Internet Video Eventually Will Create Network Winners and Losers

The switch to Internet delivery of video is going to have profound impact on the strategic fortunes of current and future providers of Internet access and video content.

If you want to know why Charlie Ergen, Dish Network CEO, is so intent on getting into the mobile business, that is the reason. At some point, as bandwidth requirements rise, and more of the traffic load becomes video entertainment content, network topology matters.

Point-to-multipoint networks are very good at delivering linear TV, where essentially one copy of a stream can be beamed to scores of millions to hundreds of millions of people.

But such networks fall apart when the traffic is point-to-point, as traditional telephone networks are, or must support unicast video, as the Internet must. The faster Internet access becomes, and the more people use the Internet to watch lots of video, the more difficult it becomes for a satellite provider, or any other unicast medium, to match.

Likewise, as bandwidth demands grow, spectrum-based networks will be at a disadvantage, compared to wired networks. As much as people enjoy the freedom of watching video content anywhere, anytime, volume sooner or later will naturally be pushed onto fixed networks.

We already can see glimmers of that trend in smart phone consumption patterns, where in many instances a majority of volume is shifted to the fixed network. That will only be more important in the future, as unicast, personalized consumption begins to rival linear consumption.

“Eventually, as linear TV is viewed less, the spectrum it now uses on cable and fiber will be

reallocated to expanding data transmission,” says Reed Hastings, Netflix CEO. “Satellite TV subscribers will be fewer, and mostly be in places where high-speed Internet (cable or fiber) is not available.”

Clearly, Netflix and other streaming video services now are driving bandwidth consumption in the U.S. ISP business. Since at least 2011, real time entertainment content has represented at least 49 percent of peak hour traffic  in North America.

By 2012, video had grown to represent as much as 75 percent of peak hour traffic. For some ISPs, that is an opportunity to sell bigger access packages. For others, video entertainment represents a danger, threatening to overwhelm either access bandwidth or capacity caps, or both.

During peak periods of internet use in the US, Netflix constitutes 33 percent of all downstream traffic, according to Sandvine. That’s more than Google’s YouTube (14.8 percent), BitTorrent (5.9 percent), Apple’s iTunes (3.9 percent), Amazon Video (1.8 percent), and Facebook (1.5 percent).

That has clear implications for all ISPs. The issue is just how big an impact all that consumption is having.

Netflix says its users consumed “more than four billion” hours of content  in the first quarter of 2013, so assume that means 4.150 billion hours, globally.

The vast majority of Netflix streaming subs are in the United States, so assume about 88 percent of the streaming happens in the U.S., market.

That implies monthly U.S. consumption of about 1.2 billion hours. So how many subscribers are streaming? Netflix has projected 28.1 million streaming users. That further implies consumption of 73 billion minutes a month.

That implies 2,599 minutes of Netflix viewing per subscriber per month, or roughly 87 minutes per subscriber per day, or 43 hours per subscriber per month.

But there’s a new wrinkle: Netflix is launching new plans that allow for up to four simultaneous streams on an account instead of two for $11.99 a month, $4 more than the current $7.99 single user plan.

Netflix estimates one percent of customers will opt for the new “family plans.” But for ISPs already grappling with Netflix bandwidth demand, the new plan will potentially double Netflix bandwidth consumption from some percentage of Netflix households.

ISPs with the ability to provision lots more bandwidth and price services to reflect higher consumption will have an advantage. ISPs that cannot so easily do so will face a challenge competing.

The Telecom Business is Getting More Like the "Internet"

One growing discontinuity in the communications business is the natural tendency to view the business through functional silos that are losing their meaning. These days, in many markets, people using smart phones are on the fixed networks for access, more than mobile access.

That discontinuity is going to grow, but should be familiar to anybody who works in the Internet ecosystem. Namely, devices and apps are agnostic to the underlying access medium. So even when a company “knows” its own revenue model is directly driven by a specific network (mobile, fixed, fixed wireless, satellite), the networks get used by people and firms with which the access provider has no direct relationship.

