Dish Buys Blockbuster

Dish Network Corp. has won a bankruptcy auction for Blockbuster, offering about $320.6 million for the movie-rental chain. Dish, unlike some of the other bidders, has said it would keep some of the stores open as retail locations to support sales of Dish services.

Some may question the wisdom of that move, but Apple also was highly criticized for opening its own retail stores. There now is recognition that the retail outlets now play a huge role in Apple's sales and support process, though. Likewise, mobile service providers have found retail locations to be crucial for selling mobile services.

Dish Network Corp. has won a bankruptcy auction for Blockbuster, offering about $320.6 million for the movie-rental chain. Dish, unlike some of the other bidders, has said it would keep some of the stores open as retail locations to support sales of Dish services.

Some may question the wisdom of that move, but Apple also was highly criticized for opening its own retail stores. There now is recognition that the retail outlets now play a huge role in Apple's sales and support process, though. Likewise, mobile service providers have found retail locations to be crucial for selling mobile services.

But Blockbuster also brings other assets that do mesh with the current Dish strategy, including the Blockbuster online and kiosk vending services. Dish also has been making other moves in the mobile and on-demand video business, though some analysts might claim they do not yet fully understand what the grand strategy is. Neither would Dish CEO Charlie Ergen, either, at this point. Rather, Ergen seems to understand that the TV business is changing, and that mobile and online services are part of that future.

The Blockbuster acquisition therefore would seem to complement a growing interest by Dish in alternative distribution channels and business models.

Dish also earlier acquired DBSD North America, Inc., a hybrid satellite and terrestrial communications company, for approximately $1 billion. DBSD has a license to operate in 8 MHz worth of spectrum.

Frontier Wireless, the wholly owned subsidiary of Dish, also owns 168 licenses in the 700 MHz range, covering about 76 percent of the U.S. population. The licenses represent 5 MHz worth of spectrum. There has been speculation about what Dish might plan to do with such spectrum, but the purchases of other assets supporting terrestrial mobile service with satellite backhaul suggest a possible move into a video service usable by mobile devices.

It is possible to use the same approach to deliver signals to fixed locations such as homes, but bandwidth constraints would make an on-demand service difficult. A more logical approach would be linear video or multicast services based on use of mobile devices.

Sister company Echostar, for its part, owns Slingbox and now Hughes Network Systems, which gives Echostar a new international business revenue stream, enterprise networks and an owned satellite network offering significant new wide-area distribution capability. Whether those assets might play a role in Dish strategy is not immediately clear.

What does seem logical is that a couple of the Dish assets could be used to create a mobile-focused video service. A technology known as TDtv supports mobile multicast content, delivering as many as 14 high-quality, 300 kbps video streams channels using only 5 MHz of unpaired spectrum. It contains a built-in uplink capability that will allow for some digital video recorder features as well.

For its part, Clearwire also has been talking to satellite concerns about creating some sort of mobile TV service as well, though nothing concrete seems to have emerged from those talks.

CEO Charlie Ergen has not been shy about suggesting that if an entrepreneur wanted to get into the TV distribution business today, that person might well take a "Netflix" style, over the top approach, rather than launch satellites or even build cable networks. Another analogy Ergen has used in the past is fixed and mobile voice service. Essentially, he has likened satellite-delivered TV to fixed-line voice, while online video is more like mobile voice. In other words, the original business was TV by satellite, but the future business will be online.

There might not yet be a clear grand strategy for how Dish uses all the new assets, but it is clear enough that Ergen wants to fashion a business model that is built more on mobile and online video, and less on satellite video delivered to fixed locations.


But Blockbuster also brings other assets that do mesh with the current Dish strategy, including the Blockbuster online and kiosk vending services. Dish also has been making other moves in the mobile and on-demand video business, though some analysts might claim they do not yet fully understand what the grand strategy is. Neither would Dish CEO Charlie Ergen, either, at this point. Rather, Ergen seems to understand that the TV business is changing, and that mobile and online services are part of that future.

