Verizon as Disruptor

As accustomed as we might be to seeing Google, Netflix, Amazon, Facebook, cable TV companies, wireless internet service providers, metro fiber specialists or T-Mobile US as market attackers and share takers, we are unaccustomed to seeing either AT&T or Verizon in such roles.

But Verizon is about to take that role, in fixed networks.

Verizon is launching Verizon 5G Home, its 5G fixed wireless service, on October 1, 2018 in parts of Houston, Indianapolis, Los Angeles and Sacramento, providing the first U.S. real-world test of customer demand for 5G fixed wireless.

And Verizon has specific business reasons for doing so. Simply, footprint, or homes passed, in its fixed networks business is a key driver for Verizon. Simply put, Verizon has far fewer homes passed than its major fixed network competitors.

source: GSMA Intelligence

Comcast has (can actually sell service to ) about 57 million homes passed. Charter Communications has some 50 million homes passed.

AT&T’s fixed network represents perhaps 62 million U.S. homes passed. Verizon, on the other hand, passes perhaps 27 million homes passed.

As dominant as Verizon is in the mobile services segment, it lacks scale in the fixed networks segment. And that means Verizon can gain revenue by taking market share in the fixed network business.

The companion issue is simply that, similar to Spring and T-Mobile US, Verizon’s revenue is heavily weighted to mobile services. As much as 69 percent of Verizon’s revenue is earned from mobility services. That is less than Sprint or T-Mobile US earn from mobile services, but is highly significant, as it means Verizon, the biggest revenue producer in U.S. mobile, has less room to grow.

source: Seeking Alpha

As cable companies have fueled growth by taking market share in voice services, business services and internet access, so Verizon expects to take share in fixed network internet access.

More Competition Coming in U.S. Internet Access Market

To the extent that cable TV industry fortunes now rely on internet access revenues, and to the extent that new competition emerges from 5G fixed wireless, that growth engine is exposed.

“We see 5G fixed wireless broadband as the biggest existential threat to broadband providers (by far),” say equity analysts at Cowen. Assume, for example, that T-Mobile US actually throws significant effort at 5G fixed wireless, and gets anywhere near its goal of 10 million accounts by about 2024.

“That would be a large majority of the entire cable industry’s broadband adds over the next six years,” Cowen analysts say.

Verizon, for its part, is targeting 30 million or perhaps 35 million homes passed, in metro markets where it has lots of fiber (places where XO has big footprint, for example) and outside its legacy fixed network territory.

That suggests Verizon could wind up competing most with AT&T, Comcast and Charter. Making a further assumption that in its chosen markets it will be Comcast and Charter that have the most market share, and already have the greatest share of faster-speed accounts, that logicall suggests the cable competitors might be at more risk than AT&T or CenturyLink.

You might argue that the telcos generally sell lower-speed services, so their customers would be most at risk from a fixed wireless entry by Verizon or T-Mobile. But most of those customers already could have switched to cable providers, were internet access speed the big consideration.

What might be the case is that customers of slower-speed telco services think those services are good enough, when bundled with other telco services, to inhibit switching behavior.

source: Cowen

Verizon has significant metro fiber in 17 of the top “NFL” U.S. markets where it is not the incumbent.

Assuming the cable competitor in those markets has 45 percent share, IComcast could have 2.1 million homes exposed to loss, about (eight percent of its base).

Charter might be at risk to share loss of perhaps 1.1 million homes, about 4.7 percent of its base.

Assuming a 25 percent Verizon take rate when it enters those new markets, perhaps two percent of Comcast customers and one percent of Charter customers could go to Verizon. That might be a manageable loss.

T-Mobile US might take a different tack. T -Mobile expects to become a viable in -home broadband alternative especially in rural areas. The carrier believes it will, by 2021, it provide data rates in excess of 100 Mbps to 66 percent of the U.S. population, reaching coverage of up to 90 percent by 2024.

T-Mobile US execs have suggested that a service offering 100 Mbps would be a competitive alternative for perhaps 19 percent  of the population. By 2024, as much as 35 percent to 45 percent of the U.S. population might be candidates for a mobile substitute product.

Looking at fixed wireless, T-Mobile US estimates it could provide service to 9.5 million households early on. By 2024 T -Mobile expects to be able to reach 52 million rural residents with a fixed wireless solution.

source: Cowen

Some who decry the lack of competition in the U.S. internet access space might be surprised to see growing competition, at scale, when 5G arrives. Google Fiber once was thought to be a catalyst for such competition. Now it appears Verizon and possibly T-Mobile US will assume that role.