In other words, there is a growing disconnect between the concepts of “my customers” and “my users.” Virtually any provider of Internet access has more “users” than “customers.” To be sure, some will see that as a prod to think about ways of creating relationships with users who aren’t customers.

But the trend also explains why ISPs worry about becoming “dumb pipes.” But there is a crucial distinction: every ISP always and everywhere operates as a dumb pipe. What people want is access to the Internet.

One can argue that particular ISPs sell “smart pipe” services. There is some logic to that. But most of those smart features wrap around the dumb pipe function is some way. Traffic can be shaped to improve user experience. Content can be cached. Charging systems can be reconfigured.

And ISPs routinely also act as content or app providers (carrier voice and entertainment video are services, not “Internet” accessed apps).

It is not that the Internet access function itself is in danger of disintermediation. It is not. But the business context is morphing. Some might well argue that dumb pipe Internet access is in fact the foundation service of the future, with “carrier services” wrapped around that access.

Some telcos are trying to do what cable operators have done, namely vertically integrating (in a loosely coupled way) by becoming app or commerce providers. The trend will grow, especially for ISPs that find they cannot significantly reduce operating or capital costs to compete with lower-cost providers.

“Until three or four years ago, consumers primarily accessed the Internet through PCs and laptops but at the beginning of 2013, the picture is very different,” says Amanda Sabia, principal research analyst at Gartner.

“Consumers use multiple screens to perform various activities that require both fixed and mobile internet connectivity,” Sabia says. Consumers are screen-agnostic; they will use whichever screen is convenient, as long as it is ‘connected.’”

Gartner reckons that global mobile devices (other than smart phones with a mobile data plan) per household will increase by more than eight percent annually through 2016.

1/3 of Planet Now Online

About a third of human beings now use the Internet. And most of the growth these days now comes from people in the developing regions. Mobile now represents about 10 percent of total usage, and will grow. 

New Rumor About Verizon Buying Rest of Verizon Wireless

Verizon Communications has hired advisers to prepare a possible $100 billion bid to take full control of Verizon Wireless from its partner Vodafone, according to Reuters. The latest rumor is but the latest rumor about Verizon buying the Vodafone stake. 

Among the recent rumors AT&T and Verizon bid for all of Vodafone. Given slower growth in most mobile markets globally and very low interest rates, the merger activity in the U.S. and other markets is logical. 

When firms cannot grow organically, they typically acquire growth. 

Does LTE Create New Revenue, or Only Displace 3G?

With every recent "next generation" of mobile networks, the hope and expectation has been that new revenue-generating services and applications would be created. That was true for 3G and now is said to be an expectation for 4G networks as well. 

It's a reasonable enough hope, even if it sometimes takes quite a long time for those new revenue-generating apps to be discovered and embraced. In fact, one might argue, it was until the advent of either mobile email and mobile Internet access that "new revenue generating services" became significant. 

That might logically be expected to happen for 4G Long Term Evolution networks as well. The issue is whether the "new revenue" is generated mostly by new retail policies, totally new apps, higher data consumption and therefore bigger data plans, or some combination of all of those possible trends.

Also, though it will be hard to quantify, users will simply shift from use of 3G to 4G, so LTE revenue cannibalizes 3G. 

Many executives say the "new revenue" will come in large part from an end to "all you can eat" data plans that are instituted with 4G. In that case, the "new revenue" does not come from "compelling new apps" but only from changes in charging policies. That is helpful for a mobile ISP, but perhaps not the same thing as arguing LTE will create brand new apps. 

So forecasts of "LTE revenue" have to be viewed with some circumspection. LTE might represent a third of revenue by 2017, Juniper Research forecasts, representing more than $340 billion worth of revenue. Other older estimates suggested faster revenue growth, but that isn't unusual early in the development of any new market. 

But the magnitude of the revenue stream is not the only, or most important, new fact. Aside from cannibalizing 3G revenue, aside from representing higher data consumption, and therefore higher access fee plans, will LTE actually enable the creation of brand new applications that generate revenue? That's the big question. 

