Internet Access Drove 86% of Comcast Net Adds in 1Q 2015

With the caveat that cable operations represent about 64 percent of Comcast revenue, revenue for Comcast access networks increased 6.3 percent to $11.4 billion in the first quarter of 2015 compared to $10.8 billion in the first quarter of 2014, driven by increases of 10.7 percent in high-speed Internet and 21.4 percent in business services.

Year over year, Comcast gained 407,000 high speed Internet access customers and 77,000 voice customers and lost 8,000 video customers.

About 37 percent of Comcast customers bought triple-play service. A third bought double-play services while 31 percent purchased only a single service from Comcast. In other words, about 70 percent of Comcast consumer accounts purchased a multi-service package.

About 70 percent of net product additions in the first quarter of 2015 were dual-play packages (two services), while Comcast lost about five percent net single-product accounts. Comcast had triple-play net gains of about 35 percent.

			Customers						Net Additions
(in thousands)			1Q14			1Q15			1Q14			1Q15
Video Customers			22,601			22,375			24			(8)
High-Speed Internet Customers			21,068			22,369			383			407
Voice Customers			10,865			11,270			142			77
Single Product Customers			8,605			8,399			(147)			(10)
Double Product Customers			8,656			8,890			116			140
Triple Product Customers			9,539			9,945			155			69
Customer Relationships			26,800			27,234			124			199

Operating cash flow for the Cable Communications segment increased 6.2 percent to $4.7 billion in the first quarter of 2015 compared to $4.4 billion in the first quarter of 2014, reflecting higher revenue, partially offset by a 6.3 percent increase in operating expenses primarily related to higher video programming costs, as well as an increase in advertising, marketing and promotion expenses, Comcast said.

The first quarter operating cash flow margin was 41 percent, consistent with the prior year period.

Google Fi Shows Value of Metered Pricing, Ironically

Google Fi might just have inadvertently managed to add some economic clarity to consumer bandwidth pricing, even if it is not so obvious.

Fi, the new Google mobile service in the U.S. market, provides unlimited domestic texting and voice usage, a rather standard policy now in the U.S. market. The major mobile providers now offer that feature routinely: domestic voice and texting now use “flat rate, all you can eat” retail pricing.

So you might argue there is little innovation on that front, for the moment, even if Google Fiber disrupted U.S. price-value metrics in the fixed network Internet access market.

Fi also charges for Internet access on the basis on usage: $10 per gigabyte consumed in a billing period. Again, that does not seem unusual. Virtually all major data plans are based on similar buckets of usage.

Where Fi is different is that, if a user does not consume it all, a rebate is paid back to the customer. That is the one area where Fi represents an innovation. The concept extends an idea T-Mobile US has put into place, namely allowing users to “roll over” data paid for in one billing period that is not used in that period.

AT&T has a modified plan that allows unused data allowances to roll over for one billing period.

Google Fi is the first to simply give the customer back his or her money when data allowances are not used.

The economic clarity is that a fundamental principle of economics is supply and demand equilibrium. In other words, a “fair price” (some might say the “right price”) for any product is the “market clearing price” where people want to produce as much as people want to consume.

In other words, when prices are at market clearing levels there are no shortages and no surpluses.

When prices are set “artificially” high or low, imbalances develop. In the water-scarce U.S. west, enforced low water prices encourage users to consume more when one would prefer conservation of the resource.

Capping apartment rents leads to lower than optimal production of new housing units, as pro-consumer as “rent ceilings” can appear.

Conversely, setting guaranteed high prices encourages overproduction.

So here’s where Fi might be profoundly important: by essentially operating on a “pay only for what you use” basis, Fi also is operating on a “metered usage” basis: consumption and price are in a linear relationship.

Contrast that with the way voice and text messaging now are handled: non-linear relationships between consumption and price. Why?

Supply and demand.

Voice and texting consume almost no bandwidth on networks, and people are demanding less of those products. There is, in other words, an oversupply of voice and text capacity, at the same time there is falling demand. Under such circumstances, offering “unlimited usage” causes no problems, since customers are self-limiting how much they want to use the resources.

Internet access providers have argued for decades that “unlimited usage” was a “right value-price” relationship when demand was low (early days of the Internet, using dial-up lines), and service providers were attempting to stoke usage (gain subscribers).

