Software Drives Hardware Demand; Video Drives Internet Access Demand

“The value of software to stoke demand for new hardware was as old as personal computing itself,” says says Daniel Eran Dilger, who writes for AppleInsider.  “Everyone in the industry was already aware that Apple II systems first sold in the 1970s because of VisiCalc; that PageMaker had initially driven sales of Macs in the 1980s, that Office had primed Windows PCs in the 1990s.”

LIkewise, one might argue that Apple’s content ecosystem was among the reasons for Apple’s possibly improbable ascent and longevity in the consumer hardware business.

So it might be an unusual stretch to argue that efforts by telcos and cable companies to move from “mere” distribution to  “content ownership,” as Apple has moved from “mere” hardware to software ecosystem, are similar. Content and apps drive sales of hardware. Perhaps likewise, content drives sales of internet access (bundles, for example) and mobility (streaming video bundled with mobile internet).

Whether the path of application (content) ownership, or simply curation, is “better” might be a bit beside the point. Apple both curates and owns apps. It distributes through iTunes without ownership of content, but it also creates and owns Siri and other apps. On the other hand, creation of original content seems to be assuming new importance for Apple as it has for video distributors.

A distributor can wring only so much revenue and profit out of content that is freely licensed to multiple distributors. And Netflix now has demonstrated the power of original content to drive subscriptions.

Netflix also has shown the power of occupying multiple roles within the ecosystem: a “studio” (developing content) as well as a “network” (Netflix the branded “channel” like HBO) and also distributor (Netflix as a replacement for cable TV subscriptions).

In that sense, Verizon and AT&T are emphasizing different strategies with regard to video, for reasons related to their existing assets and positions in the current ecosystem. Verizon does not appear to believe that the video distributor business (linear or streaming) is as strategic as does AT&T.

There may be internal cultural factors at work. Some might argue that neither Verizon or AT&T have had overwhelming success with their homegrown video services, linear or over the top.

Verizon always has emphasized the “quality of its network” (fixed and mobile), it arguably has been difficult for organization priorities to deviate much from the “best network” mindset, with its emphasis on the network.

AT&T arguably has had the reverse problem: it has so many locations, and so many that are rural or low density, that it has struggled to develop a consistent business case for fiber to home upgrades, when capital has been needed to support the mobile business, which has driven growth for more than a decade.

The point is that opportunities for revenue growth in the near term are different. Verizon can grow by taking market share away from “bigger” competitors (in the fixed network business). AT&T, as the largest linear video distributor, cannot do so. For AT&T, diversifying elsewhere in the ecosystem offers higher returns.

Geographic coverage therefore explains and shapes strategy. Verizon’s fixed network passes far fewer households than AT&T, Comcast or Charter Communications. So strategy might follow beliefs about assets. Verizon might believe it will not benefit as much in the upside from such ownership as others might. AT&T, Comcast and Charter each pass between 50 million and 65 million U.S. homes. Verizon passes perhaps 27 million. Verizon has the smallest footprint of those four fixed network firms, by far.

That also means Verizon’s ability to create an base of subscribers--and audience--is smaller. Though all the firms believe video offerings are important, AT&T arguably has more to gain in the video area. It already is the largest U.S. video linear services provider, and with Comcast, are the biggest in content asset ownership.

So if a video subscription business benefits from scale, Verizon benefits less than AT&T, Charter or Comcast in the video subscription product segment.

On the other hand, Verizon can realistically hope to grow its revenues by taking video share and internet access share away from those other competitors as it deploys its 5G networks (fixed and mobile). Fundamentally, that was the strategic rationale for cable TV operators in the voice market: cable operators could simply take market share from telcos in an existing business where the telco had nearly all the market to itself (mobility aside).

But all four U.S. national mobile service providers now believe video services play an important role in their 5G strategies, with a range of views based on where each firm sees its own assets.

AT&T and Verizon believe advertising is going to be an important revenue driver for them; Sprint and T-Mobile US do not. That makes sense, so far, as AT&T and Verizon have much-larger customer bases, and “eyeballs” matter for advertising.

AT&T clearly believes most in content ownership; its strategy resembling that of Comcast most. The other mobile companies do not believe they can viably pursue that role, and Verizon claims it does not believe content ownership is necessary.