Legacy Decline is Slow, at First, in Video Entertainment, Computing or Communications

In three different legacy businesses--video entertainment, communications and computing--we see examples of how robust markets eventually mature and then decay. 

Apple. for example, might be on the cusp of transitioning from a fast-growing technology company to a slower-growing dividend-paying company, as many would argue already has happened to Microsoft. 

Canada has one of the highest pay TV penetrations in the world, estimated to reach nearly 90 per cent at year-end 2012, but like the US, IHS Screen Digest expects that pay TV penetration will be on a relentless yet shallow decline decline through 2017, as many newly formed households are less likely to take a traditional TV service. 

And AT&T seems to hitting something of a wall as well, as its recent earnings report show revenue is flat. If Long Term Evolution is doing anything other than compensating for declining revenues in other areas (parts of the consumer fixed network business or enterprise), it isn't immediately clear. 

But it also is important to note that even if firms such as AT&T, Apple and cable companies are at a point where the growth curve flattens, there is nothing to suggest inevitable rapid decline after a peak has been reached, or passed. 

In other words, transitions often build for long periods of time, with only apparently marginal and incremental changes in buyer behavior. But every big change eventually reaches an inflection point, where change is quite rapid. 

The big challenge is avoiding too much optimism about what can change in the near term, and too little optimism about the magnitude of ultimate change after the inflection point is reached. 

For suppliers, what happens, ideally, is a gradual decline, occurring over a relatively long time, allowing a firm time to reignite growth some other way. 

On the other hand, the technology business, especially the computing business, offers a rather bracing lesson for computing suppliers. 

Leaders in one era rarely survive as leaders of the next era. Some would argue the same process has been at work in the entertainment business, as it evolved from stage to radio to movies to television. 

The big question is how communications might change. Some would note that we are only now at the first big change in industry dynamics, as voice services cease to be the revenue driver. 

And though there is much logic to suggest the Internet access business largely will replace voice as the underpinning of the business, it is not axiomatic that today's suppliers of such access inevitably are so dominant in the future. We just cannot tell. 

Though Internet access will remain a capital intensive undertaking, precisely how much capital it will take, and who can do it, will be a somewhat open question in the future. 

And though one might argue that access providers these days are in a multi-product business (mobile voice, fixed voice, video entertainment, Internet access), there also are examples of "disappearance."

AT&T, for example, never was able to evolve beyond its "long distance" revenue dependence. Nor did MCI. As crazy as it sounds, we cannot say for certain, today, how Internet access will be supplied in the future, and by whom. 

Are Apple Earnings Evidence of a Coming New Era of Computing?

Students of computing history are familiar with the notion that each distinct era of computing has been lead by a different set of companies than lead the era that preceded the new era. that doesn't mean, in some mechanical fashion, that the leaders of a former era always disappear.

Some will note that IBM still exists, though as a far different sort of company. In fact, one might say other leaders in past eras, including HP and Dell, are trying to recreate themselves largely on the IBM model, which is to say as consulting specialists, not hardware suppliers. 

Its too early to say if the pattern will hold in the next era to come. But history suggests the pattern will hold. If so, household names such as Apple might cease to be seem as the trendsetters of the next era.

It is a shocking concept, to be sure. But some observers would say the recent Apple earnings call, with its predictions of slowing growth, declining profit margins and a greater emphasis on the "value" element of owning Apple equity, rather than growth, illustrate the process at work. 

As happened to Microsoft before it, Apple might be on the cusp of becoming a "value play," not a "growth play." The corollary, one might also argue, is that as Microsoft is seen in many quarters as "not leading" in computing any longer, so Apple in several years might also be seen as a past leader, not a current leader.

It's shocking, but history suggests it will happen. 

Netflix Success Challenge in a Nutshell

In a nutshell, the key challenge for Netflix is to "grow members and revenue faster than content spending," as the latest Netflix shareholder letter mentions. In other words, Netflix has effectively become a programming network, not just a content delivery service.