All that gets turned on its head after the visual web and high speed access develops. Then the value-price relationship is upset. There is too much demand when prices are set too low.

Metered pricing should lead to a better balance, even if, traditionally, many users and app providers have preferred unlimited usage.

And that is the presently-unique approach taken by Google Fi. Its “pay only for what you use” plans actually create incentives for users and suppliers. Users will pay more attention to their consumption, while suppliers will be able to benefit from additional units of consumption.

Ironically, either metered or unlimited plans can be “good for users and suppliers” under different circumstances. Unlimited plans can help grow demand for a new product, but also work when supply is abundant and demand is falling.

In other words, “unlimited” consumption plans work when new markets must be stimulated or older markets are naturally leading to declining demand.

Metered consumption might be the market clearing mechanism for established and strong markets.

In that respect, Fi might have the best approach.

Maybe U.S. Mobile Marketing War Mostly is Harming Prepaid Service Providers

When observers cannot agree what is happening in the mobile business you can surmise that something rather subtle is happening. So it is with the possible impact of marketing wars on U.S. mobile service providers, despite one or two uncontested observations.

There is disagreement about how the marketing war is affecting AT&T and Verizon. In fact, some might argue the impact on Verizon and AT&T so far has been quite slight. Churn rates for the two carriers are stable, average revenue per account is stable and gross revenue is up, though operating income dipped, year over year.

There is general agreement that T-Mobile US has gained, at least in terms of subscriber growth, while Sprint has suffered, in terms of subscriber count and average revenue per account.

But some would point to lower industry average revenue per account, which fell for a second straight quarter, to an average of $136/month, down from$141 in the fourth quarter.

The biggest drop happened at Sprint, where heavy promotions lead to a 14 percent dip, quarter over quarter, $132/month. But it is difficult to point to clear signs of serious financial damage at AT&T and Verizon.

One might argue it is “too early” to see the impact, but the marketing battles have been underway for more than a year. That should be enough time to discern impact, if there is any serious change.

Some might argue that most of what is happening, in terms of market share shifts, is that T-Mobile US is taking share from other prepaid services, not AT&T and Verizon.  

Voice Has 5 Years Left, as a $20 a Month Product, Cablevision Believes

Two on-going issues in the fixed network communications business were highlighted during the Charter Communications quarterly earnings report for the first quarter of 2015. The first is the reality of stranded assets--deployed access capital that does not earn a return.

“Our broadband penetration is now at over 40 percent of homes passed, and today at about 85 percent of our residential Internet customers subscribe to tiers that provide 60 megabits or more,” according to Tom Rutledge, Charter Communications CEO.

While the high percentage of customers buying service at a minimum of 85 Mbps is significant, the other salient fact is the roughly 60 percent of homes passed by the network that do not buy.

As a rough metric, that means the cost of the network “per customer” is more than double the cost of the network “per potential customer site.” That is a problem is every highly-competitive market.

One advantage mobile networks have, over fixed network, are the dimensions of the stranded asset problem. At an extreme, capital is not deployed where there are few potential customers. That is true for all networks.

But especially where potential customer concentrations are dense, mobile networks are less likely to strand capital.

The other issue illustrated is product maturity and decline. Asked about voice pricing, Rutledge acknowledged that prices are destined to decline further.

“Our view in the long run is that it has to go down,” said Rutledge. Today, fixed line voice priced at $20 a month is seen as providing value. “Will it be five years from now? Probably not,” said Rutledge.

Cable Ops Will Take Same Hybrid Approach to Streaming as They Did with the Network

U.S. cable TV operators are following a playbook long in place with respect to the core network architecture. The key notion is that a “hybrid” approach is best for transition periods between technology-driven eras.

For the core network, that meant replacing the all-copper “tree-and-branch” network with a “star optical core” plus a tree-and-branch distribution network. That hybrid fiber coax network remains the mainstay of the cable TV network.

On the other hand, Comcast already has signaled that for very high capacity access networks featuring a minimum of 2 Gbps of symmetrical bandwidth, a direct fiber to home network is needed.

So if the all-copper network was the past, hybrid fiber coax is the present, then fiber to the home is the future. But the key business insight is that the hybrid  approach is the best bridge to the future.

That likely will be the same approach cable TV operators take with respect to the evolution of their video services.

