AT&T Makes Big Strategy Shift

As a long term matter, it has seemed logical that tier one telcos globally would begin to shift revenue focus from the consumer to the business segment, especially where competition in the fixed network segment was particularly robust.

That trend seems to be emerging clearly for AT&T.

Our transactions with DIRECTV and Mexican wireless companies Iusacell and Nextel Mexico will make us a very different company, said AT&T CEO, Randall Stephenson. “After we close DIRECTV, our largest revenue stream will come from business-related accounts , followed by U.S. TV and broadband, U.S. consumer mobility and then international mobility and TV.”

Consider the magnitude of the changes. In 2014, AT&T reported earning nearly 60 percent of total revenue from mobile services. AT&T meanwhile earned about a quarter of its revenue from business customers.

Consumer landline revenue was less than 20 percent of total.

Assuming AT&T’s acquisitions of Iusacell, Nextel Mexico and DirecTV are approved, AT&T will earn about 45 percent of total revenue from business customers and about 20 percent from consumer mobility services.

About 30 percent of revenue would be earned from U.S. consumer high speed access and video entertainment.

For perhaps the first time, AT&T revenue would be driven by business accounts, not consumer services.

For the first time, AT&T would emerge as a leader in the subscription video market.

Contributions from the mobility segment would not wane, but AT&T would be far less exposed to competition in the consumer mobile segment.

All of that has key implications. AT&T will reduce reliance on U.S. market revenues and consumer “communications” revenues, to a significant extent, with a bigger reliance on video entertainment.

One might argue that diversification lessens the threat AT&T faces from cable TV, T-Mobile US and Sprint, CLECs, Google Fiber and other emerging independent ISPs.

One obvious question is what Verizon might do. So far, it has made a different bet, banking heavily on the U.S. mobile market for growth. Whether that will remain the case over the next decade is the issue. Some might argue the fundamental strategy will have to change.

The extent to which the pattern emerges elsewhere around the globe is the larger issue. Some might argue the pressure to focus on business accounts is less, since “cable TV” tends not to be a rival industry but a platform owned by tier one telcos, where it is a factor in the markets.

Also, few markets have the degree of facilities-based competition on the U.S. model.

Still, there are any number of reasons why tier one service providers ultimately might want to shift attention to business accounts. Larger revenue per account is one good reason.

Also, higher profit margins are another advantage. That is one reason why U.S. competitive local exchange carriers generally focus on business accounts only when they move out of market and compete with other telcos.

Also, to some extent, there is less competition in the business segment, compared to the consumer segment. Few competitors can compete with tier one telcos, other than other tier one telcos, in the international communications segment, or even in national large enterprise account markets.

There arguably is more competition in the mid-market segment, but growing competition in the small business (mass markets) end of the market, especially as both cable TV companies and CLECs compete in the small business market.

In consumer markets, there is fierce competition from satellite and cable TV providers. In fact, in the U.S. market, it increasingly looks as though cable TV companies are emerging as the leading providers of fixed network triple play services, not telcos.

Even in the mobile services segment, long dominated by telcos, heightened competition is occurring, putting pressure on gross revenue and profit margins. And more competition is expected,

T-Mobile US "Kills It" in Fourth Quarter 2014

The quip by John Legere, T-Mobile US CEO that “we killed it” pretty much sums up T-Mobile US fourth quarter 2014 results. Adjusted earnings (EBITDA) of $1.8 billion, up 41 percent,  beat analyst expectations of $1.62 billion.

Service grew 13.6 percent year over year in the fourth quarter, and were up nine percent in 2014, compared to 2013.

Total revenues were up 19 percent in the fourth quarter and stronger by 13 percent annually.

In fact, T-Mobile US it won nearly 80 percent of industry postpaid phone growth in the fourth quarter,and nearly 100 percent of phone account net growth in 2014. That could happen because AT&T and Verizon account growth is substantially driven by tablet account additions.

T-Mobile US added 2.1 million net new accounts, including 1.3 million branded postpaid accounts.

