Telecosm - Ike Elliott

Telecom Earnings Roundup

It's dangerous to read too much into short-term results like quarterly earnings, but it can be useful to try to inform your perspective on which long-term strategies are working, and which ones aren't.  Now that most of the public telecom companies have reported 2nd quarter earnings, it's time to speculate about what it all means. 

Rob Powell has an excellent summary of the winners and losers, here.  He concludes that colocation is hot, owning your own fiber is good, the slow economy is not having broad effect in telecom, and that competition among CDNs is heating up. 

Dave Rusin agrees with Rob Powell that Time Warner Telecom was one of the big winners, and gets more specific by saying that not just any fiber, but metro fiber is the big reason why TWTC is doing well. 

I tend to agree with both Dave and Rob.  Here are a few additional observations:

• Focus counts for a lot in telecom strategy.  Internap lost focus with its Vitalstream CDN acquisition, and it is showing in the company's financial reports.  The AOL-Time Warner merger was possibly the worst telecom merger ever, and the results were still dragging Time Warner Inc. down in the 2nd quarter, many years after the fact.
• Intellectal property can also count for a lot, these days.  That's part of why Skype and 8x8 are holding their own despite being "over the top" service providers, leveraging somebody else's network.  However, that doesn't explain why Limelight is doing well despite losing an intellectual property lawsuit to Akamai, and despite being hit with a second patent lawsuit by Level 3.  However, the Limelight intellectual property story hasn't reached its conclusion, yet.
• I agree with Rusin that metro fiber is a great asset, when connected to the right buildings.  I would say that copper is not completely dead yet, though.  Hybrid Fiber-Coax architectures still have some life left in them, and the cable guys are going to continue making noise, not just in residential markets but also in the small-medium enterprise market.  After all, the main difference between FiOS and the cable HFC architectures is where the optical-to-electrical conversion is done.  FiOS does the conversion at the home, while HFC architectures do it in the neighborhood.  Over time, the advantage goes to the passive optical networks due to lower operating costs and higher bandwidth ceilings.  However, here in 2008, the cost differences are not as clear.
• Competing on price alone is a difficult strategy, as shown by Cogent's earnings.  $4 per Mbps for wholesale Internet access is mighty low, and if the trend continues it will be hard to sustain the business on those kinds of prices.  Far better to have your own fiber and be one of a very limited set of service providers serving a building.  This helps you hold the line on prices in the long run.
• VoIP as an over-the top primary line residential replacement is nearly dead.  Vonage is investing $65M per quarter to win almost exactly the same number of subscribers as they lose each quarter, and Vonage is the main remaining over-the-top residential primary line replacement player.  The cable guys now own this space.

I made a list of 2nd quarter winners and losers, mostly cribbed from Rob Powell's list, but with few of my own additions for the companies I track that Rob does not.

Winners:

• Time Warner Telecom
• Global Crossing
• Equinix
• Savvis
• Switch and Data
• Comcast

Holding steady:

• AT&T
• Verizon
• Level 3 Communications
• XO
• Limelight
• 8x8
• Skype
• Cablevision
• Charter

Losers:

• Internap
• Paetec
• Akamai
• Cogent
• Vonage
• Time Warner Inc.

Time Warner, Inc., was a loser mostly because it was saddled with AOL, which posted disappointing results.  Now that Time Warner Cable is spun out, the cable unit will be evaluated on its own in future quarters. 

Telcos, Cablecos, and Bandwidth Leadership

In yesterday's post, we saw that the cable companies won the 2nd quarter 2008 battle for high-speed Internet subscribers, netting nearly four new subscribers for every one new subscriber added by the telcos.  And this happened even though the cablecos are at a supposed disadvantage to Verizon's new fiber-to-the home service.  Verizon can certainly offer faster Internet connections where FiOS is available, but it was clear in the second quarter that just offering the fastest connections wasn't enough to win more subscribers than the competition. 

Of course, the FiOS footprint doesn't cover all of the U.S. yet, so that's certainly part of the explanation as to why Verizon isn't winning more business.  As the FiOS footprint expands, Verizon will enjoy a stronger tailwind, helping it to turn the tables on the cable companies.  However, the 2nd quarter results show a cause for concern for Verizon's fiber-to-the-home strategy.

The cable companies won the 2nd quarter based on aggressive marketing, relying heavily on promotions and price competition to drive subscriber retention and growth.  And they succeeded, in spite of a growing perception that cable high-speed Internet products are slower than telco fiber-based Internet services.  It's as if the cablecos fired a warning shot over the bow of the telcos, saying that speed alone will not necessarily win the day, and that the cablecos are ready to fight tooth and nail to win and retain customers with all of the other tricks in the marketing toolkit.

The truth is this: while the highest-speed Internet services grab headlines and generate attention, most people arent' going to buy the highest-speed packages as soon as they become available in their area, reasoning that the a 20 Mbps (or higher) service isn't justified by the higher cost.  Verizon is viewed as the product leader for its FiOS service, and that perception counts, but product leadership by itself won't automatically create market-share gains for Verizon. 

I think that's part of why cablecos such as Comcast are taking their time in developing their own fiber-to-the-home answer to Verizon's FiOS service, and instead are opting to buy time with a "faster, but not fastest" DOCSIS 3.0 service on their existing hybrid fiber coax plant. They know that it takes more than just a headline-grabbing speed offer to win this game.    

Consumer Broadband Update

Now that all of the big telcos and cablecos have reported their second quarter results, it's time to update the trend reports on subscriber growth for U.S. broadband Internet subscribers.  There were two big stories in the 2nd quarter:

• Overall broadband Internet subscriber growth is slowing down, and
• Cablecos are adding a lot more subscribers than the telcos.

Here are the stats for the big six telcos and cablecos:

High Speed Internet Subscribers	1Q07	2Q07	3Q07	4Q07	1Q08	2Q08
AT&T	12,861,000	13,300,000	13,800,000	14,109,000	14,600,000	14,693,000
Verizon	7,190,000	7,471,000	7,751,000	8,013,000	8,276,000	8,330,000
Comcast	12,432,000	12,438,000	12,888,000	13,586,000	14,078,000	14,357,000
Time Warner Cable	7,254,000	7,451,000	7,684,000	7,900,000	8,204,000	8,412,000
Cablevision	2,118,000	2,168,000	2,220,000	2,282,000	2,343,000	2,395,000
Charter	2,517,300	2,639,200	2,586,200	2,682,500	2,768,200	2,787,500

High Speed Internet Subscribers	1Q07	2Q07	3Q07	4Q07	1Q08	2Q08
Telcos	20,051,000	20,771,000	21,551,000	22,122,000	22,876,000	23,023,000
Cablecos	24,321,300	24,696,200	25,378,200	26,450,500	27,393,200	27,951,500
QoQ % Growth		2.5%	3.2%	3.5%	3.5%	1.4%

High Speed Internet Subscriber Growth	YOY Gain	%YOY Gain	QoQ Gain	%QoQ Gain
Telcos	2,252,000	10.8%	147,000	0.6%
Cablecos	3,255,300	13.2%	558,300	2.0%
Total	5,507,300	12.1%	705,300	1.4%

The 2nd quarter subscriber growth rate was 1.4%, versus 2.5% in the 2nd quarter last year.  The lower subscriber growth rate follows three consecutive quarters of subscriber growth above 3%, so the drop is abrubt and sudden.  What gives?