The Blockbuster acquisition therefore would seem to complement a growing interest by Dish in alternative distribution channels and business models.

Dish also earlier acquired DBSD North America, Inc., a hybrid satellite and terrestrial communications company, for approximately $1 billion. DBSD has a license to operate in 8 MHz worth of spectrum.

Frontier Wireless, the wholly owned subsidiary of Dish, also owns 168 licenses in the 700 MHz range, covering about 76 percent of the U.S. population. The licenses represent 5 MHz worth of spectrum. There has been speculation about what Dish might plan to do with such spectrum, but the purchases of other assets supporting terrestrial mobile service with satellite backhaul suggest a possible move into a video service usable by mobile devices.

It is possible to use the same approach to deliver signals to fixed locations such as homes, but bandwidth constraints would make an on-demand service difficult. A more logical approach would be linear video or multicast services based on use of mobile devices.

Sister company Echostar, for its part, owns Slingbox and now Hughes Network Systems, which gives Echostar a new international business revenue stream, enterprise networks and an owned satellite network offering significant new wide-area distribution capability. Whether those assets might play a role in Dish strategy is not immediately clear.

What does seem logical is that a couple of the Dish assets could be used to create a mobile-focused video service. A technology known as TDtv supports mobile multicast content, delivering as many as 14 high-quality, 300 kbps video streams channels using only 5 MHz of unpaired spectrum. It contains a built-in uplink capability that will allow for some digital video recorder features as well.

For its part, Clearwire also has been talking to satellite concerns about creating some sort of mobile TV service as well, though nothing concrete seems to have emerged from those talks.

CEO Charlie Ergen has not been shy about suggesting that if an entrepreneur wanted to get into the TV distribution business today, that person might well take a "Netflix" style, over the top approach, rather than launch satellites or even build cable networks. Another analogy Ergen has used in the past is fixed and mobile voice service. Essentially, he has likened satellite-delivered TV to fixed-line voice, while online video is more like mobile voice. In other words, the original business was TV by satellite, but the future business will be online.

There might not yet be a clear grand strategy for how Dish uses all the new assets, but it is clear enough that Ergen wants to fashion a business model that is built more on mobile and online video, and less on satellite video delivered to fixed locations.

For Fixed Network Operators, Competition Really Has Changed Everything

In the telecom business, competition changes everything, a realization that has grown over the decades as increasing portions of the market are exposed to robust competition.

You might think competition matters primarily because market leaders face rival providers who often use the “same product, less cost” marketing platform. That is an issue, but not the biggest issue.

Instead, what really matters is a change in fundamental cost structure for any facilities-based service provider--especially fixed network operators.

In a monopoly environment, the provider of a highly-popular service (voice or video entertainment) might reasonably expect that 85 percent to 95 percent of locations actually will be customers.

In other words, most locations generate revenue. In a duopoly market, assuming two competent providers, each contestant can reasonably expect to split the available market. That might mean a theoretical limit of about 43 percent to 47 percent of locations will generate revenue, for each contestant.

Add a third competent provider and the numbers shrink further. In that scenario, maximum customer locations might be 28 percent to 31 percent.

In other words, a fixed network could well find that fewer than one in three locations passed by its network will generate revenue. That obviously affects and shapes the business model. The reason there is so much emphasis on triple play services is that the strategy helps contestants compensate for the tougher business model of a two-provider or three-provider market.

Internet Protocol makes matters worse for facilities-based providers, since the separation of apps from access means any potential customer can, in principle, buy any key service from any lawful third party service, once a suitable Internet access connection is in place.

At least in principle, widespread availability of over-the-top services further stresses the business model for any facilities-based access provider.

If you want to know why incentives for investment are so important, that is the reason. Even if it is the responsibility of each discrete operator to manage and “right size” costs, it has gotten progressively harder to earn a sustainable return from an effectively-dwindling number of potential customers.

