To the extent there is legitimate danger, it comes not from massive losses of telco or cable TV market share and gross revenue (though that might well happen), but “only” from a sustained dip in profit margins caused by the new competition.
In other words, assuming Google Fiber currently is sustainable itself (earning a positive rate of return), the issue is whether the competition tips either telco or cable TV profit margins below the 20-percent level, towards zero.
Nor does Google Fiber have to do all the work.
Other trends work in that direction, namely declining demand for fixed network voice and declining demand for linear video, in addition to the obvious new pressure on high speed access pricing and profit margins.
The challenge Google Fiber represents is that cable TV and telco competitors have to increase capital investment while simultaneously risking zero net increase in revenue, or even actual declines in revenue. More spending to earn less revenue, in other words.
Simply, a market rate of a gigabit for $70 a month resets consumer expectations enough to destroy existing pricing-value relationships upon which current cable TV and telco business models are built.
In other words, it is not necessary that Google Fiber, or any other competitor in the high speed access market, reduce telco or cable TV market share far below current levels.
All Google Fiber and others must do is attack profit margins. Cable TV gross margin is typically somewhere in the low 20s and net margins are maybe in the 10 percent to 11 percent range.
AT&T has net margin in the five percent range. Other telcos might have net margins in the six-percent range, with Verizon somewhat higher, at perhaps seven to eight percent.
The competition “merely” needs to reinforce existing revenue and cost trends in ways that undermine the sustainability of cable and telco business models, especially the net margin performance.
You might well argue that is why the leaders of the cable TV industry “must” get into the mobility business, or telcos “must” get into the Internet of Things business. There is simply going to be increased pressure on gross revenue and profit margins in the fixed network business.
Given existing trends--shrinking voice and slow diminution of linear video revenue--all that has to happen is enough market share pressure and share gains by the new competitors to tip the cable TV and telco business model towards zero.
To be sure, we are likely five to 10 years away from any such scenario, as Google Fiber coverage remains relatively limited, compared to the larger telcos and cable TV companies (though far beyond what most independent ISPs could sustain).
The issue is how much coverage Google Fiber would have to attain, on a national basis, to become a significant and material force on pricing in most of the market, and whether Google Fiber decides to continue pushing in that direction.
So far, Google Fiber has avoided the “NFL cities,” targeting second-tier cities instead. Whether Google Fiber can exert national market power without significant footprint in the biggest markets is an important issue.
Some have estimated the cost of a truly-nationwide network at perhaps $140 billion. But keep in mind that no other service provider serves more than about 30 percent of all U.S. homes. Whether Google Fiber would be permitted to exceed roughly that coverage, and whether it wants to, are key issues.
At least in an environment where Internet access is considered a “common carrier” service, one has to believe that the government would not let even a Google Fiber exceed about 30 percent coverage of all U.S. homes. No other service provider is allowed to do so.
So if I am thinking about how to maximize the Google Fiber market impact, I would focus on how to wring the greatest effect from operations that never will exceed coverage of more than 30 percent of U.S. households.
No comments:
Post a Comment