Many have been quick to point out that U.S. broadband subscriber penetration is approaching saturation, and that is certainly a factor, but I don't think it explains all of the drop.  I think some of it is related to a softer economy.  And, I think that some of the drop is seasonal, since last year's second quarter growth rate was lower than the three following quarters.

The other big headline is that the cablecos are kicking some telco tail in the high-speed Internet category, with the cablecos adding 558,300 subscribers in the 2nd quarter, versus the telcos 147,000 additions.  This is kind of surprising because Verizon's fiber-optic Internet service, FiOS, is widely regarded as a superior offering to the competing hybrid-fiber-coax-based services from the cable companies.  What's behind the cable victory in the 2nd quarter?

At least a couple of factors are at work here, but the big one is that Verizon's DSL services declined by 133,000 subscribers in the 2nd quarter.  It looks like FiOS is cannibalizing some of the DSL customer base.  I can't tell for sure from the 2nd quarter release but the spinoff of local exchange assets in three New England states may have also had an effect on this.   But AT&T also showed lower growth, so isolated Verizon events don't explain the overall trend.

The other factor in the cablecos' favor is that Comcast and the other cable companies have apparently ramped up their marketing efforts, and it appears to be countering the telco surge. 

It will be interesting to see the third quarter numbers to see if the cable victory in the second quarter was a fluke, and to see if the subscriber growth slowdown trend continues.   

Envysion Takes A Leap With New MVaaS Features

Wow.  When Envysion, the Internet video startup based in Louisville, Colorado, makes noise, it likes to do it in a big way.  The company is creating a big stir with four press releases in one day:

• The company has added a bunch of features to their Managed Video as a Service line-up (more below).
• They announced a couple of big wins in the hotel and hospitality segment (Sage Hospitality and Vacation Resorts International).
• The company announced another fast-casual-dining segment win, with Kurani Global Restaurant Group now added to the growing customer list.  (Kurani owns a bunch of Pizza Hut, Dunkin Donuts, and Baskin Robbins franchises).
• Envysion announced that they are the first managed video company to become certified with the Payment Card Industry Data Security Standard (PCI DSS). 

This is all great news for the fast-growing company, which has specialized in integrating surveillance video with point of sale systems for retail establishments, and providing a web-based user interface for it. 

The customer wins are important, but I'm more excited by the new features and the PCI DSS compliance, because it shows that the company is successfully investing in and extending their unique service.  The important new features include:

• Better integration with point of sale systems, so that customers can look at an sort and filter reports of point of sale data as if it were in an Excel spreadsheet, but it is on a web page and it is indexed with the live-recorded video, so that you can quickly find the event you are interested in and can view the video with just a click.  Customers can also set alerts and triggers for certain kinds of events (like cash register voids, for example).  This will really help Envysion customers become even more productive with the service.
• The company has added audio to the product, too (in beta).  Previous releases were video-only, but certain kinds of applications really benefit from the additional context that audio provides.
• Envysion now allows video clips to be automatically saved to in-network storage, where extended groups can access it and collaborate with it.  This is very cool...what used to be just surveillance video can now be used by training, auditing, and marketing groups.
• The PCI DSS certification helps prevent unauthorized access to highly sensitive credit card data...hugely important for the reputation of Envysion and their customers.

Congratulations to Matt Steinfort, Rob Hagens, and the whole Envysion team on taking another big step!

Who's Winning the Telco-Cable High-Speed Internet War?

This week, we've been looking at who is winning the most subscribers, cable companies or telephone companies, in the race for phone and video subscribers.  Today, we'll look at the same question for high speed Internet subscribers.  Who's winning?

While there were clear winners in the video and phone categories, the Internet category is very close.  Here's the data for the year ending on March 31st, 2008:

High Speed Internet Subscribers	1Q07	2Q07	3Q07	4Q07	1Q08
AT&T	12,861,000	13,300,000	13,800,000	14,109,000	14,600,000
Verizon	7,412,000	7,700,000	7,936,000	8,200,000	8,500,000
Comcast	12,100,000	12,400,000	12,900,000	13,200,000	13,692,000
Time Warner Cable	7,254,000	7,451,000	7,684,000	7,900,000	8,204,000
Cablevision	2,118,000	2,168,000	2,220,000	2,282,000	2,343,000
Charter	2,517,300	2,639,200	2,586,200	2,682,500	2,768,200

...and here is the summarized data for the telcos and the cablecos:

High Speed Internet Subscriber Growth	1Q07	1Q08	YOY Growth	YOY % Growth
Telcos	20,273,000	23,100,000	2,827,000	13.9%
Cablecos	23,989,300	27,007,200	3,017,900	12.6%

The cablecos barely win, having added over 3 million subscribers, while the telcos have added about 2.8 million subscribers.  In percentage terms, though, the telcos are growing at a faster rate since they are growing from a smaller base.

To recap the past few posts:  Telcos are winning in video, Cablecos are winning in phone services, and Cablecos are barely winning in high speed Internet access.   

More on the TV Subscriber Wars

Yesterday, we looked how the big telcos are invading the cable TV stronghold of Big Cable (Comcast, Time Warner Cable, Cablevision, and Charter).  Over the the year ending on March 31, 2008, AT&T and Verizion have added nearly 2 million TV subscribers, while the cable companies have added less than 1.2 million subscribers.  Clearly, the telcos are beating the cable companies at their own game, but if you dig a little deeper, the picture looks even worse for the cable companies.