Consider AT&T, which now reports revenue in four buckets: business solutions, consumer mobility, entertainment and Internet services and international.

Business solutions represents 54 percent of total revenue. Consumer mobility represents 27 percent. Entertainment and Internet Services generates about 18 percent of revenue, while International produces only about one percent of revenue.

In other words, 81 percent of revenue is generated by business solutions and consumer mobility. That also is the case for some other fixed network providers that formerly earned most of their revenue from the consumer segment, but now rely on business customers for half or more of revenue.  

The operating income story is more skewed. Business solutions represents 66 percent of total operating income. Consumer mobility represents 38 percent of operating income. Entertainment and Internet Services has negative operating income, as does the International segment.

In terms of operating income, it all comes from business solutions and consumer mobility.

One suspects that will change when AT&T starts reporting results that reflect DirecTV operations, with the entertainment and Internet operations segment assuming both a higher role in revenue, but also contributing operating income.

But that noted, consider the implications. AT&T generates 81 percent of revenue from business customers and its mobility network. By definition, comparatively little revenue is earned from consumers using the fixed network.

The other problem for AT&T is that cable TV companies are the leading providers of high speed access in the U.S. market, especially at 25 Mbps and higher speeds.In fact, by some estimates, fiber to the home is feasible in less than half of all locations globally.  

Fully 54 percent of total AT&T revenue is generated by business customers, on the mobile and fixed network. Stranded assets are not really a problem for the mobile network. But low-earning or stranded assets are a big and growing issue for the fixed network.

Stranded Assets are a Growing Problem

Stranded assets are a growing problem in the facilities-based fixed network business (cable TV or telco).

There are several issues. A growing percentage of potential customers choose not to buy any services at all.

A bigger percentage of homes passed by the networks do buy services, but from another network.

AT&T has said  that it will add 11.7 million additional fiber to the home locations within four years of the closing of its acquisition of DirecTV. That’s a lot of locations.

Keep in mind, however, that AT&T’s network in 2012 passed as many as 76 million consumer and small business locations.

AT&T might have about 30 million homes in its fixed network coverage area.

In 2015, AT&T sold service to about nine million consumer customers, nine million business locations and also two million wholesale lines, representing about 20 million locations. If AT&T sold services to nine million consumer locations, it is deriving revenue from about 30 percent of locations passed by its network.

In other words, 70 percent of consumer locations passed the AT&T fixed network now are stranded assets

Verizon serves about 27 million locations. FiOS passes nearly 19 million of those locations. It is likely Verizon has about the same level of stranded consumer assets as AT&T experiences.

Big Change in U.S. FTTH Business Case

The passage of an  infrastructure bill by the U.S. Congress means as much as $65 billion in support for broadband access across the United States. While the specific allocations are not yet available, that essentially means the business case for deploying fiber to the home--and other access platforms--is better by about that amount. 

The big implication is that the business case for deploying high-performance broadband networks will improve by a substantial margin, bringing millions of locations to the point where such networks are justified in terms of business case, where they had not been deemed feasible in the past. 

The obvious issue is where to prioritize the spending of money and for how many different types of platforms. As always, there will likely be an effort to award subsidy funds in a “platform neutral” manner, or largely so. 

George Ford, economist at the Phoenix Center for Advanced Legal and Economic Public Policy Studies, argues that about 9.1 million U.S. locations are “unserved” by any fixed network provider. 

Though specifics remain unclear, it is possible that a wide range of locations might see their deployment costs sliced by $2,000 or more. Lower subsidies would enable many more locations to be upgraded to FTTH, for example: not the unserved locations but possibly also many millions of locations that have been deemed “not feasible” for FTTH.

Much hinges on the actual rules that are adopted for disbursement. Simple political logic might dictate that aid for as many locations as possible is desirable, though many will argue for targeting the assistance to “unserved” locations. 

