With Fixed Network Revenues Cut in Half, U.S. Service Provider Strategies are Diverging

In 2002, the U.S. telecommunications industry’s gross revenues were $385 billion (including cable and satellite TV), and its net revenues (after interconnection costs, program content, and handset subsidies) were $315 billion.

By 2013, wireline gross and net revenue both had fallen by more than 50 percent compared to 2002.

Disruption of that magnitude is bound to affect core business strategy in ways that likely will lead to firms taking disparate paths forward. Vodafone started out as a “mobile-only” company that now operates both fixed and mobile networks.

Verizon started out as a fixed line provider that by 2016 should generate 85 percent of Verizon earnings (EBITDA).

In 2014, mobile contributed 70 percent of Verizon revenue, so that expectation is not out of line. In the first quarter of 2015, mobility contributed $22.3 billion in revenue and $10 billion in earnings. The fixed segment generated $9.5 billion in revenue and $2.2 billion in earnings (EBITDA).

AT&T had a similar profile as Verizon, originally, as both began life as “Regional Bell Operating Companies” that provided voice and other services on local networks, but no long distance services.

AT&T has greater exposure to fixed network revenue. AT&T earned 54 percent of total revenue from mobile services and got 60 percent of its 2013 earnings from mobile services.

Mobility represented 67 percent of earnings after subtracting required capex. The percentage of revenue earned from other sources has changed, however.

On an annualized basis, AT&T will earn about 46 percent of its revenue from business sources and about 54 percent from consumer services in 2015.

That is a big change from the prior year, when AT&T earned about 54 percent of revenue from its business solutions category.

The perhaps-shocking change is that AT&T, on an annualized basis, will earn just 22 percent of revenue from consumer mobile services, making AT&T almost a mirror image of Verizon, which earns about 85 percent of total revenue from mobile services.

Altogether, about 41 percent of AT&T’s total revenue is earned from mobility services (business and consumer). About 38 percent of business solutions revenue was generated by business customer mobile services.

In the third quarter of 2015, AT&T earned about 45 percent of total revenue from business solutions, 28 percent from entertainment and Internet services and 24 percent from consumer mobility.

The operating income story is more skewed, at least before the impact of DirecTV’s video business is fully reflected in full-year results.

Business solutions represented 66 percent of total operating income in the third quarter of 2015.  

Consumer mobility represented 38 percent of operating income. Entertainment and Internet Services had negative operating income, as did the International segment.

In terms of operating income, it all came from business solutions and consumer mobility. That will change in 2016. Stil, AT&T is likely to earn a disproportionate share of operating income from business services, compared to Verizon.

AT&T’s markedly higher profile in linear video should be reflected in 2016 results. Where Verizon has a bit more than five million linear video subscribers, AT&T now has more than 25 million.

Verizon’s strategy also contrasts with AT&T and CenturyLink, the second and third largest legacy telecom providers.

AT&T already has committed to an international growth strategy, while CenturyLink has a U.S. wireline focus.

The point is the differentiation of business strategy. Companies increasingly are taking different strategic approaches to growth.

105% Increase in U.S. Internet Access Speeds Over Last 12 Months; Cable TV ISPs Drive Almost All the Increase

With the caveat that mobile and public Wi-Fi now play growing roles in the U.S. Internet access function, the Federal Communications Commission now illustrates the power of the cable TV hybrid fiber coax network where it comes to rapidly increasing Internet access speeds, compared to use of telco digital subscriber line.

“When DSL is used to provide broadband service, the maximum advertised download speeds among the most popular service tiers has remained generally unchanged since 2011,” the FCC reports.

“In contrast, when cable is used to provide broadband service, the maximum advertised download speeds among the most popular service tiers has increased from 12-30 Mbps in March 2011 to 50-105 Mbps in September 2014.”

“We find that, over the course of our reports, the average annual increase in actual download speeds by technology has been 28.2 percent for DSL, 61.2 percent for cable, and 19.2 percent for fiber,” the Measuring Fixed Broadband report says.

“Generally, speed tiers at 15 Mbps and below are dominated by DSL, while speed tiers above 15 Mbps are dominated by cable and fiber,” the FCC says.