I think it makes a difference whether the new video subscribers were gained through organic growth or through acquisition.   If a subscribers is added because you bought a cable system in Illinois and Indiana and New Jersey, as Comcast did last year, then those subscriber additions should be excluded from a measure of organic growth.  The table below summarizes the number of subscribers added through acquisition versus organic growth by the telcos versus the cablecos, in the year ending March 31, 2008:

Video Subscriber Additions	Telcos	Cablecos
Organic Growth	1,995,000	412,900
Growth by Acquisition	0	777,000
Total	1,995,000	1,189,900

The cable companies added nearly 800,000 of their new subscribers by acquisition, rather than by organic growth, so the telcos are growing TV subscribers at an organic rate that is nearly five times the rate of the cable companies.  Not good for folks in cable-land.

Of course, cable is counter-attacking by stealing voice subscribers from the telcos.  We'll have a look at that tomorrow.   

Who's Winning the TV Subscriber Wars?

With the launch of Verizon's FiOS service and AT&T's uVerse service a couple of years ago, the big telcos served notice that they were coming after Big Cable's TV subscriber base.  How well are the Big Bells doing against the big cable companies in the video arena?

It turns out that cable companies are holding their own, at least for the time being.  I compared AT&T and Verizon's video subscriber counts to the big four public cable companies, Comcast, Time Warner Cable, Cablevision, and Charter, and found that while the phone companies have added more video subscribers than cable companies in the past year, the cable companies are still adding video subscribers.

Video Subscribers	1Q07	2Q07	3Q07	4Q07	1Q08
AT&T	1,697,000	1,900,000	2,115,000	2,336,000	2,600,000
Verizon	1,008,000	1,300,000	1,511,000	1,800,000	2,100,000
Comcast	24,200,000	24,100,000	24,200,000	24,100,000	24,700,000
Time Warner Cable	20,996,000	21,123,000	21,168,000	21,273,000	21,589,000
Cablevision	5,650,000	5,689,000	5,707,000	5,751,000	5,794,000
Charter	8,278,300	8,242,800	8,230,700	8,140,300	8,231,200
Total Telco Video Subscribers	2,705,000	3,200,000	3,626,000	4,136,000	4,700,000
Total Cable Video Subscribers	59,124,300	59,154,800	59,305,700	59,264,300	60,314,200
Total Telco Change from Prior Quarter		495,000	426,000	510,000	564,000
Total Cable Change from Prior Quarter		30,500	150,900	(41,400)	1,049,900

In the year-ending March 31, 2008, the cable companies added 1,189,900 video subscribers while the telcos added 1,995,000 subscribers.  The telcos are certainly eating into cable's potential growth in video subscribers, but it's not like the telcos are the only ones winning new video subscribers these days. 

It will be interesting to watch how video subscriber growth continues to change as the AT&T and Verizon subscriber footprint expands.   

Big Bandwidth Needs an Ad Campaign

Om Malik posted a few days ago about a "speed bump" in bandwidth growth, based on a new Pew Research report that shows that growth in broadband subscriptions has slowed down.  There's lots to pick apart in the Pew report, but it occurred to me that maybe it would help juice demand if the Big Bandwidth industry launched a massive ad campaign, kind of like the Beef Council. 

Imagine a radiospot with the strains of an orchestra playing some all-American composition from Aaron Copland, and then Matthew McConaughey's smooth voice sneaks in, saying:

"Gone surfin’. 

You’ll see that sign a lot in the land of big bandwidth.

Gone surfin’ YouTube.

Gone surfin’ iTunes.

Gone surfin’ MySpace.

And nobody’s sure when they’ll be back from those pastures of data, but when they are, you can bet they’ll be satisfied.

Discover the power of data when you go surfin’ in the land of big bandwidth.

Bandwidth.  It’s better than dinner."

If Mr. McConaughey can sell steaks, then I'm betting he can sell bits.  Worth a shot?

Hitwise Claiming Online Video Is In Decline

Andrew Schmitt's Nyquist Capital blog pointed me to a contrarian view of the online video market, here.  While YouTube is continuing to dominate the online video world, HitWise is claiming that overall viewership is down 9%, year-over-year, in the month of May.  That doesn't seem possible. 

After all, Comscore reported that over 10 billion videos were viewed in February alone, a year-over-year increase of 66%.   There has to be a flaw in the Hitwise methodology, in my view, or at least there must be a difference in the way the two companies measure online video viewing.  Comscore seems to be capturing a broader perspective.

Taking Advantage of Other People's Cameras

Lately, I've been catching up on reading Guy Kawasaki's blog, How To Change The World, and I ran across an interesting post about a UK band that played a series of concerts in front of closed-circuit security cameras as a cheap way to get videos done (and as a publicity stunt).  The story says there are over 13 million closed circuit television cameras in the UK, and that the band, "The Get Out Clause", was simply leveraging other people's cameras.

What gets my attention here is the 13 million CCTV cameras in the UK.  If there are that many cameras in the UK, how many are there worldwide?  The proliferation of cameras in recent years must be enormous.

Two big take-aways:

• You are being watched a lot more than you imagine.
• A lot of that video is going to end up on the Internet.

Reminds me of this online video clip from a surveillance camera watching a recent tornado approaching a building in Windsor.   

The natural outlet for this kind of thing is the Internet.  It kind of falls into the long tail, too niche to put on a cable "video on demand" library, but it is definitely something that people are interested in seeing.   There's got to be a way to monetize this.

More on Cost Allocation and Org Structure

I had a thought-provoking comment this morning about yesterday's post about telecom organizational structures and cost allocation, from a gentleman named Mark, countering my contention that in telecom, efficiencies gained through distributing authority and control can more than pay for efficiencies lost through redundant departments and systems.  Here are some excerpts:

"This bit about control gets over-played. Certain functions should be shared; it's a more efficient use of capital. The rub comes when managers won't do the hard work to understand the cost drivers; measure and accurately report them; and work across the table with their peers to jointly minimize, at the margin, all costs - not just the shared ones. Substituting organizational structure for good cost accounting practices is a smokescreen."

Mark makes a good point, that part of the job of a manager is to work together with other managers across departments and collaborate on cost reduction or new product development, and I don't think I gave that enough attention in yesterday's post. 

I can certainly cite examples where, as a line of business leader I had to rely on colleagues to help make the right decisions for the business, and where that worked well.  One particular area was where our business counted on an external department to do capacity planning and trunk installation in support of an application-layer service.  I think it would be silly to insist that my application-layer business unit needs to have its own circuit deployment department.

On the other hand, I can point to examples where relying on a central, shared department did not work nearly as well.  In one case, the same application-layer business unit relied on an external, shared IT department for all systems development.  The IT department served business units covering the whole gamut of services, from colocation, to wavelengths, to high-bandwidth long-haul transport services, to Internet access, to application-layer services.  The IT department faced the impossible task of fielding requests from all business units and from operations, and prioritizing those requests in the midst of a great deal of lobbying on the part of the requesters, while simultaneously trying to serve their mandate to implement all of these requests on common systems for each function (order entry, provisioning, inventory, billing, etc.).  The IT department was funded with a budget that defined their capacity, and a resource allocation committee of highly-paid SVPs, VPs, and Directors would regularly meet for hours at a time to try to figure out how to allocate the limited IT capacity. Lots of time and energy, and money, was spent in those meetings.