In 2014, T-Mobile US added 8.3 million net accounts to end with 55 million total. Of the total branded postpaid net adds in 2014, T-Mobile US added more than four million phone net adds and 0.8 million mobile broadband accounts.

Branded postpaid average billings per user grew 5.1 percent to a record $61.80. Branded postpaid phone average revenue per user was $48.26.

T-Mobile US expects to add another 2.2 million to 3.2 million net branded postpaid accounts in 2015.

Will Title II Lead to App Provider Charges Even Higher than "Paid Prioritization?"

Unintended consequences are among the reasons why intended policies rarely work as expected.

Is there a danger content providers would have to pay Internet access providers termination charges if Internet access is regulated as a common carrier Title II service? Yes, say economists and analysts as the Phoenix Center for Advanced Legal & Economic Public

Policy Studies.

“Reclassification turns edge providers into customers” of access providers, argue George Ford, Phoenix Center chief economist, and Larry Spiwak, Phoenix Center president.

This new “carrier-to-customer” relationship (as opposed to a “carrier-to-carrier” relationship) would then require all access providers (telephone, cable, and wireless) to create, and then

tariff, a termination service for Internet content under Section 203 of the Communications Act, Ford and Spivak argue.

Though skeptics will argue that is not going to happen (that the Federal Communications Commission will not impose such obligations, though it can), the potential outcome could be far worse than the hypothetical “content delivery network” fees some have argued should be outlawed.

With the caveat that the arguments--however important--are “in the weeds” for most people, the FCC  “would likely be prohibited from using its authority under Section 10 of the Communications Act to forbear from such tariffing requirements because the Commission has labeled all BSPs as ‘terminating monopolists.’ Spiwak and Ford argue.

In other words, the FCC cannot avoid having ISPs impose such charges, even if the FCC now claims it can apply a “light touch” Title II regime that does not create such obligations.

Historically, edge providers (application providers) have not been considered “customers” of

the Internet access providers.

By reclassifying broadband as a telecommunications service, this termination service becomes a common carrier telecommunications service, thereby formalizing this “customer” relationship between application providers and ISPs whose facilities they use, Phoenix Center argues.

In other words, application providers are customers of the ISPs, just as end users are.

What the “just and reasonable” tariffs ought to be, and how much application providers must pay, is the issue. The only certainty is that the tariff cannot be “zero.”

In a perhaps terrifying new development for content and application providers, it could turn out that most of the revenue IPSs earn will come from content and app providers, not end users.

That unanticipated outcome could be the worst outcome of any Title II regulation for application providers, though oddly enough ISPs could benefit. Ultimately, the ecosystem would suffer, as economics suggests higher prices will lead to lower usage.

Unstable U.K. Mobile Market About to Become "Stable?"

Given regulator preference for four leading mobile players, rather than just three leading providers, it has to be noted that regulators are deliberately opting for a market that is inherently unstable, compared to the likely structure of a three-provider market.

The reason is that the mobile business arguably and ultimately is an oligopolistic industry, even if the markets can, for a period of time, apparently diverge from that pattern. As a theoretical rule, one might argue, an oligopolistic market with three leading providers will tend to be stable when market shares follow a general pattern of 40 percent, 30 percent, 20 percent market shares held by three contestants.

Up to this point, the U.K. mobile market has featured EE and O2, each with 29 percent market share, followed by Vodafone with 23 percent share, trailed by Hutchison’s 3 at 12 percent.

That four-provider structure is roughly similar to the U.S. mobile market, where AT&T and Verizon each tend to have 30 percent share, while Sprint has about 17 percent and T-Mobile US has about 14 percent share.

If one assumes a stable oligopoly market structure has the leading provider with about 40 percent share; the number-two supplier with about 30 percent share and the third player a share of about 20 percent, the U.K. market would, with a Hutchison acquisition of O2, be functionally stable.

That still leaves open the question of whether Vodafone ultimately is acquired, but that change of ownership would not make the market unstable.

