High Speed Access and Video Entertainment are "Legacy" Services, But with Vastly Different Growth Profiles

Though both high speed access and linear video subscription services might be deemed “legacy” services, there is a big difference. In the U.S market, for example, the high speed access market is growing, in terms of subscribers, while the video entertainment market is shrinking.

Consider that, in 2013, the video services market shrank by at least 105,000 customers, while high speed access grew by at least 2.6 million accounts.

The 17 largest cable and telephone providers in the United States,  representing about 93 percent share of the market, acquired over 2.6 million net additional high-speed Internet subscribers in 2013, according to the Leichtman Research Group.

The high speed access market still is smaller, in terms of subscribers, than the video entertainment market. There are at least 84.3 million high speed access subscribers. In all, there are 94.6 million linear video subscribers served by the largest fixed network service providers.

In the past, one might have argued that “always” would be the case, since not every household owns computers, and not all computer owners use the Internet. The situation is changing, as was predictable.

These days, even if “using a computer” is not the reason for buying a broadband connection, watching TV, listening to music, playing a videogame, offloading mobile data usage or buying merchandise might well be the driver.

If so, high speed access adoption should eventually exceed the number of linear video subscriptions, implying there is upside for high speed access accounts of perhaps 10 million more households.

Cable companies have 49.3 million broadband subscribers, representing 58 percent market share, while telephone companies have 35 million subscribers, representing 42 percent market share.

But the net additions are heavily dominated by cable companies, which garnered 82 percent of the net broadband additions in 2013.

The top cable companies added nearly 2.2 million broadband subscribers in 2013, while the top telephone providers added 480,000 net high speed access subscribers in 2013.

In part, those telco results are driven by deactivations of digital subscriber line connections by fiber to home or fiber-reinforced access connections.

AT&T and Verizon added 3.3 million fiber subscribers (U-verse and FiOS) in 2013 but also saw a net loss of 3.05 million DSL subscribers.

U-verse and FiOS broadband subscribers now account for 47 percent  of telco broadband subscribers.

Still, the fact that cable now gets more than 80 percent of netw new additions is significant. Even if one grants that telcos primarily are interested in upgrading customers from DSL to fiber connections, the net new subscriber figures suggest cable connections have emerged as the preferred high speed access product.

So far, there is no similar pattern in the linear video subscription business. The latest data from Leichtman Research Group suggests only a grinding and slow shift of share from cable to telco providers.

The total linear video market, which includes cable, satellite and telco providers, lost about 105,000 net video subscribers in 2013, so the market contracted slightly.

The largest U.S. cable operators lost a net 1.7 million video customers in 2013, according to LRG, while satellite providers lost 170,000 subscribers. Telcos gained 1.5 million video customers.

Basically, the market share shift amounted to an annual cable provider loss of about 1.8 percent and a gain by telcos of about 1.6 percent.

In the market as a whole, there were 94.6 million subscribers at the end of 2013. The top cable operators had 49.6 million video subscribers, satellite TV companies had 34.3 million subscribers and the top telephone companies had 10.7 million subscribers.

Cable had 52 percent market share, satellite providers 36 percent share and telcos (AT&T and Verizon) about 11 percent share, according to Leichtman Research.

Can Mobile Operators Really Do Much, In the Near Term, About Price Wars?

Price wars can be quite destabilizing in the short term. 



In France, nine percent of the annual revenue of the more established mobile operators was lost in one year, argues Itamar Altalef, vice president at marketing services firm Pontis.



In Israel, average revenue per user declined 36 percent, with an 87 percent increase in the number of subscribers churning to new providers, he says.



What mobile service providers can do about such price wars in the short term, perhaps is limited, other than to match offers in ways that protect existing market share. 



In the long term, perhaps perversely, the strongest firms in any market will tend to benefit from such price wars, as they bleed financially-weaker competitors, especially those with high fixed costs, high debt or inability to match the market-leading offers. 



Mobile service providers get lots of advice about what to do, naturally, from suppliers of services intended to aid service providers in gaining or retaining customers. Such advice might help, long term. In the near term, almost nothing other than marching competitor offers is feasible, really.



Creation of separate "value" brands is a staple, but those sorts of moves are long term in nature, not generally effective in the near term when a price war breaks out. 

