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How the Global Telecom Business has Changed

Gary Kim — Thu, 08 Oct 2009 13:29:20 -0700

A few statistics will illustrate just how much has changed in the global telecom business since 2000. Prior to the turn of the century, most lines in service used wires and carried voice.

By 2007, 74 percent of all lines in service used wireless access or carried data, says the Organization for Economic Cooperation and Development.

Mobile alone in 2007 accounted for 61 percent of all subscriptions while standard phone lines have dropped to 26 percent. And the change has come swiftly: in just seven years.

Mobile revenues now account for nearly half of all telecommunication revenues—41 percent in 2007—up from 22 percent 10 years earlier.

Along with the change in access methods and applications is the sheer number of connections. The total number of fixed, mobile and broadband subscriptions in the member nations of the OECD grew to 1.6 billion in 2007, compared to a population within the OECD nations of just over one billion inhabitants.

To put that in perspective, consider that there were seven access paths in use in 2007 for every access path in use in 1980. That includes broadband, wireless and voice connections.

To put those figures in even greater perspective, consider that the percentage of household budgets devoted to communication expenses has climbed only slightly over the last 10 years. In most OECD countries, households generally spend about 2.2 percent and 2.5 percent of household income on communications, year in and year out, though one can note a slow rise since 1998.

The big exception is Japan, where household spending on communications is close to seven percent of household income. That might be something to keep in mind when making cross-national comparisons. It is true that Japan has very-fast broadband and has pioneered any number of mobile application innovations.

But Japanese households spend very close to three times as much as U.S. households on their overall communications. That’s worth keeping in mind. It always is difficult to make meaningful comparisons between nations.

Generally speaking, though, OECD consumers have added seven new connections for every existing connection in 1980, while spending about the same percentage of their incomes on those services. That’s an obvious example of an explosion of productivity.

Much has changed in the Internet access realm as well. Broadband is now the dominant fixed access method in all OECD countries. In 2005, dial-up connections still accounted for 40 percent of fixed Internet connections but just two years later that percentage had fallen to 10 percent.

Also, while many criticize the industry for retarding innovation and behaving as “nasty monopolists,” prices have tended to fall for virtually all communication services on all platforms.

“Over the previous 18 years, residential users saw the real price of residential fixed-line

phone service fall roughly one percent per year while business prices fell 2.5 percent per year,” the OECD says.

Mobile subscribers also benefitted from declining prices between 2006 and 2008. The average price of OECD “mobile baskets,” representing a number of calls and messages per year that normalizes features and prices, fell by 21 percent for low usage, 28 percent for medium usage and 32 percent for the heaviest users over the two-year period.

User voice behavior also has changed. The number of minutes of communication per mobile phone is increasing while the minutes on fixed networks are decreasing. In other words, the mobile is becoming for most people the primary voice device while the landline is a backup.

Some might argue that ultimately has implications for pricing. In some real ways, the mobile is the “premium” device and a landline represents a supplemental service. That probably means the value is such that consumers ultimately will think it should be priced as a backup service.

Data between 2005 and 2007 suggest people are making fewer domestic calls on the fixed network in most countries, OECD says. When people do use fixed networks they are increasingly making calls to users of mobile phones.

This trend is well highlighted by Austria where the introduction of flat-rate voice telephony on mobile networks has shifted calls away from the fixed-line network. Voice traffic on Telekom Austria’s fixed network fell 13.3 percent in 2007 as a result of the shift to mobile
communications.

There was an OECD monthly average of 272 minutes of outgoing calls on fixed line telephones in 2007. This is down 32 minutes per month from 2005.

But there was an interesting landline rebound trend appearing recently in a number of OECD countries.

The number of PSTN minutes per line declined until 2005 when the numbers started rising again. For example, French minutes per PSTN line fell until 2004 when they started to increase.

One explanation is the shift in France to flat-rate national calls offered by a number of carriers. That suggests U.S. landline voice providers might stem some of the traffic erosion by offering aggressive, flat-rate, all-distance services within the domestic market, as VoIP providers generally do.

On the mobile side, the OECD average number of outgoing minutes of completed calls on mobile networks was 220 minutes per month in 2007, up 56 percent from 2005.

Subscribers in the United States make far more outgoing calls on mobile phones each month than any other country in the OECD. The average number of minutes per mobile subscription was 443 in 2007, more than double the OECD average. One might argue that is because of the reasonable cost of calling great distances. In Europe, many calls that would be domestic in the United States are international calls.

Broadband prices have fallen as well over the same time. OECD broadband prices declined significantly over the previous three years. Prices declined an average of 14 percent per year for DSL and 15 percent for cable between 2005 and 2008.

The average price of a low-speed connection (2 megabits per second or less downstream) was $32 per month in September 2008. At the other end of the scale, broadband connections with download speeds advertised as faster than 30 megabits per second averaged $45 per month.

Despite the falling price-per-unit trends, telecommunications services, about a trillion dollar market in the OECD, continues to grow at about a six-percent annual rate. That remains to be tested as we finish 2009, but there is reasonable historic precedent for continued growth, though perhaps not at a six-percent rate.

Regarding voice and new mobile and data services, we might as well note that landline voice appears to be a product like any other. That is to say, like any other product, it has a product life cycle.

To be specific, wireline voice looks like a product in its declining phase. Optical fiber-based broadband looks like a product earlier in its cycle, with 56 percent compound annual growth since 2005.

Digital subscriber line and cable modem services likely are further along their curves. DSL grew at a compounded rate of 21 percent per year while cable modem service grew at 18 percent rates between 2005 and 2007.

Mobile voice markets grew by 10 percent each year since 2005 but may be nearing saturation levels in a number of OECD markets. Mobile broadband clearly is early in its product life cycle.

Analog lines, used for voice, facsimile and dial-up Internet access, also seem to be in decline. The number of analog subscribers fell by 34 million between 2005 and 2007.

The decline of Internet dial-up services also means that many households no longer need a second analog line. The same might be true for in-home fax machines. And many additional lines once used by teenagers now have been replaced by mobiles.

Finally, the number of “mobile-only” subscribers has increased as well.

The penetration rate for fixed telephone lines (analog and ISDN) in 2007 was 41 subscribers per 100 inhabitants, which was less than the penetration rate ten years

earlier.

Overall, the penetration rate rose from 43 percent in 1996 to a maximum of 47 percent in 2000, only to decline again to 41 percent in 2007. The year 2000 appears to be the turning point in the technological life cycle of fixed-line telephony.

