Linear TV Value Prop Keeps Getting Worse

Linear TV subscriptions have been cannibalized by video streaming alternatives for a decade, partly because on-demand provides more value; partly because some like the lower cost per service; partly because linear value now increasingly comes down to sports, news and unscripted reality content. 

But lower overall cost seems less and less a value driver, as many consumers buy four or more streaming services. Most scripted content has largely shifted to streaming delivery. 

source: Ark Investment 

A recent survey by FinanceBuzz of 1,000 U.S. adults found that 24 percent of households are buying “at least three additional streaming services than they did one year ago,” while another 21 percent of respondents are now paying for two more streaming services.

The point is that consumers are buying multiple services at a higher rate than they did five to 10 years ago. 

source: Financebuzz 

About 25 percent of respondents spend more than $75 per month on streaming subscriptions. If you assume the typical linear service costs between $60 and $80 a month, it is clear that consumers are not buying streaming services because the necessarily save money. 

The issue is where linear TV value will lie, as the shift of scripted content to streaming continues. Even sports now are shifting to streaming delivery, leaving unscripted reality shows and news as the anchors for linear. That will be a declining value proposition for a greater range of customers over time. 

I, for example, never watch anything but sports or news on linear, so the entire value proposition comes from just those two types of programming. Most channels never get watched, which always was true, even before streaming. 

But the whole value-price relationship keeps getting worse. Not that many younger people watch news channels and more sports content is moving to streaming, perhaps leaving unscripted reality TV as the last bastion of “value” for linear TV, assuming one watches that genre. 

The point is that it is fairly hard to justify spending $60 to $80 a month for what boils down to regular viewing of two news channels and one-season viewing of up to two sports channels. The only channels that get watched all year are the two news channels. Looked at that way, the value proposition is even worse.

Is Net Neutrality a Problem Creator?

Network neutrality has been worse than a solution in search of a genuine problem: it actually causes actual problems to fester. Consider only auto-run video. 

Consider the amount of data consumption by most customers of any access network. How much consumption actually is quite unintentional and caused by auto-run video? Quite a lot, as it turns out. 

You might argue data consumption of the unwanted sort would be lessened if auto-run video could be lessened if internet service providers could prevent auto-run videos from playing “automatically.” But that would be considered traffic shaping that network neutrality does not allow. 

But some forms of traffic shaping already seem to be quite common, despite net neutrality rules. Many mobile service plans specifically limit video resolution, for example, even if content providers and advertisers create their content at high-definition and 4K image quality levels. In principle, limiting resolution of some content could be considered a net neutrality violation as it shapes traffic (imposes rate limits), though applied in a way that all content suppliers are equally affected. 

Though advertisers and content owners arguably prefer auto-run, that practice increases data consumption for customers and ISPs who do not benefit from the practice. For both access network customers and ISPs, it is unwanted data consumption.

And the data usage is  “unintentional” only on the customer’s part. That unwanted usage is quite intentional on the advertiser’s part. Advertisers and content providers like--and embed--auto-run functions to increase “views.”

Keep in mind the various constituencies in the content value chain whose behavior shapes data consumption. To limit auto-run requires lots of agreement to do so, and such agreements are not necessarily in an advertiser’s or content provider’s or commerce platform’s interest. 

In principle, the ecosystem could agree to reduce auto-run video and take other measures to reduce customer or ISP unwanted data consumption. But such agreements require key stakeholders to agree, even when auto-run furthers some business interest. 

And network neutrality rules make some decisions impossible, such as adjusting quality differentially. That Is more a problem on fixed networks, which bear the brunt of net neutrality rules, than on mobile networks, where the rules are less stringent in application.  

Devices of various screen sizes consume different amounts of data, but screen resolution can only benefit so much from higher-resolution settings that are more data-intensive. On a small mobile phone screen, the human eye cannot discern the difference between 4K and high-definition quality. And HD arguably does not improve user experience over standard definition.

So it is possible for many mobile service plans to deliberately degrade image resolution without running afoul of net neutrality rules. 

Network management rules also are allowed, even when net neutrality rules hold. Downloads and software updates can be managed to avoid doing so at times and locations of peak congestion, for example, without necessarily violating net neutrality rules. 

So is traffic shaping of this sort simple "network management," or is it a violation of network neutrality?

