Government Policy Uncertainty Slows China Cable Industry

Public communications businesses, whether of the mobile, fixed network telco, cable TV, satellite, fixed wireless or Wi-Fi and TV white spaces varieties, always require the approval, and sometimes the support, of government regulators and legislators.

The reason is the need for spectrum, rights of way and a legal framework to enable those businesses.

“The biggest challenge facing cable operators in China has nothing to do with technology or competition. Instead, it’s politics that will make or break Ethernet over Coax rollouts,” says  Jeff Heynen, principal analyst for broadband access and pay TV at Infonetics Research.

“After last year’s turnover among Communist Party leadership, as well as in key positions within SARFT, the emphasis on China’s NGB (next-generation broadband) network project has been called into question, and it’s adversely impacting infrastructure build-outs and subscriber additions,” Heynen says.

Despite aggressive pricing and service bundling, Chinese cable operators are having a difficult time adding new subscribers, Infonetics Research says.  

As of June 2013, nearly 25 million homes had been passed with EoC services, with only 4.9 million subscribers, a take rate of less than 20 percent.

Broadband Strategy Has Worked for AT&T, Verizon

For more than a decade, one big question about new service efforts conducted by telcos has been the basic issue of whether revenues from new services would be earned at magnitudes big enough to offset losses in the legacy voice business.

You might argue results have been mixed. AT&T and Verizon have made the strategy work, shifting revenue generation in the fixed network business to broadband services, at least in the consumer lines of business

Overall, both AT&T and Verizon have been powerfully assisted by the advantage of growth driven by mobile services. But that should not distract from the important fact that both have replaced lost fixed network revenues with new sources.

Smaller providers, unable to leverage the benefits of scale that seem essential for video entertainment services, arguably have not been so lucky.

In large part, the AT&T and Verizon successes have been driven by market share shifts.

For some time, cable TV providers and telcos have been trading market share; cable ceding video customers to telcos while telcos shed voice customers to cable operators. Both industries have relied upon those market share gains to offset legacy product revenue declines.

In the high-speed access market, telcos mostly have been losing the market share battle to cable. On the other hand, high speed access is a key part of the broadband services revenue story.

U-verse revenue growth contributed to a two percent year-over-year increase in

AT&T’s consumer wireline revenues during the first quarter of 2013. Consumer U-verse revenues grew 30.8 percent over 2012 and now represent 48 percent of wireline consumer revenues.

Verizon’s consumer wireline revenue growth of 4.3 percent was driven by FiOS revenues, which grew 15 percent in the first quarter of 2013 and generated 69 percent of consumer revenues.

The importance of video revenues can be contrasted with first quarter results at CenturyLink, which has not in the past provided video entertainment services across its legacy Qwest Communications network footprint.

CenturyLink reported a 3.4 percent year-over-year revenue decline for its Consumer Group during the first quarter.

Those broadband revenues, especially television revenues, will continue to be important, as U.S. telcos lost 0.966 million wireline voice connections during the first quarter of 2012, compared to a net loss of 1.105 million for the same quarter of 2012.

Verizon’s residential voice connections declined by 5.6 percent on a year-over-year basis, while AT&T’s consumer voice connections dropped 12.5 percent. CenturyLInk’s overall access line loss was 5.7 percent.

And though telcos generally lag cable in net new high speed account gains, the largest telcos collectively added 290,000 broadband customers during the first quarter, about 98 percent of their same quarter 2012 net additions.

AT&T and Verizon continue to take video-service subscriber share from the cable companies. AT&T video service penetration now is 19.4 percent of eligible homes, while Verizon video penetration is 34.1 percent of eligible homes.

Operating Results "Stable" for Leading U.S. Telcos, Cable

Despite all the challenges, ranging from mature markets to limited sources of new revenue to heightened competitive pressure, U.S. telecom and cable companies still are expected by Fitch Ratings to turn in stable operating results that are resilient to changes in the economy.

But Fitch also believes the service providers have a bit of wind in their sails, as Improvements in economic conditions, particularly stronger employment and housing trends, will lead to a healthier overall operating environment.

That stability is perhaps surprising given recent trends. Overall, wireless net additions among the three largest mobile service providers dropped 77 percent to 596,000 units during first-quarter 2013, year over year.