Canada had the highest fixed-line penetration in 2007 with a penetration rate of 54 subscribers for every 100 inhabitants. Sweden, Luxembourg and the United States all

had penetration rates greater than 50 per 100 inhabitants. Mexico, the Slovak Republic and Poland had the lowest penetration rates in 2007.

There’s an interesting observation we can make about those figures. Nobody seems to argue that the United States has a big problem with voice service availability. In fact, availability is not the issue: consumer demand is the issue. One doesn’t hear people complaining about the lack of voice availability in Canada or Sweden. But penetration is in the 50 percent range, per capita.

Nearly all Internet users in the United States use broadband, not dial-up. And yet broadband penetration might well be higher than voice penetration, on that score. People who want the product generally buy it.

That said, there are some methodological issues here. “Per capita” measures might not make as much sense, as a comparative tool, when median household sizes vary. Adoption by households, adjusted to include people who use the Internet only at work or at public locations, or using mobiles, would be better.

Broadband adoption, by people who actually use the Internet, might make the most sense of all. Broadband is a product like any other. Not every consumer values every product to the same degree.

DSL network coverage is greater than 90 percent in 22 of the 30 OECD countries. Belgium, Korea, Luxembourg and the Netherlands report 100 percent.

Cable coverage is extensive in some countries such as the United States (96 percent) and Luxembourg (70 percent), but non-existent in others such as Greece, Iceland and Italy.

An analysis which followed the evolution of broadband plans over four years shows that speeds increased by 28 percent for DSL and 72 percent for cable on average between 2007 and 2008.

A survey of 613 broadband offers covering all OECD countries shows the average advertised speed grew between 2007 and 2008 across all platforms except for fiber. The average advertised DSL speed increased 25 percent from 9.3 Mbps in 2007 to 11.5 Mbps in 2008.

Advertised speed of course is not user-experienced speed at all times of day. Still, it offers some measure of changes in the product.

The average advertised fiber speed actually declined between 2007 and 2008 as operators introduced new entry-level offers at speeds below 100 Mbps.

For example, Dansk Broadband in Denmark offers symmetric broadband offers over fiber at speeds between 512 kbps and 100 Mbps.

The average fixed wireless offer in 2008 was 3 Mbps, up from 1.8 Mbps just a year earlier.

Fixed wireless speeds grew by 64 percent but remain only one-quarter of the average advertised speeds of DSL providers. The average cable offer is five times faster.

There are some insights about mobile broadband in the OECD’s analysis. The amount of data traffic carried over mobile networks remains small in relation to other broadband data networks.

For example, Telstra in Australia reported in a 2008 investor briefing that data consumption increased from 100 kilobytes per month per user in 2007 to 250 kilobytes in 2008. Compare that to the gigabytes consumed on landline connections.

Data from the Netherlands also show relatively low data traffic in the first half of 2008.

Between January and June 2008, Dutch mobile broadband subscribers downloaded

358 gigabytes over mobile networks.

It is possible to calculate an estimate of mobile data traffic per 3G subscriber per month in the Netherlands by making a few assumptions. If the ratio of 3G to total mobile subscriptions in the Netherlands is equivalent to the OECD average of 18 percent, then the average amount of data traffic per 3G subscription per month in the Netherlands works out to be only 18 kilobytes per month.

Of 52 mobile broadband packages evaluated in September 2008, the average headline

speed was 2.5 Mbps. Subscribers to these plans were allowed an average of 4.5 gigabytes of data traffic per month.

Much has changed in the global telecommunications business in just seven years. Landline voice might still provide the revenue mainstay, but it is a product in the declining stages of its life cycle.

Even mobile voice, DSL and cable modem service are products at something like the peak of their cycles.

Mobile broadband and optical fiber access are early in their product life cycles.

Mobility is becoming the preferred way of consuming voice communications.

That’s an awful lot of change in just seven years. And we haven’t even discussed VoIP, over-the-top applications, content or video. IP

83 Percent of Enterprises, 24 Percent of SMBs Have UC

IPB Staff — Thu, 08 Oct 2009 14:20:22 -0700

About 83 percent of 745 North American enterprise and mid-market executives have unified communications capabilities in place, or are planning to, while 17 percent report they still are not interested, says Henry Dewing, Forrester Research analyst.

Web conferencing and collaboration services, though, are seen as a priority by 55 percent of SMB respondents, as well as storage and backup services, also seen as a priority by 55 percent of SMB respondents.

Integrated communications that unify voice, email and instant messaging are the most-wanted capabilities, with twice the number of executives saying that is important, compared to other features such as presence, integration with business applications, can conferencing capabilities.

That isn’t to say there is little or no interest in features such as desktop call control or mobile integration, but that demand for those features is about 2.5 times less important than unified handling of voice, email and IM traffic.

And while demand for specific features is relatively unevenly distributed, the business value drivers are fairly broadly distributed. Saving money, providing better customer service, improving communication flows and saving time all are cited as key values.

At a time of very-tight information technology budgets, more than a third of respondents say they are hiking spending on hardware, servers and desktop software. About 15 percent report they are increasing spending for managed UC services.

The situation at small and medium-sized businesses and organizations is a bit different, as you might suspect. Where 83 percent of enterprises have unified communications projects in place or in progress, only about 24 percent of SMBs say that is the case at their organizations.

And about 20 percent of SMB executives surveyed say they really have no interest in UC.

And though it seems logical to many of us that SMBs remain prime candidates for hosted services that avoid major capital investments, most SMB executives say they are more interested in premises-based solutions.

When asked how interested they are in buying a managed UC solution sometime in the next 12 months, 56 percent of SMB executives say they “are not interested.”

About 21 percent say they are “somewhat” interested while four percent say they are “very interested.” About 11 percent of SMB executives surveyed by Forrester Research say they currently are using a hosted UC solution.

So it appears industry advocates have some ways yet to go in convincing SMB executives that hosted UC solutions are a better approach than premises solutions.

Recent surveys of IP telephony adoption by SMBs have suggested a similar attitude towards hosted IP telephony as well. About a quarter of SMB executives say they would consider a hosted IP telephony solution, while about three quarters still say they would be more comfortable with a premises-based solution.

Call it habit, inertia or lack of trust. SMB executives still have not embraced hosted IP telephony at rates many of us expected. Some have suggested that fear about making a mistake with a mission critical tool is compounded by fear of choosing the wrong supplier.