Looking only at the mobile market, BT has 40 percent share. If Hutchison were to acquire Telefónica assets, Hutchison would have about 29 percent share. Vodafone would have about 23 percent share. That fits the stable oligopoly market pattern almost perfectly.

Whether it still will make sense in the future to evaluate fixed and mobile markets as distinct entities is the issue. In reality, the consumer services market has become reliant on a bundled services approach that initially has been anchored by voice, video entertainment and high speed access, but is moving to a quadruple play approach that includes both fixed and mobile services.

Vodafone, which with a Hutchison acquisition of O2 would fall to fourth place among mobile operators, is shifting from its historic mobile-only strategy to a quadruple play approach.

As a rule, there are two kinds of companies in the telecom business: strategic buyers and strategic sellers.

After disposing of its U.S. Verizon Wireless stake and SFT to Vivendi in France, Vodafone might have been seen as a strategic buyer. But some have considered Vodafone a strategic seller. In the near term, Vodafone might be a buyer, even if it ultimately winds up being a strategic seller.

The point is that it might soon be misleading to assess market share in the mobile segment as distinct from share in the fixed services segment. If the market shifts to quadruple play, with a mix of fixed and mobile assets, share across networks and services will matter most.

Telecom Revenue Growth Slows in Every Region

“Overall, growth in telecom revenue continues to slow in every geographic region,” according to  Stéphane Téral, Infonetics Research principal analyst.

Europe’s five largest service providers—Deutsche Telekom, Orange, Telecom Italia, Telefónica, and Vodafone—continue to experience declining revenue, though less pronounced than in the past three years, he noted.

Global mobile service revenue barely budged in the first half of 2014, up just 0.5 percent from the same period a year ago, Infonetics says.

But mobile data services (text messaging and mobile broadband) rose in every region in the first half, driven by the increasing usage of smartphones.

Mobile broadband services grew 26 percent year-over-year, enough to offset the decline of text message revenue declines, Infonetics reported. On the other hand, that sometimes was not enough to offset losses of voice revenue.

In Latin America, mobile data will not replace lost voice revenues. Orange voice revenue declined 3.3 percent in 2014. In Japan, DoCoMo says a change in voice tariffs might mean NTT does not make money on voice until 2017.

High speed access revenue still drives growth in mobile and fixed line segments, but revenue will “begin to stabilize” between 2015 and 2016, if  “our competitors behave, said Ramon Fernandez, Orange CFO.

Vodafone now is focusing on fixed network broadband for revenue growth, as its mobile business is declining.

On the video entertainment side of the business, there also are warning signs.

Only 40 percent of Millennials (people roughly 18 to 34) in the U.S. watch live TV each month, Forrester Research.

ComScore said in October 2014 that 24 percent of 18- to 24-year-olds do not have a traditional pay TV service.

Of those survey respondents, 13 percent previously had subscription TV service but have disconnected, while 11 percent have never subscribed to a linear subscription TV service at all.

Nielsen found in December 2014 that U.S. adults spent 60 percent more time in the third quarter of  2014 watching streaming video than they did the year before.

Traditional TV viewing, which had been falling among viewers ages 18 to 34 at around four percent a year since 2012, tumbled 10.6 percent between September 2014 and January 2015, according to Nielsen.

All of that illustrates fundamental revenue challenges in all the key products sold by communications service providers, fixed or mobile.

Acquisitions will help, as service providers buy growth in new product segments or geographies. Still, some big new revenue stream eventually will have to be found. That explains the interest in a variety of new businesses, largely centered around the Internet of Things.

Mobile is Becoming the Way Lower Income Users Access the Internet

Reasonable people will disagree about whether specific mergers or acquisitions should be approved, as well as about the merger conditions appropriate when such mergers or acquisitions are deemed reasonable.

What does seem odd and unwise, though, are conditions that mandate specific and high adoption rates of specific services as a condition of an acquisition. One example is a proposed condition specifying that 45 percent of low-income consumers buy a "lifeline" Internet access service from Comcast. 

