DirecTV Will be a Loss Leader

DirecTV Now will offer customers the ability to stream more than 100 channels of content on any device from a smartphone to a 55 inch TV starting at $35 a month with, no annual contract, no credit check, no installation charges, no set top box, and, for AT&T mobile customers, no data charges.

Margins will be super thin to non-existent, as the “cost of goods”represents as much as 97 percent of revenue. Craig Moffett, MoffettNathanson equity analyst, estimates the  the cost of the channels expected to be included in DirecTV Now is likely around $34, which would leave just $1 a month before other expenses including overhead and marketing.

Under most circumstances, that sort of underlying cost, and retail profit margin, would be characteristic of a “loss leader.” And that is among the strategic principles AT&T likely is following: grab market share in a big new content distribution market. AT&T already is the leading U.S. provider of linear video entertainment, so assuming a “winner takes all” dynamic comes to characterize streaming video markets, AT&T would be compelled to aggressively take market share from the existing early leaders.

That, by the way, is characteristic of how big tier-one telcos, including AT&T, have in the past come to lead other markets. AT&T was not first to offer dial-up internet access or digital subscriber line services. Those markets were pioneered by independent third parties. AT&T was not an early leader in linear video services or mobile services (arguably).

That is not the only way AT&T has entered new markets such as connected cars, where it arguably is an early leader in the connectivity services segment of the market, but is an established growth strategy that might be called “let others pioneer; we will scale the business.”

DirecTV Now, the new AT&T streaming video service, is interesting and important for several reasons. The move illustrates a classic method by which AT&T and other tier-one service providers enter and lead big new markets.

The regulatory challenges posed by use of a single access platform (IP and internet) to support multiple business models bridging formerly-distinct industries also are key issues. In other words, as the single physical network now supports multiple logical services historically regulated in distinct and highly-disparate ways--from common carrier to unregulated content--how to regulate formerly-distinct industries becomes an issue.

Entry into the retail streaming video business also illustrates the broader strategic challenges faced by access providers, and the the growth model.

Finally, DirecTV Now also encapsulates the principle that “near-zero pricing” of both access and carrier services remains a key underlying reality--perhaps “the” underlying reality--faced by the access services industry.

Perhaps shockingly, every carrier service is facing a long-term trend of retail pricing that moves closer to zero. That has been true of voice, messaging, internet access and entertainment video, not to mention wholesale services such as wide area network transport.

Some two decades ago, it was possible to hear top executives in the internet and computing industries argue that “bandwidth wants to be free,” with retorts that “software wants to be free.” As it turns out, both assertions captured the general movement of prices across access and software businesses.

With the caveat that “nothing is really free,” advertising-supported software is a dominant business model. Wi-Fi is the best example of “no incremental cost” internet access. But all “for fee” communications apps and services are trending ever-lower in absolute cost as well.

Pricing for DirecTV Now is but the latest example.

Old Regulatory Silos Do Not Work

Mobile video traffic is forecast to grow by around 50 percent annually through 2022 to account for nearly 75 percent of all mobile data traffic by that point.

Social networking is expected to grow by 39 percent annually over the next six years. However, its relative share of traffic will decline from 15 percent in 2016 to around 10 percent in 2022. Other application categories have annual growth rates ranging from 19 to 34 percent, so are shrinking as a proportion of overall traffic.

To be sure, not all the video is driven by subscription video. Embedded video in social media and web pages continues to grow. But subscription video will be the single biggest eventual driver of bandwidth consumption, as watching an hour of Netflix TV or movies might consume between 1 GB and 3 GB per hour.

The growing dominance of video traffic on internet access networks of all types raises some questions beyond the sheer amount of data to be carried.

Some three decades ago, it would have been common to hear observers talking about convergence, whereby all media types--from voice to messaging; print content to video and music--would be conveyed to consumers using a single, integrated access platform. We do not use the term much, anymore, because it simply is the way communications and content are used or consumed using internet mechanisms.

In 1983, Professor Ithiel de Sola Pool said:

“Separate nations will have separate networks, as they do now, but these will interconnect. Within nations, the satellite carriers, microwave carriers, and local carriers may be—and in the United States almost certainly will be—in the hands of separate organizations, but they will interconnect. So even the basic physical network will be a network of networks. And on top of the physical networks will be a pyramid of service networks. Through them will be published or delivered to the public a variety of things: movies, music, money, education, news, meetings, scientific data, manuscripts, petitions, and editorials.”