Extreme fragmentation of the supplier base, as also is typical of the information technology support business, means no single name generally stands out—in the service provider space—as a “logical” supplier of IP telephony or unified communications.

On the other hand, buyers seem more familiar with the brand names of the firms supplying them phone systems, which then are likely vehicles for a move to IP telephony or unified communications as well.

So far, the hosted IP telephony industry does not seem to have tipped the scales, though one might argue that 25 percent penetration of the customer base for a relatively new solution is not shabby. IP

Local Resellers Sue AT&T Over Promotions

Danny Adams — Thu, 08 Oct 2009 13:38:50 -0700

Local resellers of AT&T ILEC services have sued AT&T over the treatment of promotions offered by AT&T companies to new retail customers. The resellers contend that AT&T must give its wholesale customers, like them, the full value of any promotions that AT&T provides to new AT&T retail customers. For example, if Southwestern Bell offers new retail customers a $100 credit to sign up for new local telephone service in Texas, the resellers argue that Southwestern Bell is required to give wholesale customers the same $100 promotion for each new local customer they put on AT&T’s network. AT&T rejects this claim and contends that it may give its wholesale customers a lesser promotional amount than its retail customers. This argument has festered for over two years and now has escalated into millions of dollars in dispute. Recently, it has bubbled over into federal district court lawsuits in Texas and North Carolina. (Full disclosure, the author is counsel to the reseller in one of these cases.)

Wholesale prices for local resellers are set by the State public utility commissions following FCC guidelines. The approach mandated by law is a “costs avoided” analysis that starts with the retail price and then applies discounts for wholesale customers based on costs that the ILEC does not incur in serving wholesale customers rather than retail customers. This reduction in price is expressed as a percentage discount from the retail price, and in most states falls in a 15-20 percent range. Thus, in a typical state, if the monthly cost of local telephone service from BellSouth is $40, the wholesale discount might be 20 percent, resulting in a wholesale price of $32. For the past two years, AT&T has taken the position that any promotions given to resellers should first be discounted by an amount equal to the percentage discount applicable to wholesale pricing in general. For example, in a state with a 20 percent wholesale discount, a retail promotion of $50 would result in a discounted promotional payment to resellers of only $40. It is this $10 difference that is in dispute in most cases.

The disputes have been pending for more than two years, but were recently given impetus by a new AT&T policy. In Accessible Letters published in July and August, AT&T announced a new formula for calculating the promotional amounts to be paid to resellers starting September 1. (“Accessible Letters” are public announcements by which AT&T states new policies it intends to apply to wholesale arrangements.) The new formula itself is ludicrously complex (think of one of those high school math tricks where you multiply your age times your weight, divide by your birth date and then subtract your mother’s age, only to discover that the answer is always your home address). But the bottom line is that the typical wholesale promotional amount will stop being approximately 80 percent of the retail amount – and instead drop to about 15 percent.

There are several moving parts to the formula, but the key components in this change are the introduction of a “redemption rate” (the number of customers eligible for the promotion compared to those that actually take advantage of it) and a “retention rate” (the average length of time that the acquired customers stay on the service, and thus the period for amortization of the expense of the promotional amount). For example, if you project a “redemption rate” of 30 percent, the $50 is reduced to $15. Then if you amortize it over 12 months, it is further reduced to $1.25 per month. A few more calculations that reduce it even more lead AT&T to conclude that the present value of a revenue stream of this sort to the resale CLECs is a one time payment of about $4. (Remember, the figures used here are hypothetical and chosen for simplicity of illustration.)

If you apply this math to the illustrative figures above, using a $50 promotion, a $40 retail rate and a $32 wholesale rate, you get the following. In Month 1 the AT&T retail customer receives free service and has a $10 credit left over, while the wholesale customer must pay $28. In Month 2, the retail customer pays $30 and the wholesale customer pays $32. In Month 3, the retail customer finally pays the full $40 and the wholesale customer pays $32. Total for the first three months of service: retail customer pays $70 and the wholesale customer pays $92. Not surprisingly, this September 1 revision in the formula created a new sense of urgency about the dispute and prompted the resellers to file suit against AT&T.

The resellers contend, among other things, that this issue has already been resolved by the courts two years ago. In a ruling by the U.S. Court of Appeals called Sanford v. BellSouth, the resellers argue that the appellate court concluded that the Telecom Act and FCC precedents prohibit BellSouth from treating promotions differently as between retail customers and resellers unless the disparate treatment was first approved by the FCC or a state PUC. The Court reached this conclusion on the basis of an FCC statement that any variance of this sort between resale and wholesale customers is presumed to be unlawful. The FCC also had adopted a rule which says that such practice must first be approved by a regulatory body. Taken together, the Court ruled that BellSouth is required to give the full promotions to wholesalers as well as its retail customers, according to the reseller argument. Since there has been no FCC or PUC approval of any different treatment for promotions given to wholesale customers vs retail customers, the resellers contend that AT&T is wrong in both its past practices and its new policy. (As of this writing, AT&T has not responded to the reseller arguments.)

The resellers have asked the courts for expedited treatment of their cases in light of the amount of money and the competitive implications involved. In the Texas case, the court is considering a request for a temporary restraining order or preliminary injunction in connection with the new September 1 change in calculation. IP

Danny E. Adams currently serves as managing partner of Kelley Drye & Warren’s Tysons Corner office and is a member of the firm’s Executive Committee. He is a member of the bar in Virginia, District of Columbia and Arizona. He can be reached at DAdams@KelleyDrye.com.

RCN Metro - Way to Go!

Hunter Newby — Thu, 08 Oct 2009 13:44:17 -0700

Broadband development has been selective and bumpy and there is still much to do, but the industry has been steadily growing over the past decade in many ways and directions. The base technology at the chip and processor level has all improved dramatically to support the growth in demand and capability. The core servers hosting all of the new applications and the end-user devices being used to access those applications have all improved dramatically, but what good would it have been without an equally and balanced improvement in the networks that carry that data traffic?

Over the past 10 years, in many places narrowband thin links have become broadband fat pipes. Mobility also has been introduced into the equation. The legacy misconception that mobile and microwave wireless were polar opposites to fixed line largely has been shattered with the realization that those technologies compliment the fiber core to extend broadband reach and capabilities and that the fiber core, although “fixed”, is not analogous to fixed-line last mile. Everything has a purpose and place in the stack.

