I wrote this comment this week for publication in Ovum’s Straight Talk Daily publication, and so I’m linking to it in two spots where it can be found in the public domain online:
Ovum’s site – this tends to disappear after a period of time
It encapsulates (with a 700 word limit – more leeway than Twitter but still not enough to really develop an idea) some of the things I’ve been thinking about recently, and really the key themes of this blog going forward. I’ve previously covered telcos and social networking / web 2.0 separately but more and more I’ll be talking about how the two are coming together.
I’ll be expanding on some of the themes in the piece here in future. I’ve already posted on changing communication preferences previously here.
I’ve come across a variety of statistics recently from various surveys about communication preferences, and was tempted each time to do a post. Instead, I’m doing one post on all of them, which should allow for some bigger-picture thinking. In essence, the conclusion you naturally come to when reading these articles is that landline telcos are in for a nasty period of rapid decline in their core business thanks to the communication preferences of the rising generation. But there are things they can do to manage and slow this decline and remain relevant.
The first couple of articles concern the trend for greater use of mobile devices and the decline in the number of landlines:
Both sets of articles, though, are really about the changing communication preferences of the population as a whole, and the impact of that younger group in particular. Those currently aged 15-25 are growing up with a radically different set of communication behaviors and preferences from those embraced by even 25-35 year olds, let alone the older generations. And this will have a massive impact on the landline telcos around the world, which don’t really feature in this picture at all. As the rising generation makes up an ever greater proportion of the total population this impact will only increase.
Mobile substitution happening from the bottom up
First, the increased use of mobile devices and abandonment of landlines. I remember talking to Gavin Patterson, then head of the consumer retail bit of BT, about six or seven years ago, about the challenge of driving growth in his business, and he told me his worst nightmare was a generation of kids growing up never having a relationship with BT. Sadly for him, and other landline telcos around the world, the nightmare is now reality. The CDC survey both articles are based on tells us that 17.5% of households have no landline but do have wireless phones. However, the most striking statistic for me is this one:
Nearly two-thirds of all adults living only with unrelated adult roommates (63.1%) were in households with only wireless telephones. This is the highest prevalence rate among the population subgroups examined.
You’d better believe that that’s mostly college students and those recently graduated from college and still living with roommates, almost all in the 18-25 category. Here’s more detail on the age split overall:
More than one in three adults aged 25-29 years (35.7%) lived in households with only wireless telephones. Approximately 31% of adults aged 18-24 years lived in households with only wireless telephones.
Remember that a good chunk of 18-24 year olds live with their parents and thus technically have landlines in the home even if they don’t ever use them. The question is whether these people will ever return to the habits of their parents as they get older, settle down and have kids of their own. There’s not that much evidence yet to suggest that they will, and there’s not much incentive to either. It used to be that a landline from the phone company was necessary to get broadband but since ‘naked DSL’ is now widely available and cable competitors offer TV/broadband packages without voice that’s no longer the case.
The next question is whether these future households will have landline connections at all – with the increasing availability of 3G and impending availability of 4G wireless options for web access and an increasing preference for web-delivered rather than broadcast/linear video content, I’d question whether these households will need a wireline connection – from a telco or a cable company – at all.
Voice isn’t even a communication option for most young people
Of course, all this assumes that voice is still one of the main modes of communication for young people, but the second set of articles suggests this isn’t the case either. The ReadWriteWeb article cites an eROI study on the communication preferences of high school and college students and includes this chart from the survey:
One caveat: the survey seems to have asked about online communications specifically, but from other surveys I’ve seen and personal experience with teenagers voice would barely make a blip on charts like this even if it was included. But the other key thing is that email – so newfangled when it first entered most people’s lives in the mid- to late-90s – is becoming distinctly passé. Text messaging already enjoys a much higher use rate, and both the combined social networking categories and the combined IM categories in the chart above already add up to the same as email (26%). IM seems to be on the decline with the exception of social networking IM but texting and social networking are now the major components of online communication for most young people. And none of those services is provided by a telco either. Wireless telcos have the best opportunity for capturing some of this spend by creating easy-to-use and low-cost wireless options for using these things on mobile devices, but landline telcos risk being entirely marginalized.
