, the Internet made it easy for data to flow. Now, it was not only easy for the real world to be digitized, stored, copied, and manipulated, but also transported and shared. The launch of Napster in 1999, and it’s rapid growth in popularity, sent a wake up call to all industries that the world had changed.

Some people see the mobile and social revolutions as distinct. I see them as one integral Mobile/Social Revolution. Neither could have had as significant of an impact without the other. This revolution enabled all people, things, and content to be connected all the time and everywhere. Consider the impact that the combination of the smartphone and social networks like Facebook has had on photography. We take pictures we never would’ve taken before. We enjoy our own pictures in new ways, rarely printing them. We also share our photos differently, no longer laboring to put them in a physical photo album. Finally, our friends have a much better experience enjoying the photos we share because they control how they view them and they can join in a dialog about the pictures in real time with far flung friends around the world. In the same way, as wireless connectivity gets integrated into virtually every product with a power supply, the ways in which we interact with those products and with each other will continue to be transformed.

What impact have these revolutions had on the church?

Each of these revolutions have significantly impacted the church. As the Digital Revolution rolled onto our desktops, our churches learned to become more efficient, digitizing the people, relationships, ministries, and transactions that organically defined each local body of believers. The entire church management software industry was born. Bible software started to appear, so pastors and lay people could more thoroughly and efficiently search the Word. And of course, this publication itself was on the forefront preceding all of these advances. The Internet Revolution brought church websites, Sermon Audio, and Bible Gateway, amongst other advances. In the Mobile/Social Revolution, iPads and Facebook have transformed how we interact with the Bible and other content, and how we interact with each other in Christian community. The YouVersion Bible App has been installed nearly 150 million times on smartphones and tablets. Church Management solutions have gone mobile and social, engaging the congregation.

In general, I’d say that churches tend to move a little slower in adopting technology, although some churches are always on the leading edge, but clearly each of these revolutions has advanced our ability to know God and to serve Him, wherever we go. Obviously each of these revolutions has also brought new “dangers” into the church and into our congregations. The duty of the church is to determine how best to capture the power of the technology while managing the danger and limiting its negative impact on the church and our people. As we consider the next revolution, I believe this will be particularly challenging.

What is the next revolution?

I refer to the next revolution as the Intelligence Revolution. It incorporates buzzworthy elements such as cloud computing and big data analytics to enable organizations to better serve their constituents. We will begin to explore this next revolution in next month’s column.

It is my hope and prayer that these articles will encourage you in your daily walk with Christ. As 1 Peter 4:10 teaches us “As each has received a gift, use it to serve one another, as good stewards of God’s varied grace.”

Too Mobile?

January 13th, 2015

I know… I said I would be posting more and I haven’t. I’m sorry. Even this post is something I meant to post in late December and am just now getting around to it. My hope is to start posting some content I’ve written over the past couple of years that I think would be interesting to everyone here.

But for now, let me observe on how this mobility revolution thing is working out for me.

December is a time of year when I do a lot of work with photos. My favorite site for this kinda thing is Shutterfly. Every year we use them for our Christmas cards, and then I make a bunch of personalized calendars as gifts. The last few years I’ve also been making Christmas tree ornaments to capture the main events of the year so each year when we decorate the tree we can be reminded of the wonderful memories from past years.

Anyway, all of this means that during December I ask people to e-mail me photos to use in gifts for particular people. This year is the first year that I’ve noticed that everyone embracing mobility has really caused a problem for me. You see, when someone e-mails me a picture, then I get it on my computer. I can store it in the right folder. Perhaps do some editing, if necessary. Then upload it to Shutterfly for use in the project.

This year, several times, I was frustrated because I asked people to e-mail me photos, but instead they texted them to me. Of course, I’m not surprised that the photos I asked for were sitting on their smartphones, since that’s pretty much the only camera the vast majority of us use anymore. But when I ask someone to e-mail me a picture, and it seems to me that it is just as easy to e-mail as it is to text, and multiple people text me the picture instead, then that is telling. It seems to me a strong indication that we are well into the post-PC era. (BTW – these are not tech early adopters, these are clearly mainstream tech users.) Mobile devices have replaced our desktop devices. We apparently have also entered the post-email era. (BTW – these are not millennials I’m talking about either, each of the people who texted me photos instead of e-mailing them is roughly my age.)