Service providers cannot guarantee that specific numbers of consumers will buy any specific service. The details of the offer, aside from mandatory buy rates, are reasonable areas for discussion.

But it would be hard to ensure that 45 percent of potential consumers buy any specific products at all, under the best of circumstances. 

There is a growing body of research indicating that the most logical consumers of such a service actually rely on mobile access for Internet service, for example. The point is that mobile access is emerging as the preferred way of using the Internet. 

For that reason, it is possible demand for a lifeline Internet access service could be limited. 

Mobile Money Providers Will Provide Full Range of Financial Services in Africa by 2030

Banking and agriculture are two important ways mobile phones will help transform the lives of billions of people over the next 15 years, argues Bill Gates.

In Bangladesh, the fastest-growing financial services company is a mobile money provider called bKash. Less than four years after launching, it processes roughly 2 million transactions per day, with a total value of nearly $1 billion each month.

Mobile also will play a role in raising agricultural outcomes. As more farmers have access to mobile phones, they will be able to receive all sorts of information, from weather reports to current market prices, and be able to use that information to advantage.

“Already, in the developing countries with the right regulatory framework, people are storing money digitally on their phones and using their phones to make purchases, as if they were debit cards,” the Gates says. “By 2030, two billion people who don't have a bank account today will be storing money and making payment with their phones.”

By 2030, mobile money providers will be offering the full range of financial services, from interest-bearing savings accounts to credit to insurance.

Prices Matter: in Japan, Consumers are Buying More Feature Phones

As with most consumer products, mobile data plan prices do matter. In Japan, where mobile data plan costs are high, consumers seem to be deliberately buying feature phone devices that can be used without incurring high data costs.

Since 2012, smartphone sales in Japan have been falling. Since 2013, sales of feature phones have been growing.

Prices matter.

Communication Markets Do Not Conform to Share Patterns We See in Other Industries

Communication markets do not seem to conform very well to market share patterns one tends to see in many other industries where market entry is less capital intensive.

Put simply, a predicted pattern would have the market leader having share and profit margins double that of number two, which in turn would have double the share and profit margin of supplier number three.

Mobile service provider markets do not conform to the pattern. That is because, many could easily argue, mass market communications tends to be an oligopoly, not a monopoly or highly contested market with few barriers to entry.

In an oligopolistic market, a reference market share structure might be something like:

Oligopoly Market Share of Sales
Number one	41%
Number two	31%
Number three	16%
source: economicsonline

U.S. mobile service provider market structure deviates from the “classic” pattern one might expect. One might note the same is true in other mobile service provider markets, such as the Russian Federation. The same divergence exists in the Indian mobile market.

One might argue that a coming wave of U.K. industry consolidation could lead to a more traditional industry structure. That also could happen in the French mobile market, which still in 2012 had an “uncharacteristic” structure.

The Canadian fixed line triple play market likewise differs from a theoretical market share distribution. U.S. fixed service market share might have the same pattern, though in a growing number of markets, there is instability, as a big cable TV firm and a legacy telco now face competition from Google Fiber, for example.

It is at last conceivable that market structure in the fixed line market could change significantly, assuming Google Fiber emerges, in virtually all of its chosen markets, as the market share leader for Internet access.

Also, market share structures could assume a more traditional distribution once all communication markets are consolidated, and there is not a clear distinction between fixed and mobile services.

Whatever the reason--and many will argue it is sheer capital intensity--communication markets do not conform to patterns we might routinely expect to see in many other industries.

Since 2012, the possible fourth wave of mobile revenue growth seems to have clarified, at least in terms of expectations. Most observers might now agree that the Internet of Things represents the biggest future revenue opportunity.

AT&T Launches GigaPower in Kansas City: Important Test of Market Dynamics Looms

We soon will find out what the dynamics of a three-provider fixed network high speed access market look like, as AT&T has launched it “GigaPower” 1-Gbps access service in parts of Kansas City, Mo., parts of Leawood, Lenexa, Olathe, Overland Park, Kan. and in surrounding communities located throughout the metro area.

