2015 Inflection Point in U.S. Fixed Network Business?

It looks as though 2015 could have been an inflection point, where it comes to installed base and market share in the U.S. fixed network high speed Internet access business. Cable TV operators have had the largest market share, and have been steadily taking market share, since at least 2008 or so.

A logical question is “why” the shift is happening, and the logical answers are several. Cable TV has simply been able to upgrade its speeds faster than telcos have been able to do, in large part because the DOCSIS platform largely allows upgrades without full rebuild of the access network, where telcos generally have to rebuild plant (fiber deeper into neighborhoods or all the way to the customer premises) to match cable TV speeds.

The corollary question might be “why” most telcos have not invested more heavily into next generation access infrastructure.

That is a more complicated question. In some cases, requisite capital is not obtainable. In most cases, the business model is questionable or at least difficult.

One might well argue that the telco fixed network business is post-peak and declining. Voice take rates are close to 50 percent, meaning that telcos have lost nearly half their former voice customers.

Linear TV has helped, but now net linear video customer account additions are dropping. And telcos have been losing the high speed access market share battle as well.

Some might argue a rational executive would harvest returns in the fixed network segment to the greatest  extent possible, and simply invest elsewhere for revenue growth.

That is not to say the business cannot be sustainable, only that it is not sustainable in the current circumstances, with high fixed costs and declining revenue.

In fact, some would argue, cable TV companies are on a growth path that makes them the dominant “communication” providers in the fixed network segment. Whether telcos or newer providers are the number-two providers in at least some markets is a growing question.

source: BTIG

10 Gbps in Singapore

Singapore's M1 has joined SingTel in offering 10 Gbps residential high speed access service, illustrating the difference in “developed” and “developing” Asia, where it comes to high speed access.

M1 is offering the service for S$189 (US$124) per month on a 24-month contract. Residential service at 1 Gbps costs $39 (US$26).

SingTel launched 10 Gbps residential Internet access Internet access  services earlier in February 2016, at the same price now offered by M1.

China is expected to introduce 10 Gbps service in 2018.

source: We Are Social

Revenue-Per-Megabyte "Always" Drops; Sometimes Faster than Others

No market ever grows to the sky, financial analysts sometimes quip, while maturing markets often see competitive pressures that lead to price cuts and thinner profit margins.

The reason is simple enough: in a mature market, new accounts generally must be taken from other existing providers. These days, saturation and new competition can come rather suddenly.

As important as mobile services have been over the past couple of decades as the single most-important driver of service provider revenue growth, big changes are happening. Globally, subscriber growth has flattened.

In many markets, the immediate revenue growth opportunity is incremental data services revenue. Beyond that, similar big new sources remain to be discovered, which is why there is so much attention paid to the Internet of Things.

If sales to humans are saturated, then the next big wave of growth might well come from sales to enterprises who require huge sensor and control networks, or sell retail mass market products using such sensor capability.

source: Cisco

Of course, new competition--in addition to the underlying price-per-megabyte price drops that are characteristic of chip-based products--can disrupt even data markets that are relatively early in their growth cycles.

Reliance Jio's launch of 4G services in 2016 could disrupt data pricing in the Indian mobile service provider market, causing revenue-per-megabyte to tumble 30 percent to 40 percent this year, according to the India Ratings and Research (Ind-Ra).

To be sure, lower revenue-per-megabyte is a fundamental trend in the transport and access business, so a decline is not unexpected. Only the magnitude is unusual, for a one-year period.

At the same time, given expected lower prices, data services average revenue per user also will decline, although the number of accounts should increase, while data consumption also climbs, over time.

Revenue per megabyte declined by 4.5 percent to 5.5 percent, sequentially, in the third quarter, for Bharti Airtel and Idea Cellular.

Ind-Ra believes expects a further softening of data tariffs in the current year of perhaps negative eight percent to 10 percent.

Those are among the least controversial observations that could be made about Reliance Jio’s entry into the Indian mobile services market.

India Ratings and Research (Ind-Ra) “expects the launch of Reliance Jio Infocomm Limited (RJio) to intensify competition which will squeeze the market share, EBITDA margins and credit metrics of incumbents.”

At the same time, debt burdens will increase, as competitors and Reliance Jio itself invest heavily in their networks and spectrum.

Ind-Ra also expects voice revenue to decline. Airtel and Idea reduced voice tariffs by eight percent to 10 percent last year.

Those changes could come even as growth in the often red hot smartphone market is slowing globally, for example.