But there also will be logic for increasing FTTH services as widely as possible, which will entail smaller amounts of subsidy but across many millions of connections. The issue is whether to enable 50 million more FTTH locations or nine million to 15 million of the most-rural locations. 

Astute politicians will instinctively prefer subsidies that add 65 million locations (support for the most-rural locations plus many other locations in cities and towns where FTTH has not proven obviously suitable). 

The issue is the level of subsidy in various areas. 

“According to my calculations, if the average subsidy is $2,000 (which is the average of the RDOF auction), then the additional subsidy required to reach unserved households is $18.2 billio,” Ford argues. “If the average subsidy level is $3,000, then $22.8 billion is needed. And at a very high average subsidy of $5,000, getting broadband to every location requires approximately $45.5 billion.”

source: Cartesian

Such an extensive subsidy system would change the FTTH business model for all telcos operating in rural and even many urban or suburban areas. might affect cable operators and also could affect demand for all satellite and fixed-wireless operators. 

It just depends on the eligibility rules.

What are the Natural Limits to Fixed Wireless Market Share?

T-Mobile says it is on track to reach seven million to eight million fixed wireless accounts in 2025, and perhaps as many as 12 million by 2030. 

If there are about 110 million to 125 million U.S. home broadband accounts, that suggests T-Mobile alone--which had zero market share of the home broadband market until recently--already might claim five percent of the market. 

we might estimate that cable TV internet service providers continue to hold the largest share, but with fixed wireless accounts growing substantially.

One of the odd realities of the U.S. internet access business is that--save for a recent Verizon statement, none of the big leaders of the internet access business actually ever says how many homes their networks pass. But Verizon recently noted that is passes 25 million homes. 

My own past estimates have suggested, out of a total of 140 million U.S. homes (higher than figures some use), that AT&T’s landline network passed 62 million. Comcast had (can actually sell service to) about 57 million homes passed.

The Charter Communications network passed about 50 million homes, the number of potential customer locations it can sell to.

I had estimated Verizon homes passed might number 27 million, which is higher than the 25 million Verizon now says it passes. 

Lumen Technologies never reports its “homes passed” figures, but likely has 20-million or so consumer locations. 

Of course, if one uses the lower 110 million to 125 million figures, then T-Mobile’s share might be higher. It never is very clear whether reported “home broadband” figures include small business locations or not, but most such reports probably do include small business accounts. 

My own past estimates have pegged U.S. homes in the 140 million range based on estimates by the U.S. Census Bureau. As a practical matter, at any given point in time millions of those locations are not part of the cabled home broadband market.

Some units are vacation homes are unoccupied most of the time. Other units are fully unoccupied and therefore not candidates for home broadband services. Some units are boats, trailers or other locations not easy or possible to serve using cabled networks. 

Also, some units are so remote it is economically unfeasible to reach them by a cabled network at all. That might be up to two percent of all U.S. homes. 

AT&T, for example, reports revenues for mobility, fixed network business revenues and consumer fixed network revenues from internet access, voice and other sources. But those are traditional financial metrics, not operating indices such as penetration or take rates, churn rates and new account gains. 

source: AT&T 

Nobody seemingly believes the same effort should be made to measure the number of home broadband provider locations or dwellings reached by various networks. Better mapping, yes. Metrics on locations passed? No. 

And yet “locations passed” is a basic and essential input to accurately determine take rates (percent of potential customers who actually buy). That input matters quite a lot to observers when evaluating the growth prospects of competitors, even if that figure does not matter much for policymakers, who mainly care about the total degree of home broadband take rates, on an aggregate basis. 

The U.S. Census Bureau, for example, reported some 140.5 million housing units housing units as part of the 2020 census. The estimate for 2021 units is 142.2 million units. Assume 1.5 million additional units added each year, for a 2022 total of about 143.6 million dwelling units. 