Is Usage-Based Internet Access Inevitable, or Only an Option?

Consumers tend to prefer “unlimited usage” plans for Internet access, in preference to “metered” usage. The implication might be that people actually want to use lots of bandwidth. In 98 percent of cases, that tends not to be the case.

Though “typical” consumption tends to grow over time, the typical user actually does not consume all that much data.

Why they have that preference is the issue. One might argue that, in many cases, people buy bigger usage plans than they need, because they are buying “cost certainty,” not necessarily “better prices” or “more data.”

To be sure, ISPs have their reasons for wanting to shift retail packaging and rating to somewhat “metered” mechanisms. But most of the reasons have to do with a demand environment they expect in the future, not necessarily a present need.

And, so far, ISPs that have tried to shift users to metered plans, from unlimited, have found mixed success.

Metered mobile Internet access plans have been more successful, perhaps because mobile ISPs have been able to make those changes at the same time they have added other attractive plan features.

It hasn’t been so easy in the fixed network business.

Speaking at the Deutsche Bank Media, Internet and Telecom Conference recently, Time Warner Cable Chairman and CEO Rob Marcus said very few broadband subscribers have opted for its access  plan that caps data use at 30 gigabytes per month.

In fact, the number of subscribers taking the usage-based service tier is running only "in the thousands" out of 11 million U.S. high speed access customers.

According to Marcus, the vast majority of customers prefer to avoid broadband caps, even when they are unlikely to go over the data threshold.

Marcus said a typical user might use  "high twenties" Gbytes in a month.

It isn’t yet clear how a shift to usage-based high speed Internet access billing will affect end user behavior or service provider preferences, though it seems fairly clear most consumers dislike the practice.

A 2011 survey by Cisco found more than 70 percent of U.S. and Canadian consumers found usage-based billing of Internet access “unfair,” in both fixed and mobile settings.

Roughly similar perceptions were held by consumers in Western Europe as well. In Canada, a market considered by some a test of consumer reaction to new usage-based rating policies, Cisco found that about 30 percent of survey respondents watched consumption and curtailed usage to avoid paying overage charges.

About 58 percent of surveyed consumers reported they never think about overages, or watch their consumption levels. About 10 percent reported paying overage fees.

Those findings might suggest there is some revenue upside from heavier users, but also significant potential risk of reduced application use.

The harder question is whether “value” was enhanced, unaffected or reduced, by the institution of usage-based billing.

Why do many ISPs meter usage, if consumers prefer unlimited access or at least predictable recurring rates for access?

Some would argue ISPs gain in several potential ways from usage-based pricing. For starters, some consumers--in particular the heaviest users--might reduce consumption. That could have advantages in alleviating some peak hour congestion.

Some users who also buy video entertainment services might rely more on such services, in comparison to watching the same content online. That would protect video service revenues.

Some users might upgrade to more-expensive packages to get a bigger consumption bucket or unlimited usage plans.

But most of those advantages will be realized only in the future, when most people stream video that otherwise would be watched on a linear TV service.

Still, there are other issues at work. Consumer expectations about products profoundly shape the terrain upon suppliers offer their products to buyers.

And, possibly for historical reasons, consumers have vastly-different expectations about “metered usage” of Internet access services and other recurring services, in some markets.

Nobody questions whether electricity, water, natural gas or heating oil “should” be priced according to volume purchased. Nor, for that matter, is retail charging generally unrelated to volume.

But consumer expectations for some services are volume insensitive. Nobody thinks there should be a price differential, based on the actual amount of either “free over the air TV” or “paid linear video subscription video” one watches.

In some markets, there also is an expectation of flat rate unlimited use of some other products as well. Local calling, text messaging, in-country calling and calling circle usage are some products that are expected to incur no incremental cost for usage, in some markets.

Unlimited usage remains an expectation for some Internet access services as well, both mobile and fixed, in some markets. Public Wi-Fi and at home Wi-Fi provide other examples of use cases where unlimited usage for no incremental cost is expected.

All of that could help explain why there is consumer resistance to metered pricing. The simplest explanation is the easiest, though. People prefer certainty about the cost of a recurring service. Metered pricing introduces uncertainty.

