Intermodal Competition and Investment for Europe?

Quite often, when an executive says something “cannot be done,” what they really are saying is that “my firm, with its present business model and cost structure, technology base and intellectual property assets, cannot do it.”

Some other entity, with a different set of assets, business model and assets, might well be able to figure out how to do something others consider “impossible.”

Looking at communications policy in the European Commission region Strand Consult owner John Strand notes there is a fundamental institutional conflict between the  the Directorate General for Competition (DG Comp) and the Directorate General for Communications Networks, Content & Technology (DG Connect), in terms of fundamental approaches to promoting a sustainable long term competitive environment that also provides incentives for robust investment.

Strand has argued before that current policy is not working, in that regard.

He further argues that while one agency attempts to foster investments, the other deters them.

DG Connect, he argues, “in many ways has a realistic view of the challenges in the EU and the solutions.”

In practice, that means DG Connect is in favor of supplier consolidation, while DG Comp is not in favor of consolidation.

Perhaps there ultimately will be resolution by another means. Without suggesting that all markets globally are the same, since they increasingly are divergent, it is possible the EC could see more investment and more competition irrespective of the efforts of the two regulatory bodies, though Strand believes a resolution of the conflicting policies would be better.

We can disagree about the proper balance of incentives and controls to achieve the goals of robust investment and equally robust competition.

But as a simple historical matter, the cable TV industry, operating outside the common carrier framework, created the basis for robust facilities-based competition, “outside” the purview of the traditional “telecom” ecosystem.

That might yet be a direction within some parts of the EC as well, as Liberty Global pursues a greater role in communications, on its own facilities, not purchased wholesale from a former incumbent telco.

The potential, in other words, is for greater investment--and competition--provided across industry boundaries, instead of within them.

That sometimes has been called an intermodal approach, rather than an intramodal approach. Liberty Media is on the cusp of  bringing intermodal competition to the EC.

Verizon to Sell "HBO Now" Streaming Video Service

Verizon Communications will sell the Home Box Office “Now” streaming service as part of a new marketing deal.

HBO’s Internet-only service will be made available to more than 100 million Verizon Wireless customers as well as Verizon Communications fixed network customers who buy high speed access but not linear version of HBO or linear video service.

HBO content will also be coming soon to Verizon’s upcoming mobile video platform, Go90.

HBO Now costs $14.99 a month, after a 30-day no-charge introductory period.

The deal is an example of how some observers and providers hope the over the top business will develop, namely with large linear video distributors also emerging as key distribution partners for over the top versions of today’s linear channels.

Hybrid Business Model Favored by TV Distributors (No Surprise)

TV operators and content owners say they favor a hybrid business model approach (subscription plus pay per view) to over the top content delivery, says MPP Global. Some 60 percent of surveyed distributors say they prefer the hybrid OTT model, also used by Amazon Prime and Hulu.

The hybrid model has already been adopted internationally by Amazon for its Amazon Instant Video service, as well as by Hulu for its online streaming service in the United States.

Many consumers no longer want “all you can eat” packages but instead prefer tailored and personalized bundles of content and channels they have hand-picked, MPP Global says.

Among the popular options are “skinny” TV packages that cost less.

Some distributors also are experimenting with limited-time passes. Sky, for example, offers passes for a day, a week or month for its OTT platform, Now TV.

Hybrid models have appeal because they offer a glide path from linear TV to over the top consumption; unlimited access to buying of specific items; as well as access durations shorter than the traditional month-at-a-time pattern.

At a high level, the hybrid approach will make sense since it offers the hope of a gradual, not too disruptive switch from linear to on-demand packages and business models.

Historically, hybrid models have been highly successful, allowing legacy providers to adapt gradually to a new replacement technology platform.

Global Mobile Adoption to Pass 100% Globally by End of 2015

You might argue it is a good thing that global mobile adoption will pass 100 percent of earth's population by the end of 2015. In one sense, it is a positive milestone.