Assume vacancy rates of about six percent. That implies about 8.6 million unoccupied units that would not be assumed to be candidates for active home broadband subscriptions. The U.S. Census Bureau, though, estimates there are about 11 million unoccupied units when looking at full-time occupied status. That figure presumably includes vacation homes.

Deducting the unoccupied dwellings gives us a potential home broadband buyer base of about 132.6 million locations. 

That has implications for the theoretical maximum market share any of the leading providers might claim. Depending on one’s choice of the base of addressable homes, and keeping in mind there is overlap between at least one of the cable and one of the telco providers in virtually every territory, Comcast and AT&T are best positioned to lead share statistics, in some future market where skill and resources are full deployed (telcos have largely built or acquired fiber-to-home facilities, for example), simply because their networks pass the most homes. 

That does not speak to actual market shares; only potential share were any particular provider to take 100 percent share of the market within its cabled network footprint. 

ISP	Homes Passed	Total Homes Low	Total Homes High	Max Homes Passed Low	Max Homes Passed High
Comcast	57	110	140	52%	41%
Charter	50	110	140	45%	36%
AT&T	62	110	140	56%	44%
Verizon	25	110	140	23%	18%
Lumen	20	110	140	18%	14%
T-Mobile	(not yet applicable)

T-Mobile’s initial foray into cabled networks is important, in that regard, but the potential share stats will not be significant for quite some time, given the small number of homes T-Mobile cabled networks could reach. 

For T-Mobile, fixed wireless is the key to its home broadband share gains. Fixed wireless remains important for Verizon Fixed wireless might become important for AT&T. 

The point is that only AT&T has potential to take significant share in the overall home broadband market, based on its extensive homes passed footprint. Only Comcast and Charter are in the same league. Verizon and Lumen, no matter how well they do in their regions, do not pass a similar number of U.S. homes. 

In principle, T-Mobile gains will be limited by its use of fixed wireless as the primary platform, as that platform appeals to the value portion of the market, for the most part (customers purchasing service at speeds no higher than 200 Mbps). 

Right now, that means T-Mobile’s fixed wireless service, itself limited by T-Mobile only to regions where it has excess capacity, is not available to the up-to-20-percent of the U.S. home broadband market. The T-Mobile addressable market is “homes content with access speeds no higher than 200 Mbps” and further reduced by T-Mobile’s own unwillingness to offer fixed wireless home broadband “everywhere.” 

T-Mobile and Verizon should continue to take market share for some time. Eventually, though, the market segment most attracted to fixed wireless will saturate, leaving the bulk of competition to the cable HFC and telco FTTH facilities. 

In principle, fixed wireless speeds can grow over time, as more spectrum is made available or network architectures move to smaller cells, but there remain physical limits to either of those strategies, especially since the key revenue driver remains mobile device service.

Verizon Flips Assets: Selling then Buying Frontier Communications

Asset flipping in any business is not unheard of, but Verizon’s history with Frontier still seems instructive. In 2010, for example, Frontier Communications purchased rural operations in 27 states from Verizon, including more than seven million local access lines and 4.8 million customer lines. 

Those assets were located in Arizona, California, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, Wisconsin and West Virginia, shown in the map below as brown areas. 

Then in 2015, Verizon sold additional assets in three states (California, Texas, Florida) to Frontier. Those assets included 3.7 million voice connections; 2.2 million broadband internet access customers, including about 1.6 million fiber optic access accounts and approximately 1.2 million video entertainment customers.

source: Verizon, Tampa Bay Business Journal 

Now Verizon is buying back the bulk of those assets. There are a couple of notable angles. First, Verizon back in the first decade of the 21st century was raising cash and shedding rural assets that did not fit well with its FiOS fiber-to-home strategy. In the intervening years, Frontier has rebuilt millions of those lines with FTTH platforms.