To the extent there were gains, Fitch Ratings points to tablet accounts as the driver, creating a more stable and predictable revenue stream for mobile operators. But subscriber gains are not seen as the way mobile service providers will make revenue gains. Instead, it is more spending on usage plans that will be key.

Big slowdowns also occurred in the video services segment. Fitch estimates that the largest video service providers gained 201,000 net video subscribers in the first quarter of 2013, representing a 53 percent decline year over year.

The slower growth reflects the high penetration of video subscription households in the U.S., the mature video service product, tepid economic and housing recovery and, to a lesser extent, competition from alternative distribution platforms.

Fitch points out that the largest incumbent local exchange carriers “continue to transform their consumer businesses into broadband- and video-focused models.” In fact, at Verizon and AT&T, those gains are “sufficiently mitigating the ongoing secular and competitive pressures of their respective consumer landline businesses.”

That is not so much the case for much-smaller telcos, as video entertainment is a scale business. Under those conditions, lack of scale also means lack of margins.

Such prospects are one reason the AT&T Project Velocity IP initiative will extend IP-based wireline broadband service to approximately 57 million customer locations (both consumer and small business) representing 75 percent of the customer locations within the company’s 22-state service area by year-end 2015.

In the remaining 25 percent of customer locations where it will not be economically feasible to upgrade the wireline network to faster broadband speeds, the company will offer a 4G Long Term Evolution solution instead.

AT&T intends to expand its U-verse platform to a potential market of 33 million

customer locations as part of the initiative, adding 8.5 million customer locations to the 24.5 million locations already able to buy U-verse service.

About 90 percent of U-verse customers will have the capability to receive speeds up to 75 Mbps and 75 percent will be able to buy 100 Mbps service.

In other cases, where AT&T has concluded it cannot afford to build full U-verse connections, and DSL has to be used (about 24 million locations), speeds up to 45 Mbps will be available to 80 percent of DSL-served locations, while half will be able to receive 75 Mbps service.

AT&T estimates that 75 percent of its U-verse TV subscribers have triple- or quad-play service with the company, pointing out the strong reliance on video and broadband services in driving AT&T revenues. U-verse triple-play subscribers generate $170 of average revenue per user a month.

Verizon likewise reports that 66 percent of its FiOS subscriber base buy a triple play package and generate $150 a month ARPU. The need for broadband and video revenues is obvious.

In aggregate the ILECs lost approximately 0.966 million wireline voice connections during the first quarter of 2012, compared to a net loss of 1.105 million for the same quarter of 2012.

Verizon’s residential voice connections declined by 5.6 percent on a year-over-year basis, while AT&T’s consumer voice connections dropped 12.5 percent. CenturyLInk’s overall access line loss was 5.7 percent.

LTE is Going to be a Fixed Network Alternative

You always can get an argument about whether broadband Internet access provided by Long Term Evolution networks is a reasonable substitute for fixed network high speed access. But it already seems clear that the substitution of LTE for fixed network fiber access is going to become a reality for quite a substantial number of potential customers.

AT&T's Project Velocity will extend IP-based wireline broadband service to approximately 57 million customer locations (both consumer and small business) representing 75 percent of the customer locations within the company’s 22-state service area by year-end 2015.

In the remaining 25 percent of customer locations where it will not be economically feasible to upgrade the wireline network to faster broadband speeds, the company will offer a 4G Long Term Evolution solution instead.

That is one way of saying that up to 25 percent of households located within AT&T's fixed network footprint ultimately will only be able to buy LTE for higher-speed access, and will not have access to a hybrid fiber-copper network.

As always, different network solutions make sense in higher-density areas, such as cities and suburbs, compared to what is feasible in rural areas. One size never fits all. That mixed network approach virtually assures that LTE will be used as a substitute for fixed network high speed access.

The debate is over, for practical purposes. In at least some cases, LTE will be a functional substitute for fixed network access.

Growth, not Liquidity is Issue for U.S. Telcos, Cable

A review of U.S. cable and telco firms suggests liquidity is not a problem for most, according to Fitch Ratings. But mature markets, limited opportunities for revenue growth and heightened competition are issues.