De Sola Pool correctly identified several fundamental features of the coming “next generation network:” that it would separate logical and physical networking, becoming a network of networks; and that all media types would be accessible from one physical platform. That might seem unremarkable. That is not the case.

Recall that the IBM PC had been introduced in 1981 and that the Ethernet networking standard was released in 1983. In 1984, home computer ownership might have been about 10 percent and about 1.4 percent used the internet--using dial-up modems. There was no World Wide Web. In other words, the shape of the world to come was anything but clear.

More important than the identification of the technology developments, de Sola Pool grasped the implications for regulation.

“In the coming era, the industries of print and the industries of telecommunications will no longer be kept apart by a fundamental difference in their technologies.”

Keep in mind the traditional regulation of various media types. Print content is essentially unregulated. Cable TV is lightly regulated. Broadcast TV and radio are more regulated. Voice and messaging are heavily regulated using a utility model.

All that becomes problematic in an era where all those media types can be--and are--internet or IP apps, and when apps mix and mingle all those media types, and when any type of company can compete in another segment’s business. In that scenario, old regulatory frameworks simply do not work very effectively. Some contestants face constraints their competitors do not.

Telcos have mandatory wholesale obligations and sometimes price controls; cable TV companies do not. Some app providers have universal service obligations; others do not. Some app and access suppliers are constrained where it comes to retail pricing and packaging (zero rating), while others are not.

Some apps and services are covered by content rules, others are not.

The point is that the coming shift to on-demand content delivery is going to stress regulatory models and notions of fairness. Traditionally, “media” firms are free of content and other rules related to their business models. Cable TV firms essentially are free to set their own prices and packaging policies. Some telcos remain highly or substantially regulated in that regard.

But nearly all larger contestants in internet content markets now are “media” companies to some significant extent, and moving more in that direction.

That is going to keep exposing irrationalities in the legacy regulatory structure. The internet is used by “everything.” But not everything using the internet and IP actually has been historically regulated (or not regulated) as a “data” app.

There are multiple frameworks to resolve.

source: Ericsson

Include DOCSIS in Gigabit Plans?

The European Commission, pushing a goal of gigabit internet access by 2025, tends to focus exclusively on fiber to home as the mechanism.

Not surprisingly, Liberty Global argues a “range of technologies” will be required, and should be backed.  

So argues Communications Chambers, a communications and media consultancy firm, which also argues a broad range of technologies, including fiber-to-the-premises (FTTP), DOCSIS, G.fast and high-speed cellular access (particularly 5G) will be required to deliver a minimum 100 Mbps to all households and at least 1 Gbps to users such as schools and large businesses.

Liberty Global has an obvious stake in the outcome, as well as the policies intended to further the goal.

Not surprisingly, Liberty Global argues that hybrid fiber coax DOCSIS networks could deliver gigabit broadband by 2017 and at a lower cost than using FTTP, as obviously has been the case in the United States, the United Kingdom and some other markets.

In part, the argument seeks to dampen financial support that could be given to rivals, or perhaps, more optimistically, lead to funds being made available to support HFC upgrades, not just fiber to premises deployments or 5G.

Order of Magnitude Increase in Mobile Data Between 2016 and 2022

By the end of 2022  there will be 8.9 billion mobile subscriptions in use, Ericsson predicts.  Mobile broadband subscriptions will reach eight billion, accounting for 90 percent of all mobile subscriptions.

The number of unique mobile subscribers is estimated to reach 6.1 billion by the end of 2022.

Monthly data traffic per smartphone continues to increase in all regions. North America has the highest usage, with 5.1 GB per month per active smartphone expected by the end of 2016. In 2022, North America will still be the region with the highest monthly usage (25 GB), but other regions will be catching up.

That represents an increase of almost 40 percent since the end of 2015.

