Comcast and AT&T will Transform and Dominate U.S. Triple Play Market

Assuming both the Comcast acquisition of Time Warner Cable, and the AT&T bid to buy DirecTV are approved by regulators and antitrust authorities, the U.S. communications market (which now is becoming inseparable from the video entertainment services market) would be transformed.

Comcast would be the largest U.S. service provider, ranked by customer relationships, while AT&T would be only the second largest. Verizon would be a distant third.

Prospects for Sprint and T-Mobile US would still be significant in the mobile segment, but the really big change would be the change in what we might call the triple play services market that now defines the fixed network market.

Before one can analyze a market, one has to define a market. And that is the growing problem for the network services business, including high speed access, voice, video entertainment and mobile services, for both business and consumer segments.

Does one analyze each product segment, or all products sold by all contestants, even if some do not compete in all segments?

Even once those questions are answered, one has to decide whether to rank by subscriber or customer counts (consumer and business accounts included or disaggregated), by country where revenues are earned, or customers are served, or to use revenue (gross revenue or net revenue).

In the U.S. market, for example, measures of size based on mobile subscriber or revenues give different answers about which firm is bigger, AT&T or Verizon. And a mobile services ranking does not include Comcast, the biggest of the cable TV providers.

In the high speed services market, ranked by subscribers, Comcast clearly is the leader, while AT&T is number two and Time Warner Cable is number three.

Verizon is number four and CenturyLink is number five.

In video, Comcast in the biggest, ranked by subscribes, followed by DirecTV. Dish Network is number three, while Time Warner Cable is number four. AT&T follows at fifth and Verizon is sixth.

In voice services, AT&T is number one, ranked by customers, with Verizon and Comcast in second and third. Time Warner Cable is fourth. But many could note that Verizon and Comcast have almost the same number of voice customers.

In terms of total customer relationships, across high speed access, video entertainment and voice segments, Comcast is the biggest, followed by DirecTV.

AT&T is third, followed by Time Warner Cable, then Dish Network. Verizon is sixth biggest.

All that would change if both the Comcast acquisition of Time Warner Cable, and the AT&T purchase of DirecTV are approved. In that case, Comcast would be the largest U.S. service provider, with AT&T the number two, with both companies far ahead of all the others.

Video and high speed access would be the key services for both firms.

Video Provider	Subscribers at End of 1Q 2014	Net Adds in 1Q 2014	Net Adds in 1Q 2013
Cable Companies
Comcast^	22,601,000	24,000	(25,000)
Time Warner	11,359,000	(34,000)	(118,000)
Charter	4,355,000	13,000	(35,000)
Cablevision	2,799,000	(14,000)	(5,000)
Suddenlink	1,187,500	2,400	800
Mediacom	937,000	(8,000)	(1,000)
Cable ONE	524,563	(14,331)	(5,435)
Other Major Private Cable Companies*	6,655,000	(20,000)	(40,000)
Total Top Cable	50,418,063	(50,931)	(228,635)
Satellite TV Companies (DBS)
DirecTV	20,265,000	12,000	21,000
DISH	14,097,000	40,000	36,000
Total Top DBS	34,362,000	52,000	57,000
Telephone Companies
AT&T U-verse	5,661,000	201,000	232,000
Verizon FiOS	5,319,000	57,000	169,000
Total Top Phone	10,980,000	258,000	401,000
Total Multi-Channel Video	95,760,063	259,069	229,365

source: Leichtman Research Group

Broadband Internet	Subscribers at End of 1Q 2014	Net Adds in 1Q 2014
Cable Companies
Comcast*	21,068,000	383,000
Time Warner	11,889,000	283,000
Charter	4,788,000	148,000
Cablevision	2,788,000	8,000
Suddenlink*	1,103,100	35,100
Mediacom	984,000	19,000
WOW (WideOpenWest)	756,700	16,700
Cable ONE	484,168	11,537
Other Major Private Cable Companies**	6,450,000	65,000
Total Top Cable	50,310,968	969,337
Telephone Companies
AT&T	16,503,000	78,000
Verizon	9,031,000	16,000
CenturyLink	6,057,000	66,000
Frontier^	1,873,000	37,000
Windstream	1,170,400	(500)
FairPoint	331,538	1,772
Cincinnati Bell	270,000	1,600
Total Top Telephone Companies	35,235,938	199,872
Total Broadband	85,546,906	1,169,209

