High Speed Access Up, Video Flat, Voice Down in U.S. Fixed Network Business

It is easy enough to describe the fundamental trends in the U.S. fixed network consumer services business. People are adding high speed access accounts. The linear video business is flat. The voice business is shrinking.

But there are market share shifts as well. Cable companies are winning virtually all the net new accounts in Internet access and video categories.

Leichtman Research Group says the the 17 largest cable and telephone providers in the United States, representing about 95 percent of the market, acquired nearly 1.1 million net additional high speed Internet access subscribers in the first quarter of  2016.

The 13 largest pay-TV providers, representing about 95% of the market, added about 10,000 net video subscribers in the first quarter of  2016, compared to a gain of about 170,000 subscribers in the first quarter of 2015. Most of the suppliers now are counting both linear and OTT accounts in those totals, it should be noted.

The only question in the fixed network voice business is how fast lines are being abandoned.

source: Statista

	Subscribers at End of 1Q 2016	Net Adds in 1Q 2016
Cable Companies
Comcast	23,767,000	438,000
Time Warner Cable	13,640,000	327,000
Charter	5,727,000	155,000
Cablevision	2,828,000	19,000
Suddenlink	1,253,000	30,000
Mediacom	1,114,000	29,000
WOW (WideOpenWest)	722,300	9,800
Cable ONE	508,424	7,183
Other Major Private Cable Companies*	6,775,000	50,000
Total Top Cable	56,334,724	1,064,983
Phone Companies
AT&T	15,764,000	(14,000)
Verizon	9,218,000	(10,000)
CenturyLink	6,056,000	8,000
Frontier^	2,468,600	24,600
Windstream	1,092,000	(3,100)
FairPoint	311,323	193
Cincinnati Bell	292,400	5,000
Total Top Phone Companies	35,202,323	10,693

Cloud Workloads to Nearly Triple in 5 Years

The cloud computing “wars” are “entering a new phase,” with good implications for Amazon.com and bad implications for Oracle, SAP and other traditional IT vendors, including Cisco, JP Morgan analysts Mark Murphy, Doug Anmuth, Sterling Auty, Rod Hall, and Philip Cusick said in a research note.

The authors base their work on a survey they conducted of 207 chief information officers at companies with a budget of $600 million or more annually, making it in their view a unique window into the preferences and intentions of “large Enterprises.”

One of the main takeaways is that use of the public cloud is set to rise dramatically. CIOs report that 16.2 percent of workloads are currently running in the public cloud, and that in five years 41.3 percent of workloads will run in a public cloud. That represents nearly a tripling of cloud workloads.

This suggests at least a 20 percent compound annual growth rate for public cloud workloads over the next five years.

source: Barrons

The analysts said budget pressures have large firms focusing technology spending on cloud services.

The accelerated move to the cloud, and in particular the rapid rise of Amazon’s AWS cloud service among large corporations, signals a “changing of the guard” in enterprise IT, suggesting that “threats to traditional, on-premise IT infrastructure vendors are serious,” the report said.

It said Microsoft still holds a commanding lead in the IT market for large businesses, but AWS, which has long been popular with smaller firms, is making significant inroads.

The findings are based on a survey of 207 CIOs with an average annual IT budget per firm of $600 million, together representing some $126 billion in enterprise IT spending every year.

IT budgets at these firms are set to grow in 2016  by only 2.8 percent, compared to more typical annual growth rates of three percent to four percent.

The largest firms, with annual IT budgets of more than $2 billion, plan to hike spending by less than one percent.

AT&T Acuires QuickPlay Media OTT Platform

AT&T is acquiring Quickplay Media, a platform for over-the-top (OTT) video and “TV Everywhere services” that AT&T already uses.

Quickplay’s platform currently supports AT&T’s U-verse “TV Everywhere” offering and will support the streaming offers “DirecTV Now,” “DirecTV Mobile” and “DirecTV Preview” that AT&T plans to introduce later in 2016.