In the first quarter of 2013, liquidity in both telecom and cable TV segments overall remained strong, with 89 percent of committed facilities available for borrowing and total liquidity exceeding aggregate 2013, 2014 and 2015 maturities, Fitch Ratings said.

In other words, most of the firms have sufficient cash to operate their businesses. But the report also points out the key concerns contestants face.  

For AT&T, the concerns are competitive pressures, particularly associated with switched access lines. Also, the weak economy is affecting business revenues. AT&T also faces long-term spectrum requirements, which will cause it to spend money to catch up. Meanwhile, AT&T also is stepping up its spending on share repurchases.

At Comcast, limited revenue growth opportunities outside of its core triple-play service offering and its aggressive policy of returning capital to shareholders are seen as issues.

At DirecTV, an aggressive policy of returning capital to shareholders and lack of revenue diversity, plus a narrow product offering are issues. As with the cable providers, a mature U.S. video entertainment business also is an issue.

Time Warner Cable faces a weak economy and competitive pressure negatively affecting its free cash flow margin, subscriber growth and revenue. Financial leverage is another issue.

For CenturyLink, the issue is limited ability to drive new revenue growth.

At Charter Communications, elevated financial leverage is an issue, especially if Charter succeeds with its plans to grow by acquisition. Also, Charter has relatively weaker service penetration than most of its peers. Competition is an issue, as it new revenue growth outside of its core triple-play offerings.

Will Regulators Allow Consolidation Wave to Begin in Europe?

An important test of regulator will to allow significant consolidation in the European Union telecom business is about to begin.

KPN has agreed to sell its German operation E-Plus to Telefonica Deutschland, in an 8.1 billion euros ($11 billion) deal that has to be approved by European Commission authorities.

If approved, Telefonica Deutschland would have 30 percent mobile market share. Deutsche Telekom and Vodafone each would have 35 percent share.

Equally important, regulator approval undoubtedly will stimulate additional deals. An important matter is the number of major providers in each market, as some national regulators have insisted that four is the minimum number of providers necessary for competition. The Telefonica Deutschland deal obviously would reduce the number of strong national mobile players in Germany to three.

In recent deals such as in Austria where operators sought to take markets from four to three players, regulators have demanded concessions such as spectrum divestments and pledges to offer competitive wholesale access to rivals.

So approval is by no means assured. But KPN’s competitive situation in Germany illustrates the importance of spectrum and customer assets, as KPN trails its other competitors in that respect. Simply, KPN’s operation is too small.

As of the end of March 2013, E-Plus (KPN) and Telefónica Germany had a combined 43.3 million mobile customers in Germany.

E-Plus had around 24 million customers, with eight million postpaid. O2 has just under 20 million clients, with around 10 million postpaid customers.

What really seems to matter is the number of postpaid customers, since the average revenue per user for a postpaid account is so much higher than a prepaid account. 

Prepaid ARPU is  is six euros a month, while post-paid ARPU is 27 euros a month.  

Also, prepaid accounts tend to churn more than postpaid accounts.

Verizon Introduces 500 Mbps Service

If you think Google Fiber shows Google is crazy like a fox, think again: Verizon has begun deploying a new top-tier FiOS Quantum Internet access service, featuring speeds of 500 megabits per second download and 100 Mbps upload.

The 500/100 Mbps speed is initially available in parts of every FiOS market, and Verizon will deploy the service throughout the entire FiOS footprint into 2014.

For consumers, the 500/100 Mbps speed is available as part of a bundle or in stand-alone fashion, starting at $309.99 per month for a double play or $329.99 per month for a triple play with a two-year agreement.

For small businesses, the new top speed is only offered on a stand-alone basis, starting at $369.99 per month with a two-year agreement. The service also is available to consumers and small businesses on a no-contract, month-to-month basis.

Verizon's 500 Mbps service is an obvious response to Google Fiber’s ability to change consumer expectations on the speed front, though Verizon will not try to compete directly on the price front.

Indonesia Regulators to Raise SIM Prices Two Orders of Magnitude

One of the more basic economic insights is that raising the price of a product reduces demand for that product. 

So it is that Indonesia’s Telecommunications Regulatory Body plans to hike the price of subscriber information modules to a minimum of IDR 100,000 ($10), from current prices as low as IDR 2,000 ($0.2).

