Fixed network telcos face extreme threats to their core business models as sales of legacy products diminish and as average revenue per unit sold drops, even as usage skyrockets. But there is some disagreement about the wisdom of telcos getting into the video entertainment business, and in what roles.
Consider only the role of video distributor. One conclusion many observers reach about linear video services is that the product is declining enough that it is not a fruitful area for telcos to pursue.
Linear video in the U.S. market is past its peak, to be sure, even as streaming alternatives proliferate. Most believe the revenue implications are clear enough: linear services with higher average revenue per unit (ARPU) will be displaced by streaming services with lower ARPU. But many, perhaps most streaming customers will buy more than one service. So, ultimate revenue impact is not as clear as one might suppose, if there were a one-for-one substitution of streaming for linear accounts.
Others might point to Comcast’s strategy, which has been to diversify away from linear video distribution since 2008, as providing further evidence of limited potential. But that is a matter of incumbent firm strategy.
In the competitive era, telcos have taken video share as cable companies have taken internet access and voice share. The point is that what is rational for Comcast is not rational for AT&T or Verizon.
But there are several reasons why it makes total sense for fixed network telecom firms to invest in linear video, even as it declines. For starters, there are very few mass market services in high demand by consumers and requiring network services. There is voice, there is internet access and there is video. All other sources remain niches, and mostly small niches.
All existing “at scale” telco products (voice, messaging, internet access, most business services) are flat to declining. Also, mobility is the biggest revenue driver for many service providers. The corollary is that the entire fixed networks business is smaller, and, in many cases, shrinking rather than growing.
So much sales volume now is in the mobile domain that the total fixed network business often is quite small, compared to mobility. That is true for AT&T, SK Telecom, Elisa and Swisscom, for example.
AT&T now earns close to 70 percent of total units sold from mobility (business and consumer), about 18 percent from video about five percent from fixed network voice and less than 10 percent from voice services.
The gross revenue and profit percentages do not match completely, but the big point is that for AT&T, fixed network voice and internet access are too small to make a difference in overall revenue and especially growth.
The other important point is that the video distribution business, on AT&T’s fixed network, already is bigger than voice and internet access put together.
Recent moves by AT&T might suggest what is possible. By units sold, AT&T product sales in the consumer market are more than 50 percent of total. Internet access represents less than 25 percent of units sold, while voice produces more than 25 percent of products sold.
Other major telcos have different sales profiles, but many leading telcos earn significant revenue from video distribution services, rivaling in many cases revenue earned from providing internet access services.
As a practical matter, there are few brand new revenue sources big enough to make a difference on fixed network service provider financial statements, where it comes to consumer services.
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