Total mobile data traffic is expected to rise at a compound annual growth rate (CAGR) of around 45 percent In the future. Between 2016 and 2022, smartphone traffic is expected to increase by 10 times and total mobile traffic for all devices by eight times. By the end of this period, more than 90 percent of mobile data traffic will come from smartphones.

source: Ericsson

source: Ericsson

Why Telecom and Internet App Cultures are So Different

Those of you who have spent any appreciable amount of time in and around both the telecom and application industries recognize there are cultural differences between practitioners in both types of industries, beyond any differences in age, gender, educational attainment or any of the other “protected class” categories human resources people deal with.

There are good reasons for those differences. The fundamental business models that drive each industry are quite distinct, and in some ways polar opposites. Ubiquitous access and mobile networks are capital intensive and based on use of “scarce” licensed spectrum resources. Internet-based application businesses are asset light and based on abundance (nearly zero costs to product an incremental unit).

And though the direction of change in the access business is towards more abundance, retail access facilities remain relatively expensive and capital intensive, where it comes to scaling operations. “Web scale” providers also have to make heavy capital investments upfront, but the cost of supplying incremental units of supply is quite low.

In fact, it would not be incorrect to say that whole Internet application business model is based on abundance: universal access by anyone, on any device, from anywhere, for any reason, at any time.

In other words, to a great extent, application business models are based on Moore’s Law, and the abundance Moore’s Law brings to computing. As with coding, resources are so abundant (compute cycles and memory) that resources can be “wasted.”

Rarely are access network professionals so casual about “wasting” resources. In fact, much effort goes into finding ways to minimize the need for additional investment in capability.

source: MIT Sloan Review

Cable Dominates U.S. Internet Access at Higher Speeds

One reason a perhaps-growing number of observers believe U.S. cable TV companies will continue to dominate the fixed network internet access market is their domination of accounts sold at higher speeds. In mid-2015, for example, Comcast had about 41 percent share of accounts operating at speeds faster than 50 Mbps. Verizon, along among U.S. telcos, had 11 percent of such accounts. Cable companies as a whole had 88 percent of accounts offering service at 50 Mbps or faster. All telcos collectively had 12 percent share of such accounts.

source: Free Press

What Will New FCC Do?

Though it is hazardous to make too many predictions even before the U.S. Federal Communications Commission is reformed under President Donald Trump, it is safe to presume that a "lighter" touch on regulation  and likely a better chance for merger approvals could be in the offing. Just how much change is possible remains the issue.

Economist Jeff Eisenach and former Sprint Corp. lobbyist Mark Jamison now lead the Trump administration transition team to oversee hiring and policy for the FCC, and both are opponents of robust interpretations of network neutrality.

It is not yet clear how the new FCC will view existing rules such as Title II common carrier rules for internet access services, but it is likely the new Commission will not agree with that framework for internet access.

What is less clear is the type of network neutrality policies the FCC might consider. The present FCC had embraced “strong” forms of neutrality. The next FCC might opt for “modest” forms of neutrality. That might include the “no blocking of lawful apps” stances, or perhaps equal treatment of providers and apps within classes, but not a strict prohibition on optional access services that feature higher quality of service.

It is possible--in fact likely--that “best effort only” access (one functional definition of network neutrality) for consumer internet access would be retained, although various forms of managed services, zero rating and perhaps other packaging practices would be allowed to proceed, as well.

As it is lawful for an application provider to use content delivery services that actually do act to speed the delivery of some packets, but not all, it is possible optional tiers of service that include quality of service mechanisms might be allowed.

Still, the Commission might wait for Congressional direction on that matter.

SIP Market Still Fragmented

A survey of about 560 enterprise or business communications professionals shows that the Session Initiation Protocol market remains fragmented. Some 57 percent of respondents using SIP say they use an MPLS (quality managed) connection, while 50 percent use internet (unmanaged) connections. About 18 percent use a metro Ethernet connection.

That raises a key question. Traditionally, many argue that “managed” access is required to maintain quality or security. It appears that half the users are willingness to take those risks Also, with the coming shift to software-defined connections (SD-WAN), there might be a shift further in the direction of “unmanaged” connections, where more reliance is placed on edge devices to route packets across networks to optimize availability, load, delay and jitter performance.

Avaya (42 percent) and Cisco (37 percent) are the leading IP PBX suppliers.