Departments soon sprouted "program managers" whose primary function was to make sure that the IT group followed through on committee decisions to fund a particular project.  More time and energy and money spent.  The resource allocation committee sometimes changed their mind about priorities (suprise!) and the IT group was asked to change course, leaving half-finished projects and hoping to get back to them, someday.  Definitely a sub-optimal arrangement, in my view.

Of course, many business unit leaders don't have the experience or time to understand all of the ins and outs of information technology, so it won't always make sense to give each business unit their own IT department.  And some systems should be shared, and there should be some synergies by developing experts in certain systems and software and re-using those experts across multiple business units. 

So, is there a good alternative to the resource-allocation approach?  I can think of one potential solution: give each business unit their own budget, their own P&L, and allow each business unit to decide how much of their budget they want to spend by hiring the shared IT group to build a new wrinkle into the billing system, or develop some of the systems in support of a new product.  If the central IT group is over-subscribed, they need to develop more capacity or outsource the project.  Price competition can be introduced by allowing competitive bidding from external IT shops.  Yes, you will get some proliferation of redundant systems that way, it is a trade-off, for sure, but you also get the benefit of freeing hostage business units to do what they think is right to meet their business goals.

There are other approaches as well.  I only bring up this example of IT as an example of how shared functions can generate more "hard work" for managers than can be justified.  In my experience, managers are often eager to "work across the table with their peers."  They just aren't happy about it when it is clear that the organizational structure is creating a great deal of waste... waste that they will pay for when it comes back to them as an allocated cost on their P&L statement. 

Telecom Organizational Strategy and Allocated Expenses

Sandi Mays has a great post on the Business Tools Blog this week, laying out the case against expense allocation across a telecom corporation's business units.  If you've spent time trying to manage a business unit in a telecom company, you will know exactly what she is talking about.   

If you are managing a business unit, It boils down to this:

1. If you don't control a cost element in your own department, you are either going to ignore it or you are going to spend precious hours trying to influence another department to bring that cost down. 
2. If you don't control enough resources to determine which new products to invest in, or which automation projects to launch, then you are either going to give up on getting your priorities served by other departments, or you are going to spend an ungodly amount of time making the case for your priorities to be served by other departments.
3. If your distribution channel is shared across multiple business units, then you are going to lay awake at night wondering if the sales force is giving your product line enough of its time and attention, and you are going to spend gobs of time making sure the sales force gives you a fair share.

Say you are managing a business unit, and you get your monthly profit and loss statement. How many of the cost line items are under your control?  If you don't control much, then you are a business unit manager in name only. 

Of course, the argument against de-centralization is often persuasive.  "We can't de-centralize IT, we can't decentralize operations, we can't de-centralize engineering, because we will lose the cost synergies we currently enjoy because of shared systems and shared departments."  For some businesses, the synergies from centralization may be significant and worthwhile, but in many businesses, at some point you spend all of your "synergy savings" on the inefficiency of cross-company "influencing"  and "infighting," and the scrapping for resources soon drains the life blood of the company: serving customers.

I've lived this.  I congratulate Zayo Group on deciding to de-integrate their company into three independent companies.  When in doubt, err on the side of de-integration and autonomy for your business units.   

The Triangle of Discipline

In yesterday's post, I looked at one of my favorite shape-based strategy tools, Guy Kawasaki's famous 2x2 matrix on marketing strategy, which basically says you should sell something that has a lot of value to customers, and that if possible it should be something that your company alone can sell.  Today, we'll move from squares to triangles and draw from Michael Treacy and Fred Wiersema's classic 1995 book, The Discipline of Market Leaders.

The theory of the discipline triangle is that your company needs to make a deliberate choice about where it wants to be "the best in the world", or it risks losing focus and descending into mediocrity.  The authors contend that there are only three basic focus areas for any company:  Operational Excellence, Product Leadership, or Customer Intimacy (hence the three corners of the triangle of discipline).  Choose one and only one or resign yourself to being an also-ran in your industry.

Most of the big telecom carriers need to adopt the Operational Excellence focus, since they are selling a commodity and they need to be efficient and make sure that their costs are low in order to keep their prices in line with their competitors. This is especially true for wholesalers like Level 3 Communications. 

However, the effects of regulation on the telecom industry often skew the normal market effects that would ordinarily force a company to choose one corner over another as their primary focus.  As a result, it's harder to say where AT&T or Verizon or Qwest is focused...probably if pressed they would choose Operational Excellence, but sometimes they act more like they are focusing on Product Leadership. 

Other telecom players will sometimes focus on a single application or group of applications, sold as a service to their customers, and as a result they would probably choose a Product Leadership focus.  Often these players don't own their own infrastructure and are providing value-added services on top of the basic bit-pipe.  Google, for example, might choose to focus on Product Leadership instead of Operational Excellence.

The third category, Customer Intimacy, is often the domain of telecom consultants, system integrators, and certain kinds of telecom sales agents.  These companies get close to customers, spend a lot of time understanding their needs, and partner with them to create solutions, often from a re-usable toolkit of software, hardware, and carrier partners.  Most of the companies that focus on Customer Intimacy in telecom are not household names, but they have an avid and loyal following of lifetime customers.

Companies are often tempted to choose more than one focus, especially in telecom.  You tell your operations team to achieve excellence in service availability or efficiency, and turn right around and tell your sales team to get close to teh customer, and then tell your marketing and engineering team to dream up wonderful and unique products.  It's okay to ask each department to be the best that they can be...but it's important to know which focus area is going to get the bulk of your attention and your investment.

The Importance of Being Different

Guy Kawasaki has long been one of my favorite authors and public speakers.  He's full of witty stock sayings that help you remember key rules for how to define a marketing strategy or how to run a startup company.  I'm helping some clients develop a new marketing strategy right now, so I was reminded of a classic 2x2 matrix that Guy once did in a talk (and, of course, as a friend once told me, I'd lose my consultant's union card if I didn't trot out a 2x2 matrix every now and then). 

The thought behind this chart is pretty simple:  you've got to sell something that customers really want, and it helps a lot if you are the only one selling it.  For most communications companies, the first part, the "X-axis", is cake.  After all, most of us carbon-based life forms like to communicate, even from far away if necessary, and the forms and user interfaces and bells and whistles keep evolving.  So, telecom companies usually get a check mark on selling a product with value to a customer. 