Sometimes it takes scale to disrupt a market.

Can Independent ISPs Get 50% Market Share?

Can independent internet service providers (public or private) actually get 50-percent market share when competing against telcos and cable companies? Ting Internet believes so, but results from other firms suggest the level of competitor pricing really does matter. G

It always is difficult to quantify take rates for gigabit internet access services, as virtually no internet service provider ever releases such figures. That has been the case since faster internet access services, priced at a market premium, began appearing. The reason for the reporting reticence is that take rates for the fastest, most expensive tier of service tend to be minimal.

Still, ISPs do tout some figures. Mediacom, for example, claims that between 10 percent to 20 percent of its new accounts are buying  gigabit services costing between $125 a month to $140 a month. Again, it is hard to quantify what that means.

The actual number or percentage of account that change providers every year (churn) in the fixed network internet access business arguably varies between markets with strong offers (where fiber to home is sold, and where gigabit cable services also are sold).

Churn arguably is highest where a cable operator offering speeds in the hundreds of megabits per second competes with a telco only able to sell slower digital  subscriber line service. AT&T and Verizon, for example, tend to see low churn rates, where other independent telcos with less fiber to home tend to see higher churn rates.

Much obviously depends on pricing levels. In markets where a gigabit ISP sells 1,000-Mbps service at prices that match the current or legacy prices for slower service (perhaps 100 Mbps), take rates can climb dramattically.

What is harder to model are markets where a clear price premium exists. It will matter when a reasonably-fast standard offer costs $50 a month and the gigabit offer costs more than $125 a month.

Presumably, in such market, demand will be anchored by business demand, higher-income households and multi-user households.

Perhaps the most-optimistic provider to make public predications is Ting Internet, which tends to argue it will get adoption as high as 50 percent in any new market it launches, within five years or so. Initial take rates when first marketed appear to be about 20 percent.

In its fourth quarter 2017 report, Tucows reported Ting Internet take rates of 30 percent take rates in areas where it is able to market its gigabit service.

Ting prices its gigabit service at $90 a month. At that price, it is lower than Comcast and other cable companies charge, but higher than the $70 a month some other ISPs offer. The point is that Ting is pricing at a significant price premium to “standard” offers that offer less value (in terms of speed), but not pricing as high as cable companies or telco practice.

We are likely to see much more of this sort of independent ISP competition in the fixed market, not to mention 5G-based gigabit offers from mobile suppliers.

At least in principle, more than 100 Colorado communities could see some form of

municipal broadband network created, as voters in those communities have approved such moves.

Longmont, Colo. already has built out a portion of its planned gigabit internet access network, aided by that city’s ownership of a municipal power utility, meaning Longmont owns rights of way, distribution facilities, rolling stock and other assets helpful to creating a city-wide internet access network.

In Centennial, Colo., private internet service provider Ting Internet will piggyback on a new government network to be built by the city of Centennial itself.

Also, it sometimes is difficult to ascertain precisely what take rates are, since many independent ISPs challenging cable or telco suppliers seem to count “units sold” rather than “households served.”

That matters when an ISP sells two or more products, and then calculates adoption rates as “units sold divided by households passed.”

In other words, penetration is measured in terms of revenue-generating units, not “locations” or “households.” Each unit sold (voice, video or internet access) is counted against the base of locations. So a single location buying three services results counts as much as three other homes buying just one service.

source: Magellan Advisors

Customer “penetration” by household therefore is different from penetration measured as a function of units sold. The difference is that determining the magnitude of stranded assets hinges on how many locations passed generate revenue.

Assume that, on average, a typical household buys 66 percent of the total suite of services (two of three triple play services or  three of five services, for example).

The difference is significant. Measuring “penetration” by units sold, penetration appears to be as high as 76 percent to 87 percent. Measured as a function of homes generating revenue, penetration could be as low as nine percent, or as high as 44 percent, with a “typical” value being something between 20 percent to 25 percent of homes passed.

Penetration: Units Sold or Homes Buying Service?
	Morristown	Chattanooga	Bristol	Cedar Falls	Longmont
homes passed	14500	140000	16800	15000	4000
subscribers	5600	70000	12700	13000	500
units sold	39%	50%	76%	87%	13%
services sold	3	3	5	3	2
HH buys .66 =	2	2	3	2	1
Homes served	2828	35354	3848	6566	379
penetration	20%	25%	23%	44%	9%

It might be worth pointing out that all these communities (Morristown, Chattanooga, Bristol, Cedar Falls and Longmont) have municipally-owned utility companies, and might therefore represent a sort of best case for retail operations serving consumers.