And as has been true for all programming networks, original and unique content is the growth driver. That doesn't mean every bit of content, or even most content, has to be unique to a particular network. But virtually all popular networks have one or more "signature series" that define the network and pull in viewers.

Netflix will have to invest to do so, and that means there is going to be a tension between doing so and then adding enough additional new subscribers to keep its profit margins intact. 

Apple Financial Results Answer No Key Questions

Apple's fiscal 2013 second quarter ended March 30, 2013 included quarterly revenue of $43.6 billion and quarterly net profit of $9.5 billion, compared to revenue of $39.2 billion and net profit of $11.6 billion for the same quarter of 2012.

Despite posting results most companies would be happy to report, such as "average weekly growth of 19 percent, Apple's quarterly results do not answer any of the strategic questions observers now have about the company. 


What is the "next big thing" to drive Apple sales and customer delight? 

Can Apple create yet another big new market? Perhaps most importantly, has Apple lost the creative edge and become a "normal company" with a "normal growth rate?

In fact, some think single-digit growth rates are where Apple is headed, in perhaps five years. 

Nor, it appears, will it be possible to resolve any of those questions until perhaps September 2013, or possibly even 2014, when Apple says it will launch the next round of new products. "Our teams are hard at work on some amazing new hardware, software, and services that we can’t wait to introduce this fall and throughout 2014," CEO Tim Cook said. 

And while the big strategic questions are not narrowly financial, financial performance is an issue. Gross margin was 37.5 percent compared to 47.4 percent in the year-ago quarter, for example. 

Apple estimates its gross profit margin will dip a bit further in the next quarter, and the company faces sharply declining rates of growth. Questions about Apple strategy also revolve around the likely impact on margins if lower-cost iPhones, despite the company's denials, are launched, as is the case for lower-cost iPads as well. 

International sales accounted for 66 percent of the quarter’s revenue, and growth was driven by the iPhone and iPad. Apple sold 37.4 million iPhones in the quarter, compared to 35.1 million in the year-ago quarter. 

Apple also sold 19.5 million iPads during the quarter, compared to 11.8 million in the year-ago quarter. 

By way of comparison, sales of sold just under four million Macs, compared to four million in the same quarter of 2012 show a slight decline. 

Apple and AT&T are Borrowing Money to Pay Dividends

In an unorthodox move that reflects relatively low interest rates and the high tax rate on bringing cash from overseas accounts back to the United States, Apple says it will begin to borrow money to fund share buybacks and a higher dividend. 

AT&T is doing so as well. In 2012, AT&T dividend payments were nearly $4 billion more than its free cash flow. And AT&T sees free cash flow being some $5 billion lower in 2013. Something has to give, some would say. 

In 2012, AT&T spent $12.8 billion to buy back shares, and another $10 billion to pay dividends. Company-wide, AT&T increased long-term debt by $5 billion in 2012. 

Given the super-low interest rates on corporate debt, there is an argument to be made for using debt to fund either share repurchases or dividends. Some might not agree it is a terribly good argument, though. 

Apple iPad Sales Growth Rate to Drop by an Order of Magnitude

No matter what results Apple turns in for the first quarter of 2013, controversy will swirl around the company and its fortunes. A loss of several hundred billion in market capitalization will do that.

At least according to eMarketer, the order of magnitude projected slowing of iPad sales in the U.S. market is one worry. 

Observers are looking for the next big thing from Apple, and there is growing concern about just how disruptive the next product category can be. 

Some worry that Apple does not promise "new products" until the fall of 2013. Some would say that is a long time in the consumer technology business. On the other hand, if Apple is planning an assault on entirely new categories, getting it right is important. 

If you have a hard time imagining a "magical" TV or wearable computer, you probably are not alone. It has been a while since Apple introduced a product that flopped, like Newton, or simply has failed to capture the imagination (Apple TV). 

What comes next might be quite important, and it will be important that Apple gets it right. It seems hard to believe a "new and improved iPhone" is going to do it. 