Even if India is predicted to become the world’s second-largest smartphone market by about 2017, trailing only China, India smartphone growth rates to 2017 will drop from 47 percent in 2015 to about 17 percent in 2017, according to Strategy Analytics.

Communications Policy is Becoming Disconnected from Reality

High speed access markets in the United Kingdom and United States show a pattern that should fundamentally challenge the prevailing communications policy framework. Simply put, lightly-regulated cable TV operators are emerging as the dominant suppliers of consumer triple-play services.

Telcos not only are losing installed base and market share, but not are facing additional pressure from cable TV suppliers in small business, mid-sized and increasingly enterprise services as well.

Soon, cable TV will enter the mobile business as well. At every turn, some telco advocates have suggested cable would not succeed. Those predictions have been wrong, every time.

Now we also see lightly-regulated Google Fiber, independent ISPs and municipalities creating new alternatives as well.

That is going to cause bigger and bigger problems for regulators and policymakers over time, as policy becomes ever more disconnected from commercial reality.

Increasingly, not only is the “telecom is a monopoly” framework ceasing to be relevant, but policies that assume that framework are clashing with market realities that eventually make clear that legacy telcos are, in fact, not dominant providers, in any sense of the word, in the fixed networks business.

Consider only the strategic high speed access market.

In 2014, for the first time, U.K. cable TV high speed Internet access connections had average speed higher than that of fiber broadband services for the first time.

In the United Kingdom,  cable operators also are providing a disproportionate share of the fastest connections.

Average telco ADSL speeds were 6.7 Mbps in November 2013 compared to 5.9 Mbps in May 2013, according to Ofcom.

In the U.K. market, the average download speed of residential cable broadband connections was 40.2 Mbps in November 2013 compared to 34.9 Mbps in May 2013, an increase of 5.3Mbps over six months.

source: ISP Review

In the United Kingdom and the United States, cable TV high speed connections are faster than fiber to home connections.

Half of households in the U.S. market were, in 2013, able to buy access at speeds between 100 Mbps and a gigabit per second. Some 80 percent could buy service at 50 Mbps or more.

Just about 30 percent of telco customers were able to buy service at 50 Mbps or faster. Just about 10 percent of telco customers were able to buy service at 100 Mbps or faster.

In fact, Bain and Company suggests telcos might have about 30 percent of the installed base of high speed access customers in 2020, and could drop further to about 20 percent installed base by 2030.

source: Bain and Company

Cable access has been faster than digital subscriber line in the U.S. market since at least 2005.

source: FCC

source: Ofcom

The point is that our older models are ceasing to correspond with “facts on the ground,” where former monopoly providers are being displaced by new competitors.

That might not be true--so far--in the mobile business. But trends in the fixed network business are clear enough. Where the original problem was limiting telco market power to encourage competition, the future problem will be whether former telcos have viable business models, and if so, how they will have to change.

Some of us would therefore argue that it almost never makes sense to waste time regulating more heavily any industry--or industry segment--in decline. Market dynamics already are erasing former incumbent market power.

Of course, that still leaves two fundamental choices: equalize and lighten regulation for all providers, or tighten and equalize regulation for all providers. People will disagree about which approach is better, in terms of encouraging continual innovation and investment.

But the current framework cannot continue forever. It is breaking.

Ofcom Decides Not to Fully Separate Openreach from BT

The U.K. regulator, Ofcom, has concluded, after a review of U.K. communications structure, that it is not best to fully separate fully separate BT from Openreach, the wholesale services division of BT, as a way of promoting innovation and investment in U.K. fixed network communications.

In Australia, New Zealand and Singapore, full separation exists as the current framework for access services.

Inevitably, disagreement will continue, as the present structure might not satisfy competitors or regulators  over the long term. Wherever wholesale access is provided, there are never-ending disagreements between retail buyers and facilities owners about the appropriate prices and policies for allowing such access.

A number of other approaches to robust  wholesale access already have been taken by a number of other countries, though without embracing the full “divest the network” approach taken by Australia, New Zealand and Singapore.

In Belgium, Germany, the Netherlands, Sweden and Spain, wholesale access to “bitstream” services is the framework.

In France, wholesale access to access fiber is the wholesale framework. In the Netherlands and Sweden both bitstream and fiber access products are available.

In most cases, the objective has been to encourage further investment in next-generation access networks, in addition to fostering competition.

All those efforts revolve around ways to encourage--or force--incumbent telcos to invest, while also encouraging immediate competition.