The new plans will let viewers stream DirecTV content over the Internet to virtually any device.

The reason for the acquisition: OTT video is predicted to grow much faster than linear video.

source: IHS Infonetics Research

19% of Internet Users Experienced an Internet Security Breach, Causing Less Use of the Internet

About 19 percent of surveyed Internet-using U.S. households (some 19 million households, potentially) report they have been affected by an online security breach, identity theft, or similar malicious activity during the 12 months prior to a July 2015 survey conducted by the National Telecommunications and Information Administration.

Security breaches appear to be more common among the most intensive Internet-using households. While nine percent of online households that used just one type of computing device (either a desktop, laptop, tablet, Internet-connected mobile phone, wearable device, or TV-connected device) reported security breaches, 31 percent of those using at least five different types of devices suffered this experience.

These concerns are prompting some Americans to limit their online activity, according to data collected for NTIA in July 2015 by the U.S. Census Bureau. This survey included several privacy and security questions, which were asked of more than 41,000 households that reported having at least one Internet user.

Households Reporting Online Security Breaches by Number of Different Types of Devices Used,

source: NTIA

About 22 percent of Internet-using households that used a mobile data plan to go online outside the home experienced an online security breach, compared with 11 percent of those not using data plans while outside the home.

And it appears that security concerns are negatively affecting willingness to use the Internet. Some 45 percent of online households reported that these concerns stopped them from conducting financial transactions, buying goods or services, posting on social networks, or expressing opinions on controversial or political issues via the Internet.

Online Activities Avoided Due to Privacy or Security Concerns

source: NTIA

From "Convergence" to "OTT"

Most ideas and concepts have currency in a particular context and time. The use, or passing from use, of any such terms generally means that a specific big change has become routine, part of the background, and the new reality.

Convergence, for example, was a big idea in the 1990s. One almost never hears the term used, in the 2010s. Some 20 years ago, the big idea was that an era of application-specific networks was ending. All networks were “converging” on multi-purpose platforms that could deliver any media type.

The term also was used to describe the rise of multi-function devices able to display many media types, or to describe the the ability of applications to interact with each other.

At this point, we simply assume that is the case. On a more-granular level, it is hard to remember that “smartphone” and “Wi-Fi hotspots” once were “hyped” terms in the past.

source: Innovative Communications blog

At this point, all the “convergence” items are simply part of the existing fabric of networks, devices and apps. What was less well widely understood 20 years ago was the fundamental change in business models, however.

It now is clear that convergence was less important than another fundamental change, namely the separation of application creation, ownership and delivery from the actual “network” layer.

In the “non-converged” world, all networks were application specific, and that also meant that the network owner created, packaged and sold the apps the network supported.

That now is broken. While any network owner can create some managed apps and services (carrier voice, carrier messaging, linear TV and Internet access provide examples), most apps now are created and delivered independent of the access network.

In other words, no business relationship has to exist between any “Internet” app and any access network. That is why the term “over the top” has resonance with access provider executives, not “convergence.”

Convergence no longer matters. OTT does.

Are Internet Access Prices High or Low, in Developed Countries?

One rather frequently hears assertions that U.S. Internet access prices are “too high,” or “the highest in the world,” or “among the highest in the world.”

As often is the case with statistics, “truth” and “facts” diverge. The problems start with price levels across countries. It would be easy to make a case that prices for virtually any product or service are “high” in the most-developed countries, compared to prices for those same products in a developing country.

That is why global comparisons require normalizing prices.

There are a couple of standard ways of doing so. “Purchasing power parity” is one such technique. Expressing the “price” of any product in relation to household income, or per capita income, is another way of doing so.

Using such mechanisms, it is clear that prices can be “high” in developed countries even if “cost” is low, in terms of the percentage of income required to buy a product.

In other words, the “cost” to buy mobile or Internet services in developed countries actually is quite low.

source: ITU

source: ITU

There is a further complication when assessing price and cost as a function of “people” rather than household income, since households vary in size, from place to place.