Upon reflection it’s clear that the past 10 years have experienced not only a technological improvement on multiple levels, but also a psychological shift as well. Changing the mindset of network planners is a major feat. Changing the mindset and direction of the entire country is a feat a magnitude in proportion. Mass awareness of the need for broadband in places where it does not exist (driven by the proven benefits) has been significantly elevated by the Broadband Stimulus portion of the American Recovery and Reinvestment Act. If nothing else the Broadband Stimulus has shaken the status quo by making enhanced broadband deployment a serious goal for any service provider that wants to pursue it.

There are many service providers involved in all aspects of this extraordinary growth, but one, RCN Metro Optical Networks (RCN Metro), has recently made a couple of announcements showing that it is perfectly positioned for what is to come through natural progression and that of the Broadband Stimulus. The company recently completed the upgrade of the access layer of its Ethernet network to include 10 Gigabit Metro Ethernet-based transport at several key locations. This enhances RCN Metro’s already strong network performance, giving customers greater scalability and reducing the amount of time needed to increase bandwidth to mere days.

This news is significant for many reasons, but two stand out. First, it is evidence of the not only steady, but exponential growth of Ethernet transport. The Ethernet standard has been so widely adopted now that it totally permeates carrier networks and it is all demand driven. This is essential to reaching a common platform in the future through which carriers can seamlessly interconnect and allow for enterprise self-provisioning of VLAN’s across networks to establish peering links.

Second, it shows RCN Metro is in the right place at the right time and staying ahead of the sales/demand curve. The company’s design and implementation uses the latest and greatest equipment and technology available in the market, bringing their customers exactly what they need to expand. It also highlights the need for low-latency transport solutions, which is an ever increasingly important new differentiator beyond just having Ethernet transport as a service.

What is not obvious from the announcement but is important to note is that this is a native Ethernet over fiber network. That is important for a couple of reasons.

First, it requires fiber. In many cases it will require new fiber laterals to be built off of an existing metro ring in to the enterprise customer premise to the demarc. This is important because the demand for and growth of 10GE will drive fiber deployments at the edge and that will logically drive fiber requirements at the core.

Second, since it is native Ethernet it does not have a Wave Division Multiplexed (WDM) layer below it. This eliminates additional cost and allows RCN Metro to be more competitive and more profitable on its access service.

This access layer differs from the RCN Metro core transport network as the core is based on WDM with multiple 10G and 40G wavelengths. Soon RCN Metro will be going to multiple 100G wavelengths between New York and Chicago to accommodate the near terabit levels of capacity it currently supports in each of those markets.

None of this is speculative. This is all demand driven and, as always, the sales effort is the key to success. Maura Mahoney, vice president of sales and marketing for RCN Metro had this to say about the customer demand behind the announcement: “Our stronghold is in financial services and their low-latency data center applications, primarily multicast traffic, are driving a lot of transport between New York and New Jersey, but also between Chicago, New York and New Jersey.”

Low-latency is top of the list in terms of requirements for financial services firms, and the 10GE upgrade has done a lot for RCN Metro to meet that requirement. “The 10GE optics are much more efficient than the 1GE or FE for that matter and improve latency a lot,” states Aqeel Asim, director, data engineering & operations for RCN Metro. “They provide better buffer sizing, better memory, hold a lot more packets in the propagation stage and packet loss has improved a lot. Right when the market opens and closes there are bursts of traffic and the 10GE optics perform better then.”

On the Broadband Stimulus side of the future development story, RCN Metro also has had some recent news. It was selected by OpenCape Corp. as its network partner to build and operate a 300-mile fiber network across Southeastern Massachusetts, Cape Cod, and the Islands. The OpenCape Corp., a non-profit 501(c)(3), has applied for a $40 million grant under the federal Broadband Technology Opportunity Grant (BTOP) program of the American Recovery and Reinvestment Act to build the network.

RCN Metro will build and manage operations for the regional open access network. Municipal, public safety and private last mile providers will be able to connect to the OpenCape network for data transport throughout the region and to the Internet backbone in Boston and Providence. The added capacity will help the region develop economically and offer increased competitive opportunities for businesses, residents, non-profits, and public service organizations across the region, according to a statement issued by both companies.

What is really interesting about this is the combination of microwave wireless and fiber for transport between, around and backhaul from a series of islands just outside of a major metropolitan area. Since the proposed serving area is so close to a major metro it would seem logical to assume that it already has access to ample broadband services, but that is actually not the case. RCN Metro is proposing to build a 1 Gigabit microwave link from Woods Hole to Martha’s Vineyard, a 300 Megabit microwave link from Martha’s Vineyard to Cutty Hunk Island, and a 100 Megabit link from Cutty Hunk Island to Penikese Island. It is also looking into extending the microwave link on Martha’s Vineyard to Chappaquiddick Island. This would bring a significant increase in the amount of available capacity to these islands, making them all much more functional in many ways.

All of this microwave wireless transport will be brought back to the RCN Metro fiber-based transport network and the data traffic ultimately will be exchanged in major peering facilities such as 1 Summer Street in Boston, or 60 Hudson Street in New York. This architecture is very unique for RCN Metro since they do not offer microwave wireless transport as a standalone service, but actually created this combined offering to solve the issue of getting to and from islands. The lesson that others in rural America can learn from this is that if you live on a “digital island” with no access to proper broadband backhaul, an architecture such as this one might be exactly what you need. Microwave wireless is highly effective when coupled with fiber at aggregation points for the purpose of middle-mile backhaul to major Internet peering points. This is a simple, elegant and effective approach to solving the broadband bottleneck issue not only around Cape Cod, but also around the rest of the United States as long as the last-mile provider has access to fiber and/or multi-gigabit Ethernet/WDM-based transport.

RCN Metro has developed the opportunities and designed the network that positions them in the best possible way for the high-speed, low-latency network demands of today. There is no reason why others like them in different parts of the country cannot do the same in accordance with the levels of demand they are experiencing. The demand for broadband is not limited to any one part of the United States. The ARRA has shown us that. The amount of development that must happen over the next few years is unprecedented and network operators everywhere will need all of the help they can get. Following in the footsteps of those that came before and succeeded is usually a good way to go. The application, use and utility of broadband is always as great as the greatest example of it, so if you do not have sufficient broadband you should follow a great example of how to create it and that will help you catch up to where others already are and have been.

