Comcast Will Look for Another Big Deal, but Not Domestic Consumer Access Assets

The Comcast decision to abandon its pursuit of Time Warner Cable might be viewed through the lens of competition policy, industry structure or product lifecycles.

One might speculate about whether the abandoned deal ultimately promotes investment, competition or innovation.

One can debate the impact on industry structure or future strategy choices. Some might see an impact on the linear video product itself.

But the deal actually might have very little impact in any of those domains.

Comcast might have a little less scale, and still lack a footprint in the New York market. But consolidation in the cable industry will continue, and no combination of mergers is likely to change the fact that the owner of Time Warner Cable assets will be the second-biggest operator, as presently is the case.

Comcast would not, in any case, had gained much share in video, though its leadership in the Internet access space would have increased significantly. As with other firms such as AT&T that have had big scale acquisitions blocked, Comcast will look elsewhere for growth.

That might include international, non-access assets or non-fixed access assets.

But the need to transform revenue sources and packaging does not change. Investment might be affected by regulatory uncertainty, but the degree of competition is increasing, so investment as a defensive measure will be necessary.

Nor will the continuing evolution of media be affected. The trend, for decades, has been in the direction of consumers watching “what they want, when they want to and where they want to.”

As AT&T pivoted elsewhere, so will Comcast. There will be consequences for Comcast, Time Warner, Charter Communications and others who would have been affected by a successful acquisition. But the dynamics of the market will not change.

It has been rather clear for some time that Comcast would not be allowed to gain more access market share (a general rule is that no single access provider is allowed to gain more than 30 percent share).

Comcast will look for another big deal. LIke AT&T, that is the way the firm has grown.

One simple observation: it is inconceivable that Comcast does not have a major mobile capability within a decade; likely within five years.

AWS is Profitable, and a $5 Billion Annual Business, with a $6 Billion Run Rate

The most interesting number in the Amazon first quarter earnings report was confirmation that Amazon Web Services indeed generates $5 billion a year in revenue and earned $1.6 billion in the quarter. This is the first time Amazon has reported quarterly revenue for AWS.

The other interesting numbers are AWS growth rates--50 percent or so--and the fact that AWS is profitable, with about a current $6 billion run rate annually. AWS earned $265 million in the quarter.

In the first quarter of 2015, operating cash flow increased 47 percent to $7.84 billion for the trailing twelve months, compared with $5.35 billion for the trailing twelve months ended March 31, 2014.

Free cash flow increased to $3.16 billion for the trailing twelve months, compared with $1.49 billion for the trailing twelve months ended March 31, 2014.

Net sales increased 15 percent to $22.72 billion in the first quarter, compared with $19.74 billion in first quarter 2014.

Excluding the $1.3 billion unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales increased 22% compared to first quarter 2014.

Operating income increased 74 percent to $255 million in the first quarter, compared with operating income of $146 million in first quarter 2014.

Net loss was $57 million in the first quarter, or $0.12 per diluted share, compared with net income of $108 million, or $0.23 per diluted share, in first quarter 2014.

Project Fi: Back to the Future

Google’s Project Fi contains a amount of irony. Though talk and text are flat rated (all you can eat), Internet usage is metered.

Think about that: consumer advocates always argue that people want and need unlimited usage, and it is only the “greedy” Internet service providers that want to match consumption with end user payments.

But Project Fi actually positions consumption-related pricing as a consumer good.

Beyond that, metered pricing, consumption pricing or per-bit pricing--take your pick--actually is a throwback to the earliest days of consumer Internet access. That was the way America Online, the first mass market dial-up ISP, priced Internet access.

People did not like it, and usage surged once AOL moved to unlimited pricing. Now Project Fi moves back to that older model.

Pricing is linear, and based on consumption.

That’s ironic. Linear pricing--metered usage--is the traditional way service providers generally have sold their products. Unlimited use was the innovation.

Now Project Fi insists that strictly metered consumption is, in fact, quite pro-consumer, compared to buckets of use that almost always feature breakage (consumers pay for what they do not use) or “overage” charges when they exceed their allotments.

Consumer advocates generally have argued such plans are not consumer friendly, but also have opposed metered usage as well.

Perhaps Google is trying to spur mobile ISPs to invest more in infrastructure (more than they seem already to be doing) by creating new incentives for supplying capacity. Ironically, ISPs have preferred metered pricing all along.

Comcast Drops Bid for Time Warner Cable

As had seemed increasingly likely, the Comcast effort to acquire Time Warner Cable now has been abandoned, Bloomberg reports. 

Comcast has not formally confirmed the rumor, but with the Federal Communications Commission signaling opposition, and the probsbly frank private meetings recently held by Comcast and Time Warner Cable with antitrust officials, it has seemed very likely the bid wouild be abandoned.