On a related front, buyers report their suppliers of hosted communications are quite diverse.

U.K. to Fund Up to 2 Million Small Provider High Speed Internet Access Lines?

Even if BT is expected to supply most of the wholesale  fiber to home or “superfast” connections used by retail internet service providers, the U.K. government seems set to award funds to smaller independent ISPs in the next round of funding, representing coverage of perhaps two million households. The funds should amount to £400m.

The Broadband Delivery UK organization, dedicated to funding rural high speed access, already has been funding pilot projects using satellite (Avanti and Satellite Internet) fixed wireless (Airwave, Quickline and AB Internet)and hybrid networks using fiber and fixed wireless (Call Flow and Cybermoor).

Some smaller suppliers, including Gigaclear and Call Flow, already have gotten funding for commercial rollouts.

There are 27 million U.K. households, so the new funding for smaller providers potentially could reach about seven percent of U.K. households. Virgin Media, operating its own facilities, probably has about 20 percent share of the U.K. fixed network internet access market. If other smaller providers are able to reach seven percent of U.K. households, and sign up perhaps half of those locations, then facilities-based fixed network providers might have something in excess of 23.5 percent share of the terrestrial internet access market.

source: Point Topic, 2013 data

source: Financial Times   

Global Telco Revenue Growth and Capex Roughly in Balance in 2016

Global telecom service revenue declined four percent year-over-year in 2015 and likely will grow about one percent in 2016, according to  Stéphane Téral, IHS Markit senior research director, mobile infrastructure and carrier economics. The good news is that revenue growth and capex are roughly in balance, at least on an aggregate global level.

Total global revenue of US$1.93 trillion will be drive by the Asia Pacific region, the world’s single biggest region, followed by North America, he says. Earnings (EBITDA) for smaller telcos often are less than one percent. For tier one telcos, EBITDA can reach 15 percent. Applying the higher 15 percent level produces global EBITDA of something less than $300 billion, compared to capex of about $340 billion.

Global telecom capital investment will be mostly flat in 2016, with significant regional differences.

Low-digit growth in North America, Europe, the Middle East and Africa (EMEA) and the Caribbean and Latin America (CALA) will have been offset by a China-driven decline in the Asia Pacific region.

Asia Pacific, though, has become the world’s largest telecom spender and revenue contributor, says Téral.  

Asia Pacific will drive 42 percent of global spending, while North America stays roughly even, followed by EMEA and CALA.

Global service provider capex will grow 0.7 percent to US$341 billion in 2016, with a significant boost in European fixed network investment.

Spending on every type of hardware equipment except wireless and time-division multiplexing (TDM) voice will grow in 2016. Software, on the other hand, will expand in double digits.

Australian NBN Gets Government Loan to Finish Build

Rare is the major capital construction project that finishes on schedule and on budget. The Australian National Broadband Network (NBN) apparently is not exempt. The NBN is getting a loan of A$19.5 billion ($14.3 billion) to finish up the wholesale access network.

The loan is expected to be repaid upon the planned future privatization of NBN Co after 2020.

The NBN expects to provide wholesale access to 11.9 million premises, and also expects its retail customers to actually connect eight million homes and businesses, generating annual revenue of $5 billion.

The NBN is investing in a number of access platforms, ranging from satellite to fixed wireless, hybrid fiber coax and fiber to home. That is not an unusual choice, as there always is debate about which platforms are sustainable for different customers in different settings.

To be sure, fiber to the home is touted as future proof, and that arguably is true, where the investment is feasible (urban and dense areas). The big problem is that there are many scenarios where that investment is quite risky (lots of competitors, including facilities-based competitors)  or physically impossible (oceans, mountains, very rural areas).

That will not be the key issue for the NBN, which essentially is a monopoly wholesale provider of access capabilities. So take rates should not be a major issue.

Instead, the issue is the level of services consumers decide to buy. Some argue that unless large numbers of consumers choose to buy higher speed services that generate more gross revenue, the business model will suffer.  

Will Higher Bandwidth and Data Consumption be Matched by Revenue?

Internet access prices always fall, over time, history suggests, just as the cost of computing or storage falls, over time. Since 1998, to note just one example, internet transit prices have fallen by four orders of magnitude. In the retail internet access  business, it also is possible to predict that prices are poised to fall further. That has been true, globally, since at least 2010, according to International Telecommunications Union figures.