With the likelihood that Comcast will launch some sort of “over the top” video service, other cable operators are thinking that is a reasonable hybrid strategy as well.

“We've been considering ways to provide compelling services and packages at lower retail price points, with a lower content cost structure, and with the inclusion of direct-to-consumer services,” said Tom Rutledge, Charter Communications CEO. “We haven't found that product mix yet and we don't think anyone else has either.”

“What I was saying was that our view is that we can mix those products into products that we sell to satisfy the entire customers’ video needs,” said Rutledge.

So expect to see OTT streaming products coexist with linear products for quite some time. It is the same model cable TV operators took with respect to their core access networks.

Impact of Self-Driving Car: 80% to 90% Fewer Cars Needed

For small and medium-sized cities, it is conceivable that a shared fleet of self-driving vehicles could completely obviate the need for traditional public transport, a new study by the International Transport Forum of the Organization for Economic Cooperation and Development suggests.  

Shifting to driverless car services would deliver nearly the same mobility, but with just 10 percent of the total number of cars.

In other words, “TaxiBots” combined with high-capacity public transport could remove 90 percent of all cars in a mid-sized European city. Even without any public transportation, a system of driverless cars would remove 80 percent of cars.

The problems would occur during rush hours, though. Overall vehicle-kilometers travelled during peak periods would increase, in some cases quite substantially.

Where AutoVot car sharing happens without a high capacity public transport scenario, the increase could reach 103 percent. That would be an unmanageable situation, the report suggests.

Reduced parking needs would  free up significant public and private space. In all cases examined, self-driving fleets completely remove the need for on-street parking.

Additionally, up to 80 percent of off-street parking could be removed.

The size of the self-driving fleet depends on the robustness of the public transport system.

Around 18 percent more TaxiBots and 26 percent more AutoVots are needed in scenarios without high-capacity public transport, compared to scenarios where shared self-driving vehicles are deployed alongside high-capacity public transport.

Era of Communications "Used by People" Might be Ending

Debates about how access providers should deal with “over the top” apps never end, for a simple reason. It remains unclear which strategy is best, long term: embrace the dumb pipe access role; compete with OTT or adopt a hybrid approach.

And even if a hybrid approach is deemed optimal, so far it has proven exceedingly difficult for any access provider to compete successfully with the OTT brand names.

The debates about OTT strategy, one might argue, are indicative of deeper and more structural problems, namely the exhaustion of all revenue models based on services for humans. At some point, people derive only so much value from connected phones, PCs and tablets.

Once use of communications-capable phones and computing appliances reaches saturation (everybody has them, everybody uses them), there is almost no room for additional revenue growth.

So we are on the threshold of a truly new era, where service provider growth and relevance are no longer driven by the value of services provided to people, but by value provided to third parties (enterprises and app providers) with revenue models based on machines or devices with only an indirect end user value.

In other words, though people will continue to buy services that support their direct interactions with appliances and devices, industry growth will saturate in those areas. The new frontier, many now believe, will be in communications services related to sensors and edge processors not directly used by people.

In fact, one might argue the intense interest in “Internet of Things” is a tacit recognition that successive waves of business models built on selling applications to human beings are nearing a limit.

Up to this point, nearly all communications services have been sold to “people.” IoT implies the next wave of revenue will be built on sales of services to entities running networks of sensors and controllers.

In other words, many developments in the telecom business are indirectly built on a search for new business models, not mere technology or even architectures.

That applies as much to thinking about fifth generation mobile networks as IoT. Some might argue that, in addition to all the technology standards and features, 5G will succeed or fail largely as a platform for new revenue models and lines of business.

That switch to revenue growth by machines, not people, is why present debates about "over the top" services sort of miss the point. All services consumed directly by people will soon saturate. Machine communications is the future. If not, the industry likely has a tough and declining future ahead of it.

Exhaustion of Business Models is the Key Strategic Problem Faced by Telecom

“Exhaustion of business models” has been a key--perhaps the key--issue for the global telecom industry for at least three decades.

It might seem odd today, but several decades ago, global telecom profits were driven by long distance calling. For a variety of reasons predating VoIP, prices per minute of use plummeted globally between the 1970s and 2010.

That the business did not collapse was due to product substitution. Essentially, mobile services displaced the lost long distance revenues. Then text messaging became the first important “data” service, before mobile Internet access took the lead.