Hunter Newby is the CEO of Allied Fiber, a next-generation, nationwide wireless tower and dark fiber provider. He can be reached at HunterNewby@gmail.com.

Telcos Inch Up, but Multi-Channel Video Market is Flat

Gary Kim — Thu, 08 Oct 2009 14:03:15 -0700

AT&T and Verizon are slowly gaining share in the U.S. multi-channel video market, while satellite providers DirecTV and Dish Network are holding their own, with Comcast and Time Warner Cable under a bit of pressure, but possibly facing more erosion over the next year.

There are several reasons why AT&T and Verizon seem poised to capture more market share. AT&T and Verizon now are able to market video services to millions more customers every year as they build out their new networks.

But to the extent that customer satisfaction has a direct effect on churn behavior, Verizon AT&T and DirecTV stand to benefit, as their customer satisfaction ratings are at least three times higher than those of Comcast and Time Warner Cable, according to a recent Changewave Research survey of nearly 3,000 end users.

Still, market share changes relatively slowly in the video entertainment market. When asked whether they planned to switch TV providers in the next six months, about 12 percent reported they’ll be switching.

That works out to about two percent of the customer base a month, a figure quite consistent with what video operators have seen in recent years. But users rarely behave precisely as they say they will. One might expect churn to wind up being less than two percent a month, but more than one percent a month.

Also, service providers recently have found churn levels lighter than usual, in part because of slower housing starts, in part because of “save” offers made when customers call to disconnect, in part because bundles save customers money.

But prices seem to have very-high importance. According to the Changewave survey, price is the reason half of the “switchers” plan to make a change. Only about 10 percent indicated they would switch to get a bundle.

If price drives half the changes, rather than some other service attribute, many users who plan to defect will wind up staying because of a “save” offer that addresses the price objection.

Market share changes over the last year show just how stubbornly service providers are fighting to prevent churn in a saturated market that mostly is a zero-sum game.

For the U.S. market as a whole, cable TV operators retain dominant market share of 65 percent while satellite providers have 25 percent market share. Telcos now have 11 percent market share.

Comcast, with 23 percent share, slipped about one percentage point over the last year.

Time Warner Cable, with 11 percent share, gained one market share point over the same period.

DirecTV, with 13 percent market share, was unchanged over the year. Dish Network, with nine percent share, lost one share point over the last year

Verizon’s FiOS has five percent share of the national market, while AT&T U-verse has three percent of the national market.
About 54 percent of the Changewave respondents who say they intend to switch providers say they will choose a fiber-optic service, an eight-point increase in three months.

Verizon FiOS TV remains the top provider that switchers plan to move to in the next six months. But AT&T’s U-verse service has jumped seven percentage points since Changewave’s March survey and is currently showing the most momentum among providers.

By way of comparison, just four percent of switchers say they’ll sign up with Comcast and one percent say they’ll buy from Time Warner Cable.
Changewave researchers think cable and satellite providers will, for these reasons, face headwinds as the telcos gear up.

Fiber TV providers boast a big lead when it comes to customer satisfaction levels. Some 38 percent of subscribers say they are “very satisfied.” About 27 percent of satellite subscribers say they are “very satisfied.”

About 13 percent of cable subscribers say they are very satisfied. So satellite subscribers are twice as satisfied as cable customers while fiber TV customers are three times as satisfied as cable customers.

The difference is even more evident at the individual company level, where Verizon has the most satisfied customers. About 47 percent of Verizon FiOS TV customers say they are very satisfied, while 39 percent of AT&T’s customers say they are very satisfied.

Some 34 percent of DirecTV customers say they are very satisfied. Just 11 percent of Comcast and Time Warner Cable customers say they are very satisfied.

Still, all the providers are battling hard to hang on to their existing customers, so huge changes in market share do not seem likely. Each of the contestants have weapons—bundling and the pricing of bundles, plus short term incentives not to churn—that suggest a tough, hard-fought battle. IP

The State of Rural Broadband

Bob Titsch — Thu, 08 Oct 2009 13:49:31 -0700

Is it possible that rural broadband penetration actually is pretty close to the penetration of Internet users? In other words, is it possible that use of broadband in rural areas now is close to 100 percent of Internet users?

New data from comScore suggests that might be closer to the truth than many believe. The latest estimates are that, in rural areas, broadband penetration is at 75 percent. If one assumes some rural users still use dial-up, that suggests perhaps 85 percent of rural households now use the Internet.

In 2007 the U.S. Department of Agriculture Economic Research Service estimated that 63 percent of all rural households had at least one member access the Internet.

If rural broadband penetration now is up to 75 percent, as comScore indicates, that would imply that Internet usage is at least that high, in other words.

That would seem to have implications both for setting of national broadband policy and policy in rural areas. For starters, the new data suggest that rural broadband is growing robustly, without any additional government activity.

Some might argue that broadband usage remains lower in rural areas than in metro areas, and that remains true. Metro broadband penetration is at 89 percent. But virtually every study has shown that Internet usage also is lower in rural areas. The point? Lower Internet usage obviously means lower broadband access penetration.

One has to be careful with statistics, though. By definition, a household with no ability to access the Internet would not be an Internet-using household. So a better way to describe comScore’s findings are that, when wired facilities are available, rural households are buying broadband at rates not dissimilar to urban users.

That isn’t to say adoption is equal to urban rates, but that the gap is closing awfully fast.

Broadband penetration in U.S. rural areas increased 16 percent from 2007 to 2009, while metro area broadband penetration grew 11 percent, according to comScore.

In part, that is because rural markets have more room to grow. The analogy is wireless voice growth, which is highest in places such as India, China and Africa, where penetration is lowest.

“With low-speed DSL priced at about the same level as dial-up in many areas, there is little incentive for households to remain on dial-up,” says Brian Urutka, comScore VP.

Rural markets with a population less than 10,000 grew broadband penetration by 16 percentage points. Areas with population between 10,000-50,000 grew penetration 14 percentage points while metropolitan areas with populations of 50,000 or more grew penetration by 11 percentage points.

Critics sometimes say that even if access is not a problem, access speeds are, and that is an argument that makes sense. The issue there, though, quite often is the “middle mile” trunking between major points of presence and the actual rural communities.

Basically, the problem is not the Internet backbones, and not even so much the local access networks, as it is the trunking network to backhaul traffic to the Internet PoPs. Many rural ISPs find, for example, that they have access to a T1 or two T1s in the middle mile. That makes it tough to deliver faster broadband access to customers on the local access networks, for obvious reasons.

