Wednesday, December 9, 2015

In Most Competitive Markets, The Low Cost Provider Wins

It has long been my contention that, in a competitive market, the low-cost provider wins. So average revenue per account, while important, arguably is not as important as operating cash flow, operating costs as a percentage of revenue, and therefore actual profit margin.

In that regard, consider subscriber acquisition costs, a figure that typically includes attributed marketing costs, including discounts and other promotions, per subscriber, for linear TV and mobile service.

Dish Network and AT&T’s DirecTV (prior to acquisition by AT&T) subscriber acquisition costs were about $868, on average. Comcast incurred SAC costs of $1980 per new account, while CenturyLink had $2352 per new account.

It has been estimated that some independent third party suppliers, such as Ting, spend only about $125 to acquire a new video customer.

That is not the only key long-term input, since Ting also pays high prices for its content, compared to Comcast, AT&T or Dish Network.

The important point, though, is the substantial gap in customer acquisition costs.

The same sort of disparity exists for mobile service provider subscriber acquisition costs. Verizon invests about $484 to get a new mobile account. AT&T invests about $583 to get a new mobile account, while T-Mobile US invests only about $169.

Sprint, on the other hand, has to spend a whopping $1440 to get a new account, while Ting spends perhaps $80.

There is, in other words, an order of magnitude difference between Ting SAC and costs for tier-one competitors.

In the mobile realm, Sprint spends an order of magnitude more money than its other tier-one competitors, and two orders of magnitude more than Ting.

To be sure, there are many more elements to full business models, so subscriber acquisition cost differentials are not directly indicative of overall business model advantages or disadvantages.

But they do suggest how much room might exist for competitors.

Non-facilities-based service providers in the U.S. competitive local exchange industry, formed in the wake of the Telecommunications Act of 1996, which deregulated U.S. voice services,  largely failed.

One key reason was a not-compelling cost structure, once mandatory wholesale discounts were revised from about a 60-percent level of retail prices to perhaps 20 percent from retail prices.

Up to this point, only U.S. cable TV operators, who already had network assets, marketing organizations and other assets, managed to become serious competitors in the voice and Internet access business.

What seems to be happening is that new independent competitors are discovering that, under some circumstances, they can afford to build fiber to home networks, and operate them efficiently enough, to make a business case work, where larger providers, with higher embedded costs, have not been able to do so, as well.

The issue now is the number of local markets where that is possible, especially now that tier-one providers are moving to boost delivered Internet access speeds up to a gigabit, albeit at low triple-digit prices, where many independents price price below that level, in high double-digits.

source: Seeking Alpha

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