That might be why acceptance of "buckets of usage" is relatively high in some markets. Given enough experience, people have relatively good levels of certainty about the size of their monthly bills.

The value of "unlimited usage plans," in other words, is more about "pricing certainty" than usage.

Quadruple Play Will Further Blur Distinctions Between Industry Segments

The distinctiveness of "telco" and "cable TV" industries has been eroding for more than a decade, as many cable companies now sell voice, mobile phone service, Internet access and video, to both business and consumer customers. 

And many telcos sell the same set of services, also to consumers and businesses. Further blurring will happen as the standard consumer offer extends from the "triple play" to the "quadruple play."

The U.S. telecom industry, for example, is more complicated than it used to be, including video entertainment revenues and, by extension, revenues of the formerly-distinct U.S. cable TV industry. The U.S telecom industry now generates about $378 billion in annual revenue.

Excluding cable TV industry revenues, legacy telcos probably generate something closer to $300 billion annually. Mobile is driving legacy telco revenue growth, to be sure.

In 2014, U.S. mobile data revenues alone will cross the $100 billion mark, indicating that mobile data alone represents about a third of all revenues in the legacy telecom business, according to Chetan Sharma.

But it is getting harder all the time to separate cable TV, mobile and the rest of fixed network telecom.

Vivendi has decided to exclusively negotiate for three weeks with cable group Numericable about a sale of a majority of SFR, the second-biggest cable operator in France, to Numericable.

Do mobile operators need cable TV network assets more than cable TV operators need mobile assets? It is hard to say. As the triple-play offer (voice, video and Internet access) has been the mainstay of retail offers in many markets, it now appears the quadruple play (mobile, voice, video and Internet access) is about to emerge as the new standard offer.

If that is the case, a meaningful distinction between cable and telco market segments is going to blur, then disappear.

Separately Vodadone is nearing a purchase of Ono, the largest cable TV operator in Spain, and Vodafone earlier had purchased Kabel Deutschland, the largest German cable TV company.

Liberty Global, on the other hand,l plans to create a pan-European mobile virtural network operator operation, beginning in the Netherlands, Belgium, Switzerland, Austria and the United Kingdom, something Liberty Global has been working on for a year or more.

Liberty Global has preferred an asset light mobile strategy in Europe since at least 2013, when Liberty signed wholesale capacity agreements with Telefonica 02, Orange, Vodafone and Mobistar.

Virgin Media, now owned by Liberty Global, also has had a mobile virtual network operator business in the United Kingdom.

To be sure, most larger service providers in Europe are likely to embark on new acquisition moves over the next several years, to gain scale. In that sense, all assets will be in play--fixed and mobile, cable and telco.

The objective will be to create larger entities, with better economies of scale and scope. The scale will come from amassing larger subscriber bases. The scope will come from acquiring the ability to sell all services to all customer segments.

In the consumer markets, the quadruple play will rule. In the commercial markets, the emphasis will include traditional business communications, but also positioning for emerging Internet of Things and machine-to-machine services.

Will Fixed Network Ownership Separate Mobile Winners and Losers?

Will ownership of fixed network assets ultimately prove to be the difference between market-leading and market-chasing mobile service providers?

Consider that “by far the greatest traffic generated by smartphones or tablets is linked to the use of Wi‑Fi associated fixed networks, rather than mobile networks,” according to the Organization for Economic Cooperation and Development (OECD).  

“Fixed networks have, in effect, become the backhaul for mobile and wireless devices with some studies claiming that 80 percent of data used on mobile devices is received using Wi‑Fi connections to fixed networks,” OECD says.

Communications Outlook 2013 says that revenues from data services are growing at double-digit rates in most OECD countries and, in line with the surge of broadband wireless subscriptions, are now the main source of growth for network operators.

But if traffic offload to fixed networks grows more important, one might argue that owners of fixed network infrastructure will have an advantage over competitors who do not own such assets, especially where mandatory wholesale at low prices is not available.

And advantages will be important. A recent examination of net income earned by the world's largest 100 service providers shows a "flat" revenue trend since about 2007. Under such conditions, most service providers in competitive markets will find revenue growth quite difficult.

That suggests more pressure to acquire firms and merge with other firms, and possibly an advantage for firms owning "offload assets."

