Cablevision, Hulu Sign "First Ever" Deal

Cablevision Systems Corporation will offer the Hulu subscription streaming service to Optimum customers, becoming the first linear video provider to do so. The announcement contained no details about pricing or packaging, but it might be reasonable to assume the cost will be about $8 a month, the current price for a paid Hulu subscription, and that the tweak is that the content will be viewable directly from within Cablevision’s linear TV channel lineup.

In other words, Hulu likely will be offered in the same way a linear channel such as HBO is sold and packaged.

Some might say the deal adds value to both parties somewhat incrementally. Consumers already can buy Hulu directly, and can watch on TVs, PCs, tablets or smartphones. That likely will not change as Cablevision becomes a distributor.

But that’s where the incremental value might be created. Hulu gets a big distributor with a customer base and the ability to promote the service. Cablevision gets a new network nobody else offers as part of the linear package.

The move arguably adds a bit more momentum to the “over the top” trend.

The bigger impact plausibly could come if Netflix strikes a similar deal with another major cable TV company (in terms of subscriber share), for the simple reason that Hulu has relatively small market share among OTT providers, while Cablevision likewise has a limited footprint.

So far, only a couple of smaller cable TV providers (Suddenlink. Grande Communications, RCN and Atlantic Broadband) have signed deals to integrate Netflix into their channel lineups.

T-Mobile US Addes 1.8 Million Accounts in 1Q 2015

T-Mobile US reported revenue growth of 13.1 percent in the first quarter of 2015, on the strength of robust net account additions.

T-Mobile US had 1.8 million total net account additions in the quarter, marking two straight years of adding at least a million net new customers every quarter. Still, that was a slowdown from the 2.4 million net adds in the same quarter of 2014.

Some 1.1 million net adds were branded postpaid accounts, one million of those accounts being phone accounts.

At the same time, branded postpaid phone churn was 1.30 percent.

For the full year, T-Mobile US now expects to add a total three million to 3.5 million branded postpaid net adds.

T-Mobile’s branded prepaid net customer additions were 73,000 in the first quarter of 2015. Branded prepaid churn was 4.62 percent in the first quarter of 2015.

For the full-year of 2015, T-Mobile US expects adjusted EBITDA to be in the range of $6.8 to $7.2 billion, unchanged from previous guidance.

T-Mobile revenue rose to $7.8 billion from $6.88 billion a year earlier. But heavy promotions resulted in a first-quarter loss of nine cents per share.

At some point, some of us have noted, T-Mobile US would have to switch from rapid subscriber growth to actual profits. If the rate of subscriber growth continues to fall, then that time is coming.

Sprint might still continue with a focus on subscriber growth rather than profits, but a shift by either, or both firms would signal that the fierce marketing war, driven by those two firms, is about to wane.

Impact of 25-Mbps "Broadband" Definition

Conspiracy thinkers might see a pattern in recent decisions by the Federal Communications Commission to manipulate statistics on U.S. Internet adoption, even if each single decision has a logic of its own.

Beyond some greater inability to track progress, and some obvious marketing and strategic issues for entire classes of providers, it might be difficult to determine the impact--beyond universal service funding implications.

That might be considered odd, since the presumed reason for changing the definition was to spur faster investment in higher-speed networks.

Consider the decision to define “broadband” as a minimum of 25 Mbps downstream, in January 2015. Since access speeds are increasing, seemingly at a faster pace, it makes sense to periodically review definitions, at least for the purpose of determining performance levels relevant for government universal service purposes.

Oddly, the announcement about the speed redefinition began with the statement that “broadband deployment in the United States--especially in rural areas--is failing to keep pace.” The irony is that the new definitions make the “problem” bigger.

“The 4 Mbps/1 Mbps standard set in 2010 is dated and inadequate for evaluating whether advanced broadband is being deployed to all Americans in a timely way,” the FCC said.

“Using this updated service benchmark, the 2015 report finds that 55 million Americans--17 percent of the population--lack access to advanced broadband,” the FCC said.

Cynics might point out that redefining an issue to increase the number of incidents will logically create a bigger defined problem. Those who argue a higher definition will cause faster investment might argue the new definitions almost immediately will mean recipients of universal service funds will have to build at a minimum 25 Mbps, not 4 Mbps, to receive funds.

The impact on the broader market is unclear, in terms of investment incentives. Many commercial providers, especially those in the fixed networks segment, having long passed the 4 Mbps standard, arguably will not be much affected, however, as the market level of competition comes from the Google Fiber gigabit challenge, not the “minimum” 25 Mbps definition.

So changing the definition likely has little impact on many major commercial providers, in terms of investment incentives. 