In another sense, it points to market saturation, and the end of the ability to drive revenue growth by adding human accounts. Once everybody has at least one active phone and account, growth comes partly by convincing people to connect additional devices and use more services.

Eventually, the industry encounters the paucity of truly-huge basic demand, however. Though "everybody" might want to talk, send messages and use the Internet, the clearly-understood and truly-big demand for products beyond that is limited.

That is why so much activity in the fixed network market over the past decade has been "selling more things to fewer customers." The same dynamic will develop in the mobile business, assuming competition remains a key market reality.

Global mobile subscribers reached 7.1 billion so far in 2015, up from just seven million in 1989, and will surpass the number of people on earth by the end of the year, says TeleGeography.

As has been the case for some years, Asia has the greatest number of subscribers, with 3.7 billion. Also, as has been the recent trend, Asia represents the subscriber growth driver, globally.

Between the first quarter of 2014 and the same quarter of 2015, Asia added 194 million new accounts, representing more than 60 percent of net new accounts globally.

But saturation looms. Although more than 270 million people in the region do not have a mobile phone, that could, at present rates, reach nearly zero within two years.

The immediate revenue growth driver now becomes  mobile Internet services. In that regard, India is key. Some 90 percent of Indian mobile subscribers use 2G networks.

Africa also represents growth. Mobile adoption there is 81 percent, while 2G remains the dominant platform, used by 75 percent of the continent’s 912 million subscribers.

 Mobile Subscribers by Region, Q1 2015, source TeleGeography

European mobile adoption stands at 138 percent, representing one billion accounts. But the actual number of mobile subscribers actually fell by six million over the last year.

North American wireless penetration is expected to reach 100 percent.

The point is that mobile services will reach saturation within the next few years, with revenue growth driven by mobile Internet access.

The big challenge beyond that is how to fuel growth when mobile Internet reaches saturation.

Mobile service providers globally are turning their sights to services used by sensors and controllers.

Having first exhausted markets for mobile voice, then messaging, and now focusing on mobile Internet access, future growth in services for humans might be quite difficult.

Telemetry is the next big potential growth driver.

"Unprecedented" Change in TV Viewing Behavior

Younger users are abandoning linear TV, Nielsen reports in its first quarter 2015 report on linear TV viewing, even as they increase their mobile video consumption.

Some say the abandonment is unprecedented. Traditional TV usage has been falling among viewers ages 18 to 34 at around four percent a year since 2012.

But TV watching fell 10.6 percent between September 2014 and January 2015.

“I’ve never seen that kind of change in behavior,” said Alan Wurtzel, NBCUniversal’s audience research chief.

The other finding of note is over-indexing of smartphone usage among Asian American, Hispanic and Black households.

To the extent that some consumers are making rational choices about Internet access, preferring mobile access to fixed, or substituting mobile for fixed, that trend is pronounced in some segments.

In some real sense, some consumers are choosing mobile Internet access as their preferred form of access, analogous to the way most consumers prefer mobile voice to fixed voice.

The point is that end user demand for linear TV is dropping, while use of mobile Internet arguably has become a preferred form of Internet access in many customer segments.

Telcos Look to Enterprise for Revenue Growth

Telecom service providers will grow their revenues from global services to enterprise customers to more than US$297 billion by 2020. If so, enterprise services might well represent the fastest-growing part of the business.

The biggest contribution will come from new strategic ICT services revenues at nearly US$173 billion, which will increase at a CAGR of 9.9 percent over the period 2015 to 2020.

By some estimates, that would mean enterprise revenue grows exactly as fast as consumer revenue.

But those growth projections might be optimistic. Recent mobile revenue growth rates have been sluggish, and far less than nine percent annually, drastically less, in the case of mobile revenue, which has been the global revenue driver for more than a decade.

In fact, two percent global revenue growth likely will be the case in 2015, year over year.

Strategic ICT services include business IT and IP applications, compute and hosting, enterprise mobility, managed networks, professional services, and unified communications.

