How Important is AT&T's U-Verse?

AT&T books something on the order of $124 billion a year worth of revenue. In the fourth quarter of 2009, AT&T booked U-verse revenues representing an annualized $3 billion. Some will note that this represents about three percent of AT&T's annual revenues.

By way of contrast, wireless already contributes about $56 billion annually. For the quarter, wireless revenues were $12.6 billion and wireless data was about $3.9 billion.

A rational observer might note that U-verse, AT&T's broadband and TV services effort, represents less revenue annually than mobile data does in one quarter. One might also argue that U-verse is not a revenue contributor that really "moves the needle" in terms of overall AT&T revenue performance.

One might also infer that a rational AT&T executive would not spend nearly the time on fiber-to-customer services that he or she would spend on wireless services, given the relatively small contribution U-verse can make to the overall bottom line, even if such broadband services represent the future of the fixed access business.

On the other hand, U-verse services have a much-higher growth profile, growing at about a 32-percent rate in the fourth quarter, where mobile revenues grew at about a nine-percent rate. Wireless data is growing at about a 26-percent rate.

Still, a rational executive might conclude that the gross revenue implications of high wireless data growth rates are vastly more signficant than equally-high growth rates for U-verse broadband services.

Some U-verse growth cannibalizes digital subscriber line revenue. And though video services have room to continue growing, that revenue source is fundamentally bounded by the total size of the U.S. multi-channel video business, where AT&T essentially takes existing revenue and market share away from cable competitors.

The wireline data business essentially can aim to grow to nearly 100 percent of the existing base of AT&T's existing huge installed base of wireless voice customers. AT&T has more than 85 million mobile voice customers.

The entire U.S. cable customer base is about 62.6 million accounts, and AT&T does not have a universal U.S. footprint. AT&T ultimately might cover 30 million U.S. homes out of 115 million total with its U-verse network.

If AT&T often appears to be a wireless company first and foremost, there is a good reason.

IPTV: Signs of Changing Behavior, Maybe

There's some important new evidence that U.K. customers who change to IPTV from conventional terrestrial TV do change their behavior in ways that boost average revenue per user, say researchers at Point Topic.

There's countervailing evidence that U.S. consumers are not so inclined.

The ability to time shift TV viewing often leads to customers using pay-per-view as well, Point Topic says.

For example, one top-ten operator has found that around a third of its IPTV subscribers buy three or four pay-per-view items per month. Since the implication is that this exceeds the buy rate for non-IPTV users, there is some potential lift in average revenue per user.

High definition TV is the other potential behavioral change. Subscribers may be willing to pay more for HDTV than for standard-definition programming, again with positive ARPU impact.

ABI Research, on other hand, does not find that U.S. consumers are changing their on-demand habits.

About 66 percent of respondents say they subscribe to some form of pay-TV service, and of those, 60 percent receive at least one additional service (telephone, Internet) from their provider.

However, only 54 percent of respondents declared themselves satisfied overall with their providers: pricing and customer service are the biggest sources of discontent.

About 41 percent of TV owners have a high-definition TV, but surprisingly, only 56 percent of this group subscribe to a HDTV service package.

A substantial 45 percent of viewers say they use pay-per-view, but not often: most do so just once a month or less.

Generally, interest in “next generation” TV services is low (although greater in younger viewers), with the one exception being the ability to move content sourced from the Internet from the PC to the TV.

Video Delivery: Some Ways Better Than Others

At some point, as much more video starts to be delivered using IP networks, network marketers and engineers are going to have to come up with ways to entice people to use alternate means of delivery, when it is feasible to do so. At some point, it simply will not make sense to chew up valuable voice and interactive data bandwidth for relatively low value YouTube clips, as entertaining as they might be.

Consider for example what Qwest is doing: it has esentially decided to keep all traditional linear video programming, including high definition TV and on-demand programming intended for TV screen viewing, off its IP pipe. It is doing so by delivering linear TV in the most bandwidth efficient means possible, namely by satellite, streaming point-to-multipoint.