That might sound like a clear anti-consumer move. But the rationale is more nuanced. Monthly churn in the Indonesian mobile market is about 20 percent a month, meaning the equivalent of a complete turnover of the national customer base every five months.

Whatever difficulties that poses for service providers, it also is a consumer problem to the extent that all that churn is accompanied by a high rate of customer telephone number turnover.

The culprit would seem to be the high use of prepaid service enabled by mobile SIMs. In this case, the regulator hopes to reduce the amount of churn, and the associated number of inactive telephone numbers.

There is another angle, though. Regulators say higher SIM prices will reduce the use of “SIM boxes” that can fraudulently route international calls so that it appears to the telco to be a local call.

Such practices are not terribly unusual, and cause an estimated service provider revenue loss of US$77 million every year in Indonesia.

Southeast Asia Tablet Sales Up 100%

Sales of tablet computers across Southeast Asia have doubled over the last 12 months to reach 6.1 million units, according to GfK Asia. About 43 percent of all computing appliances sold in Southeast Asia were tablets.

Across Singapore, Malaysia, Thailand, Vietnam, Indonesia and Philippines, sales of tablet devices between June 2012 and May 2013 increased 101 percent, GfK Asia says.

Indonesia was among the volume leaders for tablet sales, accounting for nearly 1.3 million units, marking a 141 percent rise year-on-year. In the Philippines, tablet sales grew 322 percent over 12 months.

Sales of Tablets, Especially Smaller-Screen Tablets, Grow 61% in Myanmar

New devices and new networks, often unforeseen by the telecommunications industry, have played a huge role in overcoming the problem of supplying voice services to billions of people in the developing world.

In 2000, one might still have looked at tele-density figures for Africa and south Asia and still have concluded that not much was happening, in terms of adoption.

But that changed, sometime around 2004, when a growth inflection point was reached, both in terms of income and use of mobile phones. Some of us would argue that something quite similar will happen with Internet access.

The question is how the massive adoption of Internet apps will happen. The simplest answer is that people will get Internet the same way they got voice services: by way of the mobile network.

In that view, the smart phone will be the way most people will use the Internet. But tablets are a wild card. For decades, development experts have tried hard to create a $100 PC, on the not unfounded assumption that the price of a PC is a barrier to adoption.

But tablets, especially lower-priced tablets with seven-inch screens, might also be quite important.

It now appears tablet devices now are making it possible for people to acquire and use computing devices other than smart phones, while Wi-Fi hotspots are the network those tablet users rely on for Internet access.

In Myanmar, for example, a country with extraordinarily low mobile phone and fixed broadband adoption, tablets are proving to be a crucial device for Internet usage. Total fixed and mobile voice penetration, for example, is 10 percent.

From January to May of 2013, tablet sales in Myanmar grew 61 percent, according to  GfK. Those 450,000 tablet sales represented 170,000 more purchases than in the same period of 2012.

GfK says at least 78,000 tablets were sold monthly since the start of 2013, possibly driven by a 20-percent drop in retail price.

Given Internet penetration less than one percent, with most of those few users concentrated in only the two largest cities, Yangon and Mandalay, it also might not be unusual that more users are starting to rely on Wi-Fi for Internet access.

GfK says Wi-Fi-only tablet sales were about 22 percent of all units sold between June and November 2012. In the December 2012 to May 2013 period, Wi-Fi-only tablet sales were about 25 percent of all sales.

And it appears wireless and mobile networks account for those changes. "The vast improvement in wireless broadband in Malaysia has increased the number of hotspots available, which helps drive the uptake of Wi-Fi only models especially with its lower price tag,” says Selinna Chin, Managing Director for GfK in Malaysia. Chin.

In addition to the use of hotspot Wi-Fi, smart phones, used in tethered mode, also appear to be driving use of Wi-Fi-only tablets. The role larger smart phones might play, compared to seven-inch tablets, is not yet clear.

Both the use of tablets as the Internet access device, and the reliance on wireless networks, especially Wi-Fi or tethered smart phones, shows the impact of non-traditional access methods in a country with exceptionally low adoption of the Internet, mobile phones or even fixed telephone service.