It’s grim reading, all of this, if you’re a landline telco or someone who works with them. Is there anything they can do? Yes, absolutely. They should immediately begin (if they haven’t already) building partnerships with social networks and other online providers to ensure that the necessary interfaces are in place to allow telco services to be linked in to those environments. BT’s acquisition of Ribbit is a great example of an innovative approach to tying online and landline worlds together, and Telecom Italia has also done clever things with Facebook, allowing customers to make calls from within the Facebook site, for example.
Telcos need to offer deep integration both ways between their systems and these online service providers’ systems to allow address book sharing, easy initiation of old-fashioned phone calls and other methods of telco-based communication from within websites and otherwise make the linkages between the two worlds as clear and easy as possible. Telcos have no hope of creating standalone offerings for young people that will generate any kind of real interest, but partnering with the sites where those young people already spend their time is the next best thing. Allow those companies to innovate, and offer them things they can’t easily do as an incentive to partner.
All is not lost – yet. But it’s certainly heading in that direction, and only innovative telcos willing to really rethink the way they engage with teenagers and young adults will have any chance of staving off the steep decline that seems to be on the cards.
Scott Cleland of Precursor has posted a very interesting analysis of Google’s usage of bandwidth and the associated costs. He claims that Google is underpaying for its bandwidth by a factor of 21 based on a variety of calculations and estimates. The analysis is sound up to a point but it then makes the mistake of conflating two things that are really separate and don’t make much sense being treated the same. I posted a comment on his blog but since it hasn’t appeared (neither have any others) I’ve posted it here too.
In essence I think Scott’s doing a solid job of representing his clients – the telcos – but he also repeats a trope that began, I think, with Ed Whitacre – that Google is somehow using telco bandwidth for free when it should be paying for it. I use an analogy below to critique the analysis because this stuff is complex enough to benefit from it. Let me use another here to critique this idea that Google somehow ought to be paying its fair share. Say a store in a certain area suddenly starts doing great business, and customers are flocking to it on the local bus system. Would it be reasonable for the bus company to start charging the store to recoup some of its costs when all its customers are already paying the prices it has decided to charge in order to ride the bus? No. If it is unable to fund its costs from the prices currently being paid then it needs to charge more or seek ways to reduce its costs. The store isn’t the problem – in fact it’s doing good by creating more demand for the company’s services.
The telcos have no business asking Google to fund the costs of consumer broadband connections any more than the bus company has any right to ask the store owner to subsidise bus tickets. With that, I’ll leave you to the comment I posted on Scott’s blog.
Scott,
You’ve done some very interesting and useful analysis here. Thank you for sharing it with us.
However, one criticism is that you conflate two things and treat them as if they were the same and part of the same category: namely, consumer broadband spending and service provider bandwidth spending. These two things happen at opposite ends of the internet value chain and are entirely separate.
In chart VI of your report you act as if consumer broadband and dial-up internet access spending and Google’s spending on bandwidth were the only chunks of money being spent on bandwidth/broadband in the US. This is, of course, not true. Google’s spending should properly be put in the context of overall service provider spending on bandwidth, not treated as part of consumer internet access spending.
Measuring Google’s spending as a proportion of consumer internet access spending is meaningless – it’s like asking how much it costs the Yankees to drive their players to the stadium as a fraction of how much it costs all the fans to get to the stadium. You’ll get a number of out that but it won’t mean anything.
I would suggest calculating how much Google pays for bandwidth as a portion of all the spending by service providers on bandwidth used to serve US consumers. Your numbers might be just as stark, but at least then you’d be measuring the right thing.
The study attempts to push a theory that AT&T under Ed Whitacre but also others among the broadband providers have attempted to push for some time, which is that consumers and Google and others should all just pay their “fair share” of the costs of the Internet. However, this simply isn’t the way free markets work: the fact is that there is a value chain and different players pay for different parts (as they do in any other free market).