The point is that net neutrality represents a policy that apparently was not needed, aimed to solve a problem that did not arise, and more importantly, prevents ISPs and other partners from taking measures that enhance user experience while avoiding unnecessary and unwanted data consumption. 

Some argue voluntary agreements can be crafted. Sure, Wi-Fi offload helps. More-affordable infrastructure helps. But the internet ecosystem necessarily is loosely-coupled. In a closed ecosystem, everything might be optimized to avoid excessive and unwanted data consumption. That is not how the internet ecosystem works. 

Voluntary agreements can be crafted, but only when all the affected parties agree it is in their own interests. To be honest, app and content providers, and their business model partners, likely have no reason to limit auto-run video. 

Network neutrality rules arguably impede creation of access rules that would reduce unwanted data consumption, helping ISPs on the cost side without harming customer experience. But it is not so clear advertisers and content owners would agree. Auto-run video exists because it has a perceived business benefit. 

How often in life do we see ecosystem partners voluntarily harming their business models to make others in the ecosystem happy by aiding the models of the other partners?

We might need to be rid of netowrk neutrality to allow ISPs to craft policies that avoid significant costs on their part, without harming their customers' user experience. Voluntary rules are possible if we can resolve issues of vested business interests of others in the value chain.

Metaverse or AR/VR? It Matters Which Definition One Uses

With the caveat that we all can be wrong when predicting the future, a new study of 350 chief technology officers, chief information officers and IT director technology leaders from the U.S., U.K., China, India, and Brazil suggests 2023 technologies of note are cloud computing (40 percent), 5G (38 percent), metaverse (37 percent), electric vehicles (EVs) (35 percent), and the Industrial Internet of Things (IIoT) (33 percent).

What might be shocking is the appearance of "metaverse" on the list of 2023 priorities. All the others seem uncontroversial to a large extent. The inclusion of metaverse is the surprise. But the key to understanding the response is to note that the functional representation of metaverse is goggles, headsets or glasses used for VR or AR experiences and content.

Many of us would not consider those to be "metaverse."

As you might expect, respondents identified 5G and ubiquitous connectivity  (71 percent); virtual reality (VR) headsets (58 percent) and augmented reality (AR) glasses (58 percent) as the near-term key technologies. 

The IEEE study  probed for views about 2023 technologies expected to be important even for longer-run developments, including the metaverse.

It is unclear how aggressively respondents will be pursuing use of what we might term “pre-metaverse” tools in 2023, however. As with many relatively open-ended surveys of attitudes, respondents might not have had to make firm predictions about how important, and when, various important technologies would correlate with actual information technology spending. 

Views about use of artificial intelligence also vary, but might also be considered less likely to drive major investments in 2023. 

And despite slow going at first, respondents expect 5G  to affect vehicle connectivity and automation in 2023, fully 97 percent of survey respondents agree.

Most affected in 2023 are: 

• (56 percent) remote learning and education

• (54 percent) telemedicine, including remote surgery, health record transmissions

• (51 percent) entertainment, sports, and live event streaming

• (49 percent) personal and professional day-to-day communications

• (29 percent) transportation and traffic control

• (25 percent) manufacturing/assembly

• (23 percent) carbon footprint reduction and energy efficiency

Also, 95 percent believe satellites for remote mobile connectivity will be a game-changer in 2023. 

As always, when there are no consequences for being “wrong,” the predictions are to be considered indicative of possible future trends rather than correlated directly with 2023 spending. 

All of us who have had to make technology forecasts have a poor track record, as predicting the future is inherently difficult. Nor did the survey force respondents to consider all the other assumptions a fully-formed forecast would require. 

It might not be wrong to argue that most predictions are wrong, not only in terms of what happened, but also how long it took to get there. There are many examples of how we get it wrong all the time.    

5G Revenue is Right Where the Revenue Already Is, With One Exception

There are many reasons why mobile operators have worried about the 5G business model. They might prefer not to make the capital investment; they recently upgraded national 4G networks; average revenue per account might not increase; new spectrum licenses are expensive; costly small cell networks will have to be built; new revenue sources will be few and far between, to begin.

Though mobile operators might not like the frank answer to the question “where is the 5G revenue?,” the answer, for the most part, right now, is “right where it already is.” Which is simply to say that the bulk of “5G” revenue, with one exception, comes from existing or new customers switching from 4G to 5G.