My frustration stems from how much harder it is for me to get the photos into my routine when they are texted to me, but my fascination stems from watching how the mobility revolution has impacted basic behaviors of mainstream consumers. It’s amazing how fast we adopt and adapt.

The (best effort) Internet of Things

November 8th, 2014

Back in the early 1990s, I was manager of new products at WilTel.

WilTel was a scrappy telecom competitor (focused on the business and wholesale markets) whose greatest claim to fame at the time was being the first carrier to launch frame relay services. Frame relay was a packet-based service that dramatically changed the data networking landscape. It delivered performance significantly better than X.25, the previous option for packet services. In fact the performance was so good that businesses could replace expensive private line mesh networks with much more affordable frame relay networks made up of virtual circuits connecting the same end-points. It was a runaway success. In fact, WilTel’s introduction of frame relay is a great case study in successful self-cannibalization. Private lines were WilTel’s bread and butter, so frame relay meant that the company aggressively introduced a product that replaced it’s core product with a less expensive alternative. Sure, for many of WilTel’s existing business customers, there was a reduction in what they paid the company for the equivalent benefit. However, WilTel was able to not only replace a single customer’s WilTel private lines with frame relay, but also that same customer’s AT&T private lines and MCI private lines and Sprint private lines, resulting in a significant increase in “share of wallet” and a meaningful increase in overall revenue from each customer. More importantly, WilTel became a credible provider to many business customers who had never before considered the company. (Sorry for the rabbit trail, but it seemed like a good teachable moment…)

I can’t take credit for the brilliance of this move. I played a very small role in the launch of WilTel’s frame relay service. (That credit goes to Joe Zell and Christine Heckart.) But I tell the story to make the point of how important frame relay and private line services were to the company in the first half of the 1990s when I moved into the role of manager of new products for WilTel and started to see the emerging potential for Internet-based services. I started preaching that, in the future, businesses wouldn’t need private line or even frame relay services. Why would they pay for all of that, when “the Internet” could just as well deliver their data from point a to point b. (Of course, I was right, I was just about 15-20 years too early. For my last 9 years at Sprint, the company was slowly moving towards shutting down frame relay and private line services.)

Anyway, in my role at WilTel, we started increasing our focus on Internet-based services. All of that came to a screeching halt at the end of 1994. WilTel was in the process of being acquired by LDDS (the combined company would be renamed WorldCom) and I put together a summary of our product development efforts for LDDS’ CEO, Bernie Ebbers. His response: “That Internet stuff – shut it down. The Internet’s a toy. Businesses will never pay for it.”

Now, I know that Bernie gets (and deserves) a lot of grief for stupid decisions he made that destroyed WorldCom (and with it the retirement dreams of thousands of employees). But I tell this story to make the point that there was a time when the Internet was broadly considered “not good enough” for “real” use.

The Internet was designed to be a “best effort” network. No performance is guaranteed. As traffic increases, the network does its best to respond and in general everyone’s performance degrades. (Net neutrality is all about maintaining this model.) Today, Internet service providers have invested so much in the core infrastructure and access networks that this “best effort” is actually good enough for the vast majority of uses that consumers and businesses have, and providers have offered dedicated services, apart from the “public Internet”, using IP-related protocols (e.g. MPLS) to ensure the performance that businesses require for their more mission-critical applications.

But it wasn’t always this way. In reality, you couldn’t count on any specific throughput or even successful delivery from your Internet service. The only thing you could count on was unpredictability and unreliability. For many uses, that was just fine, so people bought it and the Internet grew dramatically. For at least a period of time, Internet traffic grew exponentially.

Wow, that’s a long lead in to my main point…

I think it’s important to realize where we are in the “Internet of Things”. As we are rapidly deploying these technologies, it’s important to have right expectations. In time, the vast majority of IoT applications will be rock solid with high levels of performance, and even today, those applications that need it are (hopefully) being built with the right level of investment in the right kind of core infrastructure so that they will work when they need to. (I’m thinking of things like the government-mandated Positive Train Control.)

