Will Access Costs Need to be an Order of Magnitude Lower in Global South?

“Heads I win, tails you lose” is an aphorism about “unfair” coin tosses that applies to Google and Facebook. To a significant extent, both firms can correlate revenue growth with the growth of “people who use the Internet.”

Internet service providers have no such luxury. China Mobile grows revenues primarily when people use its branded services, not when people get Internet access from any other ISP.  

That correlation of revenue in the case of Google and Facebook, and the causation of revenue for any other ISPs, explains why Google’s business behavior is so different from that of any other ISP.

Though partly an ISP itself, Google actually can grow revenue whenever additional Internet users can be created. With growth largely saturated in the developed world, Google (and Facebook) have turned their attention to how to add billions more users in the developing world.

Correlation is not causation, it always is important to remember. It is not actually the case that the incremental users “cause” Google’s revenue to grow.

Rather, in an indirect way, the growth of Google users creates a more compelling business case for advertisers to use Google venues. So revenue “follows” user growth, even if the user growth does not directly drive the revenue creation.

How different a process that is, compared to the revenue model for AT&T or Orange, where each new customer actually represents direct revenue.

That, simply enough, explains Google’s serious interest in seeing “everybody” get connected to the Internet.

Of course, as you might suppose, eventually, when “everybody” does get connected, revenue growth--to the extent it historically has been correlated with growth of the Internet user base--app providers such as Google will face new revenue growth issues.

At that point, at least for its Internet app businesses, Google’s interest will shift from user growth to average revenue per user growth, as often happens in most other businesses reaching maturity.

But to sustain growth beyond the present era, both Facebook and Google will have to retool their business models to chase “something else” that drives rapid and sustained growth, after growth from the current model slows and then largely ends.

It is that longer term “what will we do next” question that underpins Google’s experiments with driverless cars, robotics and now drones, even if drones might also play a role in the more-immediate issue of getting billions of new Internet users connected, as rapidly as possible.

Also, as with most other businesses, not all customers are equal. In Google’s case, the value of incremental users likewise is unequal.

“In the most recent quarter 53 percent of Google’s revenues came from the U.S. and U.K.,” says Horace Dediu. “Five years ago the proportion was 61 percent.”

source: Horace Dediu

That matters for ARPU since U.S. and U.K. is at least $86 per user, while users in the “rest of the world” represent about $12 per user.

Google’s “rest of world” category includes many developed countries such as all of Europe and Japan, where getting additional users will be quite incremental.  

Without any doubt, the fact that most of the remaining users will be added in the emerging markets is key.

The problem for Google is that it has an order of magnitude less income per user. In part, that is why Google and Facebook spend so much time trying to figure out whether there is a cheaper, faster way to bring Internet to billions of people who do not have access to the Internet.

If one assumes revenue upside is an order of magnitude lower than at present, then access costs, all other things being equal, have to be an order of magnitude lower as well.

Aside from providing a big challenge for new providers, those assumptions also will affect revenue potential for fixed network and mobile service providers as well.

As has been true for much of the telecom business over the last couple of decades, getting costs aligned to revenue remains a key challenge for access providers.

Why Does Amazon Want to be in the Smartphone Business?

Without a doubt, the U.S. smartphone market is vibrantly competitive, and potentially will become more so as Amazon enters the market with its own branded smartphone, while Google’s Project Ara tries to stimulate the growth of a modular approach to devices.

At the same time, a furious marketing assault by T-Mobile US is, at least for now, threatening to destabilize the market, not just by shifting incremental market share towards T-Mobile US, but also potentially changing both retail packaging and pricing practices industry wide.

For many, the key immediate question is whether Amazon should enter the smartphone business at all, and what the upside could be. Skeptics argue that is a distraction Amazon does not need. Others point out that the smartphone is a complicated device, in terms of application functionality, and that creating a valuable device able to take market share therefore also poses a risk.

But some might counter that such concerns also surrounded the launch of the Kindle tablet as well, and Amazon claims users of Kindles generate more transactions for Amazon. As early as 2012, Kindle drove about 10 percent of Amazon revenue, some estimate, driving perhaps $6 billion in revenue, even if relatively little actual profit on sales of hardware, music, streaming video or apps.

Some would argue Amazon earns a little on sales of book content and advertising. But Amazon often thinks long term, and media sales represent about 45 percent of total revenue, at the moment. As that revenue shifts to digital delivery, the Kindle ecosystem should become much more valuable.

Similar thinking likely drives interest in selling an Amazon smartphone. To the extent that connected devices now are content consumption platforms, the smartphone would provide the same sorts of advantages as the Kindle.