That seems consistent with other evidence. In markets where a telco and a cable operator are competent, as is the attacking ISP (municipal or private), market share might take a structure of 40-40-20 or so, possibly 50-30-20 in areas where the telco does not have the ability to invest in faster broadband and the cable operator has the largest share.

Beyond the actual cost of the network, and the business role chosen by the municipality, details of revenue generation (homes that generate revenue as a percentage of total; number of services offered) are fundamental.

Beyond that are the other operating and marketing costs, overhead and need for repaying borrowed funds and making interest payments, on the part of the retail service provider.

One might argue that most other communities, without the advantages ownership of an electric utility provides, will often find the lower risk of a shared public-private approach more appealing.

Also, some ISPs might find the availability of some amount of wholesale or shared infrastructure makes a meaningful difference in a business model.

One might suggest there are a couple of potential practical implications. Efforts by incumbent ISPs to raise retail prices in the same way that video entertainment prices have grown (far higher than the rate of overall inflation) will increase the odds new competitors enter a market.

Higher prices, in fact, will increase the likelihood of new entrants entering a market, as the higher prices increase the attractiveness of doing so.

In at least some cases, the new competitors will be firms such as Verizon, which now has announced it will essentially overbuild an AT&T and Comcast markets in Sacramento, Calif.

Though it is not easy, more competitive ISPs are likely to enter more markets, as lower-cost access platforms evolve, helped in some cases by municipal facilities support.

Where that happens, it is conceivable that the incumbents will see a new limitation on their market share, dipping from possibly 50-percent share to a maximum of perhaps 40 percent each, on a long-term basis, assuming the new competitor is not eventually bought out by one of the incumbents.

Fort Collins Colo. to Build Own Gigabit Network

The City of Fort Collins will build its own retail municipal broadband network. The city expects to build the entire network over three to four years.

Target residential pricing is  $50 per month for 50-Mbps service, and $70 per month for 1-Gbps service.

An “affordable Internet” tier also will be offered, the business plan says. The city expects to borrow between $130 million and $150 million to fund network construction and activation.

The city estimates a cost per passed home to be $984, with the cost to connect a customer location at about $600 each.

It is obvious that most of the customers will come from one of the two dominant providers, Comcast and CenturyLink, as more than 91 percent of households already buy a fixed network internet connection.

Comcast has about 57 percent market share, while CenturyLink has about 37 percent share, the city says.

Comcast already has launched gigabit services in Fort Collins, ahead of the municipal network launch.

City consultants estimate the new municipal network could get as much as 30 percent share of market. That is based, in large part, on experience. Other municipal networks have gotten share in about that range.

One caveat is that it is unclear how the other networks measure penetration. One way is to count by connected homes. The other method, where a network offers multiple services, is to count “units sold” and then divide by the number of households.

source: City of Fort Collins

In such cases, the actual number of connected homes is less than the penetration figures would suggest, as a single home, buying three services, generates three revenue units. When measuring penetration rates, that has the same impact as three homes buying one service.

So some of us would guess that the actual household penetration can range from less than 20 percent to perhaps 35 percent.

Much also will hinge on what Comcast and CenturyLink decide to do to hang on to existing customer accounts.

Comcast’s gigabit pricing originally was set at  $159.95 per month without a contract, and $110 per month with a one-year contract.

But few might predict Comcast is willing to lose huge chunks of market share rather than lower its prices to about $70 a month (or whatever level is needed to remain competitive with the municipal network).

Comcast has offered $70 a month pricing in other markets where it faces serious competition for gigabit internet access.

source: City of Fort Collins

Some idea of operating costs (exclusive of marketing) can be seen in estimates for personnel.

source: City of Fort Collins

The larger point is that more competition in the internet access space keeps coming, despite fears of a duopoly and limited consumer benefits. For most potential consumers, the real options are going to be mobile services, though, as 5G services are launched nationwide.

More Fixed Network ISP Competition Seems to be Coming

The fixed network internet access duopoly possibly is going to be challenged in new ways over the coming decade. New forms of mobile competition are going to develop, including both direct mobile substitution and mobile-enabled fixed wireless. Also, some new fixed network competitors are likely to enter the markets as well.

At least in principle, more than 100 Colorado communities could see some form of

municipal broadband network created, as voters in those communities have approved such moves. That clears a legal hurdle, but now means each community will grapple with the business model.

