BT Outlines Strategic Imperatives: Most Service Providers Face Similar Challenges

BT’s prospectus related to its acquisition of EE assets contains the expected statement of risks.  

The document warns that BT operates in an industry featuring “high levels of change; strong and new competition; declining prices and, in some markets, declining revenues; technology substitution; market and product convergence; customer churn; and regulatory intervention

to promote competition and reduce wholesale prices.”

Those who have read such documents will not read too much into such clauses. A reasonable person might quip that if a company really believed such risks were likely, and that the firm could not cope, that firm would not attempt the acquisition.

On the other hand, it is hard to dispute the general thesis that BT and EE operate in a tough, challenging and possibly worsening business.  

Revenue growth, even in the fast-growing mobile business, has slowed dramatically. Global mobile service revenue in the first half of 2014 grew  just 0.5 percent, compared to the same quarter of 2013, to $385.5 billion, according to Infonetics Research.

“Increased competition has led to a decline in the prices which EE charges for its mobile services and is expected to lead to further declines in pricing in the future,” the document notes.

In addition, BT warns that the rate of adding net new customers could shrink, churn could increase, revenue and market share could fall.

BT obviously believes it can deal with the challenges. But the statement of challenges neatly summarizes industry challenges that mostly are occurring on a global scale. If the global telecom business continues to grow--and many believe it soon will cease to do so--it will not be easy.

We can disagree about how much new revenue some communications service providers will have to create over a decade’s time, to replace lost legacy revenues.

One working hypothesis is that service providers in developed markets, in particular, will have to replace about half of current revenue over about a decade. That prediction is based on past experience, where the leading revenue category--long distance voice--experienced precisely that rate of decay.

Then many service providers found they had to replace lost voice revenues with high speed Internet access, mobility and video entertainment revenues. Many expect the rate of replacement will ultimately work out to a loss of half of voice revenue over 10 years, and its replacement by other sources.

If global telecom revenue is about $1.6 trillion to $2 trillion, and assuming about half the revenue is earned in mature markets, then the revenue subject to disruption ranges from $800 billion to $1 trillion.

Half of that represents $400 billion to $500 billion. That, hypothetically, is the potential amount of global revenue that might be lost, and would have to be replaced.

So BT’s prospectus, though containing much required legalese, still captures the magnitude of coming changes, and the seriousness of the response.

How Fast will IoT, M2M Commercial Use Cases Develop?

Timing of investment always is tricky when a brand-new industry segment or product is being introduced. But the pace at which demand develops also is an issue.

One might point to the mismatch between investment in low earth orbit satellite constellations and market demand; the investment in application service provider businesses that faltered when demand proved insufficient to support most of the new entities.

In the mobile business, early investments in third generation mobile spectrum came at too high a price to allow immediate recovery of the capital investment.

Those dangers will exist for firms such as Bouygues Telecom, which is building a dedicated LoRa (long range) network to support Internet of Things (IoT) and M2M network offerings. Bouygues expects to operate in 500 towns and cities by the end of 2015.

Bouygues Telecom, working with Semtech, Sagemcom, Eolane, Adeunis and Kerlink, has been testing LoRa with “several major industrial customers.”

Bouygues is not the only European mobile operator investing in LoRa capabilities. Fastnet and KPN already have done so, while Belgacom and Swisscom also are preparing to introduce LoRa infrastructure.

All of that activity aims to create the network access capabilities to support M2M and IoT applications requiring long battery life and low bandwidth, bursty communications. The low-power wide-area (LPWA) technology is designed to support devices operating 10 years, using standard batteries, before requiring a battery swap.

How fast such markets will develop is the unknown. LoRa supporters argue the platform can support smart parking, building surveillance, sound monitoring, people detection, traffic management, street lighting management, domestic waste management or billboard displays.

Fire detection, air pollution, snowfall measurement, avalanche prevention, flood and drought monitoring or earthquake detection systems might also benefit.

Monitoring of water supplies, chemical contamination detection, swimming pool monitoring, seawater pollution measurement, leak detection and tide monitoring also are other applications.

Up to this point, smart electricity/water/gas meters have provided much of the early commercial deployment.