The one exception is fixed wireless, which is the first new revenue source possible with 5G than was not so common with 4G, though that source did exist. Eventually, new sources will develop. The likely candidates include network slices, private networks, edge computing or some involvement in internet of things ecosystems. 

But all that will take time. 

source: Juniper Research

The other issue is that some markets have more revenue potential because average revenue per account is higher than the global average. The U.S. market and likely Canada are in that category. As Juniper Research argues, 5G revenue, as a proportion of the global total, is greater than 5G accounts might suggest. The other region where 5G revenue should exceed global norms is Western Europe, according to Juniper Research estimates. 

source: Juniper Research

Of course, there is that other next-generation network: the fixed network. But as important as home broadband might be for revenue earned by most fixed network service providers, it is not a product with a high growth rate. In fact, growth rates are slowing, according to Point Topic. Where growth rates were in the two-percent range in 2021, they have dropped to about 1.3 percent in 2022. 

source: Point Topic 

The causes are several. The war in Ukraine has depressed growth in the Eastern Europe region. Saturation is an issue in Western Europe and North America. Economic issues might be tempering net additions in other markets. 

In the mobile markets, growth can be measured in several ways: total accounts or subscribers; growth of 4G or 5G; growth of mobile broadband accounts. 4G and 5G growth rates are higher than global mobile account growth rates, which might run about three percent per year. . 

How Big a Revenue Driver is "Home Security?"

EE is getting into the home security business. It is a logical and not unprecedented move for either a mobile operator or a fixed network access provider hoping to create a significant new revenue stream. 

U.S. cable operator Comcast has been doing so since 2013, but interest in the business predates that entrance into the market. AT&T had gotten into the business using 3G mobile networks, but wound down the business when it sunsetted the 3G network. 

The demand for home monitoring appliances might be a separate business from the remote monitoring services business that telcos and cable operators seek to enter. The former includes a wide range of appliance suppliers, the latter focuses more on monitoring managed monitoring services, though self-monitoring options also are available. 

It remains unclear how big an opportunity this might represent for access providers. Many see home security as a subset of the smart home market, which includes both self-managed appliances and systems as well as managed services.   

What is an Access Provider's Core Competence?

Liberty Global is looking at selling its Belgian tower network. Separately, Liberty and Telefonica are investigating selling  U.K. towers as well. Both deals illustrate the changing value of asset infrastructure in the mobility business. Where once tower ownership was considered essential, it now is considered optional. 

That in turn raises logical questions about the value of towers as business moats. As it turns out, ownership of radios on towers, and not the towers, is considered important. Ownership of spectrum licenses also remains strategic. 

In a tactical sense, mobile operators have found they can raise capital to reduce debt or increase investments by selling tower assets. In a strategic sense, the move to divest towers, create joint ventures or wholesale-only access in the fixed networks business raises questions about the business moats formerly provided by ownership of scarce access networks. 

Many of the same questions could be raised about digital infrastructure assets of other types, including data centers and optical fiber assets. To the extent that owners are willing to sell off all or parts of their infra assets, that suggests a business decision that such actions preserve what is essential to the business while creating greater liquidity. 

But the corollary is that those assets might not be sources of business advantage they once were thought to be, in whole or in part. 

As the asset light business model gains more traction, issues about structural separation, once thought to be a regulatory issue, not become matters of business strategy. In a growing number of cases, access providers are choosing to deemphasize asset ownership in favor of a more asset-light approach. 

Often forced by necessity, such moves still show a belief that some parts of the digital infra asset base can be shed without loss of too much competitive advantage. 

There are other corollaries. Telco executives once claimed that their core competence was “knowing how to run networks.” That makes less sense once ownership of the networks is given up, in part or in whole. 

So “running networks” turns out not to be the core competence. That might come as a shock to many who work in the industry, but is an inescapable conclusion. The ability to shape the regulatory process might arguably be closer to “core competence” than the ability to run networks. 

Telecom Infra Project Looks at Open Fixed Networks

Telefonica, TIM and Vodafone are among ecosystem participants leading the Open Fixed Access Networks  sub-group of the The Telecom Infra Project’s Fixed Broadband Project Group.

The sub-group aims to drive the deployment of open, disaggregated and interoperable fixed network access technologies.

That includes interoperability between multiple supplier solutions, interworking between optical line terminals and optical network units,  as well as integration with software-defined network controllers, allowing service providers to mix and match network elements supplied by different infrastructure suppliers. 