The problem, some would note, is that the two objectives might be mutually exclusive, to a large extent, in the absence of significant facilities-based competition.

Incumbents virtually always complain that the huge upfront capital investments they must make place the risk squarely on the incumbents, while competitors are able to avoid the investments, yet still reap the rewards of using the networks.

Other competitors, of course, are quite able to model the financial impact on their own businesses of building their own facilities, instead of leasing access. Those competitors nearly always conclude that they are better off renting access, rather than building and owning.

Granted, there are differences in legacy market structure and business thinking in the United States and Canada. There, there already are two broadband access networks ubiquitously deployed.

And though many policymakers would disagree, the U.S. emphasis on creating facilities-based competition is made easier since two fully-deployed networks already operate, virtually nationwide.

Recent investments by Google Fiber, third party Internet service providers (Sonic and Ting, for example), as well as a growing number of municipal and now some dark fiber networks suggest a growing number of actors believe they actually can build their own networks.

There still seems to be no single “right framework” for encouraging both rapid investment and robust competition.

The other huge issue is market context. In few countries can mobile alternatives be discounted. Nor, in most countries, can risk and reward in the fixed network business case be ignored, either.

Always a hugely capital-intensive undertaking, financial returns from new next-generation fixed network investment now are tougher to justify as most markets have gotten more competitive, anchor product categories have reached maturation and begun declining, and fixed wireless, mobile and other possible platforms make the return part of any business model less certain, and smaller than in the past.

Regulators have been studying and debating the merits of structural and functional separation for decades. Wholesale obligations, functional separation, structural separation or a reliance on new facilities competition all remain ways to promote investment or competition, or both.

But it seems nothing is definitively settled, for Ofcom or most other regulatory authorities.

Sonic Begins Marketing of Gigabit Internet Access in Parts of San Francisco

Independent Internet service provider Sonic, which operates in Northern California, says it has launched gigabit Internet access service in the Sunset and Richmond districts of San Francisco. One assumes that service is provided over Sonic’s owned fiber to home facilities.

Elsewhere in San Francisco, Sonic also is selling voice and Internet access that appears use AT&T’s fiber to neighborhood network (Sonic appears to be a wholesale ISP customer of AT&T).

Sonic’s Fusion Fiber service costs just $40 a month and includes “unlimited” domestic calling as well as unlimited international calling to 66 countries.

Sonic has previously delivered Gigabit Fiber in Brentwood and Sebastopol, Calif., plus business parks in Santa Rosa, Petaluma and Windsor, Calif.

At such prices, Sonic definitely undercuts the prices Comcast (which serves San Francisco) is likely to offer when it launches its own gigabit Internet access service in San Francisco, sometime later in 2016. In other markets, such service has sold for more than $100 a month.

U.K., U.S. Consumers Like Mobile Service More than Fixed Internet, Video or Voice

U.K. consumer complaints suggest that, overall, people are much happier with mobile service than they are with fixed network service.

U.K. consumers are roughly twice as unhappy with fixed network service disruptions than they are unhappy with mobile service disruptions.

They are nearly that unhappy with fixed network service quality, compared to mobile service quality.

Customer satisfaction trends are similar in the U.S. market, where satisfaction with Internet access and video entertainment service (and fixed voice service) is lower than satisfaction with mobile service.

source: ACSI

source: ACSI

source: ACSI

source: Ofcom

Internet Access is Not a Monopoly; Why Regulate It That Way?

The Internet ecosystem tends to move faster than government regulations are able to keep up with.

In the United Kingdom, the goal for some years has been to provide ubiquitous 30 Mbps Internet access. Under the current definition, “super fast” access is said to be 30 megabits per second.

But U.K. cable TV networks, which reach about half of U.K. households, are able to provide Internet access at speeds up to 100 megabits per second, on their own networks.

One still finds data collection on “fiber to home” capabilities, for example. But that simply ignores all the other ways ISPs already are providing service between 100 Mbps and 1 Gbps, on alternate commercial networks.

Some might argue there is no alternative but reliance on a single network. But that is not the case for a growing number of countries, where two or, in some cases, three fixed high speed access networks are commercially available.

Telecommunications is no longer a natural monopoly. Neither, it appears, is high speed Internet access. Maybe we should stop framing telecom policy matters as though monopoly still exists.

That is not to say some degree of market power might yet exist. But policy seems always to lag reality in markets and technology.

So policy might need to look more at where we are going, and less at where we happen to be at the present moment. Different decisions might then be deemed feasible.

source: Ofcom

source: Ofcom

Frontier Communications to Launch Linear Video in 40 Markets

Frontier Communications plans to launch linear video service to more than 40 markets, representing approximately three million households, over the next three to four-years.