ESPN could cost $20 a Month, A La Carte

ESPN could cost subscribers $20 monthly if cable operators break up programming bundles and offer smaller packages of networks, Liberty Media Chairman John Malone John Malone speculates.

That estimate illustrates the reasons why a la carte access to video networks would not necessarily be more affordable for video subscribers, compared to what they already pay, in every instance. If a typical viewer watches a dozen channels, each costing about $5 a la carte, monthly bills would still amount to $60, if no expensive sports programming were offered. 

Add in ESPN and monthly bills climb to about $80. That would not necessarily represent a smaller sum than many subscribers now pay. 

Global Internet Access Speeds Up 25% in a Year, Peak Speeds Up 35%

Year-over-year, average global Internet access speeds grew by 25 percent, with nine of the top 10 countries also demonstrating growth. In fact, only the Netherlands (3.3 percent), Hong Kong (5.4 percent) and Japan (19 percent) reported growth below 20 percent between 2011 and 2012.

Year-over-year, global average peak connection speeds grew 35 percent, Akamai reports. 

Quarter-over-quarter, the global average connection speed rose five percent to 2.9 Mbps. A total of 98 countries/regions that qualified for inclusion saw average connection speeds increase from the third quarter of 2012, ranging from 0.1 percent growth in the Netherlands and Luxembourg to 23 percent growth in Côte d'Ivoire.

Global average peak connection speeds enjoyed a quarter-over-quarter increase of 4.6 percent to 16.6 Mbps. Hong Kong again claimed the highest peak connection speed at 57.5 Mbps, a rise of 6.2 percent from last quarter. 

Global broadband (>4 Mbps) and high-speed broadband (>10 Mbps) adoption improved by 2.7 and 2.1 percent respectively for the quarter. Global broadband adoption rates rose slightly to 42 percent, while high-speed broadband was 11 percent.

Mobile Money Has Implications for Commerce, Not Just Banking

In 2001, SMART Money in the Philippines, run by SMART Communications, a wireless telecom, was the one and only mobile payment system operating in the world. By 2006, there were 10 such systems. Today there are more than 150, in both the developed and emerging worlds, and 90 more are on the drawing board in the emerging world alone, according to Knowledge@Wharton and Ernst and Young. 

Today, nearly 20 percent of Kenya’s gross domestic product moves through M-PESA, the nation’s mobile-money system operated by Safaricom, its leading mobile network. 

Also, more than half of Kenya’s 22 million adults have M-PESA accounts, twice as many as have bank accounts. Most of those transactions are used to send money from urban areas to recipients in rural areas. 

Moreover, there is evidence that all those new users also are spurring the spread of ;hysical banking facilities as well.  For example, between 2005 and 2010 the number of bank branches in Kenya doubled (from 500 to 1,000), a growth that many attribute to pressure from M-PESA. 

International remittances are another area where mobile service providers have gotten into the "mobile money" business. Airtel Money, which is available in 11 countries in Africa and the Middle East, enables its 15 million users send and receive minutes of airtime, and trade those minutes for money. 

According to the Bank’s Global Financial Inclusion Database, there are 20 nations in the world where more than 10 percent of the population has used mobile money in the past year. As The Economist noted in analyzing this data, 15 of those countries are in Africa.

Potential customers for mobile money include the 1.8 billion people who, according to the World Bank, have a mobile phone but no bank account.  

The remittance market is about $400 billion a year globally through formal channels and, it’s been estimated, about $1 trillion through formal and informal channels. 



In developed economies, where banking is not a problem, as such, other values will drive mobile money, in particular the value of data about who is buying, what and where they are buying. In other cases, "owning the customer relationship" might be the value. 

Consumers, Businesses Boosted Technology Spending 35% Over the Last Year

Individuals and households report at least a 35 percent increase in spending on consumer electronics products over the past 12 months, according to the latest Consumer Electronics Association report on the consumer electronics market. 

But consumer sentiment is weakening. That would normally lead to lower spending, overall. The issue is whether technology spending will diverge from that pattern, as might be the case. Apple is a big part of the story.