Longmont, Colo. already has built out a portion of its planned gigabit internet access network, aided by that city’s ownership of a municipal power utility, meaning Longmont owns rights of way, distribution facilities, rolling stock and other assets helpful to creating a city-wide internet access network.

In Centennial, Colo., private internet service provider Ting Internet will piggyback on a new government network to be built by the city of Centennial itself.    

In a few cases, state funds could play a role, as subsidies for middle-mile trunking can change the business model. Magellan Advisors, for example, identifies several roles cities can take, including streamlining of processing necessary for private ISPs to build or upgrade infrastructure; providing access to city-owned dark fiber; city-owned wholesale capacity services or actual provisioning of municipal services for businesses or consumers.

Risk and capital investment grows assume more active roles, including that of actual service  provider. One point worth making is that adoption rates vary based on the number of services offered, and by the ways adoption is measured.

These days, in competitive consumer markets, penetration is measured in terms of revenue-generating units, not “locations” or “households.” Each unit sold (voice, video or internet access) is counted against the base of locations. So a single location buying three services results counts as much as three other homes buying just one service.

So it is that a number of retail service providers such as Morristown, Tenn.; Chattanooga, Tenn.; Bristol, Va. or Cedar Falls, Iowa seem to have far higher penetration rates than Longmont, Colo.

That is partly because the Longmont network still is being built out, but also reflects the fact that Longmont’s network sells only internet access and voice, but not video entertainment services. The other networks have been in operation and marketing for three times as many years as Longmont.

source: Magellan Advisors

Customer “penetration” by household therefore is different from penetration measured as a function of units sold. The difference is that determining the magnitude of stranded assets hinges on how many locations passed generate revenue.

Assume that, on average, a typical household buys 66 percent of the total suite of services (two of three triple play services or  three of five services, for example).

The difference is significant. Measuring “penetration” by units sold, penetration appears to be as high as 76 percent to 87 percent. Measured as a function of homes generating revenue, penetration could be as low as nine percent, or as high as 44 percent, with a “typical” value being something between 20 percent to 25 percent of homes passed.

Penetration: Units Sold or Homes Buying Service?
	Morristown	Chattanooga	Bristol	Cedar Falls	Longmont
homes passed	14500	140000	16800	15000	4000
subscribers	5600	70000	12700	13000	500
units sold	39%	50%	76%	87%	13%
services sold	3	3	5	3	2
HH buys .66 =	2	2	3	2	1
Homes served	2828	35354	3848	6566	379
penetration	20%	25%	23%	44%	9%

It might be worth pointing out that all these communities (Morristown, Chattanooga, Bristol, Cedar Falls and Longmont) have municipally-owned utility companies, and might therefore represent a sort of best case for retail operations serving consumers.

That seems consistent with other evidence. In markets where a telco and a cable operator are competent, as is the attacking ISP (municipal or private), market share might take a structure of 40-40-20 or so, possibly 50-30-20 in areas where the telco does not have the ability to invest in faster broadband and the cable operator has the largest share.

Beyond the actual cost of the network, and the business role chosen by the municipality, details of revenue generation (homes that generate revenue as a percentage of total; number of services offered) are fundamental.

Beyond that are the other operating and marketing costs, overhead and need for repaying borrowed funds and making interest payments, on the part of the retail service provider.

One might argue that most other communities, without the advantages ownership of an electric utility provides, will often find the lower risk of a shared public-private approach more appealing.

Also, some ISPs might find the availability of some amount of wholesale or shared infrastructure makes a meaningful difference in a business model.

One might suggest there are a couple of potential practical implications. Efforts by incumbent ISPs to raise retail prices in the same way that video entertainment prices have grown (far higher than the rate of overall inflation) will increase the odds new competitors enter a market.

Higher prices, in fact, will increase the likelihood of new entrants entering a market, as the higher prices increase the attractiveness of doing so.

In at least some cases, the new competitors will be firms such as Verizon, which now has announced it will essentially overbuild an AT&T and Comcast markets in Sacramento, Calif.

Though it is not easy, more competitive ISPs are likely to enter more markets, as lower-cost access platforms evolve, helped in some cases by municipal facilities support.

Where that happens, it is conceivable that the incumbents will see a new limitation on their market share, dipping from possibly 50-percent share to a maximum of perhaps 40 percent each, on a long-term basis, assuming the new competitor is not eventually bought out by one of the incumbents.