The problem for most companies in the telecom industry is the second hurdle, the "Y axis" of Guy Kawasaki's chart. The first time a Harvard MBA asked me "What makes your product unique?", I wanted to hit him, because he had caught me being complacent about our business prospects, and I didn't want to admit weakness.  So, like most good managers I figured violence would be a good way to shut him up and make the problem go away.

Fortunately, I didn't assault the smug smart guy, and I eventually admitted that our business plan might be a little bit flawed in that one little teensy-weensy area.  The hard truth here is that if your product or service is not different from what everybody else is selling, then you are selling a commodity and you will eventually have to use price as a primary differentiator. 

Now, I know what you are thinking.  "Ike, it's not really that simple...I can think of all kinds of ways my service is different from my competitor's."  The key thing, though, is that these differentiators need to matter to your customer.  For example, if you are a national network operator and you are competing with a bunch of regional network operators, it might matter to some customers that they can do one-stop shopping with you versus buying from multiple regional guys.  But be honest with yourself...how many of your potential customers would skip the big price savings for the convenience of dealing with one carrier?  And, for the ones who are willing to buy services piecemeal, you are right back to competiting on price.

Lots of carriers are scared out of their minds of the "C" word.  They can't stomach being a commodity, and for good reason.  To thrive in a commodity business, you have to have to be really big and really efficient and embrace those values above all others.  Level 3 Communications talks a good game on this point, often saying that they know they are in a commodity business, and that they want to be the Fed Ex of telecom.  They have yet to achieve the Fed Ex vision, but at least they are honest, recognizing that what they sell is usually not unique.

For the rest of telecom companies, the ones that aren't big, don't have economies of scale, and aren't incredibly efficient, the differentiation question is harder to answer, and more important to answer, because the long-term survival of the company is at stake.      

Gauging Internet Growth

Rob Powell has an excellent post today on how the wholesale Internet access market is not necessarily a great proxy for how much the Internet is growing overall.  The bottom line is that the measurement you get depends a lot on where the measurement is taken.

Wholesale Internet access revenue derives from Internet transit charges, where a smaller Internet Service Provider (ISP) pays a bigger ISP for the right to send or receive traffice to or from the rest of the Internet.  All the little ISPs need to do this to avoid the cost of interconnecting directly with all of the other little ISPs.  Similarly, all the enterprises need to pay to connect their businesses to the Internet. 

As Rob points out, though, the flow of Internet traffic is not limited to these "transit" connections.  More and more Internet traffic is flowing through peering links.  Peering links are direct links between ISPs who agree to exchange traffic at little or no cost beyond the cost of the interconnection equipment and circuits.  Rob points out that the relative cost of peering has been dropping faster than the cost of transit, therefore more and more traffic is going through peering links instead of transit links.  Since there is usually much less revenue associated with peering than with transit, this Internet traffic can't be easily tracked by tracking Internet revenue figures.

Peering breaks down into two categories: public peering and private peering.  Public peering can be tracked through public web sites, but private peering usually can't be tracked.  The current hypothesis is that most Internet growth is happening on peering links, and that private peering is growing even more quickly than public peering, while public peering is growing more quickly than transit.

So, the good news for folks who want to see the Internet grow, bandwidth could be growing much faster than wholesale Internet access provider revenue.  The bad news: the growth of peering means that a lot of that Internet growth can't be monetized by the wholesale Internet access providers.

Why Network Nirvana is Elusive for Wholesale Internet Access Players

Sometimes, for Wholesale Internet access players, their business must seem like trying to fill a bucket with a hole in the bottom.  You sell more and more bandwidth, but every month, the price goes down for both new and existing customers, so some of the revenue keeps "leaking out" of your bucket.

Why does it have to be this way?  Why can't wholesale Internet access players just hold the line on pricing and enjoy rapidly increasing revenues? 

The answer lies in simple economic theory and market theory.

Wouldn't the laws of supply and demand mean that the skyrocketing demand for Internet bandwidth would result in increasing prices?  If the bandwidth world had a limited supply, then yes, big demand would result in higher prices for Internet bandwidth.  However, we don't live in a world with a limited supply of wholesale Internet bandwidth. Til now, bandwidth has been plentiful, and backbone bandwidth has gotten easier and easier to provision, as network equipment keeps growing in capacity and dropping in cost. 

In addition to the basic laws of supply and demand, we also need to look at market theory, especially the parts of market theory that pertain to competition.  What are the barriers to entry in the wholesale Internet access market?  Can just about anybody become a wholesale Internet access provider?

Until now, the answer has been yes, you too can be a wholesale Internet provider.  Cogent is a clear example of a wholesale Internet access provider that does not really own their own backbone network.  It didn't take a massive capital investment for Cogent to jump into the market.  It didn't take licensing any kind of restricted intellectual property.  Just buy a few routers and string them together with rented circuits, and you are in business.

The result of all of this easy market entry and ever-increasing supply of bandwidth is sliding prices.  Telecosm commenter Paolo Gorgo quotes Internap as having a 23% price decline for the year ending March 31, 2008.  Level 3's pricing declines may have been a little higher than that in 2007.

Will this situation ever change?  I think we have been seeing signs of change for the last two years.  The rate of price decline is moderating at the same time as bandwidth demand (in unit terms) is increasing.   Also, as prices continue to decline, opportunities for competitive differentiation among the wholesale Internet players who are still standing are increasing.  It is beginning to matter more if you own your own network, as fewer and fewer network providers are available to sell services to the smaller players.  It is likely that the next twelve months will see further consolidation among network providers, and that, in turn, will enable network owners to be less willing to enable smaller competitors by selling dark fiber and substituting peering for transit.  That, in turn, will deepen the divide been the "haves" and the "have-nots" of the network backbone world, allowing network backbone owners to set pricing at levels that can't be matched by non-owners, and then allowing backbone owners to reduce the rate of price compression.

The coming surge in bandwidth demand due to video over IP has been widely reported as the root cause of the continuing recovery of the wholesale Internet access market.  But it's the continuing consolidation of network backbones that will really lay the foundation for the surviving wholesale Internet access players to thrive.    