S&P Communications Index Reflects Cross-Industry Convergence

On September 28, S&P Dow Jones Indices and GICS will create a new sector for tech, media, and telecoms companies. "The lines among media, communications, and content are blurred," David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said. "It is time to acknowledge this convergence and the overlapping services these companies provide."

It will only have 60 components, making it the eighth-largest by this metric. However, those components will include some of the biggest stocks on the market. Walt Disney Co., Netflix, Facebook, Alphabet, Comcast Corp., AT&T, Verizon, CenturyLink and others, such as 21st Century Fox, TripAdvisor and Electronic Arts.

source: Morgan Stanley

“The last several years have seen an evolution in the mode in which people communicate and access entertainment content and other information,” S&P Global says. “This evolution is a result of the integration between telecommunications, media, and internet companies.”

source: Morgan Stanley

Platforms Really Do Matter

Soon enough, we will be trying to make predictions about the impact of 5G on fixed network internet access lines, on end user typical speeds, typical retail prices, video entertainment accounts and service provider market shares. It is going to keep us busy, as few trends will be stable.

And platforms really do matter.

It is hard to overemphasize the importance the cable industry has had in driving U.S. internet access services. Cable has been the market share leader since about 2000. Telco fiber to home connections have grown, but growth has been relatively slow. Digital subscriber line has declined, with satellite connections reaching a peak of about three million before seemingly settling back to about two million accounts.

source: USTelecom

Many of us believe 5G will be a bigger platform innovation that cable's hybrid fiber coax network was.

One basic rule I use when evaluating service provider business models is to assume that tier-one service providers lose about half their current revenue about every 10 years, and therefore have to replace more than that amount of revenue to sustain growth. The rule likely works even for small independent service providers (I haven’t tried to quantify that historically, mostly because I do not have access to enough data).

source: USTelecom

It is easy enough to quantify what happened in the U.S. voice market. By 2000, mobile already represented about 34 percent of all voice lines, though arguably these were additional to the installed base of fixed network lines.

By 2018, fixed network providers have perhaps 25 percent of total lines, while mobility represents 75 percent of accounts. And in 2018, it is clear that mobile has become a substitute for fixed line voice service.

source: USTelecom

We saw this trend in long distance services, various enterprise data services, fixed network voice, now mobile voice and messaging, entertainment video and even glimmers in the internet access area.

As 5G is commercialized, we almost certainly will see mobile substitution for fixed network internet access, though it is hard to quantify the amount of change. But voice substitution provides possible guidance.

In the U.S. market, a substantial portion of U.S. consumers now rely exclusively on mobile internet access. In fact, such mobile substitution already represent as much as 20 percent of U.S. households, says the CTIA. In some segments, such substitution might be higher, as much as 35 percent.

source: CTIA

So one might ask the question of how much further that trend can go, as 5G is commercialized, and major service providers begin to actively market 5G-based services that compete directly with fixed network internet access services.

We already know what happened with voice. The portion of U.S. households that rely on mobile-only  telephone service grew from three percent in 2003 to 53 percent in 2016, US Telecom says, using Federal Communications Commission data.

So it would not be far fetched to suggest that at least half of all existing fixed network internet access connections could eventually be replaced by wireless or mobile alternatives.

U.S. Service Provider Capex Returns to 2014 Levels

A two-year decline in private capital investment in U.S. broadband infrastructure from 2014 to 2016 appears to be over, according to a preliminary USTelecom analysis of the 2017 capital expenditures of wireline, wireless, and cable broadband service providers.

U.S. broadband companies, excluding independent competitive local providers and fiber operators, have invested between $72 and $74 billion in network infrastructure in 2017, compared to $70.6 billion in 2016, showing at least an increase of nearly $1.5 billion, UST says.

source: USTelecom

IoT Success Might Typically Require Moving Up, Down the Stack, or Both

How big is IoT? Big. According to GSMA analysts, some 7.6 billion IoT connections (mobile and non-mobile) were in service in 2017.

The complication, for communications service providers, is that the vast majority of those IoT devices are connected by unlicensed radio technologies, designed for short-range connectivity (Wi-Fi, Z-Wave and Zigbee). That might be quite as true for some future IoT apps (autonomous vehicles, for example). Still, the point is that most future IoT connections might generate zero incremental revenue growth for connectivity providers.

And for many connections that are net additions, annual revenue might be quite low.