But there are some odd implications, with high sector impact. Some Internet service providers have been redefined out of existence. 

That includes most satellite and fixed wireless ISPs, plus many rural telcos. Selling a 15-Mbps access service no longer qualifies as “high speed” or “broadband.”

And some of those service providers cannot increase speeds to 25 Mbps, across the board, for reasons related to lack of spectrum. If speeds higher than 25 Mbps are the future, those contestants face long term issues related to ability to compete.

Some might see other important implications, as well. Even most Long Term Evolution networks do not consistently deliver 25 Mbps, though they easily meet the 4 Mbps definitions. So, by raising the definition of “broadband” to 25 Mbps, the entire U.S. mobile industry was eliminated from contention.

Again, the result is a suddenly “bigger” problem, even if few really believe the actual state of high speed access has gotten significantly worse over the last year.

Also, the new definition meant Comcast, had it acquired Time Warner Cable, would have had at least 57 percent market share of “broadband” connections in the United States. By historical standards, that was far beyond the 30-percent share maximum that has governed antitrust thinking in the communications and video entertainment businesses.

So some might see ulterior motives. Others might see an understandable logic, less sinister but still designed to create problems, not solve them.

Students of organizational “mission creep” or development will note that organizations never declare victory and disband, when the original problem they sought to fix has been vanquished. Instead, they search for new missions.

Cynics might argue something similar was at work: definitional changes that dramatically affected the status and scope of a defined problem, with a bigger implied need for action to solve the problem.

Others might note that the fuzziness about Internet access has grown for some time, though. Classically, “broadband” was defined as any speed at or above 1.5 Mbps. That definition now is archaic, but has been replaced by a subjective notion that “broadband is what we say it is,” in essence.

That is perhaps unavoidable in a market where speed improvements, since the earliest days of dial-up access, have been increasing nearly at the rate Moore’s Law would suggest.

There arguably is no "conspiracy." But real issues are created. Comparing performance or progress over time will be tougher, since the definitions have changed. 

Many ISPs no longer can say they sell high speed access or broadband. In many cases, there are physical limits to progress, such as lack of access to additional spectrum. What policy changes can, or should, flow from that situation are unclear.

Amazon Business to Tackle $1 Billion U.S. B2B Market

Amazon Business, a customization of Amazon for business customers will not come as a surprise, any more than marketplaces for consumer services are a surprise.

Amazon Business is an expansion of what was once Amazon Supply, the wholesale site it launched in 2012. At it's peak, Amazon Supply had about 2.2 million products serving millions of business customers. Amazon Business certainly will be much bigger, boasting hundreds of millions of products.

In part, the effort reflects the size of the business products market. In 2014, the business-to-business market was about $1 trillion, according to estimates by the U.S. Commerce Department.

That is almost four times the size of the business-to-consumer e-commerce market that recorded sales of $263.3 billion in last year, according to the U.S. Department of Commerce.

B2B e-commerce also is growing slightly faster than U.S. online retailing—at an annual estimated rate of about 19 percent, according to Deloitte, compared with 17 percent for B2C e-commerce, as reported ed by the U.S. Department of Commerce.

1,000 Times More Data Center Processing to Support IOT in 5 Years?

Only about four years from now, the Internet of Things will need 750 percent more data center capacity in service provider facilities than it consumes today, according to a recent report by the market-research firm IDC.

At the same time, it is possible latency requirements will require offloading processing to the edge of the network.

The reason is the assumption that dense networks supporting highly mobile and distributed sensors and appliances will produce so much raw data, with a need to process so fast, that computing has to be offloaded from centralized data centers to edge processors of some sort.

Whether it will be possible to process fast, with latency of not many milliseconds, backhauling all data to data centers, is the issue. Many do not think that will be optimal, even if it proves possible.

Apple Earns 69% of Revenue from iPhones

If you ever wondered why “Apple Computer” is now simply “Apple,” it is because Apple is a mobile phone company, not a “computer” company. The Apple iPhone, in Apple’s second quarter of 2015, represented 69 percent of total revenue.

Apple had quarterly revenue of $58 billion and quarterly net profit of $13.6 billion in its most-recent quarter, up from revenue of $45.6 billion and net profit of $10.2 billion year over year.

Gross margin was 40.8 percent compared to 39.3 percent in the year-ago quarter and international sales accounted for 69 percent of the quarter’s revenue.

For the next quarter, Apple predicts its fiscal 2015 third quarter will feature

revenue between $46 billion and $48 billion.

Verizon Puts Muscle Behind A LA Carte and Streaming Strategy

Verizon wants to make omelets.  It has to break eggs.