As would be the case for IP multicasting, the idea is simple" launch one single copy of each program to a virtually unlimited number of users who can view the stream at the same time or on a store-and-watch-later basis (TiVo or another digital video recorder).

That will reserve the IP connection for unicast video and other interactive applications. The same sort of "offloading" principle is used by Netflix with its "DVD in the mail" approach. The point is that we do not have to force everybody to use IP bandwidth for watching unicast video when multicasting, sideloading, satellite, physical media or some other approach, including time-shifted delivery, might work just as well.

The baleful alternatives will find service providers unable to meet customer demand for bandwidth because there no longer is any money to be made; a dramatic increase in monthly prices; or both. Consumers are smart. Given a reasonable set of different ways to get video, at discrete prices for different delivery times and media, they'll make choices that relieve pressure on access bandwidth bottlenecks.

54% of U.S. Cable Operators Face Telco Video Competition

Fifty-four percent of the cable systems surveyed by In-Stat say they face a telephone company that already is offering video service in their cable TV service area, In-Stat says. Oddly enough, though rural areas often are considered to be service backwaters, lagging urban and suburban areas in broadband access, for example, rural areas often are places where telcos have moved early to offer entertainment video services.

Historically, rural telcos have been licensed cable operators as well. But some telcos that aren't wired competitors rely on satellite partnerships to get the job done. And there's a scale effect here. It takes a long time for a large telco to upgrade nearly any part of its infrastructure.

Small operators, simply because they are small, can upgrade much faster. Keep in mind that rural operators often have a few hundred to several thousand customers, not millions. The same sort of process works at the level of a country. A small country can upgrade its facilities much faster than a larger country, simply because of the differences in scale.

Qwest Really Isn't Interested in IPTV

Qwest Communications International Inc. no longer will pursue cable franchise agreements with Colorado cities or build community-wide TV service in areas where it's recently won franchise approval. That's more confirmation of Qwest's strategic direction in video, which is to rely on its partner DirecTV for linear TV services.

Though Qwest plans to upgrade its broadband capacity in 10 major markets and 10 smallers ones in the company's 14-state service area, that is solely for the purpose of broadband-based services other than entertainment video.

Qwest still supports the idea of statewide television franchises. But it won't seek such a franchise.

Mobility and Video Will Drive Growth

If Bear Stearns analysts are correct, mobile penetration will zoom past 100 percent, as will digital TV penetration, quite soon. Which suggests those two types of devices are where ad revenue opportunities are brightest, not to mention other sorts of "for fee" services and applications.

Cable Squeezed on Both Ends

Most observers expect telco-delivered video to gradually take market share from cable operators, though modestly over the next couple of years. Most observers also think satellite-delivered services have crested, and will be lucky to hold onto their current market shares.

But one suspects there will be more change, longer term, than most observers now expect. For starters, video demand itself could shift to other IP formats, including at least some forms of Web video. So far, there isn't all that much evidence of shift. Consumers haven't embraced any of the devices and services that port video over to TV screens, though there continues to be evidence of a lessening of interest in linear television on the part of younger consumers.

Nearer term, satellite providers remain aggressive about high-definition TV services and pricing, and most consumers seem pleased with their satellite service.

And as compelling as many consumers find triple-play or quadruple-play services, not all buyers will find the pricing the most-compelling attraction. Some services, networks or suppliers are going to be picked as "best of breed" by some portion of the market, despite the fact that a bundle can be purchased from two providers in a market.

That will continue to put some incremental pressure on cable providers, who are using bundling, as telcos are, to lock in and protect the current customer base.

at&t U-Verse: 30 Million Homes Passed by 2010

at&t says it expects its U-Verse fiber-to-customer-driven video service to be available in 30 million homes by the end of 2010, compared to 5.5 million as of its last quarter. The company has said it hopes to pass 17 million homes by the end of 2008.

For users not interested in at&t's IPTV offering, the extension of the fiber-to-customer network means higher broadband access speeds will be available as well. For many of us, if not for at&t, that is the more important part of the story.