In other words, price per person can vary with the number of persons per household, the number of people using a product, or the degree of sharing possible with any product. “Price” or “cost” also can vary based on the ways people buy those products (which plans are most often purchased, for example), as there are any number of ways a “bulk discount” can be applied, such family plans.

source: The Web Index

The point is that although retail prices in developed nations can be “high,” the actual cost, as a function of overall price levels and compared to income, typically is quite low, where it comes to either mobile or Internet access services.

Nor do such metrics always include a “quality” dimension. Value is determined not only by retail price, or price as a function of income, but also by the speeds and other attributes of usage plans. Price per megabit, in other words, also matters.

Paradoxically, "price" can be high, while "cost" is quite low.

Expect Disruptions in Access Network Business Model, Technology

Though the impact might be seen only over the course of a decade, we cannot now discount the possibility of disruptive innovations in the access business. Think about Google Fiber, unmanned aerial vehicles being developed by Facebook and Google, Google’s Project Loon.

In the data center design area, Facebook’s Open Compute Project aims to spread open source data center architectures.  

The main point is that our traditional assumptions about the costs and features of an access network, not to mention our understanding of “who” operates the access network, could change radically over the next decade.

At stake are many truisms about possible market structures, not simply the cost and features of access. Also at question: the role of the access function within the ecosystem.

Though access will continue to reside at a specific layer of the protocol stack, it is not so clear that the role necessarily must be fulfilled by particular entities that traditionally have provided that function.

In other words, it no longer is a given that telcos, cable TV companies and others necessarily will have the same degree of activity or influence over the access function, in the future.

Consider “Open/R,” a routing protocol created by Facebook that ultimately will be made available as an open source tool

Open/R “has evolved into a platform that allows us to rapidly prototype and deploy new applications in the network,” Facebook now says.

“An Open/R network can easily add an application on top of routing that measures the utilization of network links, a move that could lead to computing bandwidth allocation,” Facebook says. “It could add MPLS (multi-protocol label switching) for quick movement of data over adjoining segments without looking up long network addresses.”

“Facebook's Open/R routing platform allows a combination of centralized and distributed control working together with the aim of establishing more self-governing networks that will self-allocate traffic and route it to the Internet with a minimum of supervision,” the company says Petr Lapukhov, Facebook network engineer.

“Being able to iterate quickly is central to our ability to improve the speed, efficiency, and quality of internet connectivity around the world,” said Lapukhov.

EU, US Merger Barriers Will Change Growth Strategies

Though not every region necessarily will follow the pattern, big mergers--in either the European Community or United States--have come unstuck in a way that suggests regulators are going to resist them.

Most recently, the EC blocked a proposed merger of Telefonica’s O2 and Hutchison Whampoa’s Three in the United Kingdom. No further thinking about big mergers in the U.S. mobile market has been thought about since the blocked Sprint merger with T-Mobile US.

In 2011 an AT&T acquisition of T-Mobile US was blocked. In 2002 a merger of DirecTV and EchoStar has prevented.

The proposed Comcast acquisition of Time Warner Cable likewise was nixed in 2014.

Nor has big merger opposition been confined to telecommunications. Since 1997, Staples and Office Depot have tried to merge twice, and been rejected twice. In 2016, Pfizer Inc.’s takeover of Allergan and Halliburton Co.’s purchase of Baker Hughes also have been prevented.

To be sure, some deals--such as the AT&T purchase of DirecTV, or the Charter Communications buy of Time Warner Cable--have been approved. In the former case, assets acquired did not alter the market structure in either fixed line or mobile businesses, and shuffled, but did not measurably restrict competition in the video entertainment market.

In the latter case, the combination did not trigger foundation of a new firm with more than 30 percent access of U.S. homes, the traditional trigger for antitrust action in the consumer video or telecommunications business.

At least for the moment, the pattern of behavior suggests that one avenue of growth that has been crucial for big telecom providers over the last decade--growth by acquisition--is closed, at least within the ranks of leading providers in the U.S. and European Union markets.