Today, the vast majority of applications are “best effort.” If it fails – oh well – we’ll try again tomorrow.

Case in point – my smartwatch. I have loved connected watches for a very long time. In 1994, I bought a Timex DataLink watch. Then in the late 1990s I started buying watches with a satellite connection to the atomic clock. By 2009, I’d written off the future of watches, thinking that the smartphone had replaced them, but around the same time I got my first FitBit fitness tracker. I was ecstatic when fitness tracking functionality became integrated into the watch form factor.

My current favorite smartwatch is the Basis band, which I’ve been wearing for a couple of years. Basis has since been acquired by Intel, and is launching an exciting new product. What I love about my Basis is that it encourages me to develop healthy habits. Everyday, I’m working towards eight different goals, from not sitting too long, to walking at least 2000 steps each morning, to walking at least 10,000 steps each day. There’s also a sense of gamification, earning points by hitting goals allows you to add more habits. It’s great – when it works. It’s absolutely frustrating when it doesn’t.

For example, yesterday, the Basis cloud (which is what rewards me for hitting my goals) told me that I walked 6,640 steps in the morning (yea! – crushed that goal), 5,570 steps in the afternoon (yea!), and only 823 steps in the evening (oh well, can’t win them all). But the really surprising and frustrating data is that Basis thinks I only walked 6,482 steps total for the day. You’re probably thinking what I always think when this happens – that logically is impossible and mathematically is about half of the actual total. But, the big deal for me is that I didn’t get credit for my goal of 10,000 steps, even though I clearly achieved it.

Unfortunately, this is not unusual. In fact, it’s happened twice this week and probably a handful of times this month. I’ve been reporting the problem to Basis for a long time. Their typical response is “do a hard reset of the device” (which really never does any good – it doesn’t recover the data for the current day and doesn’t seem to improve performance over time). The most recent time I reported the problem, after a few back and forths with customer service, I got a more complete response which included this explanation: “The Basis clears the watch memory after a sync to prevent the memory from becoming full and failing to record further data. This clearing of data is the last step in the sync process, and normally, if the sync fails, this action does not trigger. Sometimes, however, data corruption does not register immediately and the action to clear the watch memory is triggered. This results in the loss of data from the watch memory. The totals on the watch face do not reset with each sync in order to keep your daily data accurate, but if a segment of that data is corrupted, the data on the web will only show the information that was successfully uploaded to it. This is why you can see discrepancies in the data on the watch face versus what’s in the app.” Never has Basis indicated that are going to do anything to fix what would be a relatively easy thing to fix (when morning+afternoon+evening > total, update the total…). For these reasons, I won’t be buying any more products from Basis.

But my point isn’t meant to be that the Basis product is a failure. It’s that virtually all IoT products are going to have similar failures. Bluetooth, WiFi, 4G, software, hardware… they all fail at times. The fact that my smartwatch fails to give me credit for what I’ve done is frustrating, but it’s an application that is just fine for “best effort.” And for now, “best effort” isn’t all that good.

Thankfully, if history is any indication, “best effort” is going to keep improving, and IoT will fundamentally change the way that we interact with the world around us, and the way that businesses operate.

Introducing SDG Advisory Services

October 6th, 2014

Friday was officially my last day with Sprint. Over the weekend I updated my LinkedIn profile indicating the “end date” of my Sprint employment and listing a new “job” as Strategic Advisor for SDG Advisory Services. Thanks to everyone who sent me congratulations on the new “job.”

I’m not really looking for a new job. Although I don’t qualify to officially “retire” from Sprint, I’ve viewed my departure as my “retirement from corporate life.” God has blessed my family and I incredibly over the ~28 years since I graduated from Virginia Tech. He has filled my career with wonderful experiences as a corporate executive (Sprint and Williams), a consultant (TeleChoice), an entrepreneur (Digital Frontiers, Seek First Networks, Christian Homeschool Network), and a communicator (The Power of Mobility book, other book contributions, this blog, Christian Computing magazine, Business Reform magazine and BizNetDaily, Homeschool Enrichment magazine, Network World magazine, over a dozen conference keynotes and many other speaking opportunities, etc.).