AT&T also has plans to expand the service to Independence, Mo. and Shawnee, Kan.

Perhaps the only issue is what share the new market might take, as some surveys suggest Google Fiber gets as much as 50 percent take rates. If that happens, the former market share leaders--Time Warner Cable and AT&T, might easily have lost half of their respective customers for high speed access.

Whether even a triple-play provider can sustain itself on just 25 percent take rates is the issue now to be tested. Survival would not seem to be out of the question, but profit margins would be very squeezed.

Splitting the high speed access market, AT&T and Time Warner Cable might have gotten between 20 percent and perhaps 40 percent profit margins on high speed access service (allocated overhead across voice, video and high speed access is somewhat arbitrary).

It might not be unreasonable to suggest profit margins have been sliced to a range of 10 percent to 20 percent after the loss of customer share.

U-verse High Speed Internet 1Gbps costs $70 per month, and AT&T is waiving equipment, installation and activation fees, as well as offering a three year price guarantee.

U-verse High Speed Internet 1Gbps with subscription video starts at $120 a month.

A U-verse triple play starts at $150 per month.

Kansas City will be one battleground where we begin to see how the business model for a triple play services provider changes in a three-provider market.

Can New ISPs Sustain Themselves? Can Telcos?

Revenue, in addition to the cost of the network and other operating costs, is part of the complex  fiber to customer business case. Traditionally, one might have argued that fiber to the home made for tough payback models.

But we now are seeing lots of activity by gigabit Internet access providers that have decidedly different potential economics, driven mostly by the payback model.

For starters, traditional modeling has assumed a mandatory city-wide construction project, and in the U.S. market, at least, a likely ability to convert only about half of all potential sites to the status of “customers.”

Over time, service providers also have moved from a “single service” model to the “triple play,” a change that allows fixed network service providers to build a sustainable model even when only 40 percent to half of sites are “customers.”

The latest innovation is the “build by neighborhood” approach, essentially allowing service providers (ISPs, telcos, cable TV companies) to “cherry pick” their targets, instead of using the older “universal service” approach.

That approach earlier had been used by business-focused service providers (competitive local exchange carriers) to compete for business customers. The basic approach has been to target clusters of customers, using leased access to reach them, and then, over time, deploying backhaul facilities to lower cost.

The new evolution has firms building fiber-rich facilities to neighborhoods where the estimated demand is highest.

The question is long term sustainability, as the price-value relationship is redefined. We might assume investment costs per-location, and potentially, cost per customer, are lower than they were for Verizon Communications.

We might also assume costs are higher than for a new hybrid fiber coax network supporting DOCSIS 3.

That might put the cost per location somewhere between a high of $2,250 per site and $660 per location on the lower end, including activated drops, but not including any required customer premises equipment.

Since none of the new ISPs seem to be using HFC, we can assume their costs are closer to what any other telco would pay for fiber to home network elements. But current prices for telco style fiber to home networks might be far lower than in the past.

The key breakthrough would be if telco style FTTH costs were to approach cable TV HFC costs.

Assume a smaller operator could manage to connect a customer and activate service (including customer premises equipment) for about $300, where a telco connection might cost as much as $800.

Much depends on what services a service provider actually is offering. Internet access will have one cost profile, but video service will add costs.

If the network portion of cost is in the legacy $1450 per passing, then a new contestant might expect to invest $2900 per customer, at 50 percent take rates, plus a connection cost of $300, for a total of $3200.

Against that, assume $70 to $130 of revenue, in some cases. Over a three-year period, that is about $2520 to $4680 in revenue.

Some ISPs, such as Sonic.net, are retailing gigabit connections plus voice for $40 a month, though. That implies three-year revenue of just $1440 per subscriber.

All of that is before operating costs, franchise payments and marketing. Clearly, service providers are counting on longer customer life cycles, incrementally higher revenues and muted operating costs.

