Listen up!

No, the sky is not falling but that sound you just heard is the first tiny snowball in what is eventually going to be an avalanche. And like all avalanches that preceded it, this will not be the end of life on the planet, or even the end of our society as we know it, but it will lead to carnage somewhere on the level of the Telecommunications Crash of 2000-2001 with the distinct possibility of requiring a massive government bailout.

What the hell? One in eight consumers will eliminate or scale back their cable, satellite or other pay-TV service this year and this is a problem even worthy of mention?

Why yes, yes it is, and even if you didn’t ask, I’m still going to explain.

Recently, Verizon announced that they would be adding “3M FiOS homes in 2010 but have now cut that to 1M for budget reasons.While the rationale provided was “budget reasons” one might want to think about exactly what that reasoning actually means. Is it safe to assume that if the FiOS network was reasonably profitable we should logically expect to see Verizon continue to build out this network? To expand on the previous question, if the FiOS network was wildly profitable, wouldn’t it stand to reason that Verizon would be actively courting investors to raise the cash necessary to expand the FiOS footprint well past what they had initially set out to do?

Well, what can we assume caused what should be considered to be the next generation of telecommunications and information infrastructure construction to be suspended?

How about a faulty business model?

As with any venture, a business plan, one that includes financial projections which outlines both expenses and revenues for a set period of time, needs to be created. For those unfamiliar with this process, in layman’s terms, this means that someone is going to have to make an educated guess at those numbers. If you were to ask anyone who is intimately aware of how this process is tackled, without exception, they would tell you that the longer the financial projections are forecast the more likely that they are going to be inaccurate. Add to that formula the uncertainty that high tech brings to the mix and trying to guess both revenue and expenses for several years out is an exercise in psychic abilities.

Starting somewhere around the beginning of this millennium, the term “Triple Play” was introduced. This concept made the claim that customers would be looking to secure voice communications (as defined as being fixed or landline service), Internet, as well as Television (or more correctly Video Entertainment) and that any provider who was serious about providing any of these services had better provide all of them. A later variation of this term, The Quad Play, followed up on this by adding mobile voice (and now data) to the mix. While no claim was ever made that 100% of the customer base would subscribe to all of the services, it was expected that virtually 100% of available customers would sign up for at least one service.

So, what happens when ambitious businesses decide to embark on the construction of a business plan which would bring them into alignment with this new model? Well, the short answer is that the plan is constructed using four revenue streams, weighting each one as market demand seemed to indicate would provide the percentage of total revenue. On the other side of the spreadsheet came the cost to build out this project as based on the total demand that was expected to arise to deliver these services.

Great – the numbers look fantastic, let’s do this thing.

And then reality sets in.

Voice? – Yes, about that. Well, we didn’t forecast that a high percentage of our customers would be dropping that voice line at home in favor of using a cell phone exclusively. And, well, we really didn’t correctly anticipate companies like Vonage dropping the price of voice service to almost zero. And then there was that Google thing that actually did drop voice calling to zero. Ah well, it’s only one revenue stream, we still have three others.

Television? – Wait, what? The amount of people that watch TV is dropping? Okay, we forecast that into our model but maybe we didn’t quite expect that number to drop quite as fast as it did. Add to that the issue that many of these customers would elect to use an outside supplier for their video content, like NetFlix, who would eat away at our projections. How bad is it? Netflix: 55 percent of subscribers now streaming movies. Yes, that’s got to hurt. Still, we’re still making money, right? And we’ll still be making money after one in eight of our customers either downgrades or eliminates our pay TV service – just not as much.

Internet? – Ah, the one bright, shiny, spot in the business plan that we got right. After all, we did predict that we would see some pretty serious adoption rates and that seems to be holding true. And we did build out a network that could handle the bandwidth demands, right? So, all is well – with the exception that those bandwidth demands are climbing and while we built a network that was capable of servicing that requirement, there are escalating costs that we might have underestimated a bit.

Mobile Communications! – That’s going to save the day. What could possibly go awry in that revenue stream? I mean, it’s a cash cow that keeps on giving, between low bandwidth applications like text messaging and voice, we’re good for years and years, right?

And then the iPhone hit. Well, that would be obscuring the load that all of the previous smartphones added to the network. And then the iPad hit. Next up, the 3G iPad and an increase in people watching video on their portable devices – across a cellular network that was designed for low bandwdth applications.

I wonder if this might be why we see Verizon moving their financial resources from FiOS to cell network expansion. Could it be that Verizon now believes that this will be the one leg out of the Quad Play that will fill in the gaps?

If so, what happens when mobile voice communications move over to the data side? And what if the data side then moves to license exempt (WiFi) connections, where they are available?

To be perfectly fair, this article has used Verizon to illustrate the situation when Verizon is probably the most capable company out there to handle this insanity. AT&T under Ed Whitacre didn’t seem to show the foresight to handle this onslaught – but thankfully, Mr. Whitacre has moved on to saving General Motors – a company that needs vision, probably more than anything else. Quest? Who?

So, will we hear the other shoe dropping? If so, what will it sound like? To be quite honest with you, I don’t know – but I’m looking forward to experiencing it. There’s a killer ap coming, in fact, it’s overdue. It’s another Napster but I’m not sure what shape it’s in or what that manifestation will actually encompass – but it’s coming.

The question is, will the walled garden collapse when the other shoe drops? And if it does, what will replace it?

Stay tuned, we’ll have that information for you after a word from our sponsors – if you’re still paying to hear it when we return.

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