The sub-group also seeks the virtualization and disaggregation of hardware and software, removing vendor lock-in.

Improved operating efficiencies also will be investigated. 

Home Broadband Growth Slows

As important as home broadband might be for revenue earned by most fixed network service providers, it is not a product with a high growth rate. In fact, growth rates are slowing, according to Point Topic. Where growth rates were in the two-percent range in 2021, they have dropped to about 1.3 percent in 2022. 

source: Point Topic 

The causes are several. The war in Ukraine has depressed growth in the Eastern Europe region. Saturation is an issue in Western Europe and North America. Economic issues might be tempering net additions in other markets. 

In the mobile markets, growth can be measured in several ways: total accounts or subscribers; growth of 4G or 5G; growth of mobile broadband accounts. 4G and 5G growth rates are higher than global mobile account growth rates, which might run about three percent per year.

The Lead Product Sold by Access Providers in 10 Years Might Not be Invented Yet

Some might think it is mere hyperbole to argue that connectivity service providers literallly must replace half their current revenue every decade. But that has historically been the norm in the competitive era of connectivity. To use the most-obvious examples, nearly all revenue and profit in the period before 1980 was earned selling voice. Does anybody think that is the case today?

Instead, globally, mobile service is what drives both revenue and revenue growth. On the fixed networks, internet access (home broadband) drives revenue, not voice. In developing markets, mobile subscriptions still drive growth. But in developed markets internet access is the revenue growth driver.

In the enterprise wide area networks market, X.25 once drove revenue, followed by frame relay. ISDN and ATM nver caught on. Now it is dedicated internet access, Ethernet transport or MPLS that are key revenue generators. And MPLS is being replaced by SD-WAN.

The colloquial way of expressing this is to say "my top revenue-producing product in 10 years has not been invented yet." Again, that might seem hyperbolde. But think about 4G, 5G and 6G. Each successive next generation network was introduced 10 years after the prior generation. And each successive generation displaced prior generation customer accounts,

Part of the reason for revenue change of that magnitude is product obsolesence. The other issue is declining average selling prices.

This graph of mobile termination rates--the fee a mobile network charges another network for completing an inbound call--illustrates a couple of principles relevant to the connectivity and computing industries. To the extent that computing costs are driven by chip-level capabilities that double about every 18 months, cost-per-operation drops over time. 

source: iconnectiv 

In other words, the cost of executing a single instruction or operation will fall rather sharply every decade, as they essentially fall by half every two years. In this example of mobile termination rates, costs fell from seven cents per minute to less than two cents per minute over a decade, or more than half--and close to three times--in 10 years. 

All other things being equal--such as holding traffic volumes steady--that means termination revenue would have fallen by close to three times, and clearly more than half, over that decade. In practice, since call volumes rose, the decline was likely less, in absolute terms. 

For example, the global number of mobile subscriptions grew about 52 percent between 2010 and 2019, so there were more people making mobile phone calls. But per-minute charges dropped faster, close to 100 percent lower in some countries. 

Other charges also declined. Between 1997 and 2022, for example, the cost of U.S. mobile 41phone subscriptions dropped by 50 percent. So the actual rate of decline for recurring service was not as fast as the decline of calling costs per minute. 

The actual change in revenue sources was complicated. Revenue was boosted by additional subscribers, replacement services (mobile internet access in place of voice and messaging) and higher possible usage in some cases. But revenue was diminished by lower average unit rates for subscriptions, calls and text messaging. 

That illustrates a second point about revenues in the connectivity business: about half of all current revenue earned by a service provider will be gone, every decade. That might sound like an exaggeration. It is not. How many service providers sell ISDN, X.25, frame relay or ATM anymore? At one time, each of those services was, or was supposed to be, a key driver of wide area network data revenues. 

How many access providers sell dial-up internet access anymore? And, over time, what is the typical downstream package purchased by half of all customers? At one point it might have been 1 Mbps or less. At some point that changed to perhaps 10 Mbps, then 100 Mbps, then higher. The point is that in each generation, the “product” changed. 

International and national  long distance calling rates show the same pattern. 

source: FCC 

source: U.S. Department of Justice 

The general point is that revenue sources changed over that decade, as they tend to do every decade. 

In fact, calling revenues now are minor enough that it is difficult to find statistics on calling volume or revenue, as internet access now drives revenue models. 