Perhaps significantly, cable has achieved a speed advantage even over telco fiber-to-home services. But data in the next report could show changes, if data from independent providers including Google Fiber are included.

All that noted, between September 2013 and September 2014, there was a 105 percent increase in the maximum advertised download speeds among the most popular service tiers across the studied ISPs, with most of the increase coming from the ranks of cable TV providers.

                  Maximum Advertised Download Speed (Most Popular Tiers)

source: FCC

Generally speaking, latency performance was best for fiber access, good for cable access, less good for digital subscriber line and worst for satellite, as you might expect. However, latency performance for any the fixed network providers is unlikely to negatively affect experience. That might not be true for the satellite ISPs.

                                             Fixed Network Latency Performance

source: FCC

                                                Satellite Latency

source: FCC

Several studies have suggested that, beyond about 10 Mbps, users are unlikely to perceive any incremental improvement in experience, no matter how much faster downstream access speeds get.

The latest FCC data suggests that remains true. Beyond 15 Mbps, web pages do not load any faster, for example.

                            Average Webpage Loading Times, by Downstream Speed

Words Matter

Words matter. YouTube says T-Mobile US is throttling its video. T-Mobile US has not directly responded, but T-Mobile US does process video, as part of its Binge On program, for bandwidth efficiency, in ways that can reduce image quality. The trade-off is that viewing Binge On video does not count against mobile data usage.

YouTube is not part of Binge On, so some think the issue is that T-Mobile US has not yet figured out a way to identify YouTube video content, one way or the other.

So is video encoding, for better bandwidth efficiency, at the risk of lower image quality, throttling or only processing?

Some might argue, oh by the way, that processing media types for better performance (lossless) is a good thing. Image degradation that is not asked for, or wanted, is not a good thing. But Binge On partners have agreed to have their video processed as part of the program.

Nor, some would argue, should content providers be prohibited from coding that actually boosts image quality or loading times. That is, after all, what they pay Akamai and others to provide.

Why IoT is Necessary

There is an easy way to illustrate why there is so much interest and effort in the mobile industry around “Internet of Things.” Simply, every other major product category is mature, or declining.

The next wave of products to drive revenue growth must be discovered or created, and IoT seems the best candidate for such growth.

Though we might not have always seen telecom products as having life cycles, that appears to be the case.

First fixed network voice, then messaging, then “talking” have experienced either declining usage, or declining revenue, or both. Now linear video entertainment also seems to be past its peak. The only two services that so far have defied decline are mobile service and Internet access, both of which continue to grow.

Mobile service revenues, which had been the growth driver for more than a decade, not have reached maturity in Europe, for example.

source: 451 Research

Will Reliance Jio Content Services be "Managed" or "Internet" Services? Why it Matters

As part of its effort to position itself as a “digital content” provider, not a mobile service provider, Reliance Jio has planned to emphasize video streaming and other content-related services.

To make that positioning work, Reliance Jio has planned to sell content that includes use of the bandwidth to consume it, on the model of cable TV services or the delivery of Amazon book content to mobile data-equipped readers without a separate mobile data charge.

In present beta tests with employees, Reliance Jio is giving “employees access to numerous applications for free,” including Jio Beats (a music app), Jio Drive (a cloud service to store digital content), and Jio Play (entertainment app) featuring movies, for example.

One wonders whether a storm of controversy (unwarranted, some will argue, as has been the case of opposition to Free Basics) will erupt over the practice of allowing “no extra charge” access to content.

Much could hinge on whether the content access is a managed service (such as over the air broadcasting or cable TV) or an Internet service.

Presumably, a managed service would not be subject to network neutrality rules. So it matters which course is taken.

There is a Private Interest Corresponding to Every Public Policy. Always.

With the caveat that there are some important and foundational elements embedded in ongoing debates about what network neutrality, should, and does mean, many of the arguments around programs such as Free Basics, or sponsored data or even any third-party-supported access and usage inherently are arguments about sources of perceived advantage in the Internet ecosystem.

That is unavoidable, as every public policy decision inherently has implications for commercial advantage, favoring some in the ecosystem to the perceived detriment of others in the ecosystem.

That is why at least some seem to object to Free Basics or any sponsored data programs. Whatever the stated public policy rationale, it often seems as though the sub rosa objective is to restrain some other major participant from making further gains.