Tracking of vehicles, bicycles, objects of value, animals or people also are feasible apps, as are safety and rescue services.

But many commercial applications are expected in the industrial areas of the econmy, such as for supply chain control, mobile payments, smart shopping or shelf stock rotation.

Logistics and industrial or agricultural monitoring provide many potential examples.

Many see eHealth apps as well.

The trick will be matching investment to expected development of commercial apps requiring use of the network in volume. It always is tricky.

GM Expects to Make $350 Profit on Auto LTE Services

General Motors believes it will generate $350 million in additional profit between 2015 and 2018 from fourth generation Long Term Evolution services (4G LTE) mobile broadband in its cars and trucks.

GM has suggested 4G LTE in GM cars will cost between $5 and $50 per month for data on top of the $20 to $30 per month that owners pay for OnStar telematics.

A 200 MB per month service plan costs $5 ($10 without Directions & Connections plan).

The 1 GB per month service costs $15 ($20 without Directions & Connections). The 3GB per month plan costs $30.

The 5 GB per month plan costs $50.

A day usage plan including 250 MB for one day costs $5.

Users also can buy a 10 GB plan, allowing usage over 12 months, for $150 ($200 without Directions & Connections).

AT&T Share Plan customers can add the car service for $10 per month per GM car.

7% of U.S. Consumers Substitute Mobile Access for Fixed Access

About seven percent of U.S. residents own a smartphone but do not buy fixed network high speed access service at home, and therefore rely on their smartphones for access. That data point provides some evidence about consumer ability to substitute mobile access for fixed Internet access.

About 15 percent report they have a limited number of ways to get access to the Internet aside from using their phones, according to a study conducted by the Pew Research Center.

Those finding point out the growing role of mobile Internet access, especially for some groups of consumers, as well as the changing context of “Internet access,” which now includes a variety of access methods.

Today nearly 66 percent of U.S. residents own a smartphone and 19 percent rely to some degree on a smartphone for online access.

Using a broader measure of the access options available to them, 15 percent of Americans own a smartphone but say that they have a limited number of ways to get online other than their cell phone.

Those of you familiar with Internet access trends in the developing world will not be surprised to find that smartphone-only Internet access is correlated with income, education and age.

About 15 percent of U.S. residents 18 to 29 years old are heavily dependent on a smartphone for online access.

Some 13 percent of U.S. residents with an annual household income of less than $30,000 per year are smartphone-dependent, compared to one percent of residents in households earning more than $75,000 per year.

Likewise, some 12 percent of African Americans and 13 percent of Latinos are smartphone-dependent, compared with four percent of whites.

U.K. Poll Finds 33% No Longer Talk on Their Phones

We still call the devices “phones,” but “voice” was not on a list of the top 10 most-used mobile phone features in a recent poll of 1,000 people in the United Kingdom, conducted by Oxygen8 Group.

In fact, 33 percent of respondents claim they no longer use their phones to make or take calls.

Granted, the online poll appears not based on a randomizing process, so likely is not representative of the “typical” user, but the results are a surprise, nonetheless.

source: Oxygen8

Messaging Apps are Really Sticky

“Stickiness” long has been among the important features of any app or site. “Stickiness” means new users stick around and become regular or habitual users, while regular users become engaged users that do not churn out for another rival app or experience.

By those measures, messaging apps are highly sticky, meaning new users tend to become regular users, and regular users are engaged enough that they are “loyal.”

Retention rates of messaging apps outperform the average of all apps, according to Flurry.

In fact, messaging app retention is 1.9 times better than the average app after one month and 5.6 times better than the average app after one year. After 30 days, some 36 percent of people continue to use a new app, compared to 68 percent of people using a new messaging app.

After six months, just 18 percent of people who first used a new app continue to use it. By comparison, about 62 percent of people who started using a messaging app continue to do so.

After a year, just 11 percent of people who tried a new app still use it, compared to 62 percent of people who tried a new messaging app a year ago.  

Messaging apps’ daily use is 4.7 times higher than the average app, Flurry says, while the average daily use of an app across all categories is 1.9 times.

Messaging apps are used, on average, almost nine times every day. Most other apps get used less than twice a day.