It appears that has happened. What happens next depends, in part, on what course Time Warner Cable might choose for itself. Other bids from Charter Communications are expected, but Time Warner could decide not to sell, but become an acquirer.

It does appear that history did repeat. The staff of the Federal Communications Commission had called for a hearing by an administrative law judge on the proposed acquisition.

In 2011, AT&T and T-Mobile USA dropped a planned $39 billion merger after the Justice Department filed an antitrust lawsuit to block the deal and the FCC issued a hearing designation order on the deal.

It appears the call for a hearing has had the same impact as the same sort of call did for the AT&T effort to buy T-Mobile USA.

How Long Before Comcast Ends Effort to Acquire Time Warner Cable?

If history provides any guidance, the Comcast bid to acquire Time Warner Cable is going to be withdrawn. The staff of the Federal Communications Commission has called for a hearing by an administrative law judge on the proposed acquisition.

In 2011, AT&T and T-Mobile USA dropped a planned $39 billion merger after the Justice Department filed an antitrust lawsuit to block the deal and the FCC issued a hearing designation order on the deal.

That would still leave Time Warner Cable “in play,” and another bid by Charter Communications is generally expected. In all likelihood, a successful Charter bid would create a new number-two U.S. cable TV company by customer market share.

Verizon and AT&T See Slight Impact from Marketing Wars, Apparently

With first quarter financial reports now in from both AT&T and Verizon Communications, it is possible to say that both firms seem to be holding up rather well, despite the heavy marketing pressure in the mobile segment of their businesses.

Churn rates are stable, average revenue per account is stable and gross revenue is up, though operating income dipped, year over year.

For the quarter ended March 31, 2015, AT&T's consolidated revenues totaled $32.6 billion, up 0.3 percent versus the year-earlier period.

More to the point, however, AT&T had first quarter mobile revenues of $18.2 billion, up 1.8 percent over the same quarter of 2014.

Some might point profits that were down 12 percent to $4.4 billion, but that is largely an accounting artifact, caused by the continuing shift of revenue to “Mobile Share” no-subsidy plans that result in higher device revenues but lower recurring service revenues.

Churn rates suggest AT&T and Verizon are not suffering as much as observers might have guessed from attacks by T-Mobile US and Sprint.

AT&T, for example, reported its best-ever first-quarter churn at 1.02 percent, down from 1.07 percent for the first quarter of 2014.

Still, margins are under slight pressure, in part because operating costs are higher. Compared to the first quarter of 2014, AT&T operating expenses were $27.1 billion versus $26.2 billion; operating income was $5.5 billion versus $6.3 billion; and operating income margin was 16.7 percent versus 19.3 percent.

Verizon grew total revenues 6.9 percent year-over-year, with a 35 percent operating income margin.

Verizon’s first-quarter 2015 operating income reached $8.0 billion, an 11.2 percent increase compared with the first quarter of 2014.

Verizon consolidated operating income margin was 24.9 percent in first-quarter 2015, compared with 23.2 percent in first-quarter 2014. Cash flow from operating activities increased to $10.2 billion in first-quarter 2015, compared with $7.1 billion in first-quarter 2014.

Verizon added 565,000 net retail postpaid connections in the quarter and had postpaid churn of 1.03 percent.

One might conclude it is difficult to ascertain the impact of current mobile marketing wars on the mobile business.

The issue: where is the account growth at T-Mobile US coming from, if not from AT&T and Verizon?  

Google Mobile Serivice "Project Fi" Launches

It is doubtful Google would name its new mobile service “Project Fi” if it were really aiming for a service with large numbers of customers. Instead, Google calls it a “program” that is “similar” to the Nexus hardware program.

In other words, Project Fi is a smaller scale effort to demonstrate what can be done. Google confirmed that Sprint and T-Mobile US will provide mobile connectivity for Project Fi.

Among the project objectives is pioneering what should be standard when the fifth generation mobile network standard is finished: the ability to connect to the best-available network, “right now.”

Project Fi will automatically select the best network, whether a Wi-Fi hotspot or a specific 4G LTE network.

When a voice session begins while connected to Wi-Fi, Project Fi will seamlessly transition from Wi-Fi to mobile networks so sessions are not interrupted.

Project Fi also uses cloud-based phone numbers, allowing customers to talk on any number of Internet-connected devices, not just phones.

Google also will test a “simple” approach to service plans, offering just one plan. For $20 a month customers get talk, text, Wi-Fi tethering, and international coverage in 120+ countries), with a flat $10 per GByte for mobile  data while in the U.S. and abroad.

:Since it's hard to predict your data usage, you'll get credit for the full value of your unused data,” Google says. “You only pay for what you use.”

Project Fi is in an “early invite” stage, using the Nexus 6 device.