In the fixed networks part of the business, a similar displacement, or product life cycle, can be seen. Where voice once dominated revenue, revenue growth now is lead by high speed access or video entertainment services.

Now mobile voice and texting are losing their salience. In some markets, overall usage is declining, as is average revenue per user or average revenue per account.

That is the reason you hear so much about Internet of Things, connected cars, mobile payments or machine-to-machine services, mobile advertising or e-commerce.

Service providers know they must find big new revenue sources to replace lost legacy revenues.

In fact, there is relatively wide agreement that the historic business model--end users paying mobile operators for connectivity services--is itself exhausted.

That is why the search is one for services provided to devices, sensors, monitors beyond “people.”

That could include any number of new niche markets (vertical markets and apps). The 5G network will need to support a wide range of industry verticals but also a wide range of operator business models, including mobile virtual network operators (horizontal business models).

For fifth generation networks, there also will be a move to compete directly with fixed networks for high speed access.

DirecTV Would Create Triple Play for 47% of U-verse Homes

Though there are several reasons AT&T wants to acquire DirecTV, ability to rapidly supply linear video is among the key drivers.

AT&T has about 57 million high speed access locations, but only 30 million (53 percent) can get linear video service. The fastest way to create a triple play bundle for nearly half its consumer locations is to bundle DirecTV with U-verse.

Beyond that, DirecTV will throw off massive amounts of free cash flow, which is helpful for a firm that pays out most of its earnings in the form of dividends.

Eventually, DirecTV also would give AT&T the ability to create a triple play bundle out of region, where it does not have U-verse facilities. In those situations, AT&T would bundle DirecTV with mobile-supplied voice, messaging and Internet access.

Vodafone India Drops Roaming Fees As Much as 75%

In advance of mandates to lower roaming fees, Vodafone India has cut voice roaming fees as much as 20 percent, and text messaging rates as much as 75 percent. That is good for consumers but will hit mobile service provider revenues.

The rules on roaming fees are but one example of the profound impact regulators can have on communications markets, both enabling and shaping private actor decisions that directly affect end user welfare.

Investors and service providers also are speculating about what bottom line and top line impact might result from the recent Indian spectrum auctions that generated record $17.4 billion in spectrum costs for mobile service providers.

Observers say India’s carriers may have to raise prices (either for voice, or data, or both).

“While the costs of the industry are massive,” the average revenue per user (per month), or ARPU, of Indian telecom service providers is $2.96, compared with the international average of $35 to $40, according to the Cellular Operators Association of India.

The cost of acquiring spectrum in the recent Indian mobile spectrum auction were high enough that Bharti Airtel, Idea Cellular and Reliance Communications may take a sharp hit to earnings in 2016 and 2017, driven by interest charges on borrowed money spent to acquire spectrum, analysts estimate.

And most observers say retail end user costs are certain to rise, as the capital investment has to be recovered.

Bharti Airtel’s net profit could drop eight percent, starting in April 2016, US brokerage Morgan Stanley estimated. that would be mild, compared to what could happen at Idea Cellular and Reliance Communications.

Idea Cellular could see earnings before interest and depreciation drop 27 percent, while Reliance sees a plunge of 26 percent.

India’s Airtel provides more evidence that a mainstay product in the telecom industry--mobile voice--is following its cousin fixed network voice along the classic product life cycle.

Airtel's voice revenue per minute of use dipped 2.4 percent, compared to the prior quarter, while average revenue per user also fell in the quarter ending in March 2015.

Overall revenue grew 31 percent, year over year, due to mobile data revenues, counteracting the revenue pressure in the voice business. That also is part of a global trend, namely that mobile access to the Internet now is the revenue growth driver in many markets.

Idea Cellular, the third-largest provider by subscribers,  also reported a three percent quarter-on-quarter decline in voice revenue per minute.

The trend is long standing. Prices have been falling since at least 2007. Likewise, data revenues have been growing since at least 2006, in the Indian mobile market, while voice prices have declined almost steadily since then.

Some have criticized the Indian government for making government revenue a bigger priority than creating conditions where service providers can aggressively extend service. Calling taxes and charges “excessive,” outgoing Vodafone India CEO Marten Pieters said Vodafone pays 30 percent of gross revenue to the government.