source: Leichtman Research Group

No Sprint Bid for T-Mobile US, After All

Sprint will not be makinng a bid to buy T-Mobile US, after all. On Aug. 5, 2014, Sprint said it was abandoning its effort to buy T-Mobile US, because it believes regulators would not approve such a deal.

As some of us have been arguing, even had the acquisition been attempted, and approved, the likely structure of the U.S. mobile market of the U.S. mobile market would have remained at a minimum of four, and possibly five leading national providers.

Some of us also have been arguing that the U.S. market also would remain unstable, based on some classic patterns of market share.

CNBC also reports that CEO Dan Hesse will  be "replaced tomorrow." 

Some wonder what will happen next. Dish Network and Illiad are among the firms that have either said they would be willing to make a bid, or, in Illiad's case, already have made an initial offer to T-Mobile US.

Among the most logical questions is what will happen to T-Mobile US, as it still is believed to be "in play." The equally-important question is what Sprint will do. 

Over the last year, Sprint executives have increasingly been vocal about the need to gain scale faster to compete effectively in the U.S. market, even if a slower growth pattern still was possible without a merger of Sprint and T-Mobile that would create a much-larger number three provider in the U.S. national market.

Sometime in 2014, though, an independent T-Mobile US is likely to pass Sprint, for the first time, as the third-largest U.S. mobile provider, ranked by subscribers. T-Mobile US also has the fastest growth rate of the four national providers. 

Most likely believe there is little chance of a buyer trying to buy Sprint, rather than T-Mobile US, though perhaps that is conceptually possible. So Sprint now will have to execute on a business plan based on operation as an independent company, likely as the smallest U.S. mobile provider.

And though many expected Sprint to launch disruptive attacks on U.S. market structure, that role has been claimed by T-Mobile US. 

And, at least so far, there is not much reason to believe that regulatory opposition will be a key issue for Dish or Illiad. 

Coincidentally, 21st Century Fox also dropped its bid to buy Time Warner on the same day.

Tablet Market Slows

Global tablet shipments fell five percent sequentially in the second quarter of 2014, to 48.4 million units, as Apple and Samsung suffered shipment declines, according to Canalys.

Apple shipped just under 13.3 million iPads in its weakest quarter since the first quarter of  2012. Samsung shipped just under 8.9 million tablets during the quarter, which represents a sequential decline.

Apple and Samsung continue to account for 46 percent of global tablet shipments, and as a result many markets hinge on their combined success.

Tablet shipments in Asia Pacific (including China) came in eight percent lower, sequentially.

Shipments in EMEA fell 11 percent year on year, with declines in Central and Eastern Europe, and Western Europe negating growth in the Middle East and Africa. In Western Europe, sequential shipments fell 18 percent.

Canalys Senior Analyst Tim Coulling argues “a slowdown in the pace of innovation is creating an issue for tablet vendors.”

Some argue the tablet market already faces the old PC problem, where capabilities for new models is not sufficient to drive upgrades.

source: Canalys

Some might now be wondering just how big the tablet market is going to be, a somewhat shocking development for a product that many observers say has been the fastest-adopted consumer product of all time.

Best Buy, for example, says tablet sales are “crashing.” And during its second quarter 2014 earnings call, Corning acknowledged it had seriously misjudged demand for glass that goes into tablets.

“We just got that really wrong about what was happening in the tablet market,” said Jim Flaws, Corning CFO. “And we have adjusted down our forecast for that dramatically compared to our original expectation.”