Wireless and fixed broadband subscriptions in OECD countries

By Itself, Sprint Will Not Catch AT&T, Verizon, History Suggests

SoftBank CEO Maysaoshi Son argues Sprint must be allowed to purchase T-Mobile US in order to have a shot at massively disrupting U.S. mobile markets.

U.S. regulators are reluctant to allow the number of leading U.S. mobile operators to shrink from four to three.

European regulators face the same issue in France, for example. Operators believe consolidation has to happen, while regulators fear the consequences of reducing the number of service providers from four to three.

SoftBank’s own experience in the Japanese market would suggest Son is correct. When SoftBank purchased the Vodafone assets in Japan in 2006, that operation was the number-three provider, as is Sprint in the U.S. market.

All observers agree SoftBank rather quickly took significant new market share, largely by attracting a larger share of customers than its competitors.

Vodafone’s Japan mobile assets, when purchased by SoftBank, had market share of about 17 percent. On the other hand, Vodafone’s business had fallen from a high of about 19 percent market share in 2003.

Today, SoftBank has about 20 percent share of market.

So, In other words, the net swing in market share since 2006 (eight years) has been about three points, though only one percentage point from the 2003 high.

Granted, SoftBank is growing at the expense of KDDI and NTT. But that is a rather long, slow grind, not a whipsaw and dramatic share shift. And SoftBank remains some distance away from number-two KDDI, which has 28 percent share, while NTT Docomo has 50 percent market share.

Some would argue that, globally, most mobile markets feature rather extreme concentration of market share by two providers. A share of between 25 percent and 70 percent would be within the range of expectations, with share in excess of 40 percent held by the number-one provider in Organization for Economic Cooperation and Development countries.

Others would point to flat revenue growth for tier-one service providers globally, though there are exceptions. Since about 2007, revenue for the top-100 firms globally has been “stagnant” to “declining.”

There are clear implications, namely the growing need for scale to offset declining gross revenue and profit margins in a growing number of markets.

“We need a certain scale, but once we have enough scale to have a level fight, OK. It’s a three-heavyweight fight. If I can have a real fight, I go in more massive price war, a technology war,” Son said on the Charlie Rose TV show.

Without T-Mobile US assets, Sprint cannot rapidly and massively challenge either firm, Son has said. That is partly a view based on SoftBank’s experience in Japan.

SoftBank’s own history in the Japanese market, and the recent experience of Illiad’s Free Mobile in France, might suggest that even a fearsome attack by a number-three or number-four service provider can succeed only to a certain extent.

Who Does Sprint Compete With?

“Who does Sprint compete with?” is a question SoftBank CEO Maysaoshi Son will try to get regulators to think about as he gives a speech to the U.S. Chamber of Commerce on March 11, 2014.

Facing skepticism about a Sprint bid to acquire T-Mobile US, which would reduce the number of national mobile providers from four to three, Son will try to reframe the issue, focusing instead on whether consumers would be helped by the gaining of a third national competitor to telco and cable TV fixed network Internet access services.

Son hopes the reframing will shift thinking from market structure in the mobile business to market structure in the fixed network Internet access business.

Whether that clever bit of “spin” will have any impact is the issue. Regulators are likely to argue that if that was what Sprint really wanted to do, it could do so already.

And, in fact, to a large extent, mobile Internet access already provides most of the access, in terms of number of connections, everywhere.

One might bet that the effort to re-frame a potential merger will have no impact.

Google Fiber, AT&T Fuel Gigabit Network Trend

Google Fiber says it is considering expanding the footprint of its gigabit access networks beyond Kansas City, Mo. and Kansas City Kan., Austin, Texas and Provo, Utah, to some additional metro areas, with nine regions now being investigated.

Separately, AT&T says it will build a fiber to the home network in Dallas. Both illustrate the growing gigabit network trend.

AT&T now says it will build fiber to the home networks in Austin, Texas and Dallas, capable of delivering speeds up to one gigabit per second, at least in Austin.

AT&T has not yet specified speeds for Dallas, but it is reasonable to assume gigabit services will be the draw.

The U.S. Federal Communications Commission has suggested a goal of 100 million U.S. residents having access to 100 Mbps Internet access service by about 2020. Some might have thought that a bit of a stretch. It no longer seems so remote.