Google pays less than it otherwise might because it has so many peering arrangements (entered into voluntarily by the various parties to them) which it doesn’t pay anything for. That’s the way the system works, and large broadband providers benefit from it too. AT&T, Verizon, Qwest and the cable companies are perfectly free to develop their own business models to compete with Google and are entirely within their rights to sign whatever agreements they want to. No-one is forcing them into anything. They can also charge their customers less or more if they think that will solve the problem. The real issue here is that bandwidth use is skyrocketing and broadband providers don’t want to pass the costs on to their customers, but those customers are causing the increase in costs and should rightfully pay for it.
I’m not a stooge for Google or the broadband providers (though the broadband providers are clients of mine) but I think this analysis needs some tweaks before it becomes really meaningful. Thanks again for some very interesting groundwork though.
Note: I’ve heard Scott argue against net neutrality at a couple of industry events and I think he actually makes some really good arguments (although I think there – as here – he sometimes overplays his hand). I have a lot of respect for the work he does and I’m grateful for the analysis he’s done here too.
Note 2: Google has posted its own critique / response here.
I penned the piece below for our Straight Talk daily email the day after the US election. Since that time I’ve seen more and more articles springing up around this subject, some of them based on new news such as the appointments to the various Congressional committees overseeing aspects of telecoms. Some examples:
Here’s my piece from a few weeks ago. Also on the topic of regulation, the “5 things regulators can do to stimulate telecoms” I mentioned in this post will be published in the Straight Talk monthly publication in December – co-authored with Matthew Howett, who heads our regulation team.
What the US election means for telecoms
The Dow Jones stock index dropped around 5% on Wednesday in an apparent response to the election of Barack Obama as the next president of the United States. Some investors fear an increase in regulation and taxation and a negative impact on businesses under an Obama administration. Telecoms operators should start thinking about what an Obama presidency will mean for their businesses too.
A deregulatory FCC administration comes to a close
The accepted wisdom appears to be that the Chairman of the FCC, Kevin Martin, will step down following the election of Barack Obama, and will likely be replaced by a Democrat nominated by the incoming president. This will shift the balance at the FCC from a 3-2 Republican majority to a 3-2 Democratic majority for the first time in eight years. As the terms of the other commissioners expire over the next few years there may be further changes in the composition of the commission.
The Martin FCC and the regime of his predecessor, Michael Powell, have taken a largely deregulatory, hands-off approach to the US telecoms sector. They have given the green light to large mergers such as Deutsche Telekom’s acquisition of Voicestream, SBC’s acquisition of AT&T and AT&T’s subsequent acquisitions of BellSouth and Cingular, Verizon’s acquisition of MCI, and just this week the acquisition of Alltel by Verizon Wireless and the merger of Sprint’s WiMAX assets with Clearwire. As such they have presided over a significant thinning of the major players in the US market, leaving four major wireless operators and three major wireline carriers (with Verizon and AT&T making up two of the members of both camps).
At the same time, regulations have been rolled back in a number of areas, reducing the reporting and network access requirements imposed on the RBOCs and focusing on facilities based competition as the preferred alternative to regulation-dependent, service based competition. This has resulted in an effective duopoly between cable companies and telcos in the consumer market and an oligopoly in the large enterprise market, with only the small and medium sized business market seeing a significant number of competitors.
Larger operators likely to suffer most, but broader repercussions likely
The incoming FCC is likely to take a different approach, much more sceptical of further concentration of market power in the hands of a small number of players, and much less likely to lift regulation. Indeed, it is also much more likely than the outgoing administration to finally tackle the issue of net neutrality decisively, something the Martin administration dodged for a long time and then handled only half-heartedly earlier this year.
As such, the large operators which have done so well under President Bush are likely to find life rather harder under President Obama, while smaller players and consumer groups are much more likely to have their voices heard. The change at the FCC is likely to be echoed in other government institutions too, such as the Federal Trade Commission and the Department of Justice, both of which have roles to play in regulation competition and merger activity in the telecoms sector too.
On top of all this, broader changes in the government’s approach to regulating business will impact the telecom sector too. The Obama adminstration’s likely focus on environmental issues may lead to more stringent emissions standards, for example, something which hits telcos with their large fleets of specialised vehicles particularly hard. Tax rates on corporations may have to be raised to pay for some of the income tax cuts and increases in spending proposed by the Obama campaign.