 

Internap's Internet Growth Rate

We've had a running debate on this blog about how fast the Internet is really growing, with Dan Caruso's Bear on Business blog usually taking the position that revenue and unit growth rates are higher, and yours truly taking the position that the Internet is growing really quickly but not as fast as some wish to believe.  Rob Phillips, of the Telecom Ramblings blog, has now waded into these murky waters with a thought-provoking post about Internap, saying that they might be a good proxy for overall growth in the wholesale Internet transit market, and that their 17% year-over year IP services revenue growth in 2007 is evidence of rapid Internet revenue growth.  Here are the stats from Internap's annual reports:

	2005	2006	2007
Internap IP Services Revenue ($MM)	$      99.8	$   104.4	$   122.2
Year-over Year Revenue Growth %		4.6%	17.0%

If you dig a little deeper into the company's annual reports and investor presentations, though, you will find that the company says:

"Our IP growth is faster than the market."

In fact, the company said in an investor presentation in August of 2007 that they think the compound annual revenue growth rate in the IP services market is 5% per year, based on Gartner data.  They updated that stat in an investor presentation in early June, 2008, now saying that the market is growing at 7% a year.

This reinforces the assertion I made in April, that Dan and others dispute:

"Last week found that the Internet is still growing at a brisk 50-60% rate, in terms of bandwidth utilization.  That is certainly not as good as the 250% to 500% rate predicted by some (as in a recent speech from John Chambers of Cisco), but it is still a rapid growth rate. 

The problem for the wholesale Internet service provider industry, though, is that revenue is not growing at a corresponding rate, because wholesale Internet access service prices are compressing at a rate that very nearly offsets all of the bandwidth growth.  So, for the provider of Internet backbone services, you get little or no additional money for providing 50% more capacity every year."

This condition of having price compression offset most unit growth has been dogging the wholesale Internet access business for many years, ever since the big Telecom meltdown.  That's the bad news.  The good news is that we are seeing signs, as Rob Powell points out, starting in 2006 and onward, that some wholesale Internet players are starting to post better performance.  Internap's 17% revenue growth in 2007 is a fine example.

Rob himself followed his Internap post with a post that does a good job of explaining why even Internap's numbers don't necessarily reflect the state of the overall wholesale Internet market. 

I expect that in April of 2009, I won't be able to make the same claim as I made in April of 2008, and we will finally be able to see that price compression is no longer erasing most of the gains from unit growth in the wholesale Internet access business.    

The Cogent Strategy

One of the key questions in any company's strategy is "What is our sustainable competitive advantage?" Cogent's CEO Dave Schaeffer had some interesting things to say about his company's strategy in an interview this week:

"Our advantage boils down to really four factors – the first two are balance sheet related and deal with how we acquired assets to build Cogent, but those will disappear as we consume that initial capacity, and will eventually go away."

Let me decode what he's saying about these first two "advantages" a bit, before looking at the rest.  The reference to balance sheet advantages that will eventually disappear refers to the fact that Cogent bought really cheap fiber optic cables from Level 3 back in the telecom recession of 2002, and eventually that capacity will be fully utilized and Cogent will be forced to buy additional capacity at higher prices.  Also, Mr. Schaeffer is referring to how Cogent didn't spend tons of capital to dig ditches and lay their own fiber, as Level 3 did, so Cogent isn't burdened with as much debt as Level 3.

This second thought is true enough, Cogent doesn't have as high a debt burden as their biggest competitor, but the source of that debt for Level 3 is also the source of one of Level 3's big advantages...Level 3's incremental cost of service per bit-mile is lower than Cogent's, simply because Level 3 owns the network.  Mr. Schaeffer raises an interesting question, though: if you burden Level 3's incremental cost per bit mile with debt payments, would Level 3's cost actually be higher than Cogent's?  I'll give a conditional answer:  If Level 3's debt-burdened cost per bit mile isn't already lower than Cogent's, then it is about to be, because as every day goes by Level 3's debt-burdened cost is diving faster than Cogent's, for these reasons:

• As Level 3 grows, they get to spread their debt service costs over a greater and greater number of bit miles.  Level 3 has stated that they expect their Internet backbone to grow by 75-80% in unit terms this year.  That means that they get to spread the debt service costs over 75-80% more bit miles this year. 
• Level 3's debt burden is about to shrink, as the company has said they expect to retire over $300M in debt next year, and may have additional opportunities to reduce their debt load.
• If we could know Level 3's true incremental cost per bit mile, without the debt burden, I believe we would find that Level 3's cost is already well below Cogent's, and improving more quickly than Cogent's, due to the fact that Level 3 owns the network and Cogent doesn't. 

So, Mr. Schaeffer is right to say that these advantages will disappear, and soon.  In effect, Mr. Shaeffer admitted that his company will shortly be paying a higher cost of goods than his competitors. No sustainable advantage there.

Mr. Shaeffer goes on to point to other advantages that he feels are more sustainable, deriving from the fact that he offers fewer products than his competitors.  He explains why it is better to have only 8 products as compared to "thousands" offered by its competitors:

"Those thousands of products come at a very high cost, consuming a huge amount of people and infrastructure.  A Cogent employee produces 20 times as many bit miles as a Level 3 employee."

Cogent's claim is that by focusing on fewer products, and by operating less of the infrastructure themselves, that their payroll costs and other overhead costs are lower than Level 3's, as measured on a cost per bit mile basis.

It may well be true that Level 3 carries a higher SG&A costs than Cogent, for now, though the claim of Level 3's costs being 20X higher than Cogent's seems exaggerated.  Perhaps I'll dive into that in more detail in a future post.  Meanwhile, let's just assume that Mr. Schaeffer is right to claim that Cogent does have lower SG&A costs and that the source of the efficiency advantage is the fact that Cogent has a smaller product catalog.  Is that really a sustainable competitive advantage?

If I were Cogent, I'd worry about how sustainable that SG&A cost advantage is.  Level 3 is steadily reducing SG&A costs this year as they gradually absorb and integrate their many acquisitions.  And, if Cogent is placing the right bet that their 8 products are the best and most profitable products to offer (a bet I wouldn't place), then couldn't a competitor winnow down their product line to achieve a very similar focus? 

The bottom line for me is that Cogent's CEO hasn't done a convincing job of articulating anything sustainable about his company's competitive advantage.  Yes, I do think that Cogent's customers probably do recognize some benefit from Cogent's focus on a narrower product line.  I just wonder if that benefit will be enough to continue to attract customers to Cogent when their price "advantage" has completely disappeared.

 

Cogent CEO Helps Ike Win Bet With The Bear

Interesting article in Telephony Online yesterday:  Cogent Throws Down Pricing Gauntlet.  Interesting for a bunch of reasons, but the most important one to me: because the company's CEO refuted Dan Caruso's single lame attempt to win our bet over whether wholesale Internet revenue experienced significant growth in 2007, in revenue terms, and whether the Internet as a whole was experiencing accelerating growth.  I said Internet revenue grew slowly in '07, and Dan said it grew more quickly, and we have a nice dinner riding on the outcome.  We've been throwing data at each other ever since in an online food fight that has left us both dripping with gravy and mashed potatoes.