Tablets, recall, were supposed to be a prime example of the “post-PC” era. In May 2014, for example, IDC lowered its forecast for tablet sales to 12 percent annual growth, from an earlier forecast of 52 percent.

Comcast, CenturyLink Take Different Paths to Challenge of New Gigabit Markets

The shift to gigabit access continues to gain traction in the U.S. market. Perhaps the interesting now-developing issue of how a legacy provider adjusts value and pricing of its offers to protect legacy revenues while adopting a new pricing umbrella set by gigabit services.

In other words, if a telco or cable company sells a stand-alone standard high speed access product for $50 to $80 a month, how does it align value and price in a market where 1 Gbps costs only $70 a month to $80 a month?

The issue is, depending on your view, either less complicated or more complicated because a clear majority of cable and telco customers buy services as part of a bundle, where the actual cost of each component service is hidden, more or less.

Still, all telcos and cable TV companies have to post stand-alone prices, because at least some customers prefer to buy service that way. Comcast and CenturyLink are taking two possible, but different, routes.

As part of a move to higher speeds, Comcast has doubled Internet access speeds that it has increased Internet speeds for customers in almost all of its residential service areas in California, as well as select markets in Kansas, Missouri and Texas, doubling speeds for buyers of 25 Mbps and 50 Mbps services, for example.

Customers now will get 50 Mbps or 100 Mbps for the same price they have been paying for either 25 Mbps or 50 Mbps services.

That is a classic example of how prices and value historically have been changed, over time. Customers get “more for the same price,” while more-pricey and faster offers are added at the top end.

Such an approach protects revenue earned from the standard offers, while gradually allowing faster speeds to be sold, for higher prices, and simultaneously adjusts value-price relationships.

Separately, CenturyLink has launched symmetrical gigabit speeds for residential and business customers in select locations in 16 cities. But CenturyLink is taking a different tack, apparently leaving existing prices for its 20-Mbps or 40-Mbps standard services in place, with unchanged value propositions, but adding a new higher-price option.

It is a subtle difference, but an important strategy. Committed to a new top-end speed of 1 Gbps, CenturyLink also wants to avoid cannibalization. But it can do so by leaving the current value proposition where it has been, and simply adding a new offer.

To stay within the broad framework of “1 Gbps for $70 or $80 a month,” CenturyLink offers that price only to customers who bundle a voice line, a product some 40 percent of potential customers likely do not want.

The additional revenue from the unwanted product then brings the effective revenue for the gigabit service up to about $120 to $150 a month.

Comcast, by taking its “more for the same price” strategy, does not immediately have to commit to upgrading to a gigabit service, but also provides more value for money, making its lower-speed offers superior to the CenturyLink standard offers at speeds Comcast already can offer.

In essence, then, CenturyLink will try to leapfrog to higher speeds, for more money, while Comcast will try to supply a better value proposition for the lower-speed offers, now boosted to 50 Mbps to 100 Mbps.

Both approaches make sense for suppliers who have made different decisions about physical upgrades. To offer a gigabit, CenturyLink has to make a historic break with its traditional fiber to neighborhood approach.

Comcast is able to keep its hybrid fiber coax approach, without immediately shifting to a fiber to home approach. In essence, Comcast is betting that much faster speeds for the existing prices will be valuable enough to forestall share losses to a competitor offering much higher speeds.

The other consideration is that the full extent of CenturyLink’s upgrades are as yet unknown.

The initial deployments are said by CenturyLink are said to reach “thousands of locations.”

CenturyLink expects to have gigabit services available to “hundreds of thousands of residential and business customers”  within the next 12 months.

The 10 cities where both consumers and business customers can buy include Columbia, Mo.; Denver; Jefferson City, Mo.; Las Vegas, Minneapolis-St. Paul; Omaha; Orlando; Portland; Salt Lake City and Seattle.

Markets where business customers now can buy 1-Gbps symmetrical services include Albuquerque, N.M.; Colorado Springs, Colo.; Phoenix; Sious Falls, S.D.; Spokane, Wash. and Tucson, Ariz.