I’ve made lots of mistakes along the way and unfortunately seen many more mistakes made by others. Those lessons have been incredibly valuable. I’ve also been blessed to do some things right and to watch others have impressive successes. Those too are wonderful lessons. Over the years I’ve had the opportunity to share those lessons with others, sometimes in formal and informal roles as a strategic advisor to companies, events, and organizations, and sometimes in formal and informal mentoring relationships with individuals. These have been some of the most rewarding opportunities I’ve had in my career.

The desire that God has placed on my heart is to focus on “giving back” out of my storehouse that He has filled with rich experiences, knowledge, and capabilities. I believe that tapping into this storehouse could be very valuable for the right businesses and I have created SDG Advisory Services especially for these types of opportunities. I think where I add the most value is in listening (about an opportunity or challenge), framing (helping craft a framework for evaluating options), and then shaping (the work that needs to be done to evaluate the options and make a decision). I think I’m also good at communicating, especially about the impact of technology innovations.

On the SDG Advisory Services website I’ve outlined four types of services for which companies may want to hire me:

  • Communications: Help customers and prospects understand the “big picture” of how innovations are changing their world by leveraging a successful communicator’s writing, speaking, or facilitation skills.
  • Two-Day Strategy Lab: Quickly develop a deep and focusing understanding of what is true about your business, your opportunity, and how to uniquely focus your strategy to achieve your long-term goals through a structured 2-day process.
  • Consultation Session: Uncover, clarify, and evaluate strategic options for specific business challenges and opportunities by engaging an experienced strategist who will ask the right questions and provide valuable perspectives.
  • Strategic Advisor: Improve your business decisions through an ongoing relationship with a proven, innovative business leader who can help shape and inform your strategic approach to business.

Most businesses have done a good job of building the right team to execute on their plan. They know more about the opportunity and their own capabilities than any outside expert could ever tell them. Sometimes, however, there’s a real need for help stepping back, framing the situation, and making the right decision with intentionality and focus, before moving forward. My desire isn’t to bill as many hours of consulting time as possible, but rather to have the biggest impact possible with the least amount of time and effort expended (for both you and me).

If you think I could help, drop me a note and we can chat about it.

CTIA 2014: Connected Intelligence

September 15th, 2014

Last week, I was in Las Vegas for “Super Mobility Week.” I spoke at CCA and received an award on behalf of Sprint at CTIA, but one of the highlights for me was actually sharing a cab to the airport with Chetan Sharma. Chetan is one of the smartest and one of the nicest guys in the industry. I met him several years ago when he moderated a couple of panels that I was on at GigaOm’s first Mobilize event and it’s been a pleasure to catch up with him whenever our paths cross.

With my own career at an inflection point, I am especially impressed by how Chetan has been able to manage his consulting business. He has kept it very small so that he can focus attention on his family, and yet he has a huge impact on the industry. The work that he takes on leverages his knowledge, experience, and insights to their fullest. That is what I aspire to as well, so it was great to have the chance to reconnect again last week.

But you, my dear readers, probably could care less about that. What I think would be interesting to you is what we talked about in that short cab ride. The most meaningful discussion was about Chetan’s most recent paper “Connected Intelligence Era: The Golden Age of Mobile,” which I had just read on the flight out to Vegas. (You should read it too.) Chetan’s question for me was “what do you think, is this a new cycle, or the old cycle?” I have to admit that my mind probably hadn’t thought about it enough to be prepared for the discussion, so I had to mentally work through a few concepts first…

In the paper, Chetan references theories on economic cycles put forth by Nikolai Kondratiev, Joseph Schumpeter, and Carlota Perez. It is Carlota’s writings on “Technology Revolutions” that I’ve paid the most attention to since they are both more recent (and therefore informed by the Digital, Internet, and Mobility revolutions) and more specific to technology. The first mental hurdle I had to get past, in my mind, was that Carlota looks at long cycles (PC/Digital, Internet, and Mobility are all in the same “Age of Information and Telecommunications”, which followed the similarly long “Age of Oil, the Automobile, and Mass Production”, “Age of Steel, Electricity, and Heavy Engineering”, and the “Age of Steam and Railways”), while I tend to think in short cycles, the Digital Revolution, followed by the next cycle of the Internet Revolution, followed by the next cycle of the Mobility Revolution, etc. So, when Chetan asked me his question, he effectively was restating what he had included very early in his paper “Where are we in the big economic cycles? Are we in the golden age of the last technology cycle of information and telecommunications that gave birth to the Internet and the modern wireless ecosystem as we know it or are we perhaps on the verge of a new age that will transform human history for the next 50 years?”