If you live where we have coverage in the U.S., request an invite at fi.google.com to get started.

Mobile Internet Access Generates at Least $1.1 Trillion Globally, Every Year

Globally, analysts at Boston Consulting Group estimate a mobile Internet ecosystem annual revenue of $2.9 trillion a year. If spending percentages globally reflect the average of 13 countries--39 percent of total mobile ecosystem spending--that would imply mobile Internet access revenues globally are about $1.1 trillion annually.

Smartphone users in the U.S. currently spend an average of $1,450 per year on their phones, data plans, apps, and content, BCG estimates.

If 41 percent of mobile ecosystem spending is for apps and content, 42 percent is mobile access and devices 12 percent, then U.S. mobile consumers spend $594.50 annually on content and apps.

Mobile Internet access, at 42 percent, represents $609. Devices represent about $174 a year in spending.

Revenues generated by the mobile Internet ecosystem in 2013 amounted to $682 billion in 13 countries (Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, South Korea, Spain, the United Kingdom and the United States) that account for approximately 70 percent of global gross domestic product.

Internet access revenues range widely from about 18 percent of total ecosystem revenues in Japan up to about 58 percent in Brazil, and an average of 39 percent across the 13 countries. About 34 percent of mobile ecosystem revenue us earned, on average, by app and content providers.

52 Mobile Operators Have Deployed LTE-Advanced, 58% at 300 Mbps

LTE-Advanced supporting downstream capacity between 150 Mbps and 300 Mbps, with 50 Mbps on the uplink, now are commercially deployed by 52 operators.

Some 30 of the networks support the maximum 300 Mbps downlink speed, operating in 20 countries: Australia, Austria, Belgium, Estonia, Finland, Germany, Greece, Hong Kong, Jersey, Norway, Portugal, Romania, Russia, Singapore, Slovenia, South Korea, Spain, Switzerland, United Arab Emirates, and the United Kingdom.

Altogether, 64 operators have commercially launched LTE-Advanced systems, using frequency aggregation, in 39 countries, the Global mobile Suppliers Association says.

Some 116 operators, representing about 30 percent of LTE operators, are investing in carrier aggregation technology worldwide.

Globally,  393 operators have commercially launched LTE networks in 138 countries, according to data in its latest Evolution to LTE report. 107 operators commercially launched LTE service in the past year. GSA forecasts there will be 460 commercially launched LTE networks by the end of 2015.

Globally, some 858 devices (about 30 percent of all LTE devices) support speeds up to 150 Mbps, while 69 devices (small cells, routers, MiFis, smartphones and tablets) support 300 Mbps.

There also are 13 deployed LTE-Advanced networks in commercial use or trial supporting 450 Mbps, in Angola, Australia, Finland, Japan, Portugal, Qatar, Turkey, South Korea, Switzerland, UAE and the UK.

Networks Claim Verizon Skinny Bundle Violates Programming Contracts

It was inevitable that contract disputes would break out in the wake of the Verizon Communications decision to restructure programming options, creating “skinny bundles” that have optional content packs.

The reason is that standard contract clauses normally call for ad-supported networks to be carried on the “most popular” tiers of service. The new skinny bundles likely will not be the “most popular” tier of service.

The new packages start with a base package of about 35 channels, selling for $55 a month, but also including two of the optional channel packs, including themes such as children’s programming; sports; news; lifestyle; entertainment or popular culture.

So far, ESPN, NBCUniversal and Fox have said the new format violates their programming contracts with Verizon. Verizon says it is not going to back down, and is within its rights.

Verizon is not the only distributor to offer skinny bundles, but the other suppliers so far have been over the top providers. Make no mistake, this is a huge issue. If Verizon wins, we should expect to see more similar moves in the linear TV business, with a further shift in the fortunes of linear TV networks and distributors.

The Verizon Custom TV offer is the first offered by a linear TV distributor.  

30% is the Key Number for Either Comcast or AT&T Acquisition Efforts

If market concentration rules of thumb continue to matter, either the Comcast acquisition of Time Warner Cable or the AT&T acquisition of DirecTV will turn on “30 percent” thresholds.

If both mergers were approved, Comcast would have about 57 percent market share in high speed access service and about 30 percent share of the linear video subscription business.

The number that will cause trouble is the share of high speed access accounts.

AT&T with DirecTV assets would have about 17 percent share of the high speed access market and about 25 percent of the linear video subscription market.

That is why the greater concern is likely to be the Comcast acquisition, not AT&T’s purchase of DirecTV.

Is T-Mobile US Taking Share Mostly from Prepaid Providers?

At least so far, it is hard to see the margin-reducing or revenue-reducing impact of the U.S. mobile marketing wars on Verizon Communications.  And though we will know more shortly, some have argued it likewise has been difficult to detect the negative impact of U.S. mobile marketing wars wars on AT&T.