They represent the new generation of dedicated IT and IP communications services that telecoms service providers are able to offer under contracts with enterprise customers, Ovum says.

Regionally, the growth areas for telco strategic services are in Latin America (17.8 percent CAGR), Africa (17.5 percent), the Middle East (16.4 percent), and Central Asia (13.0 percent). The big markets of 2015 – Europe and North America – will grow more slowly, but will still be the largest in 2020.

“Telcos have taken more than 14 percent of the global ICT services market in the last couple of years,” Ovum said.  “We expect that share to reach more than 18 percent by 2020.”

SDN Likely Means Lower Capital Spending, AT&T Says

If one agrees the fixed network business models are growing more difficult, with a growing mismatch between revenue and cost, the only logical imperative is to align expected revenues with expected cost.

Furthermore, if one believes revenue gains will be tougher than in the past, then it likewise makes sense to look at all other ways to lower capital investment and operating costs.

And that appears to be among the things AT&T is signaling, with its moves to create a core network operating on software defined network (virtualized) principles.

One might expect that trend to deepen as we move towards fifth generation mobile networks that also will heavily rely on virtualized cores, virtual access and services that are supplied using cloud mechanisms.

Commenting about AT&T’s moves towards a software-optimized network that, at the same time, relies more on generic and lower-cost network elements, John Stephens, AT&T CFO said “we see a real opportunity to actually strive to bring investments, if you will, lower or more efficient from historical levels.”

“I think there is a real opportunity with some of the activities are going on in software defined networks, on a longer term basis, to actually bring that in capital intensity to a more modest level,” Stephens said.

Some of us would argue that virtually every fixed network operator will face similar challenges, and for several reasons. Some national governments will simply take the position that Internet access is a public service so important that retail prices must be controlled.

In China, for example, the Ministry of Industry and Information Technology has ordered retail high speed access price cuts.

It is expected that prices for broadband speeds between 50 and 100 Mbps will be reduced about 30 percent, and the price cut for 20 Mbps will be about 20 percent.

Beyond that, marginal cost pricing and competition pose growing risks to commercial Internet service providers and communications providers. Marginal cost pricing is the practice of selling incremental new units of a product near actual production cost.

In a business with scale, and especially any business selling digital products, the marginal cost is very close to zero.

That especially is the case since a time-tested tactic for new entrants into any market is to sell “same product, lower cost.”

That further tends to reduce overall gross revenues in any market. Some disruptors take the model further, literally pricing at levels guaranteed to reduce the size of the overall market, while simultaneously allowing the new entrant to take a dominant position in the new, if smaller market.

Let us be clear: what that all means is that there is a growing risk to the sustainability of traditional telco, satellite, fixed wireless and perhaps cable TV business models.

Hence the urgency of creating business models able to survive and thrive at lower cost levels. That means more self service, automated provisioning and lower overall capital and operating costs, generally.

That especially is crucial when key competitors operate at lower costs. And one might argue that Google Fiber, cable TV companies and independent ISPs across the United States already have a cost advantage.

One example: “the large incumbent telephone companies do not earn attractive returns in their wireline businesses,” said Craig Moffett Partner and Senior Analyst, MoffettNathanson. “For example, a decade after first undertaking their FiOS fiber-to-the-home buildout to eighteen million homes, Verizon has not yet come close to earning a return in excess of their cost of capital.”

In other words, Verizon FiOS has actually lost money.

AT&T also has earned poor returns on its fixed network.  AT&T return on invested capital has been declining for a decade and is, like Verizon’s, well below the cost of capital, Moffett said.

In 2014  aggregate fixed network telecommunications businesses earned a paltry 1.2 percent return, against a cost of capital of roughly five percent, Moffett argues.

“For the non-financial types in the room, that’s the equivalent of borrowing money at five-percent interest in order to earn interest of one percent,” said Moffett.

“That’s a good way to go bankrupt,” Moffett said.