Here's what Cogent CEO Dave Schaeffer said about why Cogent is cutting prices, yet again:

“We have seen Internet traffic growth slow over the past year as measured by a couple of references.  The rate of growth in percentage terms has slowed and that is because of a number of factors. The casual video and social networking sites that drive a lot of traffic are maturing and we have not seen the huge wave of displacement by professional video services that would cannibalize cable and satellite TV. Part of the new price points is to stimulate that business and new business in general.”

Back in April, Mr. Caruso claimed Cogent was proof that Internet growth was accelerating, in this post.  Here is a relevant excerpt:

"The only pure play public company that provides wholesale Internet access is Cogent. Here is a summary of their 2007 financial performance. Fantastic growth matched with rapidly growing EBITDA. If you look at their enterprise value, their investors seem to be thrilled with their performance. Cogent’s EBITDA multiple is 14.3x. Sound like resurgence is in full swing for them."

I responded with a post saying that Cogent isn't really a pure play wholesale Internet player because they also sell circuits connecting their customers to the Internet.  In any case, Cogent's business isn't looking so rosy right now. 

Of course, the performance of any one company can't be taken as a proxy for the entire wholesale Internet market, due to timing differences on pricing changes and operational performance of each company.  Two big examples are Level 3's operational problems of last year, and Cogent's recent suffering at the hands of Level 3's more aggressive pricing. 

The irony of the Cogent CEO's confession is that he might be wrong, and that at present the Internet may actually be seeing a surge in growth.  Level 3 is certainly predicting a healthy growth of 75%-80% in traffic on its Internet backbone this year, which does not represent any significant slowdown from recent years.  Why is Cogent's CEO complaining about a slowdown then?  Could it be that the company's notoriously aggressive pricing is no longer highly differentiated from their competitors?  Could it be that Cogent is losing market share while the Internet is continuing to grow rapidly?

My bet with Dan aside, I think Cogent is facing a difficult road right now.  The company does not have a broad product set, and therefore can't cross-subsidize from as many other products to boost their Internet product's lack of profitability.  Also, Cogent mostly buys network capacity in bulk from others and resells that capacity as higher-layer Internet access services, leaving Cogent vulnerable in a world where their suppliers are also their competitors, and where their suppliers are in a mood to raise prices for Cogent's supply on less-competitive routes.  I smell a profit squeeze coming for Cogent. 

Congrats to Envysion on winning a 2008 Apex Award!

A couple of monts ago I interviewed Matt Steinfort and Rob Hagens of Envysion, an up-and-coming managed video as a service company, based here in Louisville, CO.  This month, we got the good news that the Colorado high-tech community is starting to notice that Matt, Rob, and the team are creating something pretty cool in the Internet video space.  Congratulations to the Envysion team for winning the CSIA "Most Innovative Technology Product of the Year" for 2008! 

Singapore's Telecom Utility Model

A few days agos, Tim Flavin suggested that the US needs to move to a telecom utility model in order to achieve the lower costs per Mbps enjoyed by consumers in other countries.  The basic idea is that in exchange for a guaranteed rate of return on investment a telecom infrastructure provider must permit any content provider to interconnect with them.

It turns out that Singapore is moving down a very similar path to the one proposed by Mr. Flavin, having issed an RFP last year to create a state-sponsored network that will bring fiber to every home and business in the country by 2015.  Of course, Singapore is hardly a good proxy for the United States...it is a tiny country measuring only about 253 square miles, with a population of 3.87 million.  It's a better proxy for the Seattle metropolitan area, really.

But there is something interesting going on in Singapore.  The plan is to create a single Netco that owns and operates the fiber optics, and a single wholesale Opco that owns and operates switches and routers.  The Opco has to sell services to any retail service provider that comes along. 

The government is giving a grant of $543M (US) to the Netco company to help with construction of the network.  Bids for the Netco and Opco roles have been received by the government, and they plan to select the Netco winner in the third quarter this year, and the Opco winner should be selected early next year.  It will be interesting to see how Singapore is doing on the international cost-per-Mbps rankings by 2015. 

Even if Singapore's plan is successful, it doesn't necessarily mean that the US should follow suit.  However, it would be interesting to see if individual US cities could create a similar plan, and get away with it.  Considering the lawsuits pouring out of the major incumbent telcos when cities tried to put up free WiFi networks, cities wanting to commission a telecom utility would face major opposition.

By the way, I first learned about Singapore's plans from an excellent post on Brough Turner's Communications blog a few months ago.  Check it out if you want to learn more.

Will a Utility Model Reinvigorate Lagging US Broadband?

In Monday's post about how US consumers pay 3 to 4 times more per Mbps than leading broadband countries such as Japan and France, I offered two reasons for our lackluster performance:

• Many of us are more spread out and more expensive to reach,
• The rest of us who live in high-density areas are victims of a lack of real price competition.

I had a comment from Tim Flavin, offering a theory that our regulatory policies in the US favor large incumbents and are designed to extract the most money from consumers instead of maximizing consumer benefit.  He goes on to say:

"For wired broadband we should go back to the utility model. The last mile provider is given a guaranteed rate of return on investment. In turn they must permit any content provider, like Netflix, 8x8 or an ISP to interconnect with them."

This is an idea that has been kicking around for many years now, based on the theory that there is a natural monopoly in parts of the network, despite the fact that most homes are now served by at least two network connectivity choices (a telco and a cable company). Still, I get the point: having two lumbering incumbents does not make for significant price competition.

Plus, many businesses have only one connectivity choice: the incumbent local exchange carrier.  That ILEC is often required to resell their plant to competitors on a wholesale basis, but with the rise in granted forbearance petitions at the FCC, there isn't much price competition there, either.  Network connectivity prices are actually rising in many locations.

So, we don't have enough competition in the local loop.  Is the utility model the answer? I admit I have my doubts.  To some extent the ILECs have been forced to wholesale their plant for twelve years now, and it hasn't produced meaningful price competition in the local loop.   

Still, there are those that hope a fiber-optic-based utility model will be more effective. Tomorrow we'll look at a country that is taking that approach, and we'll examine how they are structuring their telecom market. 

Big Threat to Cable: Free Internet Content

Time Warner Cable leader Glenn Britt had an interview in the Wall Street Journal yesterday, in which Mr. Britt disclosed the fear that keeps him awake at night:

"I'm not too worried about the cable business, but I am about the whole entertainment economic ecosystem... If all of the programming goes to the Internet, and it's free, then there is a whole source of revenue that the entertainment business is not going to have anymore."