Verizon Dismisses Wi-Fi-Based Mobility. But Just Wait

It never is unusual when a major incumbent dismisses a new rival offering a lower-end product without all the features of the existing product. That happened when Skype and other VoIP products started appearing, or when instant messaging services arose.

Cable TV operator business communication services arguably were “not as good” as service supplied by the historic suppliers.

More than 45 years ago, MCI’s long distance service was not as good as AT&T’s service.

So it will come as no surprise that Verizon argues any Wi-Fi-only mobile service, or even a Wi-Fi with default to mobile service offered by cable operators might not “be as good” as Verizon’s arguably industry-leading service.

One present issue is the seamlessness of transitions between Wi-Fi networks and mobile networks. But it seems only a matter of time before that capability improves dramatically. Seamless use of any available network is, in fact, a design goal for coming fifth generation networks.

So it would not be surprising is a present weakness disappears over time, as it has in many other segments of the business, when new technology, networks and platforms are used to attack a legacy business.

India Mobile Prices are About to Rise

It is a truism that consumers (buyers) ultimately pay for all supplier costs of doing business. So it is that Indian mobile consumers are going to pay for all the spectrum recently purchased by the leading Indian mobile service providers.

That means retail prices are going to climb.

“We believe that telcos are likely to raise prices in response to high spectrum prices,” said Fitch Ratings. Also, “most telcos will report negative free cash flow in 2015 as they need to pay a quarter of the committed amount up front.”

At the same time, the spectrum acquisitions will put pressure on balance sheets and cash flow, limiting supplier ability to invest in networks and compete. That, in turn, means the Indian mobile market will consolidate from about 10 contestants to six in the wake of the recent spectrum auction, says Fitch Ratings.

India's spectrum auction raised US$17.7 billion, a sum that now will have to be raised or shifted from other uses, and will prove too heavy a burden for some contestants, Fitch believes.

The biggest four mobile companies--Bharti Airtel, Vodafone, Idea Cellular and Reliance Communications--won 82 percent of the licenses. Bharti spent about US$4.7bn. Vodafone invested US$4.2 billion.

Idea Cellular committed US$4.9 billion, while Reliance spent  US$693 million.

As logical as it might be for governments to view spectrum auctions as a way to raise money, spectrum costs ultimately are paid for by consumers who buy mobile services.

As mobile operators seek to recover the sums spent on spectrum, they primarily will have to turn to retail buyers of mobile service. On the other hand, consolidation might help the surviving carriers raise prices.

One Way or the Other, U.S. Cable TV Market Changes

Bright House Networks might be called a consolation prize for Charter Communications if the Comcast bid to buy Time Warner Cable is approved by regulators. As structured, a Charter offer to buy Brighthouse is contingent on regulator acceptance of the Comcast offer.

Charter had made a bid of its own to buy Time Warner Cable, but its offer was topped by Comcast’s own offer. The $10 billion offer for 2.5 million subscribers values Bright House at about $4,000 per subscriber, a valuation metric not used in the broader telecom business.

U.S. cable TV operator rankings will change, in almost any conceivable set of decisions and deals. Comcast, which became the largest U.S. cable TV operator when it acquired the assets of AT&T Broadband, was trailed by Time Warner Cable as the clear number two cable company, ranked by number of subscribers.

If Comcast is successful in gobbling up Time Warner Cable, Charter gets Bright House, creating a new number-two provider for the first time in decades. For decades, Time Warner has been the second-biggest U.S. cable TV provider, behind either Tele-Communications Inc., which sold to AT&T, or AT&T Broadband itself, which then was purchased by Comcast.

Charter has held the number-three spot in the rankings, but with a wide gap between it and a Comcast that has added Time Warner Cable.

If the Comcast bid is scuttled, observers expect Charter to reemerge with a bid to buy Time Warner Cable. That would also create a new number-two provider, but far larger than a Charter that had purchased Bright House.

AT&T Launching Gigabit Service in Cupertino, Calif.

AT&T will launch its “GigaPower” 1-Gbps Internet access network in Cupertino, Calif. The symmetrical network is the first to be supplied by AT&T in California. AT&T also said it is considering other San Jose areas, including Campbell, Mountain View and San Jose, as candidate municipalities for the service, as well.