CenturyLink plans to charge $150 a month for the service, but $80 a month if the access is purchased in a bundle including fixed network voice service. Since many customers really do not want to buy voice service from CenturyLink, the effective price in many cases really will range from $125 to  $150 a month.

Comcast has increased the speeds of three Xfinity Internet tiers: "Performance" now offers speeds up to 50 Mbps, up from 25 Mbps; "Blast" is now 105 Mbps, up from 50 Mbps; and "Extreme 105" has been bumped to 150 Mbps. The changes impact all California customers (except those in Santa Cruz, Scotts Valley, Isleton, Lodi and Rio Vista), as well as those in the Olathe, Kan., Independence, Mo., and Houston, Texas markets.

Those speed boosts will be provided at no charge for Comcast customers.

Essentially, Comcast will in the near term simply boost value while maintaining price. CenturyLink will preserve existing offers while adding a pricier and faster option at the top of the range.

In Select Markets, Comcast Doubles 25 Mbps, 50 Mbps Access Services, Bumps 105 Mpbs Services to 150 Mbps

Comcast has doubled Internet access speeds that it has increased Internet speeds for customers in almost all of its residential service areas in California, as well as select markets in Kansas, Missouri and Texas.

Comcast has increased the speeds of three Xfinity Internet tiers: "Performance" now offers speeds up to 50 Mbps, up from 25 Mbps; "Blast" is now 105 Mbps, up from 50 Mbps; and "Extreme 105" has been bumped to 150 Mbps. The changes impact all California customers (except those in Santa Cruz, Scotts Valley, Isleton, Lodi and Rio Vista), as well as those in the Olathe, Kan., Independence, Mo., and Houston, Texas markets.

Those speed boosts will be provided at no charge for Comcast customers, and are a response to increased competition from Google Fiber.

The change in retail packaging is not surprising, Once Google Fiber reset expectations about what $70 a month buys, it became inevitable that all other Internet service providers competing against Google Fiber, or any other ISP offering a gigabit access for about $70 to $80 a month, other offers would have to be adjusted.

Overstetched Analogies Now Threaten Net Neutrality Arguments

There is a growing danger that network neutrality supporters are going too far in creating analogies to the "treat all apps equally" position. 

For starters, the analogy is being applied on a broader basis in ways that probably are not helpful. Network neutrality, over time, as swept up so many concepts that it is in danger of becoming "anti-consumer" in its application, the opposite of what its supporters intended.

For example, the extension of the concept to sponsored apps, where mobile consumers in many developing nations get access to social media apps such as Facebook, without having to buy a data plan, now is cited as a violation of network neutrality. If so, some of us would say, go ahead and violate at will, because people like and benefit from the practice.

Likewise, there now is an argument, advanced in support of net neutrality concepts, that sees danger in managment of the flow of electricity under conditions of high load. That also is a potential overstep.

Electrical utilities already know what they must do when demand exceeds supply. They cut off access to some, as required, to preserve the integrity of the grid as a whole. That is called a brownout, a planned and rolling disruption of power supply under extreme conditions, to preserve the functioining of the electrical grid as a whole. 

The point is that denying all access, not just to some apps, sometimes is a step a utility supplier must take, under extreme load. Telcos have done the same. When voice circuits became overloaded because of holiday calling, for example, users were denied admission to the network and got a message instructing them that "all circuits are busy now, please try your call later."

Networks have to be managed under conditions of high load. There is an intellectual trap network neutrality supporters are in danger of falling into, namely overplaying the analogy in too many settings, to the point where the value of the original premise is damaged.

Yes, sometimes the flow of electrons to your house could be throttled or blocked, for entirely understandable reasons. Sometimes that is done with your permission, as when you allow temporary shutdown of your air conditioning, in the summer, to help your energy supplier manage load. 

Either way, network managment is valuable and necessary. Allowing the whole network to go down isn't so smart. That's one value of smart grids. 