Time Warner Launches Business TV

Time Warner Cable Business Class has launched BusinessLink.tv, an IPTV service that delivers real-time, high-speed broadcast TV video service directly to the computers of its business customers in select New York and New Jersey markets.

The BusinessLink.tv service delivers high-quality news and information video programming to clients via cable modem across their enterprise LAN using IP multicast connectivity. It is, in other words, bandwidth efficient.

The television networks included in the BusinessLink.tv New York City offering are: NY1 News, CNN, CNN Headline News, CNN International, CNBC, CNBC World, Bloomberg TV, Fox News, Fox Business News, and The Weather Channel. This 10-channel IPTV delivery service requires a 4 Mbps core local area network bandwidth.

And you thought people were wasting time using Facebook! Just kidding. I do the same thing in sneakernet fashion, having one of the news channels up all day in the background while working. It is quite helpful. Of course, I'm in the news and analysis business, so it is simply another form of "scanning" the environment. I would not give it up.

Movie Download Business Won't Be That Easy

Until now, most consumers have been reluctant to purchase movie downloads. There are lots of reasons. It is a new behavior, and learning to do things in a different way takes time. There's little compelling reason to change current behaviors, either. Whatever else one might say, the ability to rent or buy movie material is not a pressing problem.

So Web downloads of the same material consumers easily can get is not a winning proposition for most people: it simply doesn't solve a big enough problem, or save enough time or money. Not when DVD retail, Netflix, Blockbuster rental channels, IPTV and video on demand are so easy to use, both absolutely and comparatively.

And so far, it would be hard to argue that paid movie content delivered over a Web connection for viewing on a standard TV actually saves either money or time.

Download-to-burn services offer a way to get around these limitations and might prove more appealing to consumers, says The Diffusion Group. But not for a while. The number of titles available for D2B services is extremely limited, and that won't be an easy problem to fix.

Not for any technical reason, but because movie content owners are acutely tuned to the distribution methods that net them the most money. And there's no way they'd take a chance on harming existing channels by aggressively deploying a new channel before they have some assurance that cannibalization is minimal and new markets can be created.

CinemaNow and Movielink, both of which offer who offer D2B services, have found uptake to be poor. The problem is pretty simple. Movie rentals and purchases are all about the content, and when the content can be had. Since the studios are cautious, the content D2B offers is widely available elsewhere, through the traditional channels.

While 49 percent of adult Internet users are to some extent familiar with online movie stores that offer downloads, less than five percent report having purchased a movie download.

Not surprisingly, those most interested in D2B services are also the heaviest DVD buyers. On average, D2B potential users purchase 55 percent more movies than users who say they won't, or probably won't use D2B services.

Price sensitivity for B2D services also is significant as well. Still, the biggest problem is simply that the hassle factor is too great, the content selection available elsewhere and the price or time savings minimal to non-existent. This is going to be a tough market to jumpstart.

Joost will provide a new test, of course. But it still is hard to see how the incremental value outweighs the hassle, at least for most consumers. Non-traditional content likely will be the more important factor, ultimately.

Do the Math

IPTV might have been the one overarching theme at NxtComm, but at&t CEO Randall Stephenson left no doubt about where at&t is anchoring its strategy. "To succeed you have to be a wireless centric company," Stephenson said. "The wireless decision is the first decision a consumer makes."

"Everything else comes after that, because the wireless is the most personal communications device and goes everywhere with you," Stephenson said. Of course, he fairly quickly added that at&t is not neglecting its wireline broadband strategy.

But there's an important principle here. If one totes up the actual revenue any telecom provider can generate from video (ARPU is nice, but gross margin for an entertainment product has to be sliced in half to figure out what "gross revenue" actually is for a service provider), and then compares that to what a service provider can lose from current voice and data, the potential loss from voice and data is a larger number than the potential gains from new video services.

That isn't an argument against providing video. It is an argument for not getting defocused on core data and voice revenues. That's where the money is.