Can Cable Win, Long Term, Without Mobility?

Cable execs keep stressing they are communications companies--and arguably leading companies--rather than video entertainment distributors. But it might be hard to do that, long term, without a key position in mobility, which drives the bulk of revenue in the U.S. communications business, unless an alternative international growth strategy is the alternative.

The Sky purchase, though increasing Comcast exposure to video distribution, might suggest the early focus.

source: Infonetics

The issue for Comcast, as for some other firms, is whether a “fixed network only” or “mobile only” strategy is sustainable.

To be sure, cable companies are positioned to take market share in business services and consumer broadband. In fact, the whole growth story for cable companies in communications is “taking market share” from telcos faster than video revenue is lost.

But the bucket is leaking. Cable has to add new revenues simply to replace lost video revenues. Net growth beyond that replacement is the issue.

SNL Kagan forecasts residential cable industry revenues will rise from $108.38 billion in 2016 to $117.7 billion in 2026, a $9.32 billion increase over the 10-year period, even as video revenues shrink.

Commercial services revenues will push total industry revenue from $130.57 billion to $140.99 billion, a $10.42 billion increase, SNL Kagan suggests.

That forecast assumes consumer broadband subscriptions grow by more than eight million over the next 10 years, largely by market share gains at the expense of telcos. That is why fixed wireless and 5G mobile substitution are such a big potential change for telcos. If 5G reduces share losses to cable TV, the consumer revenue growth estimate for cable is too high.

The SNL Kagan forecast also is sensitive to the rate of linear video subscription losses. Basic video subscriptions are projected to drop by an annual compounded growth (CAGR) rate of 1.5 percent to 45.4 million by 2026. Accelerated losses, which most likely expect, will damage the overall growth forecast as well.

SNL Kagan anticipates total revenues generated from residential video services to fall at a CAGR of -0.5 percent over the next 10 years, totalling $55 billion annually in 2026. Again, that could be overly optimistic.

Advertising revenue is expected to grow at a 4.3% CAGR through 2026 to reach $6.3 billion, but is not a big enough contributor to offset bigger losses in the core services areas.

So the strategic issue is whether the cable industry can sustain a position at the top of service provider rankings without serious mobile revenues and profits, even if taking market share in enterprise and business markets will help.

That might be likened to the position CenturyLink finds itself in: it already earns more than 76 percent of total revenues from enterprise customers on its global networks and metro enterprise services.  

Its entire national footprint of mass market customers is essentially a drag on company profitability.

source: Seeking Alpha

Mobile remains the growth engine globally, but the relative scale and importance of the mobile, fixed broadband, and entertainment TV  markets varies hugely by country and region. In 2021, the mobile market will generate 87 percent of total connectivity and video revenues in Africa and 70 percent in the Middle East, compared to 50 percent in North America and 49 percent in Western Europe, according to Informa Ovum. The differences stem largely from revenues generated from fixed networks.

Cable dominates consumer broadband, has a strong, if declining video business and is growing its share of commercial revenues. But the other leading incumbents are fighting for their lives as well, and will not easily yield market share in voice and data, least of all AT&T and Verizon, which appear to be holding their own in consumer internet access share, for example, while most of the telco industry losses come from smaller providers relying mostly on digital subscriber line for internet access.

Almost without exception, such providers also have no mobile exposure. How long such firms can compete against cable, which arguably offers better value for consumers, is an open question.

Conversely, cable can compete against weaker telcos without mobile assets quite well. Whether cable can challenge AT&T and Verizon, though, is a bigger question at the moment, so long as no clear mobile strategy at scale.

Why AT&T Should Not Invest Too Heavily in FTTH

A telco executive once told me, nearly two decades ago, that the investment in fiber to the home was not intended to boost revenues or necessarily to gain market share on other key competitors, but instead simply to allow the firm to remain in business.

In other words, the rationale for FTTH was strategic, and not necessarily motivated by classic return on investment criteria. That arguably remains the case: it is not that FTTH upgrades are unnecessary, but that the return is thin enough that deployment cases have to be looked at quite carefully.

AT&T and Verizon, for example, now are flat in terms of net additions, with nearly all the telco segment losses coming from other telcos still heavily reliant on copper connections. In other words, at current levels of investment, AT&T and Verizon are holding their subscriber bases, but not gaining on cable competitors.

The big unknown is what happens if either firm were to dramatically increase investment. Verizon is largely FTTH already, so the issue is what happens if investments to boost consumer internet access speeds were to be made.