“In addition to the income that smartphone sales would create, it would support Amazon’s expansion into the content-delivery field,” said Tom Caporaso, CEO of Clarus Marketing Group.

But that might be the most significant value for Amazon. Smartphones and tablets are becoming more important platforms for e-commerce. In 2014 alone, the value of mobile-initiated e-commerce could grow about 24 percent, according to eMarketer, representing perhaps $17 billion in 2014 sales volume.

Beyond that, Amazon would be in position to learn much more about the context of user behavior related to commerce, Amazon’s key business. “An Amazon smartphone would provide another large wellspring of information” in that regard, argues Caporaso. “Augmenting its existing customer knowledge with GPS data, user information, shopping behavior, and other personal and demographic details could help Amazon hone its customization efforts.”

That should pay dividends in the form of loyalty and therefore both higher purchasing levels and repeat purchasing.

Amazon could stumble, of course. But the logic of how a smartphone plays into its core retailing buisness is clear enough.

Tablets are Driving Net New Mobile Connections in U.S. Market

Tablets with mobile connections now are driving net connection growth in the U.S. mobile market for most of the largest national service providers.

Mobile tablet connections grew about  46 percent in 2013, according to researchers at NPD.

For AT&T, in particular, tablet subscribers are a large part of what's driving net subscriber additions. Some  440,000 of AT&T's net new postpaid subscribers in the fourth quarter of 2013 were tablet connections.

“Connected devices” (tablets, principally) drove net mobile additions at AT&T during the third quarter of 2013, as did U-verse broadband services in the fixed network segment.

AT&T added nearly one million net mobile subscribers, including 63,000 mobile postpaid accounts and 192,000 prepaid accounts.

But connected device net adds were 719,000, or 73 percent of net additions.

Verizon Wireless added 625,000 tablet subscribers in the fourth quarter of 2013, but nearly one million more handset subscribers in the fourth quarter.

Sprint added 58,000 net new postpaid subscribers in the fourth quarter and 466,000 tablet subscribers.

T-Mobile US alone seems to be adding more phone than tablet connections. But that is likely why T-Mobile US has launched its new connected tablet  promotion.

New Street Research predicts Verizon Wireless will find that many of the predicted 485,000 net subscribers for the first quarter of 2014 will be do so to connect their tablets.

AT&T Mobility is expected to add 229,000 net new subscribers in the quarter, again on the strength of tablet accounts.

Sprint probably will lose 247,000 postpaid accounts, but tablet additions will help.

T-Mobile US, which has been showing strong quarterly net additions for more than a year, "could easily add" 1.1 million net new subscribers in the first quarter of 2014. T-Mobile US might be the carrier that adds the greatest percentage of traditional phone accounts.

Source: NPD

TV Paradigm Shift?

When major scientific theories (paradigms) are about to change, one encounters confusion. When an accepted scientific paradigm is about to change, scientists find they have to work harder to fit existing data to an older theory.

When a paradigm is accepted,most scientific progress occurs incrementally, by the accumulation new data that then is fitted into the paradigm. When anomalies start to appear often, it can be a sign that the paradigm is wrong.

Eventually, the inability of the older paradigm to explain and predict leads to a revolution in thought and the establishment of a new paradigm. The point is that coherence tends to  be a problem at times when paradigms are preparing to shift.

Such paradigm shifts might be likened to times when eras of technology are changing, as well, without overplaying the analogy. Of course, what changes when eras of technology change are revenue models built on consumer behaviors and buying preferences.

Perhaps one sign of the looming change are viewership studies that product discordant data.

Make no mistake, linear (scheduled) TV is still overwhelmingly the preferred method for watching TV, with 84 percent of U.S. adults who watch television watching live, in real time, according to BroadStream Solutions, despite the popularity of digital video recorders, mobile, PC and tablet viewing.

A separate study by Experian Marketing Services confirms that watching streaming or downloaded video on any device is connected `to higher rates of cord-cutting, the abandonment of linear TV altogether.

But it is not clear how devices such as Chromecast, Kindle Fire TV, Roku or Apple TV, and use of mobile or untethered appliances will change viewing habits.

The fastest growth of “non-traditional” viewing is watching streamed or downloaded video on a television, Experian Marketing Services says.

For instance, while adults who watch video on either a tablet or smartphone are 1.5 times more likely than average to be cord-cutters, those who watch streaming video on a television are 3.2 times more likely to be cable-cutters.

Furthermore, those who say that they use their television primarily for watching streaming or downloaded video are 5.7 times more likely to be cord-cutters.