The Internet backbone is a firehouse. So are the access networks, for the most part. But the middle mile is a straw.

Solve the middle-mile problem and broadband access probably ceases to be an issue in many communities. Yonder Media CEO Craig Vallarino estimates that half the cost of building fixed wireless networks in rural areas is in the core network and middle mile.

The radio infrastructure represents about 20 percent of cost while customer premises investment represents about 30 percent of cost. In other words, it isn’t the access infrastructure which is the main investment barrier: the middle mile is.

That said, there still will be some locations so isolated that only a satellite connection really will ever make sense. IP

The State of SME Communications Spending

Gary Kim — Thu, 08 Oct 2009 14:12:11 -0700

Cutting costs, consolidating data centers and building IP contact centers are top concerns for SMBs in 2009; as are conferencing capabilities. But buying more managed services does not appear to be viewed as an urgent matter, though 40 percent already are using managed services of one sort or
another.

The exceptions are Web conferencing and collaboration services, seen as a priority by 55 percent of respondents, as well as storage and backup services, also seen as a priority by 55 percent of SMB respondents.

And while unified communications remains of high interest, it appears most executives still are more comfortable with premises solutions than hosted services.

A majority of SMBs are interested in or are already implementing a UC solution, says Ellen Daley, Forrester Research analyst. About 24 percent of SMBs say that they already have or are currently implementing a UC solution.

Just 20 percent of SMBs report no interest in doing so. But SMBs and enterprises still prefer premises-based solution. Only tepid interest exists for UC managed services, says Daley.

UC equipment will see the biggest rise in spending by SMBs, with 30 percent of respondents planning to increase their spending on unified communications.

That would strike some of us as surprising. At a time when capital is tighter, it would seem logical to acquire new capabilities “as a service.” But that might not be the case.

Sharp differences also are evident in enterprise and smaller business expectations about their revenues for 2009, and those expectations seem to be shaping buying decisions.

About twice as many smaller business executives believe their revenues will grow in 2009, compared to enterprise executives in North America and Europe recently surveyed by Forrester Research.

More than half of SMBs expect to do the same amount or more business as last year, where only 13 percent of enterprise executives think this will happen, says Daley.

Perhaps because of that relatively buoyant expectation, small and medium-sized business executives say they will spend more on telecom and networking in 2009 than they did in 2008.

About 18 percent of SMB executives say that they will spend more on telecom and networks and communications in 2009, while 34 percent will spend about the same as last year. At the same time, though about half of respondents said they would reduce spending.

Also, about half of SMBs surveyed plan on reducing their use of contractors and consultants while freezing staff hires. About 48 percent also say they are deferring capital expenditures and increasing requirements to justify return on investment.

Cutting costs is the highest priority for SMBs in 2009, says Daley. Some 57 percent of respondents say cutting communication and telecom costs is a critical or high priority for them this year.

Data center consolidation also is seen as a high priority in 2009. About 48 percent of respondents say such consolidation is a critical or high priority.

Server centralization also is ranked a critical or high priority by 46 percent of respondents.

Nearly one third of SMBs use managed network or telecommunications services, behind the number of enterprises that do so.

Almost 40 percent of SMB respondents say that they already use a managed service, while 47 percent of enterprises say they do so. SMB motivations for buying managed services include the fact that they can concentrate on core business competencies (59 percent of those polled) and the simplification of operational management (58 percent of respondents).

But it isn’t clear how much additional movement in that direction SMBs want to make in 2009. Just four percent of SMB executives surveyed say they will buy new managed services in 2009, while 11 percent say they would consider it.

About 42 percent say they are not interested in buying managed telecom services.

SMBs also say building IP contact centers are important in 2009. About 54 percent of SMBs with more than 50 contact center seats are at some stage of deploying IP contact centers.

Some 33 percent are implementing, 10 percent are upgrading or expanding and 11 percent are piloting IP contact centers.

SMBs also are using speech-enabled interactive voice response (IVR) capabilities. Some 18 percent are implementing, 10 percent are expanding or upgrading and one percent are piloting IVR.

But there seems quite a lot of interest in IVR capabilities. About 41 percent of firms report they are considering the technology. Topping the priority list for contact center upgrades is workforce optimization, cited by 38 percent of SMB respondents as a priority.

But buyers seem to be reluctant to buy hosted or software-as-a-service contact center

Services, as almost half of SMBs report not being interested.

About 25 percent of SMBs plan to outsource more of their remaining contact center seats, while 63 percent of the firms surveyed plan no change in the number of outsourcing seats.

Ethernet is starting to make its mark in the SMB segment, with eight percent to 12 percent of respondents reporting full migration to point-to-point or multipoint architectures.

IP security (IPsec) virtual private networks (VPNs) are still the top choice for remote access within SMBs, but interest in secure socket layer (SSL) remote access VPNs is growing, with 23 percent of respondents reporting interest, says Daley.

Wide area network optimization interest is also growing, with 34 percent of SMBs saying that they’re interested or considering these technologies, although only 20 percent of respondent firms are piloting, implementing, or upgrading or expanding their deployment.

But SMBs show tepid interest in managed data services: more than half of the firms say that they aren’t interested in various landline data managed services.

About 34 percent of SMBs say that they’ve already implemented a desktop voice-over-IP solution; another nine percent are upgrading or expanding their current deployment, while four percent are piloting a solution.

Nearly one quarter of SMBs are also interested in buying a desktop VoIP solution, while between 34 percent and 37 percent of the firms surveyed are interested in IP Web and video- and audioconferencing.

Service cost is the single most important factor for SMBs when choosing a landline voice vendor, as you might have guessed. About 82 percent say that is the single most-important issue. But vendor financial stability and viability are close behind. About 71 percent of respondents say that is a top concern. About 69 percent said service-level agreements were key.

Close to half of SMBs have already implemented or are implementing an in-house wireless local area network.

SMBs almost match enterprises in using wireless email/BlackBerry solutions, and they show similar interest in, but less adoption of, other mobile applications, including customer-facing, sales force, and field service applications.

When choosing mobile service providers, the most important criteria for SMBs are cost (88 percent of respondents) and domestic coverage (82 percent).

SMBs are only mildly interested in mobile managed services, with 55 percent of respondents saying that they aren’t interested in any mobility management services.