Did Verizon Just Screw The Content Giants? http://m.seekingalpha.com/article/3106216?source=ansh $VZ, $DIS, $FOX, $FOXA

Level 3 And Verizon Agree To Share Cost Of Network Upgrades

That is the way large networks and Internet domains always have interconnected. And it makes sense.

When networks exchange roughly equal amounts of traffic there is no structural problem. When traffic is unequal,  the sending network imposes costs on the receiving network. "Sending network pays" is how it works.

And how it should work, in fairness.

Level 3 And Verizon Sign Interconnect Agreement: Agree To Share Cost Of Network Upgrades http://m.seekingalpha.com/article/3106406?source=ansh $LVLT, $VZ

ESPN Sues Verizon Over Skinny Bundles that Do Not Include ESPN

ESPN obviously sees the Verizon skinny bundle as a bigger threat than DirecTV’s skinny bundle. Verizon excludes ESPN from the base tier, relegating ESPN to an optional sports tier.

DirecTV does something similar, albeit on a smaller scale, by allowing consumers to purchase a basic tier without ESPN, though most of the packages do seem to include ESPN.

So Verizon’s approach likely is going to affect more consumers. Verizon has been sued, and DirecTV has not been sued.

55% of U.S. Internet Homes Buy OTT Video

Some 55 percent of U.S. households with Internet access now subscribe to an over the top streaming (OTT) video service, up from 44 percent in 2013, Parks Associates estimates.

Subscriptions are highest among households with a younger head-of-household, with 72 percent of households headed by those 18 to 24 and 71 percent of households headed by those 25 to 34 having an OTT service subscription.

That alone might not suggest a tipping point, or inflection point, is nearing. More significant are moves by content suppliers to create stand-alone streaming services not dependent on a prior purchase of a standard linear service.

AT&T Acquisition of DirecTV Seems Likely, for Good Reasons

As a rule of thumb, I tend to assume U.S. regulators will nix any acquisition by a market leader that produces an outcome where a single entity controls more than 30 percent national market share.

That math suggested Comcast would not be allowed to buy Time Warner Cable, since Comcast’s share of high speed Internet access would exceed 57 percent.

The only issue, after the Federal Communications Commission raised the definition of broadband to a minimum of 25 Mbps, was how much higher Comcast’s share would grow.

By way of contrast, an AT&T that has acquired DirecTV would still only have a maximum of 17 percent share of the U.S. Internet access market. The actual share, under the new 25-Mbps definition, is not clear, but would be less than 17 percent. And linear video share would not exceed 27 percent, in a line of business universally recognized to be declining, in any case.

That is why rumors of merger approval seem logical. Even if the acquisition consolidates one of the major linear video providers, the new entity has 27 percent market share, and faces almost-certain declines over the next five to 10 years.

What if Nobody Wants to be the "Carrier of Last Resort?"

AT&T has about 17 percent share of the U.S. Internet access market, assuming none of its lines now fail the new definition of 25 Mbps. Most consumers buying satellite Internet, and probably most customers buying fixed wireless services likewise now are purchasing Internet access, but not, strictly speaking, what the Federal Communications Commission calls “broadband” or “high speed access.”

Beyond the issue of FCC regulatory fiat redefining a few industries out of business (most satellite and fixed wireless access services), causing a statistical, overnight decline in “broadband” adoption in the United States, and rendering multi-year tracking of Internet access more difficult, there are other perhaps perplexing issues in the U.S. Internet access business.

In a competitive market, some of us would argue, the low cost provider wins. In the fixed network Internet access market, that is cable TV.

So it is noteworthy that Verizon has been shifting capital investment into mobile, and generally away from its fixed networks.

And even allowing for its use in a lobbying capacity, AT&T now says its own fixed network is more costly than that of the cable operators that now are the market leaders in high speed access, in the U.S. market. AT&T's fiber to the neighborhood network cannot keep pace with the bandwidth offered by cable and other competitors, AT&T has told the FCC.

So AT&T increasingly will have to shift to fiber to the home to keep pace, as Verizon already has done with FiOS.

The problem is that the new investment will occur in the context of declining profit margins in the fixed networks business overall. Voice revenue is declining, linear video is expected to decline, and cable has the more efficient, and faster, Internet access services.

Put bluntly, the ability of a telco--even a tier one telco--to compete against a well-capitalized cable TV company is doubtful, long term, in the fixed network business.

That might be a shocking conclusion. But evidence points in that direction. It is fashionable, perhaps even directionally correct, to say that the fundamental strategic importance of a fixed network is mobile backhaul.