We should not object to contenders fighting for their own interests. That’s life. But it sometimes seems as though the veiling of “interests” as “good public policy” is a problem only for the successful providers, not for those who wish to profit from their competition with those providers.

In fact, every protagonist in every debate about Internet policy stands to gain, or lose (at least that is the clear perception) from every particular policy decision.

Despite those vested private interests, public policy must still be made, as best we can. So implementation of good policy should not be prevented simply because some firm or industry segment happens to benefit. That will be the result, for better or worse, no matter which policies are adopted.

Private winners and losers cannot be avoided when any public policy is adopted. That simply is not the point. The point is creation of good public policy. Arguing, directly or indirectly, that a particular policy should not be adopted because X will benefit is simply wrong.

X, Y,Z and others might benefit from any particular bit of public policy. Get the policy right--on policy grounds--and be done with it. The entangled commercial interests simply are there. We cannot do policy without also favoring or damaging some private interest. But the private interests are not the reason we do policy.

LIke it or Not, Oligopoly Often is the Only Possible Market Structure

Once upon a time, fixed network telecommunications was thought to be a “natural monopoly,” akin to roads, bridges, sewer services, water and electrical services.

In many markets, that clearly is not true. There is at least some room for facilities-based competition, though the number of viable contestants will be limited.

So fixed and mobile telecommunications are best thought of as oligopolistic, where only a few leading suppliers actually can exist in a market.

There are key implications. It likely never will be possible for more than a few facilities-based competitors to survive in any market.

That naturally will lead to thinking about regulatory policies based on robust wholesale obligations. The downside: robust wholesale tends to depress both investment by the existing carrier, and market entry by new carriers.

So the issue is not monopoly versus widespread market entry, but between monopoly and the best-possible (sustainable) level of competition among a limited number of contestants. That always will be a judgment call.

But that also poses issues for telecom regulators. If the regulated markets will, under the best of circumstances, only support a few suppliers, where is the boundary between oligopoly conditions where there is not enough competition, and oligopoly under which there is reasonable competition?

“High market concentration levels in a given market may raise some concern that the market is not competitive,” the Federal Communications Commision says. “However, an analysis of other factors, such as prices, non-price rivalry, and entry conditions, may find that a market with high concentration levels is competitive.”

In other words, says the FCC, even high levels of concentration do not necessarily mean a market is uncompetitive. Such markets might, in fact, be substantially competitive, even when other measures say they are not competitive.

We might not like the situation, but in some industries--including telecommunications--oligopoly is the pattern. There always are smaller niches within the market, but typically the amount of activity is a small fraction of total market revenues.

The U.S. mobile market is no exception. The four U.S. nationwide mobile service providers accounted for approximately 98 percent of the nation’s mobile wireless service revenue in 2014, up from approximately 91 percent in 2012, and the service revenues of AT&T and Verizon Wireless together accounted for approximately 71 percent of total service revenue in 2014, according to the Federal Communications Commission.

Of the four nationwide facilities-based service providers, AT&T and Verizon Wireless continued to maintain the largest market shares throughout 2014.

Sprint stayed relatively flat, and T-Mobile had the largest quarterly increases in market share to end 2014, as measured by revenue.

The same pattern continued in the first half of 2015, with AT&T and Verizon Wireless continuing to account for approximately 71 percent of total service revenues.

While T-Mobile continues to narrow the gap against Sprint, as of mid-2015, Sprint remained the third largest service provider in the mobile wireless marketplace in terms of service revenues.

http://transition.fcc.gov/Daily_Releases/Daily_Business/2015/db1223/DA-15-1487A1.pdf

The practical issue, then, often becomes the actual number of sustainable providers in any market. In the mobile arena, that tends to be the difference between three and four.

Why Amazon Cares about Drone Delivery

There is a very simple reason why Amazon is interested in commercial drone delivery services. For parcels weighing less than five pounds, the thinking goes, Amazon could potentially cut delivery costs up to an order of magnitude, compared to using UPS Ground, or “only” about nine times less than same-day shipping, or five times less than U.S. Postal Service one-day shipping.

Such changes also illustrate channel conflict. By internalizing delivery cost, and using a new platform. Amazon slices its distribution costs dramatically. Of course, that means less business for one of its traditional delivery partners.