Clearly, at least so far, watching video on portable personal device is not an alternative to linear TV, though watching streamed video on a TV display could be developing in that way.

The ability to stream or download video directly to the television “seems to be the tipping point,” Experian Marketing Services says.

“We should expect to see the number of cord-cutters grow” as that behavior becomes more common, Experian Marketing Services argues.

Mobile service providers clearly are thinking there is a mobile opportunity as well, even if the study by BroadStream Solutions also suggests that, at the moment, very few Americans want to watch on smaller screens.

That study suggests about two percent of respondents “prefer” to watch on tablet devices. A similar two percent prefer to watch on mobile devices. Some four percent prefer to watch on desktop PCs and about seven percent prefer to watch on notebook PC screens.

On the other hand, the study by Experian Marketing Services found that “mobile is the first screen for online video,” with 24 percent of adults reporting they watch video on a smartphone every week.

Nearly 25 percent of  all adults and 42 percent of smartphone owners watch video on their phones during a typical week, Experian Marketing Services reports.

So there’s a bit of data that doesn’t quite fit. People might not “prefer” to watch on a small screen. Yet there is much evidence that is what they do.

And one useful rule for tracking trends is to pay attention to what people do, not what they say. What already seems to be clear is that lots of people are watching video on small screens regularly.

They also are watching more streamed video on standard TV displays.

But behavior is changing. Most studies are likely consistent in reporting that people do not watch much video on small screens, compared to large screens, and not so much long-form content. But all that continues to change.

One explanation for those findings is that people need to own small screen devices in order to use them. And the Experian data suggests dramatically different behavior by people who own tablets and smartphones, compared to people who do not own such devices.

Also, one might argue that connected game consoles provide the same function, where it comes to watching online video on a TV, as a Chromecast, Kindle Fire TV, Roku or Apple TV box. And note the vast difference in behavior for viewers who own a game console.

Just 10 percent of adults report using a game console to watch streamed video every week. But 25 percent of console owners report they do so. The same differences can be observed for owners of smartphones and tablets.

Anomalies can sometimes signal that technological eras are about to make a transition. So watch for more signs of contradictory evidence on viewing habits as the base of users of streaming TV devices, smartphones and tablets increases.

Dish Network Will Play a Role in Rearranging U.S. Mobile and Video Market Share

source: Bruck Kushnick

Facing important decisions about potential consolidation in both video entertainment  and mobile industry segments, Federal Communications Commission decisions, along with Department of Justice antitrust reviews, could trigger other cross-industry consolidation as well.

The immediate issues include the Comcast acquisition of Time Warner Cable, the possible, though unlikely Sprint acquisition of T-Mobile US and a potential merger between DirecTV and Dish Network.

Also in the background are upcoming auctions of former TV broadcast spectrum that likely will limit potential gains by AT&T and Verizon, while favoring Sprint and T-Mobile US.

All those intramodal changes could also trigger intermodal activity, though. Dish Network has been amassing spectrum suitable for building a mobile business based on fourth generation Long Term Evolution.

source: Bruck Kushnick

Dish faces an FCC deadline for beginning and finishing construction of that network, in order to keep its licenses. So there has been logical speculation about a deal with Sprint, for example, to expedite the actual network activation process.

But there are other possibilities as well. Both AT&T and Verizon face some limits on how big their existing linear video services business can grow. And some would question the long term value as well.

Dish Network CEO Charlie Ergen sees a dwindling future for satellite-based video service, and also for fixed network delivered linear video entertainment, as demand shifts to over the top and on-demand delivery.

“In my opinion, the video business for a monthly subscription of $80 to $100 a month is a mature business,” Ergen has said. “We’re losing a whole generation of individuals who aren’t going to buy into that model because they only want one particular show or they want to watch the show wherever they can or they want to watch it on their schedule and so that generation is not signing up to satellite or cable or phone video today.”

“At some point in time, the video business, as we know it today, will change dramatically enough that the current business will go from a mature business to a declining business,” Ergen has candidly said. “Hopefully, we’ll make up for that and in an over-the-top business or a wireless business or other businesses that make sense.”

That, many would argue, explains Dish Network’s effort to buy Clearwire and Sprint, purchases of satellite spectrum that can be repurposed to support terrestrial LTE and H block spectrum purchases.

Though initially some speculated that Ergen was buying all that spectrum, and talking about mobile networks, only to entice a buyer for all of Dish Network, Ergen now arguably is quite serious about shifting his business model.

For AT&T or Verizon, a shrinking fixed network linear video business could make a mobile-centric, over the top and on-demand video service much more attractive, positioning either carrier in a growing revenue segment that would become the successor to the linear video business.