But that statement also suggests the revenue potential of a fixed network is shrinking. Special access might have been a high-margin service that drove profits for networks that recovered their costs substantially from consumer services.

But such business-focused services (backhaul) were not huge gross revenue drivers.

It is too easy to argue that telcos will discover huge new revenue sources to revive the fixed networks business, so there is no strategic issue. It is possible such revenues will never be found, leaving cost reduction or exiting the business the options.

That does raise issues for regulators. What if no single service provider wishes to, or can afford to be, the “carrier of last resort?”

And if the intent is to create and sustain incentives for any service provider to take on that role, what has to change? We don’t have clear answers, yet.

Scarcity and Abundance Have Strategic Implications for Access Providers

We sometimes forget just how much the telco business model is built on scarcity. Only a few fixed networks are viable, long term, in any community.

How many facilities-based mobile service providers are viable, long term, in any country, remains a question, but the number is probably three to possibly four.

Also, with consumer bandwidths climbing into the gigabit range in some markets, speed is going to drop away as a relevant constraint on experience or business models, just as processor speed and memory have ceased to constrain apps and devices.

App and device suppliers long have understood the implications of abundance of bandwidth and processing power for their businesses. Abundance means lower retail prices are possible.

Bandwidth suppliers long have understood this as well, which explains the fear of "commodity dumb pipe" services.

But abundance always has been a key enabler in the Internet ecosystem, at least for app and device providers. It can be argued that firms ranging from Microsoft to Netflix have been built on the notion that neither bandwidth nor processing power or memory would be fundamental constraints on business models.

That model has not worked quite so well in the mobile service provider business, in part because spectrum available for communications use always has been scarce, and licensed access meant whatever resources were available would remain fairly scarce.

That is why unlicensed access, or releasing vastly more spectrum for communications uses, undermines service provider “scarcity” value.

In all, AT&T now holds spectrum licenses worth more than $91 billion, estimates Goldman Sachs analyst Brett Feldman. He also estimates the value of Verizon's spectrum at $79.4 billion.

The current equity value of all AT&T stock is $176.5 billion, implying that spectrum alone represents 51.6 percent of AT&T’s total equity value.

Verizon’s market value is $207.9 billion, implying that Verizon’s spectrum represents 38 percent of total valuation.

Feldman estimates that the U.S. mobile industry, plus Dish Network’s spectrum represents $368 billion in value.

All that could change dramatically in the future, though, as shared spectrum, unlicensed spectrum and dynamic spectrum alternatives are made possible. All those methods could reduce the amount of licensed spectrum mobile service providers have to buy or reduce the market value of current holdings.

To be sure, many proponents of unlicensed spectrum believe releasing much more spectrum in that way will reduce the scarcity value of licensed spectrum held by mobile service providers.

Dish Network owns rights to use spectrum worth perhaps $50 billion, if actually deployed, and virtually nothing if Dish Network does not put the spectrum into commercial use, or sell the rights to some other company able to launch commercial services.

T-Mobile US might own about $55 billion worth of spectrum, while Sprint owns more than $67 billion worth of spectrum, according to Goldman Sachs.

That value is based on scarcity. But what is scarcity is replaced by abundance?

Big Internet Winners Prospered Using Non-Traditional Revenue Models: Can Device and Access Providers Do the Same?

Radically-new business models are something of a rarity in the communications, computing or consumer appliance business, though rather common in the Internet applications space.

Google is the best example of a technology company--or a software company--creating a business model on advertising, not sales of computing equipment or “packaged software.”

To the extent Amazon is viewed as a technology company--not a retailer--it might be be the first to build a build a business model on e-commerce. But PayPal might be an even-better example.

Up to this point, consumer electronics suppliers, including smartphone suppliers, have generated significant application or content revenue streams, but still representing a minority of total revenues. What could happen in the future is the issue.

As device supplier Xiaomi might put it, the firm someday might make money the way that

Tencent and Alibaba do, namely by selling games or engaging in e-commerce, and not by “selling phones.”

That ambition would be quite rare, if realized. But such rare outcomes might ultimately be decisive for any number of eventual big winners in the Internet ecosystem.

Oddly enough, the traditional or legacy communications “app providers” (voice and linear video) are making less money from apps and more from “access.”

Where use of a network was only a prerequisite to selling the service, now “dumb pipe” access to Internet apps is a major, and growing, underpinning of both mobile and fixed network businesses.

Recall that consumer Internet access, easily representing a third of revenues for many firms, is a classic dumb pipe service, allowing consumers to reach app providers and facing profit margin pressures.

Voice and video are apps--managed services--still represent major revenue sources, but are dwindling, overall.