Wi-Fi access blurs the line between public and private networks, fixed and mobile access modes. But Wi-Fi will likely remain an important form of Internet access in many developing countries where mobile broadband is too expensive and fixed networks are not built.

It now appears Internet cafes and public Wi-Fi hotspots could play a similar role in many rural areas of developing countries. With the growing adoption of smart phones, tablets and PCs, many users who would once have used a cybercafe arguably have begun using the mobile network.

That is less the case in rural areas, though, where the traditional reasons people have used cybercafes (they don’t own a PC, for example) might still be relevant issues. Still, tablets are interesting in that they represent, in many ways the illusive $100 PC. In that case, the key problem shifts to “Internet access,” especially place-based access that allows tablet use with Wi-Fi networks.

Lower prices are important drivers of tablet adoption. In Myanmar, tablet prices dropped from US$497 in June 2012 to US$397 in June 2013, a price drop of 20 percent in a year.

Smaller screen devices, probably because they sport lower price tags, seem to be a big factor. In the first five months of 2013, demand for seven-inch devices (or smaller) has grown from 37,000 units sold in January to around 57,000 units sold in May.

The preference for smaller screen devices also is shrinking sales of larger-screen devices. In 2013, eight-inch to 10-inch device share shrunk from 38 percent in 2012 to 16 percent in 2013.

What I'd Rather be Doing Right Now....

It's summer. News flow is slow. That's me, surfing Topanga Canyon, south of Malibu. Not recently! These days, boogie boarding is fine. 

Is Google Fiber a Big Revenue Opportunity for Google?

How big a business might Google Fiber eventually represent for Google? The question has been asked ever since Google launched Google Fiber in Kansas City, Kan. and Kansas City, Mo.

You might say the questions are larger now that Google Fiber is going to operate in Austin, Texas and Provo, Utah.

So far, Google Fiber in the Kansas City markets seems already to have passed the threshold for a sustainable Internet service provider operation. About 33 percent of 200 homes part of a survey by Bernstein Research are taking the service, and three-quarters of the rest are considering doing so.

That’s a very healthy take rate so early in the marketing effort of the first year. Some 85 percent of respondents are buying the gigabit service, and about 15 percent have opted for the free 5 Mbps service.

So some might argue Google Fiber could well expand to other cities, even if doing so would require triple-digit billions over time. That has lead to skepticism about just how extensive Google Fiber might eventually become, as a product for Google.

On its earnings call for the first quarter of 2013, Google executives were asked about prospects for Google Fiber. Carlos Kirjner, analyst at Sanford C. Bernstein & Co. asked about Google Fiber impact, noting that even if Google invested billions, and managed to pass 20 million U.S. homes, Google “would be at best and mid-sized provider in a market that accounts for less than half of your current business.”

There is another way to look at matters, and that is that if Google Fiber managed to generate revenues equivalent to 50 percent of Google’s current total revenues, that might well make it a meaningful business for Google.

Larry Page, Google CEO, answered that “we would love to find businesses much bigger than our entire current business to invest in, but I think there's only a very small number of such companies that even exist.”

But fiber-based Internet access might just be one of those “very small number” of businesses big enough to be significant for Google. “We look at places where we can provide products that can make really big difference in peoples' lives and we can make a lot of money and resources doing it,” Page said.

“We're not in a business to lose money, cross subsidize or any of these things,” Patrick Pichette, Google CFO, said on Google’s second quarter 2013 earnings call. In other words, Google intends to make money on Google Fiber.

“We really look at every incremental profit dollar that creates shareholder value and really focused on these profit dollars rather than the percentage margins,” Pichette said.

“Many of the new opportunities that we may be exploring whether it be hardware, whether it be Play, whether it be – many of these will have different margins in our core business, but they actually offer great kind of – huge revenue pools, huge margin pools in absolute dollars and then create much shareholder value and in many cases with Larry and the product area leads, great synergistic value between the products to create this great experiences,” Pichette said.

Pichette also reiterated that Google expects Google Fiber to be profitable. “We did Kansas City because we know as a city was going to be very profitable,” even if the ventures are not profitable on day one.

To be sure, Google Fiber already is changing ISP behavior. But Google executives also seem to be suggesting that if Google Fiber winds up being as successful as some believe, it could generate significant revenue for Google, with acceptable margins.