Channel conflict dangers never fully disappear, in any business.

source: Business Insider

How Much Advantage Does Quad Play Provide?

Just how much advantage--beyond the free cash flow--AT&T will derive from DirecTV remains unclear. In some large part, one’s optimism or pessimism is driven by one’s beliefs about the coming power of quadruple play offers.

Many are skeptical of consumer demand for bundles of fixed services and mobility, while others, including cable TV operators, believe quad plays will drive both customer acquisition and loyalty.

To be sure the actual benefit of triple play offers has been driven by consumer discounts for buying the bundle, and not necessarily some new service or app potential based on the buying of voice, video and Internet access.

The issue for AT&T might be the extent to which that also extends to the quad play, while mobile services are added to fixed network services.

Count Walter Piecyk of BTIG Research among those who remain skeptical about the benefits AT&T can wring out of DirecTV. The upside?

DirecTV has 15 million customers who don't use AT&T for mobile services and three million DirecTV customers who have access to U-verse but use another Internet service provider. If AT&T can convert a significant percentage of those customers into AT&T mobile or fixed network Internet access customers, there is upside beyond the ability to take advantage of DirecTV’s free cash flow to support AT&T’s dividend.

The downside? Consumer willingness to switch mobile or fixed ISP accounts for relatively modest bundle discounts might be limited, especially when the level of promotions for mobile switchers is presently so high, and churn levels for AT&T and Verizon so low.                                                                                                                             

The analysis all comes down to the expected value of bundling now possible.

AT&T has argued the DirecTV buy would help reduce churn, overall. But Piecyk expects AT&T postpaid account losses to widen from 1.4 million in 2015 to 1.6 million 2016 and further to 1.7 million in 2017, in large part on account of fierce promotional activity by T-Mobile US.

On the other hand, many would argue that DirecTV will be a useful asset as AT&T launches a streaming TV service of its own, soon.

It is fair to say the divergence of opinion is largely centered in the legacy telco part of the market, not the cable TV segment. Where some believe telcos will not get many benefits from quad play, most believe cable TV operators will win.

For some of us, that implies the quad play does have strategic value, even if, as always, the attackers in the market benefit disproportionately.

Incumbents arguably do benefit from enhanced retention (lower churn) and, in AT&T’s case, some incremental ability to cross sell.

The former will be hard to quantify; the latter easier to demonstrate. One way or the other, we shall know, in a rather few years, whether the upselling reality matched the potential.

OTT "Versus" Mobile Operators is a Dead Argument

“OTT versus operators is dead,” argues John Strand, Strand Consult principal. “Partnerships will flourish, if not regulated out of existence” by regulatory bodies.

His argument is quite simple: “the two players need each other, and OTTs know it.” The argument, in broad outlines, is not new. Though some access providers have attempted to create their own over-the-top voice and messaging services, that generally has not worked well.

Instead, one might argue, there is more opportunity for collaboration in all other areas, where access providers might well find it fruitful to partner with OTTs.

You might think of what Internet.org is doing around the world with mobile service providers, partnering to provide “Free Basics,” a suite of Internet apps that can be used by anyone with a smartphone, or in many cases even feature phones, without a mobile data plan.

The idea is to allow people to sample the value of the Internet, on the assumption that many people will discover they want to use the Internet, and hence will buy data plans.

“Music services such as Spotify and Deezer; video services like HBO and Netflix; newspapers and magazines—any and all content that can be bundled with traditional traffic packets that telecom companies sell will be bundled with mobile service for all devices,” Strand argues.

“We expect that the number and type of services that operators bundle with voice, SMS and data will explode,” Strand predicts.

As you might suggest for services built on content, brands will matter. “In the same way that toys, clothing and other consumer products enter partnerships with film companies, more brands and mobile service will come together,” says Strand.

Growing Mobile Substitutiion for Internet Access?

Fixed-line and mobile voice connections are generally perceived by consumers as product substitutes, it is easy enough to argue. Whether that can broadly be the case for mobile and fixed Internet is the bigger question.

The extent to which mobile can be a functional substitute for fixed access is a more complicated issue, in part because of the value-price relationship. Mobile Internet access historically has been slower than fixed access, while the cost to use a mobile gigabyte of data generally is far higher than use of a fixed network gigabyte.