Some would note that Sprint saw a 14 percent quarter over quarter drop in average revenue per account (ARPA) to $132 per month, largely due to its "Cut Your Bill in Half" promotion, in the first quarter of 2015.

T-Mobile US, on the other hand, saw its ARPA increase by four percent quarter over quarter  to $121 per month.

Meanwhile, AT&T saw its ARPA stay flat at $143 per month, while Verizon saw a five percent drop to $143 per month, some estimate, though ARPA had grown by six percent in the fourth quarter of 2014.

Though thinking might change after AT&T announces its first quarter earnings, so far it appears that T-Mobile US in substantial part has been growing at the expense of other prepaid service providers, and not primarily at the expense of AT&T, Sprint or Verizon.

In fact, some believe that, at the end of the first quarter of 2015, all four national carriers gained accounts at the expense of prepaid providers. Tablet account additions complicate the picture, though.

Still No Sign Mobile Marketing War is Denting Verizon Revenue, Margin

At least so far, it is hard to see the margin-reducing or revenue-reducing impact of the U.S. mobile marketing wars on Verizon Communications.

If revenue growth is the key metric for most tier-one communications service providers, Verizon Communications was a winner in the first quarter of 2015. Operating revenue grew 3.8 percent. Operating profit margins were up slightly, year over year.

Mobile segment revenues grew 6.9 percent, year over year, while operating income profit margins were flat. Postpaid customer churn improved, both quarter over quarter and year over year.

Perhaps more surprising, fixed network revenues grew four percent, year over year.

Wireline operating income margin was 4.3 percent in first-quarter 2015, up from 1.5 percent in first-quarter 2014. Segment EBITDA margin (non-GAAP) was 22.7 percent in first-quarter 2015, compared with 22.5 percent in first-quarter 2014.

With AT&T also reporting first quarter 2015 results soon, we will have a better handle on what is happening, at the firm level, in the U.S. mobile market, especially regarding the source of T-Mobile US net customer gains, and the impact of promotions on Sprint and T-Mobile US revenue and profit margin.

So far, it is hard to see negative impact at Verizon.  

FiOS Internet penetration (subscribers as a percentage of potential subscribers) was 41.5 percent at the end of first-quarter 2015, compared with 39.7 percent at the end of first-quarter 2014. In the same periods, FiOS Video penetration was 36.0 percent, compared with 35.0 percent.

By the end of first-quarter 2015, 62 percent of consumer FiOS Internet customers subscribed to FiOS Quantum, which provides speeds ranging from 50 to 500 megabits per second, up from 59 percent at year-end 2014. The highest rate of growth is in the 75-megabit-per-second tier, to which more than 20 percent of FiOS customers subscribe.

Broadband connections reached 9.2 million at the end of first-quarter 2015, a 2.4 percent year-over-year increase.

Net broadband connections increased by 41,000 in the first quarter of 2015, as FiOS Internet net additions more than offset declines in DSL-based high speed access connections.

Rate of Return Regulation Now Drives Cost in Electrical Utility Business

If you have been in the telecom business for some decades--long enough to remember rate of return regulation--you know how different the business is today.

Some might start wondering whether a shake-up is needed in the electrical utility business that--even decades ago--was widely considered more stodgy than telecom.

Utilities still operate under rate of return regulations, meaning if they invest a dollar, they are guaranteed to earn more than a dollar on the investment.   

Rate of return regulation historically did not promote innovation in the telecom business, and did next to nothing to restrain spending or prices. Some might now be seeing similar problems in the electrical utility business, which despite all efforts has not yet been subjected more to market forces.

Families in New York are paying 40 percent more for electricity than they were a decade ago, the Wall Street Journal reports.  Meanwhile, the cost of the main fuel used to generate electricity in the state—natural gas—has plunged 39 percent.

Prices have not fallen because of rate of return regulations, in essence.

If you are a veteran of the telecom business, you know all about that.

Republic Wireless Wants to Pay You for Data You Don't Use

Republic Wireless is taking a different approach to data plan capacity not used in any single billing period. “What if you could get paid back each month for whatever cell data you didn’t use?” Republic Wireless Labs now says.  “Like, in money. Actual dollars credited back to your account.”

“If you signed up and were selected for Lab 1: Maestro, then having total control over your plan and the ability to get paid back for what you don’t use is exactly what you’ll be helping us test and figure out, this May,” said Republic Wireless. “What if you had total control over your plans and could appropriately size them for what best fits your needs?”

The issue Republic Wireless is tackling is generalized unease over prices and value.

“Our members want access to LTE coverage, but only four percent were willing to pay extra for an LTE plan,” Republic Wireless said. “On average, every single smartphone user is overpaying about $16/month for service they never use.”