Mobile network IoT connections might grow from 600 million connections in 2017 to 3.1 billion in 2025. That might represent 12 percent of mobile accounts. And 60 percent of those might require mobility, while 40 percent are fixed, GSMA argues, using either NB-IoT or  LTE-M.

Of total IoT ecosystem revenues, 66 percent might come from platforms, applications and services. Professional services will grab another 27 percent. That leaves about five percent for connectivity services, declining from 10 percent today.

That is the reason many argue connectivity providers will have to move up or down the stack to capture more of the IoT revenue growth. That is the same strategy chip, device, app and platform providers will be employing, as well.

The bottom line is that IoT might require most would-be major players to move up, down, or up and down the stack.

source: GSMA

Verizon Fixed 5G Strategy: Attack Out of Region

Verizon’s strategy for its 5G fixed wireless platform is fairly clear, so far. In its announced first four cities--Indianapolis, Houston, Los Angeles and Sacramento--Verizon is attacking out of its fixed network footprint, and therefore will be competing head to head with AT&T, Comcast and Charter Communications.

One obvious objective is to grow revenue and accounts the “old fashioned way,” by taking market share away from incumbents who already have those accounts, in the fixed network internet access business.

Comcast passes (can actually sell service) about 54 million homes. Charter Communications passes some 50 million home locations.

AT&T’s fixed network passes perhaps 62 million U.S. homes. Verizon, on the other hand, passes perhaps 27 million locations.

What that means is that Verizon has a clear interest in using 5G fixed wireless to expand its addressable market by more than 35 million U.S. homes (up to perhaps 39 million) that it cannot reach today, giving Verizon a fixed network footprint that is comparable to its key rivals.

Does Better Internet Access Cause Rural Economic Growth?

A new examination of the correlation between internet access and unemployment, income and employment in rural U.S. areas finds no correlation. That matters because any government program to expand internet access availability is based on the fundamental assumption that internet access “leads to” or “causes” economic growth.

On the other hand, there is a subtlety: there might be a correlation (not causation, though) between use of internet access and economic growth.

So one researcher argues the focus should be on spurring adoption by people who do not use the internet, rather than a focus on increasing internet access availability in  “underserved areas” as such.

That actually is a rather non-controversial observation, as many observers have noted that teaching people how to use the internet, and why it is useful,  is among the keys to spurring use of the internet by the the last 15 percent to 20 percent of non-users.

What we need is “a nuanced approach to broadband policy that is targeted to those individuals who have not adopted broadband Internet,” according to Will Rinehart, American Action Forum director of technology and innovation policy.

For people to benefit from the Internet, they need to use it, not merely have access to it. Yet, the trend in policy is toward expanding broadband networks, not promoting their adoption. The best mix of policies will certainly vary depending on local needs, but the key to helping local economies is getting more people connected to the Internet, not merely increasing availability.

“Broadband access is not correlated with economic growth, although broadband adoption is,” he says.  

The “percentage of the population with access to 25 Mbps down/3 Mbps up broadband “doesn’t explain the unemployment rate, median household income, the change in employment, or the rate of population change in rural regions,” says Will Rinehart, American Action Forum director of technology and innovation policy.

An analysis using the 4 Mbps down/1 Mbps up standard also shows no connection, he says.  “This analysis calls into question whether the 25 Mbps download and 3 Mbps upload metric, the older 4 Mbps download and 1 Mbps upload metric, or any availability standard for that matter, provides a reasonable understanding of the underlying economics of rural communities,” says Rinehart.

Cable Gets 100% of Net Internet Access Accounts in 2Q 2018

The largest cable and telephone providers in the U.S., representing about 95 percent of the market, acquired about 455,000 net internet access subscribers in the second quarter of  2018, compared to a gain of about 235,000 subscribers in the second quarter of 2017, according to Leichtman Research Group.

These suppliers providers now account for 97.1 million subscribers. Cable companies have 62.9 million subscribers, while telephone companies have  34.2 million accounts.

As has been the case in recent years, cable is getting virtually all the net additions. Telcos have had net account losses in each of the past nine quarters. A great percentage of the losses over that period have come at Frontier and CenturyLink. AT&T and Verizon sometimes gain, sometimes lose, but at a rather low rate, either way.

The top cable companies added about 585,000 subscribers in 2Q 2018, compared to about 465,000 net adds in 2Q 2017.

Telephone companies lost about 130,000 subscribers in 2Q 2018, compared to a net loss of about 230,000 subscribers in 2Q 2017.