FCC Rural Subsidies Might Not Find Takers: There Might Not be a Business Case

The Federal Communications Commission has increased Connect America Fund funding for “price cap” carriers by about 70 percent, but also raised the minimum required speeds to 10 Mbps, although the Federal Communications Commision has redefined “broadband” as a minimum of 25 Mbps.

The conditions include a requirement to serve all high-cost areas within a state, if a carrier accepts the funding. Predictably, not all potential affected carriers might support all of the requirements for funding.

In some cases, a service provider might conclude that the total impact of upgrades required to receive the high cost service area funds exceeds the revenue that can be earned by doing all the upgrades.

The new funding benchmarks range from $72.40 for 10 Mbps downstream/1 Mbps upstream service with a 100 gigabyte usage allowance, to $96.89 for 25/5 Mbps unlimited service.

High-cost fund recipients that are subject to broadband performance obligations are required to offer service at or below the benchmark rates to qualify for the subsidies.

The fundamental economic problem is that, in many areas, there literally is no traditional business case for providing service, at the rates which can be charged, and which most consumers would pay. When that is the case, even the subsidies might not be sufficient to create a positive business case for upgrading.  

That has been a problem in the past, and is one likely reason the amount of support has been raised.

If service providers decline to take the funding, other service providers will be allowed to bid for the the support. But that also is part of the subtlety: consumers might well prefer to buy mobile service, in place of fixed network services. And the cost of providing that service might be lower, using mobile, than using any fixed network approach.

No Consolidation Among Top-4 Mobile Operators is Possible; One Has to Fail

Even if one argues a four-provider U.S. mobile market is not sustainable, U.S. regulators have ruled out any consolidation among the top four suppliers. That means the market cannot consolidate to three strong providers by means of mergers among the contestants.

That leaves only one solution: one of the firms, or perhaps even a couple, would have to be so weakened that the top ranks shrink naturally to two or three providers, with a distant number four unable to keep up. Failure, in other words, is the only way the U.S. mobile market is going to consolidate.

That appears not to be the case in the video market.

Even 20 years ago it would have been possible to predict that, ultimately, both DirecTV and Dish Network would cease to be operating entities, and would have been acquired or merged with another entity. The logical candidates always have been Verizon and AT&T.

Now that AT&T has made the move to acquire DirecTV, half the prediction seems likely to be fulfilled. The issue now is what happens with Dish Network. Verizon likely has little interest, as Verizon thinks linear video is going to decline rather quickly.

That makes Dish Network exit options tougher. It never has seemed likely any cable TV operator would see the logic of acquiring Dish Network or DirecTV. If Verizon isn’t interested, the pool of buyers gets very thin, one might argue.

Likewise, some have argued that, long term, the U.S. mobile market simply cannot support four major national suppliers. But it is hard to see, at the moment, how that consolidation would happen.

In fact, the only scenario that would reduce immediately and clearly reduce the number of suppliers is the one development regulators will not presently support: Sprint merging with T-Mobile US, or either AT&T or Verizon buying T-Mobile US or Sprint.

In other words, none of the four leading national providers will be allowed to merge. That doesn’t mean there will not be acquisitions; there simply won’t be any mergers of the top four firms.

“I have always said on consolidation, it’s not a matter of if it’s when and how and now I’m going to add and who, because I think as we think ahead you need to think I still reiterate that in five years we will think it comical that we thought about the  industry structure as the four major wireless carriers,” said T-Mobile US CEO John Legere. “So I think you need to think about the cable industry and players like us as not competitors but potential partners and alternatives for each other in the future.”

That would not necessarily reduce the number of providers from four to three, as a firm such as Comcast would still remain in the market. But a Comcast acquisition of either T-Mobile US or Sprint would give the acquired company the heft to secure its number three spot in the market on a long-term basis.

On the other hand, it always is possible that Dish Network might also try to acquire T-Mobile US, to transform itself. That likewise would not immediately reduce the number of leading mobile providers.

So, like it or not, no consolidation of the U.S. mobile market is possible by means of any mergers among the top four providers.

Instead, one of the firms would have to be weakened so much that it essentially drops from contention. Weakened sufficiently, the number-four provider might well be acquired by a firm that has a different business model, and essentially does not compete directly with the leading three providers.