Perhaps prices now paid for network elements and cabling are lower than $1450 per passing, though, perhaps in the $900 range per passing. That helps, but does not make for an easy positive business case.

At 50 percent take rates, investment per subscriber at $900 per passing is $1800, plus $300 for connecting and activating a customer, or about $2100.

At 33 percent take rates, costs per customer are about $3000. As always, the business model is highly sensitive to adoption rates.

So a key expectation might be that take rates will be closer to 50 percent than 33 percent.

But the business case still is not easy.

On the other hand, market dynamics might be trending in a direction that makes the gamble less risky.

If one argues the telco business case keeps getting worse, while cable TV holds its own, in many markets, the competition might evolve towards a “cable TV versus independent ISP” model, with telcos becoming weaker competitors.

There is only so much a telco can do to reduce costs, given dividend payout obligations and union workforces, plus pension obligations.

Ultimately, there will be growing questions about sustainability, the possibility of bankruptcies or other restructurings, with the possibility that new sets of owners might be able to create a more sustainable business model. As crazy as that now seems, it cannot be excluded as an eventual outcome.

ISP "Cherry Picking" Will Have Financial Repercussions

“Cherry picking,” as helpful as it is for new entrants to communication markets, reduces the addressable market for the largest service providers that collectively serve most consumers.

That can have the unwanted effect of causing price increases for all remaining customers, as fixed costs are spread over a small number of paying customers.

That noted, nearly all gigabit network construction occurs on a cherry-picked basis, where ISPs build in areas where there is customer demand. Those neighborhoods tend to be higher-income areas, it goes without saying.

That clear tendency to focus on the lowest-cost, highest-return geographic areas makes clear financial sense--both for incumbents and attackers--but also tends to conflict with the notion of universal service.

That is an obligation typically only one provider has in any market: the incumbent telco. Eventually, that obligation might become onerous, not only for the provider of last resort, but also for customers, a declining number of which will have to pay for the fixed costs of the whole network.

Economically, that is the same problem faced by nations where the number of retirees exceeds the number of working people who pay the taxes to support all the retiree benefits. Similar problems increasingly will be faced by individual firms whose markets are not growing fast enough to generate the revenue required to support retiree benefits.

If the new trend where smaller ISPs launch gigabit networks continues, and more importantly, if most major U.S. markets start to feature three large ISPs (cable, telco, Google), the problem of stranded assets will become a big problem for telcos and cable.

The companion issue is whether the new entrants can create networks affordably enough, and maintain operating costs low enough, to compete in markets where addressable market share might be about 33 percent of homes and other locations.

Traditionally, that has proven quite difficult on a “one service” retail platform. The difference now is the additional revenue provided by triple play services, where an ISP might serve one house, but sell two to three services, boosting gross revenue past $130 a month, where it might otherwise be $40 to $50 on a single-service basis.

Still, there are clear business model issues. All three of the core triple play services are under pressure. Consumers are abandoning fixed network voice, even if that trend tends to be obscured by the very fact of triple play bundling, where consumers rationally might conclude they are better off buying all three services, even if demand is high only for two services.

With the U.S. Federal Communications Commission moving towards licensing rules that would allow over the top linear video providers access to the same programming, on the same terms, as now purchased by cable TV, satellite and telco providers, the likelihood of new OTT suppliers is growing.

And even high speed Internet access, arguably the mainstay and anchor service for any fixed network service provider, increasingly is challenged by new suppliers offering gigabit access for $40 to $80 a month, a price that often is paid for rival services operating between 15 Mbps and 105 Mbps.

The biggest strategic changes are new services provided by suppliers with lower capital or operating costs, or both. That often means a cable TV operator or independent ISP.

In the United Kingdom, for example, cable TV providers supply the overwhelming number of the fastest connections. And “Project Lightning,” the new Virgin Media investment program, will extend higher speed access to about four million additional premises over the next five years.

After the investments, Virgin Media will increase its footprint by about 33 percent, increasing its ability to sell the fastest Internet access services to perhaps 66 percent of the country.