That is going to be a problem. Unable to grow by acquisition, and facing negative growth in their core markets, the leading service providers are going to suffer a possibly-prolonged period of stringent revenue growth in their domestic businesses.

Sure, one can argue, new emphasis will have to be placed on growth by acquisition outside the home markets. And the already-intense search for brand new markets (Internet of Things, connected cars and so forth) will continue.

But nobody expects those new sources to have the bulk to displace eroding legacy revenue sources.

Hutchison is likely to fail in its bid to acquire Wind in Italy, as well.

But those are “within the silo” deals. It appears regulators are approving “outside the silo” deals.

In other words, AT&T could acquire the satellite video business of DirecTV because it was out of domain. BT could acquire EE for similar reasons (fixed line operator acquiring a mobile firm).

That suggests, at least for the time being, that leading telecom providers will not seek to acquire “in-silo” assets, but complementary out-of-silo assets. That might mean more fixed-mobile or mobile-video entertainment deals, across silos.

Alternatively, more acquisitions by access providers of content or app entities, non-facilities-based segment specialists (enterprise IT, non-consumer-facing assets, over the top apps and services) or growth internationally will happen.

But that path tends not to add much gross revenue, compared to what might be possible when an in-silo acquisition happens.

So firms might be forced to consider international acquisitions to increase revenue bulk, but avoid regulator opposition to a reduction of competition.

Within domestic markets, we are likely to see more acquisitions outside the legacy core.

FCC Forces Charter to Overbuild 1 Millon Homes

As often is the case, the U.S. Federal Communications Commission put some conditions on its approval of the merger between Charter Communications and Time Warner Cable.

Broadly, Charter has agreed to not impose broadband usage caps on its customers for seven years.

Charter also will provide “no charge” interconnection for online video providers and will be subject to  restrictions on its ability to keep programming from being available on online platforms.

Charter furthermore will offer high-speed broadband to two million more homes and offer a low-income broadband program for eligible households.

Somewhat unusually, the FCC also requires Charter to “overbuild” at least a million households already served by another cable TV operator offering high speed access of at least 25 Mbps downstream speeds.

That last clause is unusual. It essentially requires that Charter compete with another cable TV operator, something cable TV operators have been historically loathe to do.

Predictably, an organization representing small cable operators is worried that provision will mean not only competition, but ruinous competition for its members.

American Cable Association President and CEO Matthew M. Polka says harm will occur because Charter has scale advantages, and will “have an economic incentive to choose locations served by smaller providers because Charter can most easily drive them out of the market.”

Of the merger conditions, it is the requirement to overbuild which is the most unusual.

Google Fiber Seems to be Sustainable

For many years a reasonable rule of thumb has been that a competent provider in the fixed network consumer communications services business could reasonably expect to get 30 percent market share within the first few years of operation.

That was true for cable TV operators getting into the voice business, for telcos getting into the linear video subscription business, and for telcos and cable TV providers getting into the Internet access business.

It now appears Google Fiber is getting to the 30 percent threshold in its first few markets. If so, then Google Fiber is a sustainable endeavor.

In the mobile business, similar rules of thumb suggest that any single mobile operator requires market share around 30 percent to sustain itself long term.

source: McKinsey

But there is a major caveat. All such analyses are based on current notions of capital investment and operating costs. Should capital or operating expense assumptions change dramatically, the conceivable market structure could also change dramatically.

In other words, under different assumptions about the cost of market entry, more competitors could survive. Equally plausibly, lower-cost competitors could imperil the existence of legacy providers.

One might note that the emergence of platforms using unlicensed spectrum, or shared spectrum, could change assumptions about the range of sustainable business models, as well as the viability of firms with high cost structures.

Games Generate 90% of Google Play App Revenue

Since 2012, Google Play downloads grew by almost 400 percent, while  app store-related revenue has gone up by a staggering 3500 percent, according to App Annie.

Also, Google Play is gaining market share the fastest in emerging markets like India, Vietnam and Pakistan.