Blocking or throttling sometimes might be necessary, under conditions of high load. That is different from blocking specific competitive and lawful apps. That is an antitrust issue, though. 

Zero Rating: Does Consumer Benefit Outweigh Impact on Supplier Revenue Model?

But many oppose the notion of subsidized use of apps, including zero rating, which allows use of some apps without the purchase of a data plan. That has proven quite popular with consumers in many parts of the developing world. 



But some say zero rating is unfair to app providers, as it "turns the Internet into cable TV." It sometimes is hard to know what to make of such arguments. 



Every app and service must have a viable revenue model to survive, even assuming there is clear value for end users. Content services, such as cable TV, subscription radio, streaming video services, subscription websites, magazines, newspapers, 



And the Internet arguably is chaniging. Many of the new apps are content related. And content businesses have a few reliable revenue models, including subscriptions, advertising and sponsorship. 



The argument against zero rating essentially is that any app provider should not have the right to choose a sponsorship model for business reasons of its own, just as it might choose a commerce, advertising or end user fee revenue model.



Some think that is a form of application blocking.



The problem these days is that nearly every dispute between Internet domain providers, content providers and access providers, mobile app store owners and app suppliers is viewed as some form of "application blocking." 



How about viewing zero rating as a consumer-friendly choice with direct benefits for consumers who get to use valuable apps at lower cost than otherwide would be possible? 



For millions of consumers in the developing world, zero rating is anything but a problem. 

Google Disappers as Part of Microsoft Update

If you own a Windows Phone 8.1 device, once you install the GDR1 update, the new software update removes all search options except for Bing, according to documentation for the update.

For all the attention paid to Internet services providers "not treating all apps equally," how about app providers and operating system providers? Facebook has blocked rival apps, for example.

Nor are the ISPs, necessarily bigger financial actors than app providers, and therefore a bigger threat to use of lawfual apps or exercise of market power.

AT&T’s market capitalization now is about $184.8 billion to Facebook’s $188.9 billion.

There always are gatekeepers in communications, content and information businesses, retailing, transportation and logistics, to name only a few industries. But relative ability to act as a gatekeeper changes over time.

For decades, executives debated whether "content or distribution was king." Depending on the decade, the answers have varied, sometimes favoring distributors and sometimes content providers. 

These days, new actors have appeared. 

In fact, some would argue, the new gatekeepers are the platform owners — companies like Apple, Google, Twitter, Facebook, Amazon, and even Spotify, the companies that shape information availability and access. 

One might note that European Union antitrust officials have been investigating and challenging both Microsoft and Google for years. 

One doesn't have to agree with many of these complaints or actions to observe, empirically, that gatekeepers in any market can, and do exist. But the key gatekeepers can change over time. 

What Next in T-Mobile US Effort to Gain Scale?

Deutsche Telekom reportedly does not consider Illiad’s bid to buy a majority stake in T-Mobile US to be a reasonable alternative to a purchase by Sprint. What happens next is key.

Illiad is considered a long shot bidder, even if T-Mobile US parent Deutsche Telekom benefits from a bidding war for T-Mobile US.

If you assume Illiad will have to find some other bid package that does rise to the level of serious competition for T-Mobile US, then a financially strong partner would have to be enticed to bid with Illiad.

It probably would not be Carlos Slim, the Mexican telecom magnate on the lookout for expansion opportunities. Slim has said the U.S. market requires too much capital, and Slim's friendship with AT&T CEO Randall Stephenson likely is an issue as well.

It won’t be Comcast, which is otherwise occupied by its effort to buy Time Warner Cable. Having recently exited the U.S market, Vodafone, which as the cash, likely does not have the interest.

Deutsche Telekom wants to exit the U.S. market as well, and Orange would not likely want to partner with its fiercest rival in the French market.