Mr. Britt is mourning the looming loss of the two-sided economic model, in which cable sells network connectivity along with content subscriptions.  Now, content creators are bypassing cable and going directly to consumers over the Internet, and in many cases they are offering their content for free, in exchange for advertising revenue.  Cable companies are worried that they are at a competitive disadvantage because they charge monthly fees for video content, while consumers can get the same content for free, elsewhere. 

Mr. Britt has good reason to be worried.  I remember sitting at dinner with some cable senior managers three years ago and warning that their video franchise was about to be disintermediated, and at that time I heard a lot of denial and disbelief.  Now, I think the threat is more obvious.

Why would a content creator turn down subscription money from cable distributors in favor of an advertising-revenue-only model?  Could it be that content creators think that cable marks up the price of their product too much, and therefore limits the audience size?  Could it be that content creators hope to reach a large audience through the Internet and drive higher ad revenue as a result?  Could it be that content creators are realizing they don't need to pay a middleman anymore?

Mr. Britt grieves over the poor entertainment industry and how it won't have as much money to invest in quality programming any more.  Maybe, deep down, he is really lamenting the fact that the cable video distribution channel has a new, lower-cost competitor.   

The Bear on Content

Dan Caruso's excellent Bear on Business Blog has teed up a topic near and dear to my heart: is content king of the network?  I had a post on the topic a few months back, and  I'm looking forward to seeing what Dan has to say.

Why is the US Falling Behind in the Broadband Race?

Residential subscribers in the Unites States pay about $12.60 per megabit of peak bandwidth capacity, according to the Organization for Economic Cooperation and Development.   By International standards, that's high.  We pay:

• over 4 times more than Japan
• over 3 times more than France
• over twice as much as the UK, Italy, and Korea

Wall Street Journal columnist Walt Mossberg cornered FCC Chairman Kevin Martin in an interview a couple of days ago, asking him why we are doing so badly, and Martin trotted out the standard answer:

"I think you do have to put in the context some of the demographics of the United States and some of the countries we are competing against...Because it costs a lot more to build out in more rural areas and people who live further apart… We have a history of averaging some of the cost to make it affordable for people in Montana."

Well, okay, that does explain some of it.  At least it explains why prices in rural America, and in sprawling suburbia, are higher.  It reduces your costs as a service provider if the people you serve are all conveniently located in apartment buildings downtown.

However, that doesn't explain why unregulated competitive carriers, who don't have to serve rural areas if they don't want to, and who can target the more lucrative sardines in the city, have to charge the poor sardines so much.  I mean, shouldn't there be some benefit from living in a thin-walled closet next door to an aspiring rock drummer?

Yes, there are taxes and subsidies that even competitive carriers pay, and supposedly those dollars find their way to rural carriers, but those taxes don't come close to explaining why prices in the US are massively higher than elsewhere.

When I look at why prices for high-density populations in the US are still so high, I think the reason is simple:  service providers charge so much because they can.  There is no other service provider out there undercutting them on prices, forcing a more aggressive pricing structure.   

It's either a triumph of pricing discipline among service providers, or it is an utter lack of real competition.  Either way, the American sardine is the loser.  Oh, and sorry about having to live beside the next Carter Beauford. 

Telecom's Naval Arms Race

Rob Powell has an excellent post today, describing the Telecom M&A world in terms of a warships: the big battleships and carriers, the heavy cruisers, the destroyers, and down in the comments, even the submarines.  It's an entertaining read! 

Rob commented on yesterday's post on this blog about Level 3 getting back into the acquisition game, saying that he thinks the soonest that will happen is in the Fall.  It will be fun to watch!

More on LEC Line Losses From Tech Untangled

Senaka Balasuriya, who authors the Tech Untangled blog, has a report on a Harris Interactive poll that provides some additional insight into where all those LEC line losses are going.  I had a series of posts last month that analyzed quarterly earnings reports of public companies to try to glean where the LECs lost their lines.  Now, we have a recent survey that shows who uses what kinds of service:  traditional landlines, wireless phone service, or Internet telephony.

The survey showed that only 0.5% of the respondents use Internet telephony by itself.  15% of respondents use Internet telephony in combination with either wireless phone service or landline phone service, or both. 

And, of course, survey says: wireless is the big winner!

Managed Video As A Service Blog Is Launched

My friends at Envysion have just launched a blog of their own, the Managed Video blog.  It'll be fun to watch Matt Steinfort, Rob Hagens, and the whole Envysion crew share their managed video wisdom.  Welcome, Rob and Matt, to the blogosphere!

Churn Week Continues: Sprint's Struggles

Sprint Nextel announced their first quarter earnings yesterday, and it looks like their struggle to keep subscribers in their Nextel unit are getting worse.  Yesterday's post focused on Vonage's atrocious 3.3% monthly churn, and today, we'll look at Sprint's 2.45% churn in post-paid wireless subsribers.

Here is Sprint's pattern of post-paid subscriber losses since the beginning of 2007:

	1Q07	2Q07	3Q07	4Q07	1Q08
Net change in Sprint post-paid subscribers	(220,000)	16,000	(337,000)	(683,000)	(1,070,000)

Sprint did say that they expect an improvement in churn in the 2nd quarter, but til now, churn has actually worsened.  Last quarter, and the quarter before, post-paid churn was 2.3%.

It is enormously damaging to a recurring revenue service business to experience churn above 2% per month.

For example, did you know that if you assume a constant rate of gross subscriber additions, a service provider's churn rate can predict the maximum size of the service provider's subscriber base?  The higher the churn rate, the lower the maximum size of your customer base.  Tomorrow, we'll look at how this works.

Inflationary Trends in Retail Internet Access

Isn't competition supposed keep prices in check?  Apparently not in retail Internet access these days. All three of the big phone companies are making noises about price increases for their retail Internet access services:

• In February, the Chicago Tribune reported AT&T is raising prices $5 per month on their DSL-based Internet access services.
• Verizon announced on their late-April quarterly earnings call that they plan to raise Internet access prices on their FiOS based services in the 2nd quarter by similar amounts.  Verizon also plans to raise prices on FiOS-based video services.
• Qwest made a similar announcement on their quarterly earnings call last week, saying they will raise prices on DSL-based Internet access by as much as 11 percent.

Will the inflationary environment in retail Internet access creep into the wholesale Internet access market as well?  If so, that would be a huge turnaround in the wholesale Internet access market (where large companies, content providers, and carriers are charged by the megabit for access to an Internet backbone), which has experienced price declines in the 25% to 35% range for several years.