In April 2014, AT&T announced it was evaluating deployng GigaPower in as many as 100 communities.  AT&T already has deployed the service in neighborhoods in Austin, Dallas and Fort Worth, Texas.

GigaPower networks also are being deployed in Charlotte, Raleigh-Durham, Greensboro and Winston-Salem, N.C.; Houston and San Antonio, Texas;  Jacksonville and Miami, Fla.; Nashville, Tenn. and Overland Park, Kan.

CenturyLink, for its part, is building symmetrical gigabit service now to residential and business customers in select locations in 17 cities, serving residential and business customers in 11 cities, including Columbia, Mo., Denver, Jefferson City, Mo., Las Vegas, Minneapolis-St. Paul, Omaha, Orlando, Portland, Salt Lake City, Seattle and Platteville, Wisc.

CenturyLink is selling gigabit services to business customers in Albuquerque, N.M., Colorado Springs, Colo., Phoenix, Sioux Falls, S.D., Spokane, Wash. and Tucson, Ariz.

Google Fiber Files Paperwork to Support Operations in Colorado

Google Fiber has filed paperwork for Google Fiber to operate in Colorado, though Google Fiber says it has no immediate plans to construct a gigabit network in Denver. 

The filing only means Google Fiber could base equipment and employees in Colorado, some note.

CenturyLink might not be so sanguine, as that firm has ramped up gigabit Internet access offerings in a number of Colorado communities, including Denver. 

"Bandwidth Doesn't Matter Much"

There are lots of reasons why Internet access headline speed and actual end user experience vary so widely, and why, for a typical user, higher speeds (capacity) do not translate into enhanced experience.

In fact, some would argue that more bandwidth doesn't matter much.  

The amount of resource sharing can be affected by headline speed, as when multiple users share a single access connection, either at work, home or a public hotspot.  

Ofcom, the U.K. communications regulator, has found that, for any single user, speeds below 5 Mbps do affect end user experience, on the local access link. Speeds above 10 Mbps, however, have negligible or no impact on end user experience.

The caveat is that experience can benefit if a single connection is widely shared.

On the other hand, one might well argue that latency is the bigger problem for most users, accessing most applications, most of the time. That means better latency performance is an important objective for ISPs and app providers.  

source: Mike Belshe

The larger point is that headline speeds mostly are about marketing platforms, not end user experience, once per-user local connection capabilities reach 10 Mbps per user.

Mobile Traffic Gets Asymmetrical

Oddly enough, for networks designed for symmetrical traffic, Internet traffic now drives bandwidth demand on mobile networks, and that traffic is highly asymmetrical, one reason access to Wi-Fi and other non-traditional networks has become so important.

Telefónica O2’s customers, as an example, are using 60 percent more data than they were 12

months ago, and 600 percent more than at the end of 2010, according to Real Wireless.

The uplink:downlink ratio, on a mobile network supporting 3G or 4G, is now about 1:7, and much of the downstream traffic is bandwidth-intensive video.

Eventually, most believe, new Internet of Things sensor traffic will add other types of load, namely demand for smaller messages of lower bandwidth, but requiring low power performance and high reliability.

LTE was not optimized for this type of usage, so Wi-Fi and other specialized connections

will likely be important.

That is why spectrum sharing, and the move towards dynamic spectrum allocation, are cornerstones of Ofcom’s plan to open up more spectrum for mobile broadband. Currently, around 29 percent of spectrum is shared between public and private sector users, and increasing that percentage is vital to achieving the government goal of opening up 500 MHz of new sub-5 GHz frequencies.

Cloud-based services featuring constant streaming of data and content, rather than

more periodic application and data downloads, also are affecting thinking about the design of networks.

The GSMA believes that mobile cloud traffic will account for 70 percent of total by 2020, as compared to 35 percent in 2013.

While the dominant design of a mobile network will continue to be based on support for roughly symmetrical traffic, future requirements will be for support of asymmetrical traffic.

AT&T "Harvest" Strategy is Not New; DirecTV Buy Makes Sense

Some have questioned the wisdom of AT&T’s bid to acquire DirecTV, the argument being that the capital is better invested elsewhere, while the linear video business is declining.