Though word of mouth still is a key way SMBs find out about trusted services, search engines are the most important online information source (57 percent of respondents say they use search engines).

But the importance of online sources is growing. SMB executives say they anticipate increased use of online sources such as technical support forums (41 percent) and open public social networks (40 percent).

And as has been the case in enterprise buying processes, and typically is the case at very-small businesses, CEOs and other line of business executives are assuming greater influence and control over networking and telecom investments and buying.

Senior-most IT leaders continue to have the highest input to the overall decision-making process, but SMBs are shifting the bottom-line financial investment decisions to business and financial leaders. Also, as has been the case for enterprises, SMBs are starting to bring technology end users into the buying process. IP

Unified Communications Continues to Grow, but What Does That Really Mean?

Gary Kim — Thu, 08 Oct 2009 13:34:38 -0700

Although businesses continue to tighten their belts when budgeting for spending on information technology and communications services, unified communications is one of the few business solutions that tops the priority list of enterprise investment, says Agatha Poon, Yankee Group senior analyst. The issue, though, is what, precisely, that means, and whether enterprise buyers are behaving differently than small and mid-sized buyers.

Some of us might argue that though it always is difficult to pinpoint precisely what the various UC market segments represent in terms of business or consumer buying, one problem is that much of what now counts as “unified communications” is in fact largely a rebranding of existing lines of business.

Yankee Group analysts say approximately 60 percent of U.S.-based enterprises already have implemented some form of UC project. Among the UC deployers, 43 percent of them have achieved what Yankee Group calls a basic UC deployment, in which a business entity has deployed VoIP and presence as a foundation and then integrated three other UC components into its communications platforms.

Another 17 percent of UC deployers have achieved an advanced or a full UC deployment, in which a business entity has deployed VoIP and presence as a foundation and then integrated six or more other UC components into its communications platforms.

As a primary communications tool, not surprisingly, VoIP (31 percent) is considered the most important element of the UC framework, followed by e-mail (30 percent) and mobility (20 percent).

You can see the problem. UC includes VoIP, which means private branch exchanges or what we used to call “business phone systems.” It includes email services and mobility. That makes sense, but also is an imprecise way of figuring out how much “unified communications” actually is being bought and used.

To make matters even more complex, the Yankee Group also considers chat, video conferencing, Web conferencing, audio conferencing, unified messaging, fixed-mobile convergence, mobile UC, click to call, business application integration and IP phone applications to be part of the overall UC deployment.

Again, that’s correct, but it illustrates the difficulty of figuring out how much “UC” businesses actually are buying. In large part, UC now includes all the things businesses had been buying before. That’s illustrated by the fact that enterprise buyers say their primary and secondary suppliers are Cisco, Microsoft, Avaya, IBM, Nortel, Siemens, Mitel, ShoreTel and NEC. If that sounds surprisingly like what one would expect if one asked enterprise managers which phone systems they used, you get the point.

Thatr isn’t to say that “new” UC applications are unimportant. In fact, 75 percent of enterprises cast a unanimous vote for UC’s ability to create new applications and boost employee productivity.

That said, some clear trends exist. Demand for conferencing tools is rising. Some 75 percent of surveyed companies have implemented Web conferencing, followed by room-based video conferencing (61 percent) and desktop video conferencing (43 percent).

Interest in mobile UC is growing. Some 26 percent of surveyed enterprises already have deployed mobile UC, and a further 32 percent plan to do so in the next 24 months.

But everybody acknowledges there is weakness. In Europe, 42 percent of enterprise respondents say they will spend about the same as last year on communications. Still 43 percent report they will spend less.

In North America, 57 percent say they will spend less, just 29 percent the same amount. What sorts of projects seem to be getting funding? Anything that saves firms money. About 40 percent of decision-makers at North American companies and 44 percent of European decision-makers report accelerating projects to realize cost savings.

Forrester Research researchers say the top enterprise “voice” priority this year is saving money. But given the economic climate, that also means an emphasis on service level agreements and supplier stability.

Beyond that, Web and other forms of conferencing seem to be lead applications for many buyers.

Mid-market and smaller businesses likewise say “cutting costs” is their top priority. But desktop VoIP and desktop conferencing seem to be at the top of capabilities wish lists.

So “UC” remains a high priority, even though it sometimes is difficult to ascertain precisely what that term actually means, and how well UC is selling.

What Enterprises Are Buying This Year

Gary Kim — Thu, 08 Oct 2009 14:18:50 -0700

It always is dangerous to make predictions about what enterprises will do when extrapolating from what they did last year, and what executives say they will do in the coming year. It is even harder when conditions are volatile in addition to being tough.

But those caveats noted, enterprise executives in North American and Europe seem to have realistic expectations. About 52 percent of enterprise executives interviewed by Forrester Research they expect their firm’s revenues to decrease in the next 12 months, and 58 percent say that they are going to reduce their telecom, network and communication budgets in response to those conditions.

That likely confirms what most of you have been encountering in the enterprise market.

About 13 percent of respondents say that their revenues will be higher and 10 percent say that they will increase their telecom and network spending as a direct result.

But cost cutting is a big priority for most in 2009. About 24 percent of those polled

say cutting telecom and network costs is a critical priority, and 48 percent say it is a high priority.

Data center consolidation also is a high priority this year, with 24 percent saying that is a “critical” priority and 43 percent saying it is a “high” priority.

Unlike most SMBs, 40 percent of enterprise executives say mobility, collaboration and voice over IP continue to be high or critical priorities.

Desktop IP telephony migration continues, while other VoIP technologies of high interest also seem to be getting attention. Some 34 percent of enterprises say they already have implemented or are implementing desktop VoIP, and an additional 14 percent are expanding or upgrading their VoIP environment.

IP conferencing, including Web, video, and audio, while not yet implemented

widely, have high interest as well.

Business issues seem to be more important than the core technology, though. Service cost is a very-important issue for 65 percent of respondents. Service level agreements are a top priority for 47 percent of respondents. Vendor financial stability and viability are key concerns for about 43 percent of respondents.

Cost savings, faster communication, and decision speed are values that drive UC adoption, says Ellen Daley, Forrester Research analyst. UC adoption continues to see traction, as well. About 21 percent of firms report that they are already, or are currently implementing, a UC solution, while nine percent are expanding or upgrading their current UC solution.

About 15 percent say they are piloting one. An additional 39 percent of firms are interested in or are considering UC solutions.