Such a business also would be national in scope, where each carrier now has a limited geographic footprint. Also, should Google Fiber continue to scale its business, AT&T or Verizon would gain some revenue to offset possible losses in the fixed network and video services business.

If the Federal Communications Commission limits bidding on spectrum in upcoming auctions of former TV broadcast spectrum, limiting the amount of spectrum AT&T and Verizon can acquire, there are certain to be correlated actions by Verizon or AT&T.

The Federal Communications Commission seems to be interested in crafting auction rules that would ensure that T-Mobile US and Sprint get a reasonable share of the new spectrum.

This is important and valuable to both carriers as the new frequencies will propagate farther than the higher-frequency holdings that anchor both carriers’ present services. Greater propagation means less capital cost for the transmitting network.

But those bidding restrictions also would limit the additional spectrum AT&T or Verizon could acquire.

To be sure, Verizon has said it has no need for more spectrum for additional spectrum. But Verizon already has invested in assets that would allow it to launch a nationwide, mobile-delivered over the top video service. And that would take lots more bandwidth than Verizon presently controls.

Verizon’s public statements notwithstanding, it almost certainly will be needing more spectrum, not so much for its “mobile communications” services, but for potentially key new mobile video entertainment services.

And that is where Dish Network could come into play. Dish owns enough spectrum to be attractive if Verizon or AT&T are serious about a mobile-delivered, over the top and on-demand video entertainment service.

Keep in mind that Verizon’s FiOS footprint is relatively small, compared that of Comcast and the satellite networks, for example.

One might argue that will happen. The traditional argument--for at least a decade--is that neither AT&T nor Verizon can grow the video portion of their triple-play services much more than incrementally, without acquiring more video share now held by the satellite providers.

No matter how effective the telcos are at marketing video services, they are hampered for a couple of reasons.

The cost of upgrading their fixed networks to handle video is a task now made tougher because the financial return from investing in mobile assets now competes for investment funds, is one limitation.

AT&T and Verizon have very good reasons for caution about capital investment in their fixed networks, even if high speed access and video entertainment services have emerged as strategic applications for fixed networks.

The other problem is that both firms are barred from significant growth by acquisition, simply because of their large share of the telco fixed network business. AT&T’s fixed network might pass about 30 million of 115 million or so U.S. homes, and not all those locations are video-capable.

Verizon passes about 27 million homes. And despite new AT&T plans to vastly accelerate upgrading its networks, perhaps half of all lines operated by AT&T and Verizon fixed networks are not yet upgraded to enable video services.

The point is that AT&T and Verizon will be limited in the number of video subscribers they can attract, simply because their footprints are relatively limited, both geographically and in terms of the cost of upgrading rapidly.

source: BTIG Research

Verizon’s video entertainment customer base, for example, is about five million households. DirecTV has about 20 million customers while Comcast, with Time Warner Cable, would have more than 30 million customers. Dish Network has about 14 million customers.

No matter how effective Verizon is at winning video market share where it has fixed network FiOS assets, the fact is that Verizon’s network footprint is too small, relative to the satellite networks, Comcast or AT&T, to grow its business too much further.

AT&T has about 5.5 million video customers as well. One might argue that the only way either AT&T or Verizon gets significantly more video share is by buying one of the satellite providers.

To the extent that national footprint is helpful, as it has become in the mobile business, national scale arguably would be beneficial in the video business, as both DirecTV and Dish Network are able to take advantage of, in terms of marketing and to some extent in terms of appeal to advertisers.

Not only does Ergen expect demand for linear video to decline, geostationary satellite networks are ill-suited for interactive services.

But to the extent that linear video remains a key revenue driver, acquisition of Dish Network and DirecTV subscriber bases are one of the most-logical ways for AT&T and Verizon to gain scale and revenue volume in the linear video business.

Dish also offers Verizon a service organization outside of FiOS areas that could help Verizon deploy additional mobile broadband capacity and support an over the top mobile video service.

And either AT&T or Verizon would have more headroom to acquire additional spectrum from such a secondary transaction if the FCC revises the “spectrum screen” it uses to ensure diversity of spectrum ownership.

Essentially, the FCC limits ownership by any provider to no more than about 33 percent of available spectrum. In recent days, the Commission has not included 2.5-GHz Sprint holdings in the base, for such purposes.

Many believe that will change, automatically giving AT&T and Verizon more leeway to acquire spectrum in secondary markets (by buying firms with rights to spectrum). Dish Network is the firm with the greatest amount of spectrum to be acquired in that manner.

So watch for big intermodal changes in the U.S. mobile and video services business.