Technology Futures, a firm with an extraordinary record of broadband predictions, now argues it is reasonable to expect that half of U.S. broadband access users will be buying 100 Mbps connections by about 2020.

Technology Futures also predicts that about 10 percent of customers will be buying 50 Mbps connections, while 24 percent will still be buying 24 Mbps service.

That might seem a crazy amount of bandwidth for “many typical users,” but standard technology forecasting techniques have, for more than a decade, actually suggested that would happen.

In 2001, for example, Technology Futures predicted that by year-end 2004, over 25 percent of U.S. households will have adopted broadband services, up from about five percent at the end of 2000. The actual U.S. broadband penetration rate was 30 percent, according to the Pew Internet and American Life Project.

“By 2010, we expect that the percentage will exceed 60 percent,” Technology Futures predicted in 2001. The actual penetration wound up being 66 percent.

So widespread 100-Mbps access by 2020 seems increasingly possible. Competitive pressure is forcing AT&T, among others to invest in faster access networks.

And subtle but important changes in thinking are likely to help. In the past, would-be ISPs have faced time-consuming and cost-inducing “make ready” costs when considering access network builds. But Google Fiber provides incentives for municipal authorities to cut those costs.

Google Fiber’s investigation of possible new Google Fiber networks in nine metro areas focuses on three key infrastructure items Google says will make construction more efficient, and increase chances a metro area will get Google Fiber.

The checklist covers some concerns are traditional for cable or telco access providers: access to municipal poles and duct work.

Such access is more or less routine, but Google Fiber will go where there is room on poles and in ductwork, especially where a metro area contains several municipal entities. And Google wants municipalities to do the work of gathering all that information, both municipal-owned and private assets.

Likewise, Google Fiber wants “accurate information” about utility poles, conduit and existing water, gas and electricity lines. Again, you might think that is routine, but it can be time-consuming for a would-be access provider to dig up all the information. Google also wants municipalities to help Google get conduit and pole access in an efficient and timely manner.

The third concern concerns the efficiency of permitting processes, which could entail thousands of separate construction permits, as well as identification of locations where cabinets can be sited.

Google Fiber wants municipalities to streamline those processes so construction can start faster.

That is likely to result in most municipalities streamlining all make ready tasks, to the benefit of all other ISPs looking to build next generation fixed access networks.

Gigabit Access Networks are Becoming Table Stakes

AT&T, which now finds it must deploy gigabit networks in some parts of Austin, Texas, as a counter to Google Fiber, now believes the economics of spot builds are attractive enough that it is moving ahead with fiber to the home deployments in other areas, such as Dallas.

It is unclear what the initial activated bandwidth will be in those areas, but the incremental cost of a gigabit service, compared to 300 Mbps, might be less than was the case just two years ago.

The major cost component of offering a Gigabit is the physical construction of the access network cables, not the optoelectronics.

Arguably, once that is done, the incremental cost of offering 1 Gbps as opposed to 100 Mbps “comes down to slightly more expensive ports, slightly more expensive routers or CPEs and bandwidth provisioning,” argues Benoît Felten. co-founder of Diffraction Analysis.

Various regulators in Europe and North America have estimated the latter incremental cost of gigabit networks cost to be in the 10s of cents per subscriber per month, Felten argues.

Traditionally, ISPs have not wanted to overprovision bandwidth that cannot be monetized relatively quickly. But market conditions in a growing percentage of U.S. markets arguably have changed with the advent of Google Fiber.

Overprovisioning might be necessary in competitive markets where at least one other provider has moved ahead with a symmetrical gigabit offering.

Fiber to the home might be viewed tactically, in terms of what new incremental revenue can be generated, or how much operating costs can be reduced. But sometimes, fiber to the home has to be viewed strategically, not in terms of incremental revenue, but in terms of avoiding massive customer defection, which might imperil asset prices and even ability to continue as a going concern.

In large part, one might argue, that is what now is changing for AT&T and other telcos or cable companies. It isn’t so much that the economics of fiber to the home have dropped so much, or that the incremental costs of gigabit access networks have changed dramatically, but rather that market conditions have altered.

Gigabit networks are, in a growing percentage of markets, becoming “table stakes.”