Broadband Providers	Subscribers at end of 2Q 2018	Net Adds in 2Q 2018
Cable Companies
Comcast	26,509,000	260,000
Charter	24,622,000	267,000
Cox	5,020,000	20,000
Altice	4,082,100	9,500
Mediacom	1,251,000	23,000
WOW (WideOpenWest)	747,800	3,900
Cable ONE	653,876	2,326
Total Top Cable	62,885,776	585,726
Phone Companies
AT&T	15,772,000	(3,000)
Verizon	6,956,000	(10,000)
CenturyLink	5,506,000	(89,000)
Frontier	3,863,000	(32,000)
Windstream	1,006,700	2,300
Consolidated	786,787	1,557
Cincinnati Bell	310,500	(400)
Total Top Telco	34,200,987	(130,453)
Total Top Broadband	97,086,763	455,183

source: Leichtman Research Group

Can Charlie Ergen Do it Again?

John Chambers, former Cisco CEO, is known for his belief that the technology business is about making transitions.

There are likely many observers who believe Dish Network cannot make another transition in its business model, as Comcast, Verizon and AT&T have done in the past. People sometimes forget (or never knew) that Charlie Ergen, Dish Chairman and also chairman of Echostar, has made at least a couple of business model transitions.

He started out in business selling personal earth stations, back before there was a direct broadcast by satellite business. That business of retailing television receive only dishes existed at a time when satellite TV programmers did not encrypt their signals, allowing any owner of a TVRO earth station to watch the feeds at no incremental cost.

That was declared lawful by the Federal Communications Commission in late 1979, allowing consumers willing to put up a 20-foot reflector to watch HBO, and eventually many other satellite-delivered channels, for free.

But programmers started encrypting their signals, killing the TVRO business. So in 1990 Ergen purchased satellite orbital slots, founding EchoStar in 1993, to support a new DBS service known as Dish Network,  that arose to supply satellite TV on a paid basis to subscribers, largely in rural areas.

In the intervening years Dish Network acquired Blockbuster, the chain of video retail outlets, and then continued to acquire other satellite assets, making bids for Hulu and Sprint as well as Clearwire. Those the Hulu, Sprint and Clearwire efforts did not result in a transaction, you can see the development of thinking about business model.

Separately, EchoStar moved into decoder manufacturing and also bought Hughes Network Systems, the supplier of satellite enterprise network services,  and consumer internet access.

Most recently, Dish has amassed, by acquisition and spectrum auctions, 5G spectrum assets that now represent the future of the company.

The point is that Ergen has made at least one major successful business model transition (TVRO to DBS), with a key diversification into satellite enterprise services and consumer internet access by satellite through EchoStar.

Ergen also has attempted to become a key player in streaming (Sling TV) and mobile services.

So it arguably is clear that Ergen has seen the need for a further business model transition out of DBS and into something else for quite a while. Some would say the 95 MHz of 5G spectrum now represents nearly the entire value of Dish Network, as the DBS business continues to shrink.

Many have believed that Ergen ultimately would simply sell the spectrum, rather than try and pull off yet another major business model transition. But at least some now believe Dish has no choice but to go ahead and build a narrowband internet of things network as the foundation for its next transition.

The reason is simply that no acquirer would be likely to get transaction approval before the deadline for building an operating network using much of the spectrum purchased at auction. That has to be done by 2020 or Dish (or any other owner) loses the AWS spectrum assets.

That buildout includes a stipulation that the network be active and reach about 70 percent of U.S. population in 2020.

So it now appears Dish will have to do so, spending perhaps $1 billion to create the narrowband IoT network as a first step. The actual revenue model has not yet been talked about (Dish could operate as a wholesaler to others who want to create a national NB-IoT network, or could sell at retail to enterprise customers.

Some likely continue to think Ergen will not be successful making that sort of business transition from video entertainment provider to mobile service provider. But skeptics believed cable TV operators would not be good at programming, or that AT&T would not be all that successful as a video retailer, or that AT&T cannot be competent as a programmer.

To be sure, some still might question some parts of those theses. But video suppliers have become competent providers of communication services, while telcos now are successful video subscription suppliers, and there is no reason to doubt, in principle, that a big video subscription services supplier cannot become a competent programmer.

Ergen has made big business model transitions in the past, and he might well do so again.