Once complete, video service will be available to about 50 percent of the 8.5 million households in Frontier's existing footprint. Frontier also will be adding video subscribers as the result of its acquisition of Verizon properties in California, Texas and Florida.

In total, Frontier will pass about seven million homes with video-capable networks.

Some might think Frontier Communications is making a mistake, investing in linear video at a time when the market actually is shrinking. The same sort of argument was made about AT&T’s acquisition of DirecTV.

source: Marketing Charts

But actions by other actors, such as Google Fiber, show that the business case for a fiber to home network is dramatically improved when an ISP can sell both high speed access and entertainment video. In other words, selling two or three services boosts average revenue per account.

Also, adoption of streaming services will slow, sharply, soon, some predict. Combined with slowish erosion of linear subscription behavior, that suggests a rather longish period where linear remains a key source of revenue and cash flow for any fixed network service provider.

High speed access might still be the anchor, as voice revenue dwindles. But linear video remains significant.

source: Telco 2.0

Compression technology might have quite a lot to do with the business model.  Frontier says its high definition TV signals will consume just 2.5 Mbps per channel.

So a household with four HDTVs active at once will only require 10 Mbps.

Frontier also says the incremental capital investment to enable 1.3 million households for video will require less than $150 million spread over several years.

source: Activate

Maybe Service Providers Need to Follow Banks

It is too bad that service providers have to send bills to consumers every month. Such processes, and the questions they generate, are one reason customer service chores sometimes are onerous, and why consumer ill will is garnered.

Some banks have found that mobile phone transactions can offload as much as 90 percent of the transactions that once required a JPMorgan teller.

In 2015, about 65 percent of new JPMorgan customers used mobile capabilities within six months of opening an account, up from 53 percent.

Customers say they are happier, and JPMorgan cuts its operating costs and churn.

JPMorgan estimates that each teller transaction costs $2 to $3, compared with 10 cents for the same service using an automated teller machine and just a few cents via a mobile device.

Mobile devices are helping with customer retention as well.

People who use their bank's smartphone app frequently are 40 percnet less likely to switch banks than those who do so only rarely, according to a study JPMorgan conducted.

Some service providers have processes that are easier to use, more pleasant and can be “self provisioned.” Some service providers literally force customers to interact with a call center.

But most service providers would do well to emulate at least some of the processes banks have found customers like, use and that also lower operating costs.

source: JPMorgan Chase

source: JPMorgan Chase

Top U.S. Linear Video Providers Lose Subs in 2015 for First Time Since 2006

For the first time since Verizon and AT&T launched their TV services in 2006, the six largest U.S. linear video subscription providers lost subscribers for a full year, despite gains in the seasonally-strong fourth quarter, says Ooyala.

There possibly should be an asterisk, however. Some of those firms now include streaming accounts in their subscriber totals. That is akin to a mobile operator including prepaid accounts as well as postpaid accounts in the subscriber totals, mixing higher revenue, higher value net adds with lower value, lower revenue gains.

In the fourth quarter of 2015, DirecTV, AT&T, Time Warner, Comcast, Dish Network and Verizon gained a net 125,000 subscribers.

DirecTV (owned by AT&T) gained 214,000 subscribers in the U.S. market, but AT&T’s  U-verse also lost 240,000 for the quarter.

source: Business Insider

It was AT&T’s third consecutive quarter losing accounts, the only three quarters AT&T has failed to gain linear video accounts since 2006.

For the year, AT&T was lost a net 355,000 subs and DirecTV lost a net 568,000, Ooyala says.

Comcast added a net 89,000 accounts for the quarter. For the year, Comcast was down 36,000 accounts.

But Comcast now seems to be including streaming customers to its linear video totals.

Dish Network lost 12,000 subs in the quarter and 81,000 over the year. Notably, Dish Network definitely now includes Sling TV customers in its account totals.

According to MoffettNathanson, Dish might actually have lost 141,000 linear subs in the quarter.

Time Warner Cable added 54,000 video customers in the last quarter and 32,000 over the year,

Verizon adding 20,000 FiOS television customers in the quarter, its lowest level of net additions  since 2006.

For the year, the six firms lost 781,000 accounts.

In 2014, the companies added 472,000 accounts. In 2013, they added 500,000 accounts.

Nobody will be particularly surprised by the findings. Virtually everyone considers the linear video subscription business a declining legacy business.