AT&T thinks differently, and perhaps partly because of its historical legacy and business culture. Keep in mind that AT&T (the former SBC) grew primarily by acquisition, organic growth notwithstanding.

Also, AT&T contains many executives who remember vividly the former independent AT&T’s strategies related to a declining business (long distance calling). While attempting to create new replacement revenue streams, AT&T harvested its declining, but substantial long distance business.

That is what AT&T sees in linear video, a mature business that throws off enough cash flow to be interesting, as the legacy business slowly erodes. Yes, there are risks. If the business declines precipitously, the gambit will not play out so well.

But AT&T is betting it will see what it has seen in the past: a major legacy business declining at a predictable rate.

Precisely what happens to the linear video subscription business once over the top streaming alternatives proliferate is as yet uncertain. But it is hard to imagine aggregate revenue increasing, and a stretch to think revenue will be no worse, but no better, than at present.

The best scenario for AT&T is gradual revenue descent, at predictable rates.

And there is reason to believe new alternatives will have incremental impact. Though a full-blown transition to “every channel is available, a la carte” would be more damaging, that does not seem to be the general pattern for developing streaming services.

Instead, the general pattern is smaller packages of channels, not full a la carte sales.

The economics of full streaming access of a la carte channels, should that be the dominant model, arguably would be worse for the ecosystem than a linear model.

Consider the Sling TV package of 20 streaming channels. That “skinny” bundle includes ESPN.

In a full a la carte regime, where a channel such as ESPN could be purchased by itself, the implied cost, at a revenue neutral outcome, would be more than $36 a month, MoffettNathanson analysts have estimated.

Obviously, Sling TV is being sold for far less than the implied cost of ESPN alone, on a revenue-neutral basis.

The same problem is faced by other less-popular channels. Disney might cost more than $8 a month. but HGTV’s implied cost might cost only $1.42 a month.

Many observers believe fewer channels will be viable once on-demand and a la carte content viewing becomes easy and affordable. The reason is simply that the implied cost of a single channel is more than a reasonable consumer would pay.

So the context for AT&T’s bid to buy DirecTV is not that linear video is a growth business; it is not. The expectation is that DirecTV will throw off huge amounts of cash flow, despite a shrinking overall business, long enough to help AT&T make a transition of revenue sources.

Yes, there are risks. But AT&T has done it before.

Sling TV will Cannibalize Dish Network Linear Video, says CEO Charlie Ergen

A recurring phrase used by Dish Network CEO Charlie Ergen, when asked about his plans for monetizing Dish Network’s spectrum holdings, is that “we are not suicidal.” In other words, Dish Network does not intend to deploy or monetize those assets in ways that destroy shareholder value.

“Wireless is an oligopoly,” he noted recently. So that means “we see working with others, not AT&T or Verizon.” In other words, should Dish Network decide to create a retail or wholesale network, it is not likely to build its own facilities, but lease them.

“Optionality” is a concept Ergen has relied on it the past, as well. In other words, get spectrum and then see what can be done to monetize it. “Short term, we had to get the licenses,” Ergen said. “Then we need to get handset compatibility.”

“We will see where it goes from there,” he said. But Ergen also said he will wait to see what happens “with the two big mergers,” referring to Comcast’s bid to acquire Time Warner Cable, and AT&T’s effort to buy DirecTV.

When Ergen says “we don’t know for sure what we’re going to do,” that likely is quite accurate. “Our dream is to compete with AT&T and Verizon, but we’re not suicidal,” Ergen said. “Whatever we do, it is long term value enhancement.”

Ergen also was honest about another thing: “without our spectrum, we would have had to sell.” In other words, like DirecTV, Dish Network would have been in an untenable situation as a stand-alone satellite TV company.

But Ergen has been more willing to cannibalize his legacy revenue streams to remain a leader in the new business he sees emerging, much as Disney has been in the forefront of streaming, when other peers are more hesitant.

That’s a somewhat unusual strategy for any firm that is a leader in its space. And Ergen does believe even Sling TV will cannibalize Dish Network’s linear subscription business. But it is the future. In the past, Ergen has said that if he were starting in the video entertainment business today, he might not use satellite delivery.