I think it’s clear that we are at the beginning of the next “short” cycle. Big data analytics, connected devices (Internet of Things), and cloud all point to this next revolution, which Chetan calls Connected Intelligence and that I’ve been calling the Intelligence Revolution. What’s harder to answer, as Chetan readily acknowledges, is whether this short cycle is part of the current long cycle (the Information Revolution) or part of the next one. As Chetan points out, we probably won’t know for sure for at least a decade, but in the cab, I started to formulate a test that might help us think about it.

During that short conversation what came to mind was “what do the products look like?” I can think of easy things like advertising as a means of creating economic value from “connected intelligence” but it’s harder for me to think of other “products” of this new capability with more direct economic benefits. In the steam era, the products were clear. In the steel era, the products were clear. In the oil era, the products were clear. In the information era, the products have been clear. If this is a new era, the products aren’t yet clear to me.

Another way to think about it is in terms of how the revolution increases productivity. It’s pretty easy to see how industry, steel, steam, oil, and information have increased productivity. I think we need to consider whether “connected intelligence” has the same “big bang” transformative impact.

To his credit, Chetan does a good job in his paper outlining potential products and potential productivity improvements for existing products and services. But it doesn’t really seem to me like a huge leap. So, my vote is that this “Intelligence Revolution” is really just the next step in the “Information Age” and not the beginning of a new age.

What do you think?

CCA 2014: Is Wireless a Commodity?

September 11th, 2014

This week I participated in a panel at CCA on “The Evolving Operator: 2014 & Beyond” that was moderated by Sue Marek, Editor in Chief of Fierce Wireless. My co-panelists were Rob Riordan, EVP of Corporate Development for Cellcom, and Mauricio Sastre, Vice President of Product for FreedomPop.

For those that aren’t familiar, CCA is the Competitive Carriers Association and basically includes all of the wireless carriers smaller than Verizon and AT&T. Until Sprint and T-Mobile joined, it had been the Rural Carriers Association. So everyone at the show really cares about the success of small operators.

Early in the discussion, I answered a question by saying that I believed that we need to make three critical strategic shifts:

  1. We must recognize that we’re operating in a commodity market. Today, we don’t operate our businesses in a way that supports a commodity market.
  2. But, we can’t be satisfied with being a commodity, we need to find ways to differentiate.
  3. Finally, we need to act like an Internet company. (Move faster, focus on the customer experience, eliminate bureaucracy, do less and partner more, etc.)

That sparked a follow-on question from Sue for all three panelists. I was sitting in the middle at the table, and I’d say I was also sitting in the middle relative to this question. She asked “is wireless really a commodity?”

Rob is convinced it’s not. He passionately described how many competitors Cellcom faces in Wisconsin, and yet they take the largest share of subscribers. They do it by being part of the community and caring about the people they serve. They don’t operate an IVR – when you call them a live person answers. I don’t disagree with him. For operators like Cellcom, there is an opportunity to be seen as special by those in your community. You aren’t just another provider in a competitive matrix, you’re a neighbor who cares.

My position was that wireless is becoming a commodity. Especially if we look beyond the traditional mobile operators and recognize that we’re really competing against the Facebook and Google’s of the world, who provide over the top services using our own bandwidth against us, we have to realize that our traditional operating model must be challenged.

Mauricio kind of shrugged and said, yeah, of course it’s a commodity. FreedomPop wouldn’t be here and growing as fast as we are if it weren’t already a commodity.

What do you think?

New Book

September 4th, 2014

I recently contributed a chapter to the book “Enterprise City: How Companies Are Changing the Global Urban Landscape)” which is available from Amazon for Kindle.