At the same time, the drive towards sustainability should also provide opportunities for telcos, which stand to gain from efforts to substitute telecommuting, TelePresence, telemedicine and other innovations for their less carbon friendly current incarnations. If the Obama campaign makes good on its promise to invest in clean energy and other technology to reduce emissions, telcos may be the beneficiaries of some of this spending too.
Larger telcos are likely to feel the impact of the change in adminstrations more than their smaller brethren, but all telcos are likely to have to make some adjustments and concessions under the new regime.
Advertising Age recently published its annual review of spending by the 100 leading advertisers. I was curious to see how the telecoms companies ranked in their data, and spent some time crunching the numbers.
First headline: The telecom players ranked in the survey end up as follows:
AT&T: 2nd overall, with spending of $3.2 billion in 2007
Verizon: 3rd, $3.0 billion
Sprint: 15th, $1.9 billion
Deutsche Telekom (T-Mobile): 52nd, $0.8 billion
Alltel: 93rd, $0.36 billion
(The only company spending more than AT&T and Verizon in 2007 was Procter and Gamble.)
Let’s crunch those numbers a bit. First, let’s look at how much these companies spent in relation to their revenues:
AT&T: 2.7% of revenues
Verizon: 3.2%
Sprint: 4.7%
T-Mobile: 5.9%
Alltel: 4.1%
With the exception of Alltel (more on them in a minute), the trend is very clear among the first four players on the list: the smaller they were, the greater a proportion of their revenues they spent on advertising. It’s obvious why: if these companies want to have a similar impact to the larger companies, they need to spend as close as possible to their larger competitors, but that amount is a (much) greater proportion of revenues for them. In fact, only Verizon actually approaches AT&T in size of spend (and it increased its spend 8% in 2007 while AT&T reduced its spend by 4%, perhaps thanks to the advertising Apple did on its behalf with the iPhone, but likely also because it was able to consolidate spending once it had unified its brands).
This is a massive scale advantage for the larger players, and a massive scale disadvantage for the smaller ones. For Sprint and T-Mobile to even remotely compete with the two big guys, they have to eat into their profits considerably more, which creates further disadvantages. Alltel, as to some extent a regional carrier rather than a national one, perhaps spends its money a little more carefully, realizing that large national campaigns are going to hit a lot of people not in its core service areas.
Another interesting set of data to look at is the media these companies spread their advertising over, and the portion of total spend that goes to each. One might think it would be fairly similar, especially for the larger players, but in fact there’s quite a range, as you can see from the chart below.
Alltel spends 71% of all its ad spending on TV advertising, while Verizon only spends 42% on TV. Verizon and Sprint spend 32-35% of their money on newspaper advertising, while AT&T thought that medium was worth only 15% of its spend. Meanwhile, Internet spending is a fraction of the total for all five carriers: from 5% for Alltel to 8.8% for Verizon. However, this reflects overall Internet ad spending trends as much as carriers’ reluctance to advertise there: Verizon is the third highest spending company on Internet advertising, while AT&T is eighth. But what drives this difference in the media used for advertising? Even if you allow for the fact that the balance between mobile and wireline offerings is different for these five carriers, that doesn’t seem to explain it. They just seem to have fundamentally different views of what’s likely to work best for them.
On another note, there’s no category in here yet for mobile advertising – for all the hype, it’s still tiny. and even Internet advertising, another category telcos could have a stake in, is just 4% of total advertising spend today (although rising relatively quickly). But it amounts to just $4 billion in total for the US in 2007, not a big pie for telcos to try to take a slice of. TV advertising seems a much better bet, to the extent that they can take a chunk away from the cable operators, with almost $35 billion of spending in 2007. Meanwhile, the cable companies themselves (with the exception of conglomerate Time Warner) don’t make it into the top 100 at all.
"A Social Telco is an operator which seeks and achieves deep integration between its own core assets and functionality and that of social networks and the broader sphere of web 2.0 services and applications in order to develop new channels for its services and harness greater innovation in the creation of new services."
This post provides a brief introduction to the topic. This blog as a whole provides more detail! The term is my own invention but I hope it may prove useful in describing one of the ways telcos need to evolve to stay relevant to their customers.