Some other U.S. firms likely have the resources, but not the immediate appetite. It is easy to toss around the names of firms such as Google, Microsoft or Apple, all of whom have handset and device interests in the U.S market,

The problem is constructing a value proposition that makes sense. All of those firms arleady could buy wholesale access if they wanted to run branded mobile Internet access operations of some sort. They wouldn’t need to own stakes in one of the underlying providers to achieve that goal.

Still, with T-Mobile US in play, some other combination of bidders could emerge. The investment bankers would like that. So would Deutsche Telekom.

Will Microsoft Cloud Revenues Pass Amazon Web Services Revenue?

Microsoft and IBM lead revenue growth in cloud infrastructure services, according to Synergy Research Group.

Amazon Web Services was in the second quarter 2014 still the largest single provider, but Microsoft has a blistering 164 percent revenue growth rate.

At such rates, if Microsoft can sustain it, Microsoft inevitably will pass AWS in cloud computing market share, as AWS is growing at perhaps a 49 percent rate.

Synergy Research estimates that quarterly cloud infrastructure service revenues (including infrastructure, platform, private and hybrid cloud) have reached $3.7 billion, with trailing twelve-month revenues comfortably exceeding $13 billion.

That figure excludes the value of software-driven cloud revenues, typically the largest single category of cloud services.

With the total market growing at over 45 percent, Microsoft and IBM have gained market share over the last four quarters while the share of AWS and Google is essentially unchanged from a year ago.

Total Amazon AWS revenues are now well in excess of $1 billion per quarter, with nearly all of that coming from cloud infrastructure services, Synergy Research estimates.

IBM and Microsoft also both claim quarterly cloud revenues of around $1 billion, but in their cases much of the cloud revenue comes from software, cloud-related hardware products or associated professional and technical services.

Financial Implications of 30% Market Share and Triple Play

Municipally-owned U.S. access or telecommunication networks always have been contentious, for obvious reasons: these are instances where tax-supported non-profit institutions compete with private firms.

Between 2001 and 2011, the number of such municipal telecommunications initiatives grew from about nine to 108, an order of magnitude expansion in a decade.

Supporters might simply argue that “non-profits” compete with “for-profits” all the time. Museums, hospitals, gas, water and electrical utilities provide examples. Opponents say it is unfair for tax-advantaged entities to compete directly with non-subsidized entities.

The issue is “live” again since Federal Communications Commission Chairman Thomas Wheeler has promised he would stimulate more broadband competition by overriding state laws that presently restrict or ban municipal broadband networks.

The issue remains unsettled, though. Some believe the FCC has no authority to do so, and others think Congress could bar the FCC from taking such action.

The historical record is mixed: some efforts have succeeded, while others have failed. Even those which have succeeded can leave big debt burdens for taxpayers.

Ignoring the policy issues, the level of risk for gigabit networks has grown, as the risk for fixed networks of all types--private or public--has grown.

There are several reasons. Structurally, markets with multiple competitors inherently mean the cost per customer grows dramatically, increasing risk.

Networks that are built with an expectation of 80 percent to 100 percent customer adoption rates have far lower stranded asset problems than networks where a reasonable assumption is that maximum adoption rates will be in the 30-percent range.

Basically, costs per paying customer are about three times higher in the 30-percent scenario, than in the 100-percent business case. That risk is the same whether the provider is a cable company or telco, a municipal broadband or an upstart ISP, especially if a network must reach all potential customers in a municipality.

Risk is mitigated if suppliers are able to “spot build” only where there is higher demand. That, for example, is why many competitive local exchange carrier operations can survive: they target clusters of business customers, and do not aim for ubiquity.

The triple-play (voice, video entertainment and high speed access) is important for marketing reasons. It also is important for financial reasons. Without the ability to sell three products to a customer, a service provider with 30 percent household adoption would be in grave danger of failure. At 33 percent household adoption, and three products to sell each customer, a service provider mimics the financial results one would expect of a 100-percent take rate for one service.

        source: National Taxpayers Union

source: National Taxpayers Union

  source: Internet Innovation Alliance