Nevertheless, there are growing instances where fixed and mobile Internet access are more-nearly functionally the same. Such mobile substitution has grown in the U.S. market, for example

For Deutsche Telekom customers, mobile Internet access speed--since 2014--has generally been faster than what is available on the fixed network.

Some usage scenarios already are clear enough. Where the cost of fixed network Internet access is non-economical, mobile will be the only form of access.

Where both mobile and fixed access are available, there are more use cases. With the advent of Long Term Evolution, the number of viable use cases has grown, compared to the situation where 3G is viewed as a potential substitute for fixed access.

Low usage, single-user consumers are a generic class of consumers for which mobile access using LTE could be a viable substitute for fixed access. Single-person households or users who do not watch much online video are examples.

On the other hand, multi-user households that watch significant amounts of video almost never are the best candidates for mobile Internet access substitution.

Someplace in the middle are many use cases where mobile offers might compete effectively with fixed network offers on a price-per-gigabyte basis.

It will is tough, but not impossible. Users will have to manage their own behavior, resisting the temptation to use resource-intensive apps when on the mobile network.

Substitution also will be easier in markets where public Wi-Fi or at-work Wi-Fi is plentiful.

The big question is whether future 5G mobile networks, supporting gigabit access speeds, also will be priced, on a cost-per-gigabyte basis, close enough to fixed prices to make both modes relatively full substitutes.

The other issue is mobile access in markets where fixed network alternatives are unavailable, expensive, slow or all of the above.

The converse also is true: where fixed network services are highly affordable, the value of using a mobile alternative is less compelling.

According to Ofcom, the lowest levels of mobile broadband take-up are in France (15 percent of respondents) and the United States (10 percent).

In France the widespread availability of cheap triple-play bundles of fixed voice, fixed broadband and pay-TV provides an incentive for households to have a fixed broadband service, while in the United States, relatively expensive mobile broadband data charges are likely to be limiting the use of mobile broadband as a substitute for fixed broadband services, Ofcom says.

source: Ofcom

source: Ofcom

Reliance Communications Halts Free Basics, at Least Temporarily, After Government Request

The Telecom Regulatory Authority of India has asked Reliance Communications to stop the Free Basics service, at least temporarily.

"We have asked them (Reliance Communications) to stop it and they have given us a compliance report that it has been stopped," a senior government official said, the Times of India reports.

It always is hard for any firm regulated by a government entity to resist such "requests."

Free Basics, called by many a zero rated approach, allows mobile consumers to use and sample a selection of Internet apps without incurring a data plan charge, or even if they do not have a data plan.

In India and elsewhere, including the United States, regulators, policymakers and policy advocates have been arguing that zero rated apps are a violation of network neutrality principles.

Others argue the practice is a business policy, like offering coupons, discounts and other promotions.

In the United States, the Federal Communications Commission has requested more information from mobile service providers about programs that allow users to listen to streaming music, or watch streaming video, without incurring usage charges on their mobile data plans.

The T-Mobile US "Binge On" program provides an example of that effort. AT&T, meanwhile, offers a sponsored data program where advertisers can sponsor data consumption by consumers, much as toll-free calling works. Verizon, for its part, also is working on a sponsored data program.

Internet Access by Smartphone Now Depresses Fixed Network Internet Access

As wireless substitution has been a major trend in voice communications, it now is measurably an issue for high speed access as well.

About 67 percent of U.S. adults have access to fixed network high speed Internet access, according to the Pew Research Center, down slightly from 70 percent in 2013.

Reliance on mobile Internet access appears to account for the change. More Americans are “smartphone-only” in 2015 than was the case in 2013.

Some 13 percent of adults rely on their smartphone for online access at home, up from the eight percent who did so in 2013.

The increase in “smartphone-only” adoption largely corresponds to the decline in home broadband adoption, according to Pew Research Center.

Smartphone adoption has reached parity with home broadband adoption (68 percent of U.S. adults report they use a smartphone, the same percentage as report using at-home fixed network Internet access.

The bottom line is that 80 percent of U.S. adults have either a smartphone or a home broadband connection, a small change from 2013, when 78 percent had one of these two access means.