AT&T has added perhaps four million new FTTH lines over the past few years. AT&T says it will have connected 14 million U.S. homes with fiber-to-home facilities by the end of 2019.  If AT&T passes a total of 62 million homes, that implies FTTH will be about 23 percent of total passings.

Keep in mind that the entertainment group (consumer services including all internet access services) represents about 15 percent of the company’s adjusted EBITDA. In other words, earnings from 62 million homes generates just 15 percent of AT&T total. There is limited upside, one might argue.

At a high level, and for immediate purposes, AT&T has passed less than a quarter of consumer locations with FTTH. Still, while not growing its internet access market share, it is holding steady, overall. A rational executive might conclude that scarce capital is best deployed elsewhere, to reduce debt and build the 5G network.

Still, you might wonder why AT&T apparently has been so slow to upgrade, given recent evidence that, where it chooses to build optical fiber access facilities, it can get 50-percent take rates, as well as higher dual-play revenues (video entertainment plus internet access). The key is that those areas tend to be the areas of highest household income. So spot builds make more sense than full-town or full-city upgrades, given other demands for investment or debt repayment.

And AT&T has to prioritize mobility. Recall that mobility represents half of AT&T's revenue.

WarnerMedia represents about 17 percent of the company’s revenue and adjusted EBITDA. That’s more revenue and profit than AT&T makes from consumer fixed network operations.

And recall that WarnerMedia earns money from lots of customers and content and service providers not on AT&T’s network. It is an “app,” not a network service confined just to AT&T.

Business wireline represents about 17 percent of the company’s adjusted EBITDA.

In terms of revenues, mobility represents 40 percent, entertainment group 26 percent and business wireline about 15 percent of total quarterly revenue of $45.7 billion.

The business issue is whether any massive expansion of FTTH would produce revenue gains great enough to justify the move, and what the opportunity costs might be.

In fact, opportunity cost probably is the bigger issue. With capital limited, does it make more sense to invest in 5G and the mobile platform, or put lots more capital into the fixed networks business that drives a minority of revenue for both AT&T and Verizon.

Verizon earns 87 percent of its profits from its mobile network.  

But it is not clear how much upside exists for AT&T, in terms of fixed network internet access revenue. You might argue that the best case for AT&T, for a massive upgrade of its consumer access network, is about 10 percent upside in terms of consumer market share.

That is by no means insignificant, depending on the assumptions one makes about the cost of the upgrades. Still, given that as important as it is, fixed network internet access now is a mature business, there are limits to how much capital a telco “ought” to invest, compared to deploying capital elsewhere.

Realistically, a major telco has to expect it will, under the best of circumstances, and in a two-provider market, split share with a competent and motivated cable TV provider. If cable now has about 60 percent share, and AT&T about 40 percent share, that implies a sort of share ceiling of 50 percent. That is one driver of revenue. The other is revenue per account.

But typical account revenues have not risen as much as one might expect, given consumer shifts to higher-speed services that tend to cost more.

Basically, internet access prices in the developed world have tended to move roughly in line with growth in gross domestic product, and are flat to declining in terms of spending as a percentage of gross national income per person, according to the International Telecommunications Union.  

So there are important reasons why scarce capital has to be put places other than massive consumer FTTH upgrades. Consumer fixed network operations produce relatively little revenue or profit for AT&T.

So a rational executive would invest just enough to hang on to most of the revenue, as long as possible, while investing for revenue growth elsewhere. Just saying.

Verizon Earns 87% of Profits from Mobility

By now it comes as no surprise that most leading U.S. telcos (but not all) earn most of their money from mobile services, not the fixed network. Verizon, for example, in 2018 earned $91.7 billion from mobile services, representing 70 percent of Verizon’s aggregate revenues.

So everything else, including fixed network operations contributed 30 percent of total revenues.

source: Seeking Alpha

The retail services portion of the fixed network generated $29.8 billion, representing 23 percent of Verizon’s total revenues. Of that amount, consumer services were $12.6 billion , representing approximately 42 percent of fixed network revenues.

Enterprise revenues were $8.8 billion , representing approximately 30 percent of fixed network revenues.

Wholesale revenues were $4.7 billion , representing approximately 16 percent of Wireline’s aggregate revenues.

Earnings are even more weighted towards mobility. Verizon earns 87 percent of total profits from mobility services, just 13 percent from fixed network services.

source: Bloomberg