The issue: what are the implications for the service provider business model. In the voice business, lower prices lead to higher usage, so lower price-per-unit was offset, to a large extent, by higher consumption.

That also is true of internet access services. As prices fall, consumption increases. But there arguably is a difference. Supplying voice services required some tweaks and some investment, but not wholesale upgrading of the networks on a continual basis. And that is precisely what internet access historically has required.

So the fundamental problem is not that unit prices fall, or that demand fails to increase, but that the supply increases faster than revenue at the new levels of consumption, while investment likewise has to grow substantially to support the new levels of consumption.

In simple terms, usage grows faster than revenue, while investment requirements also remain high. That is a crucial problem for legacy service providers with legacy cost structures, less a problem for new providers without such cost burdens.

Even Google Fiber seems not to have had as much success as expected. Cable TV operators have fared far better.

source: strategyand

http://drpeering.net/white-papers/Internet-Transit-Pricing-Historical-And-Projected.php

Virtually all studies of U.S. residential internet access services show declining “cost per megabit per second” trends, nearly matching the pricing and performance trends one would expect from any business driven by Moore’s Law.

Such radical revenue-per-unit declines arguably must be accompanied by other moves to reduce the cost of supplying bandwidth.

And that is precisely the challenge to be faced by many service providers.

Surprised that Gigabit and Competition Lead to Lower Prices for Legacy Products?

Would you be surprised--at all--if a study of internet access pricing finds that competition leads to lower costs? Would you be surprised if a study finds that new services and new competitors offering products sold at higher prices--but higher potential value--lead to lower prices?

Would you be surprised if new competitors, offering better value, for lower prices, take market share away from providers offering “inferior” products at higher prices than the new products?

Probably the only statement that might find even a bit of disagreement is that new products sold at higher prices lead to lower prices for legacy services.

“Broadband Competition Helps to Drive Lower Prices and Faster Download Speeds for U.S. Residential Consumers” is the title of a study by Dan Mahoney, associate, and Greg Rafert, VP of the Analysis Group. The study finds that when a new gigabit service is offered in a market, prices for slower speed offers decline.

The study of high speed internet access pricing by the Analysis Group was funded by the Fiber to Home Council.

“The presence of gigabit service in a Designated Market Area (“DMA”) is associated with a $27 per month decrease in the average monthly price of broadband plans with speeds greater than 100 Mbps and less than 1 Gbps,” the study says. “This is equal to a reduction of approximately 25 percent of the monthly standard price.”

In an area with two gigabit access providers, “we estimate that the standard monthly price for gigabit internet will decline by approximately $57 to $62, which is equal to a reduction in price of between 34 and 37 percent.”

When gigabit internet is available, prices of “slower” speed services also decline. The authors estimate that prices for plans of 25 Mbps, but less than a gigabit, drop about $13 to $18 a month, representing a cost decline of about 14 percent to 19 percent.

None of those developments should be surprising. Competition tends to lead to lower prices, which is why policymakers and lawmakers often prefer it, why studies of markets with new competition often confirm the dynamics and why it is possible to note that new competition--lead by gigabit offers--tends to reduce prices of existing access services.

Perhaps the basic point is simply that competition leads to lower prices across the board. Nor should be surprising that new offers lead to lower prices for legacy offers. As the launch of the latest model of a smartphone leads to lower prices for the model being replaced, so a new “lead” offer offering more value will tend to devalue legacy offers offering what now is “less value.”

5G Apps Might Require Order of Magnitude to 100 Times More Mobile Bandwidth

Even if relatively few industry professionals think “speed” will be a key use case for 5G, it probably is useful to understand what speeds are expected to needed. Of some 800 industry professionals polled about 5G by Telecoms.com, though there was no clear consensus, the range of 5G speeds expected to be required ranged from less than 100 Mbps (10 percent of responses) up to greater than 2 Gbps (15 percent of respondents).

Some 25 percent of respondents guessed apps would require 500 Mbps to 1 Gbps.

For networks that have in the past struggled to supply 50 Mbps to every device, most of the time, that is a big stretch.