Not surprisingly, my chapter (chapter 5) is titled “Mobility is Revolutionizing Cities for the Better.” Other chapters include

  • “Cities Will Redefine the World’s Future as Much as They Influenced our History” (by Richard Kadzis),
  • “Smart Work Will Transform our Cities” (by Peter Miscovich),
  • “Big Business and Cities: Opportunities for Leadership” (by Todd Megrath of MGM Grand Resorts),
  • “Creating Sustainable Communities with our Next Natural Resource: Big Data” (by John Clark of IBM),
  • “The A-daptive City” (by Rives Taylor),
  • “Chicago New Heights – The Case for Integrated Sustainable Development” (by Paul McDermott),
  • “The Ubiquitous Web and the ‘All-ternet(tm)’ (by Lubna Dajani),
  • “The Forces Shaping the Future of Urban Economic Development” (by Bill Sproull of the International Economic Development Council),
  • “Using the Power of Collaboration to Invent our Future Cities” (by Carol Warkoczewski of the City of San Antonio),
  • “Can Public Policy Be Nimble Enough to Affect the Competitiveness of a Fast Growing City-Region?” (by Glenn Miller of the Canadian Urban Institute and Iain Dobson of Real Estate Search Corporation),
  • “Form, Function and the Shape of Things to Come” (by Brock Dickinson),
  • “Conscious Collective Evolution as the Primary Focus for Developing our Communities” (by Stijn De Winter), and
  • “Finnish Cities as Forerunners of Sustainable Lifecycles and Smart Technology” (by Galina Kaariainen of PWC Cyprus and the World Futures Studies Federation).

If you’re interested in the urban future, it’s worth checking out!

Sprinting to the Finish Line

September 3rd, 2014

A month from today will be my last day at Sprint. I’m looking forward to my “retirement” from corporate life and the opportunity to pursue some things I’ve been passionate about, but had lacked the time to pursue. I’m excited to see where God will take me next. I’m also looking forward to having more freedom to write for this blog, so stay tuned.

In the meantime, I wanted to let y’all know that my departure from Sprint will mean two changes that you might want to pay attention to. Through this blog (and through e-mails to my Sprint address shared here – russ.s.mcguire@sprint.com), I’ve been able to get many people the help they need to resolve issues with their Sprint service. Unfortunately, that will come to an end when I’m no longer an “insider.” Also, through this blog, literally thousands of people (probably tens of thousands) have been able to take advantage of the Everything Plus (and before that SERO) discounts. I’ve literally had people stop me at conferences to thank me for making their service affordable. These days, with Sprint’s aggressive retail offers, the Everything Plus discount is much less compelling than it has been, but if you’re still interested, don’t wait too long to use my credentials at http://sprint.com/everythingplus (russ.s.mcguire@sprint.com 383).

Stay tuned. I’ll be back in October.

Hmmm….

April 24th, 2014

Years ago I drafted a post for this blog. After seeking the counsel of wise co-workers, I decided not to post it and it stayed in my drafts folder. For some unknown reason, WordPress autonomously decided to post it yesterday.

I apologize for any confusion it may have caused. The report and analysis referenced are years old.

For complete transparency, there were a couple of reasons folks recommended I not post it originally. The first was that the vast majority of my readers wouldn’t be able to access the report. In respect to Craig Moffett’s and Bernstein’s intellectual property, I couldn’t share enough of the report to do it justice and yet my readers couldn’t access the rest of it. That didn’t seem fair to my readers. The second reason was that, while I liked Mr. Moffett’s analysis in this report, there are many other reports that he’s written that I don’t agree with. By strongly commending his thought process and analysis on this one report I may lead people to believe that I was endorsing (or worse yet, that Sprint was endorsing – even though everything that’s posted here is my own and doesn’t necessarily reflect Sprint’s positions or opinions) Mr. Moffett’s entire body of work.

I do think Craig Moffett is a very intelligent man, that he deeply understands the industry, and that he often provides incisive perspectives on various players in the industry – whether or not I think he’s right or wrong. I also think this particular analysis was very interesting. I don’t have time now to go back and see how right or wrong he was (using 20/20 hindsight). But anyway, for those reasons, I’m not going to take down this post (unless Craig or Bernstein ask me to).

Is the Mobility Revolution Deadly for Big Bells?

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!