Four of the top-10-grossing Google Play games of all time were driven almost entirely by store revenue in Japan.

Casual-style games were nine of the top-10 downloaded Google Play games of all time, representing approximately 40 percent of total all-time downloads and approximately 90 percent  of total all-time revenue.

source: App Annie

Excluding games, the remaining 10 percent of total revenue is generated by communications and social apps.

EC Blocks O2-Three Merger

As many expected, the European Commission has blocked the $15 billion merger of the U.K.’s Three and O2, At the heart of the concern is the belief that a minimum of four mobile operators are required to sustain robust competition in a market.

According to the Commission, the O2-Three merger would have led to less choice and higher prices for consumers, by reducing the number of network-owning operators from four to three.

Looking at mobile market structure, a report by the Organization for Economic Cooperation and Development notes that the “most significant” of constraints are the limited amount of spectrum and substantial economies of scale in building network facilities.

The mobile communication sector is characterised by a number of factors that significantly influence market structure, OECD says.

The most significant of these are constraints due to the limited amount of radio spectrum available and substantial economies of scale in building network facilities.

But it has to be noted: all such determinations are founded in present business models built on use of scarce licensed spectrum. But the ability to use “scarce” spectrum is dictated by interference control mechanisms that can be more efficiently designed.

In other words, existing frameworks are inefficient because they allocate spectrum on an exclusive basis, even when the primary licensee is not using a resource. Allowing spectrum sharing would dramatically increase the amount of usable spectrum, presumably changes the economics of operating a mobile business.

The point is that the long-term mobile market structure could change radically if spectrum cost constraints are altered.

The issue now is whether another company might emerge as a buyer for O2’s assets, as owner Telefonica wants to exit the U.K. market. Liberty Global, for example, is expected to enter the mobile business in virtually all of its European markets, and already had said it would consider buying any spectrum divested in the wake of a successful O2-Three merger.

source: Shape Networks

“We had strong concerns that consumers would have had less choice finding a mobile package that suits their needs and paid more than without the deal,” said Margrethe Vestager, EU competition minister. “It would also have hampered innovation and the development of network infrastructure in the UK.”

At least in part, the decision was justified on the grounds that a merger would have been bad for mobile virtual network operators.  

The Commission noted that the combined operation would have had a market share of over 40%, and would have had less incentive than its constituent parts to compete with rivals Vodafone and EE.

Ofcom, the U.K. telecom regulator, also opposed the merger.

Artificial Intelligence Will Boost Virtualized Network and Business Processes

As it would have been unwise to ignore the impact of computing and the Internet on the legacy telecommunications business, so too should artificial intelligence likewise be taken seriously, both as an enabler of productivity gains, but also as a development that has serious social, economic, social and political implications.

In one sense, virtualizing networks is a trend that AI could reinforce. So too, “big data” analytics will be enhanced by use of AI, allowing virtualized networks and processes to work better, and faster.

And it is hard to imagine that AI will not also lead to changes in sales and marketing practices. If AI can be used to predict usage and therefore demand, AI also can help organizations adjust demand “on the fly.”

But AI also will reduce the number of jobs required to run any telecom business, as AI is expected to reduce demand in other industries.

Graduate recruitment at auditors and accountants could fall by as much as 50 percent by 2020 due to the impact of artificial intelligence, according to Steve Varley, EY chairman and managing partner for the UK and Ireland. “Over time our graduate needs are coming down."

source: World Economic Forum

The World Economic Forum estimates that AI, robotics, and automation could replace five million jobs around the world by 2020.

Citi estimated that 35 percent of jobs in the UK are at risk of being replaced by automation,

Likewise, the Organization for Economic Cooperation and Development has estimated that 47 percent of U.S. jobs are at risk, and across the OECD as a whole an average of 57 percent of jobs are at risk. In China, the risk of automation is as high as 77 percent.

AI will help. It also will “harm,” in the area of employment. The issue is whether, on a net basis, more jobs are gained than are lost.