Also, with fixed network growth stagnant, acquiring Frontier now provides a way to boost Verizon’s own revenue growth. The acquisition means Verizon’s FTTH  connections will jump from approximately 7.4 million to 9.6 million, a gain of about 23 percent in one fell swoop. And since home broadband is the primary revenue growth driver for fixed networks these days, that matters. 

source: Verizon 

There are other takeaways. As in the mobile communications business, where Verizon and AT&T, for example, had been focusing on urban footprints and customers, market saturation has forced both firms to plumb rural areas and customers as well as the mobile virtual network operator business and prepaid accounts, where the main focus had been postpaid branded accounts, market saturation has forced the major providers to search in new areas for growth. 

As a byproduct, Verizon might, in some cases, be able to leverage its new fixed network assets to support its mobile network as well (fiber backhaul, for example). 

It is possible there are other strategic considerations as well. T-Mobile, which started out with zero share of the fixed network home broadband market, now is growing based on its use of fixed wireless services provided by its mobile platform.

But T-Mobile is making its first steps towards adding some amount of fixed network access provided by cabled networks as well. For example, T-Mobile has partnered with EQT, a global investment firm, to acquire Lumos, a fiber-to-the-home platform.

T-Mobile also formed a joint venture with KKR, another global investment firm, to acquire Metronet, a leading fiber-to-the-home provider. That acquisition also will expand T-Mobile’s fixed network home broadband market share.

And while it has seemed unlikely that T-Mobile would contemplate moves such as acquiring Frontier Communications or other firms such as Brightspeed itself, that outcome--at least regarding Frontier--is closed. 

On the other hand, the pressure to grow footprint to grow market share remains intact. Brightspeed does appear to have substantial overlap with Verizon’s new fixed network footprint, but duplicated assets might be sold. 

And Verizon appears to face little danger of antitrust action were it to acquire additional fixed network assets, given its modest coverage of U.S. homes. By some estimates, prior to the Frontier acquisition,   

Verizon homes might have numbered less than 25 million, possibly as low as 20 million. 

That is far fewer than top Verizon competitors might claim. 

Comcast has (can actually sell service to ) about 57 million homes passed. AT&T’s fixed network represents perhaps 62 million U.S. homes passed. 

Charter already passes more than 32 million locations, including homes and businesses. 

CenturyLink never reports its homes passed figures, but likely has 20-million or so consumer locations it can market services to.

The point is that additional Verizon acquisitions of fixed network assets, to reach more U.S. homes, might not pose antitrust issues. The Frontier acquisition adds between five million to 10 million potential new fixed network locations (not all upgraded for FTTH, yet, and including business locations). That potentially increases Verizon’s “locations passed” footprint by as much as a third. 

Using Verizon’s recent assertion that, after the Frontier acquisition, Verizon will reach 25 million homes, Verizon would still have some ways to go before it passes as many homes as AT&T, Comcast or Charter, its larger fixed network competitors. 

Frontier is said to have a network reaching 15 million locations, including homes and businesses. A reasonable guess is that at least 10 million of those locations are homes. 

Most of those locations are arguably not good candidates for FTTH investment, which is why firms such as Verizon and Lumen sold off rural footprints in the past. 

If Verizon’s “homes passed” footprint, after the acquisition, is only 25 million, there remains room to add more homes by acquisition.

Brightspeed’s network seems to pass about 6.5 million locations. Most are homes, but not all. Assuming 90 percent are residential, that implies less than six million locations are homes. So even adding Brightspeed assets would only bring Verizon up to perhaps 31 million or so homes, still far less than reached by AT&T, Comcast and Charter. 

The point is that the strategy of selling off rural assets and re-acquiring them later, once a critical mass of FTTH passings and accounts have been created, seems a logical strategy. Verizon’s cost to acquire the Frontier footprint (not customers, but network passings) is north of $1,000 per location, and possibly in the $1500 per passing range. 

Many observers expect that the former Frontier FTTH passings will double within a couple of  years. At current take rates, that also implies a potential additional two million or more FTTH accounts being added. 

Asset flipping remains part of the connectivity business. But it is rare to see a seller reacquire its sold assets.