The top motivation for adopting UC is cost savings, followed by increasing communication between users. It appears enterprise executives are more comfortable with UC as well.

Some 51 percent of executives say they understand how UC will affect the way their companies do business. Still, about 32 percent of respondents say they still have some questions about UC value.

Integrated voice, email, and instant messaging top the list of the most desired

features for UC.

Web conferencing and audio- and videoconferencing capability come in second while presence, allowing others to see coworkers’ status, comes in third.

Almost half of enterprises buy managed services, and though cost savings are a factor, freeing up time to focus on core business issues has grown as a driver of perceived value.

About 62 percent of respondents say that they have already purchased or are interested in purchasing managed or outsourced telecommunication services.

Unlike in past years, the top reason isn’t cost savings, although it is still high on the list. Instead, firms are opting for managed services to enable them to focus on their core business competencies.

Telecom and network buyers are also interested in managed services beyond physical networks and telecom services like multiprotocol label switching. Web conferencing and or collaboration are the most popular managed services among respondents.

About 52 percent of those polled say they are very or somewhat interested in the technology.

Firms also are interested in network-based security services (46 percent), storage and backup services (44 percent) and data center services (43 percent).

About 51 percent are using IP technologies for contact centers. About eight percent are piloting IP contact center implementations, 31 percent are implementing now and

12 percent say they are upgrading or expanding their existing IP contact center capabilities.

So far, though, enterprise executives have lukewarm interest in hosted contact center solutions, Daley says.

Close to half of firms (49 percent) expect their overall number of contact center seats to remain about the same over the next year, with similar portions either increasing (23 percent) or decreasing (24 percent) seats.

Outsourcing of contact center seats is a different matter, though, says Daley. About 30 percent of firms report planning to outsource more of their contact center seats, while 51 percent of firms anticipate no change.

Both MPLS and Ethernet wide area networks are popular. About 36 percent of those polled say they already have completed their firm’s migration to MPLS. Ethernet adoption is growing fast as well, but has not yet reached use of MPLS, Daley says.

Managed MPLS is also popular, with 30 percent of firms already using it, and 22 percent of firms using managed Ethernet service.

Cost is the most important criterion when choosing landline data service providers, respondents say. About 60 percent of buyers say that is a very important consideration.

Service level agreements are important to 49 percent of respondents. Vendor pricing models, especially clarity on service elements and options, are very important to 43 percent of buyers.

Nearly 65 percent of respondents say they have, or are implementing, wireless local area networks. And while SMB respondents generally are not that interested in public data networking, enterprise executives are much more interested both in fixed WiMAX (23 percent) and mobile WiMAX (25 percent) of respondents.

The majority of respondents have deployed wireless email or BlackBerry applications. Customer-facing applications dominate, though there is interest in line-of-business apps as well, though little buying as of yet, says Daley.

The majority of enterprises buy vendors’ mobile versions of existing packaged applications (41 percent), but a large portion also are developed in-house (35 percent) or are custom-built by third parties (33 percent).

Cost is the most important criterion (68 percent) for choosing a mobile network service provider, followed by domestic coverage (56 percent).

As in the case for SMB executives, though word of mouth and peer references are important, digital sources—such as industry, trade or professional Web sites; search engines; and technology or business publication Web sites—are growing in importance.

One third of the respondents also consider discussion forums, online communities, or social network sites to be important, and 10 percent say that they will use these sources much more during the next 12 months. IP

Wi-Fi Replaces Ethernet in Enterprise

Bob Titsch — Thu, 08 Oct 2009 14:07:00 -0700

Given that less than one-third of enterprise employees work in large corporate headquarters any more, most work these days is in branch offices, remotely from the field or at home offices. And of those who do work in headquarter facilities, 48 percent spend at least 20 percent of their work time away from their primary workplace.

Enterprises are also adopting the idea of “hoteling” or other nontraditional office setups, where mobile workers use shared desk and office space when working in a main corporate site.

All of those trends are driving higher wireless usage, both Wi-Fi in buildings and mobility outside buildings. In fact, say researchers at the Yankee Group, wired Ethernet ports go unused about 50 percent of the time, in part because workers are traveling or telecommuting.

So it comes as no surprise that use of in-office WLANs is increasing at enterprise sites.

Just three years ago, 43 percent of enterprises did not offer any WLAN access in the office to workers. Today, the number of enterprises not offering Wi-Fi has dropped to only 11 percent of enterprises.

In three more years, 93 percent of enterprise sites will use Wi-Fi and only 7 percent of enterprises will be no-Wi-Fi zones. Wireless-heavy organizations, where more than 40 percent of employees use 802.11 as their main access technology, have gone from 12 percent of enterprises to almost a third. In three years, 56 percent of enterprises will use wireless as the primary connection.

Wi-Fi-enabled laptops are the tool of choice for accessing in-office WLANs, with around 35 percent of enterprise workers having such devices currently. In the next two years, that number is expected to jump to 42 percent.

Also, almost 60 percent of enterprise IT executives say their employees are demanding smart phones such as BlackBerries and iPhones, devices with native support for Wi-Fi.

Today, around 20 percent of enterprise employees use BlackBerries and seven percent of employees use iPhones. Enterprises expect this installed base to reach around 30 percent for BlackBerry and 11 percent for iPhone by about 2011.

So it is possible that some workers could have as many as three or four Wi-Fi devices sitting at their desks.

As for wired Ethernet in the access layer, one has to wonder how much longer it will get as much attention as it has it the past, though increased use of IP telephony and video will continue to drive wired network use.

As enterprises rolled out IP telephony in the early to mid-2000s, they used the opportunity to upgrade older, incumbent LAN infrastructure, such as hubs or basic Layer 2 switches. However, 33 percent of enterprises now say they are interested in replacing as much as half of their fixed-line telephony installed base with mobile phones in the next two years.

Some enterprises even see high-speed 802.11n (with throughput as much as 300 Mbps) as an alternative to deploying higher-speed, but less flexible, gigabit Ethernet to desktops.

Forty percent of enterprises polled recently by the Yankee Group said they had no plans to deploy Gigabit Ethernet to desktop users. This means many enterprises are foregoing the next generation of speed upgrades on the wired side for high-speed WLAN.

All of those changes also mean that a hard-wired network access architecture, built for rows of cubes with 90 percent-plus occupancy, is a waste of resources, Yankee Group says. IP