The Lesser of Two (Maybe Four) Evils

On*Net Fibra, the Chilean digital infrastructure company 60 percent owned by KKR and 40 percent by Telefonica, is buying rival service provider Entel’s fiber to home network for US$358, and will continue to operate as an open access wholesale network. 

Selling your network might seem the lesser of several evils: capital investment one cannot afford; inability to differentitate services; becoming a commodity or maintaining business moats. Basically, Entel is choosing to reduce capex, the virtue, at the cost of the other evils.

Entel’s FTTH network passes 1.2 million homes and businesses. On*Net Fibra will, after the deal closes, pass 3.9 million premises. The goal is to grow home and business passings to 4.3 million by 2024.

Telefonica had sold “non-core” Central America network assets in 2021, selling 40 percent of its towers business Telxius to KKR in 2017 before agreeing to flip the whole business to American Tower for €7.7 billion in 2021. Entel also sold its data centers to Equinix.  

One has to wonder whether an asset-light business model is emerging in many parts of the connectivity business. In addition to operating as would a mobile virtual network operator, some access providers might choose to specialize, narrow the scope of their services or radically reshape their customer-facing marketing, sales and support processes to achieve lower costs. 

source: EY 

Telcos using public hyperscale cloud computing services instead of managing their own private clouds provides another example of this trend. To a degree once unthinkable, access providers are reshaping, in some instances, their roles as infrastructure owners. 

In part, that is because open access fiber-to-home networks enable operating modes that cost less, while still offering required levels of network performance. The trade off is a loss of pricing flexibility, as retail prices have to reflect the wholesale costs of securing access. 

Since all competitors have the ability to purchase the same services, wholesale customers also lose some amount of ability to differentiate service levels. If every ISP offers symmetrical gigabit per second or multi-gigabit-per-second access, that ceases to be an area where competitive differentiation is possible.

So the bad news for access providers going asset light is that their products might become more commoditized than they are today. The “plus” of lower capital investment is accompanied by the “minus” of higher degrees of commoditization. 

But such trade offs have been happening for a while. Access providers have been selling physical infrastructure assets to raise cash to reduce debt, for example. Were debt not a problem, would they sell? Perhaps not. 

But most access providers struggle with the economics of building the next generations of mobile and fixed networks. Getting out of substantial parts of the digital infra ownership business seems the lesser of several evils.

Verizon Home Broadband Share "In Region" Has Not Moved Much

If Verizon now has seven million fiber access accounts, what does that imply about household penetration rates? It is not so easy to say. For starters, Fios accounts serve small business and larger business accounts, not just homes. 

Verizon homes passed might number 18.6 to 20 million. We must estimate as Verizon never seems to publish a “homes passed” figure. At seven million accounts, Fios would represent 35 percent to 38 percent of homes passed. That seems in line with Verizon’s past reporting, but it is not clear whether business accounts are included in those figures. 

My guess is that business revenue--and therefore the accounts and lines--are reported elsewhere. Given the amount of time Fios has been available, that penetration rate testifies to the amount of competition in the home broadband market, where, by and large, it is cable operators who have 60 percent or higher levels of the installed base, and may have higher market share rates (net new accounts added), at least for most of the past two decades. 

Most other incumbent AT&T executives have speculated that they might ultimately get about half the installed base of accounts. 

Long term, MoffettNathanson sees cable having a 50 percent broadband market share in markets in which they compete with fiber-to-home facilities. That implies a shift of 20 percent of the installed base from current levels: telcos gain 10 points while cable operators lose 10 points of share. 

Not all observers agree with that analysis. S&P Global Market Intelligence, for example, does not expect stepped-up telco FTTH investment to change share statistics very much, in the near term. 

But S&P Global Market Intelligence does believe new competition from mobility suppliers using fixed wireless (T-Mobile, for example) will gain about six percent share of the U.S. residential broadband market with about 7.19 million subscribers. 

It is not yet clear how much of that share gain will be claimed by upstarts in the home broadband market such as T-Mobile, and how much will be gotten by fixed wireless operations conducted by incumbents such as Verizon. 

S&P Global Market Intelligence also estimates there will be about 1.52 million satellite customers by the end of 2021, accounting for just one percent of the installed base of home broadband accounts. 

Many observers expect telcos and independent providers  to gain share. The only issue is how much and how long it takes. Historically, most telcos have found their installed base share tops out at about 40 percent of homes passed.