The broader point is that business model innovations are becoming essential. Over time, cable, telco and satellite providers will earn less money from legacy apps, and more from dumb pipe access operations Profit margins then will be key.

That might not be a challenge restricted to access providers. Few smartphone suppliers except for Apple and Samsung actually make any money selling phones. And even app suppliers or bundlers are likely to make as much money from transactions, e-commerce or advertising as they do from app sales.

Even if direct sales account for the bulk of sales revenue, such activities often do not generate much actual profit.

So the broader strategic issue is how successful most  suppliers in the Internet ecosystem ultimately will be in creating new revenue and business models based direct content and app sales, and indirect (sponsorship, transaction or e-commerce) revenue streams.

For some suppliers, revenue streams based on e-commerce or advertising, even when relatively small, could have outsized implications. Xiaomi, for example, sells smartphones almost at cost, hoping to create huge audiences for applications.

Apple traditionally has had the opposite model--offering content to drive sales of devices--but seems to be moving in the direction of greater reliance on app, transaction or content revenue streams (mobile payments, mobile apps, streaming video services).

In a direct sense, mobile service providers creating connected car services--and selling “just” 4G access to vehicles--are an example of efforts to drive higher sales of apps, not access.

Mobile remittance services (generally successful) and mobile payments services (relatively unsuccessful) provide other examples. Firms such as Verizon have, so far, made little progress in creating viable mobile streaming services, but the outcome is not determined, , and such efforts are bound to continue.

The ultimate problem, for most contestants in any Internet segment, is that the number of viable suppliers in any category might be quite limited. In advertising, Google and Facebook dominate. In mobile advertising, Facebook might be the bigger factor at the the moment. In the e-commerce-supported arena, Amazon is trailed by lots of retailers who have yet to make much of a dent, in terms of market share.

Internet service providers (telcos and cable TV firms) are entering new terrain. They historically have prospered by selling apps that require the use of networks. Now their legacy apps can be provided by third parties.

The one truly-new line of business is Internet access. But because of network neutrality, that is a dumb pipe business, by definition, in the consumer segment.

That might be a situation more contestants in the Internet ecosystem find themselves confronting, in the future.

All the effort that goes into creating and selling devices or access could wind up generating a relatively small portion of actual profit, even if essential to the profit mechanism.

That could happen in two ways. Device and access providers could fail to gain a significant role in the apps and transactions role, and ride a dumb pipe or commodity business to the bottom. In that case, access and devices simply is not a high generator of profits, even when generating lots of gross revenue.

In another scenario, the new apps and transaction businesses or will have successfully created app and transaction services of sufficient size to drive profit margins.

Across the ecosystem, actual direct sales (apps, devices, access) remain vital. But indirect revenue models increasingly will be important (commissions, fees, revenue sharing), as core products (devices, apps, access) face blistering competition.

To the extent the analogy fits, think Google, the first technology company to build a revenue model based on advertising, or Amazon, the first technology firm to build a revenue model on e-commerce, or PayPal, perhaps the first technology firm to create a revenue model based on transaction fees.

Unique Value of Mobility Remains, Even with Greater Wi-Fi Access

There has been a two-decades long line of thought that Wi-Fi eventually could become a full substitute for a mobile network. So far, Wi-Fi has proven to be more a complement than a competitor to mobile access. But fourth generation networks have raised new issues about mobile substitution that fifth generation (5G) networks might settle.

The argument always is that a “Wi-Fi First” or eventually “Wi-Fi Only” model can fulfill most user needs, relegating the mobile networks to “filling the gaps between hotspots.”

That might be true to a great extent. But the value of the mobile network always has been about filling the communication space between fixed locations.

Think about it: the great value of mobile was the ability to communicate “on the go,” between places. That still is the case for Wi-Fi access and mobile access, to a very large extent. It is precisely the ability to stay in touch, when on the go, that is the unique value of mobile services.

In fact, that will continue to be the case for connected cars and other vehicles, where a mobile connection supplies in-vehicle Wi-Fi. Mobility at high to moderate speeds, with session handoff, remains the unique value.

That is true for high speed handoffs when communicating from moving vehicles or even out and about, on foot. Even when very dense network of public hotspots adds “public places” to the venues where Wi-Fi can be used, the primary and unique value of mobility remains the abilty to communicate when all fixed services (wired or untethered) are unavailable.

Such connectivity still will be the unique value of a mobile service, even when Wi-Fi access in stationary locations is available. That was true even when mobile phones were about voice communications.

In that sense, the fundamental value proposition for mobility is not diminished by even dense networks of public Wi-Fi hotspots.