In U.S. Market, Tier Ones Have to Grow by Acquisition

If you run a consumer fixed line communications business, flat video entertainment revenues are not the best of all possible outcomes. But compare that sort of performance to the fixed line voice business, or to mobile segment revenues, which have driven revenue growth at most telcos for the past two decades.

Flat video entertainment revenues have to be evaluated against what is happening in other lines of business, as well. In the U.K. market, telecom revenue has dropped 1.7 percent per year since 2012. Globally, we might be nearing an absolute industry peak revenue situation, after which it is possible global connectivity revenue could start to gradually decline.

The trend to price retail services at marginal cost, a trend I refer to as near-zero pricing, is part of the backdrop, leading to declining average revenue per user.  

Consider that AT&T’s fixed network voice revenues are dropping about 18 percent annually, costing that firm about $1 billion a year in lost revenues that need to be replaced.

source: Seeking Alpha

And what is happening in the mobile category? Revenue arguably is declining there as well, for both AT&T and Verizon. And that raises the biggest strategic issue for most communications service providers: what must be done if connectivity revenues have reached their historic peak?

In other words, what if communications connectivity has already, or will soon, reach the top of its life cycle, with a period of decline to follow?

That arguably is the case for most communications categories, ranging from linear video to voice to mobile service. Only internet access revenues have continued to grow, driven by growth in emerging markets and by a shift to higher-speed tiers of service in some developed markets.

source: Seeking Alpha

source: Seeking Alpha

That is why some believe big changes are coming. A massive wave of consolidation will help surviving service providers sustain revenue growth by acquisition. There will be some benefits on the cost side as well, as additional scale is gained. That might account for the biggest single change in firm economics over the next decade.

But eventually, when that trend as run its course, there will be no alternative to adding additional lines of business “up the stack” or elsewhere in the communications, app, platform, device and content ecosystems, still the era of communications growth will have ended.

Though mobile services have been the global revenue driver, we are approaching a time when every human who wants to use mobile service does so, and eventually we will be at a point where every human who wants to use internet access will do so.

That is not to say all firms are in the same position. Smaller firms can take share from larger firms. Mobile substitution will shift additional share from fixed to mobile networks. Specialist firms of all types might continue to grow in their niches, up to a point.

And the same growth by acquisition dynamics that will apply for tier-one telcos will hold for all specialist firms as well, for some time.

Still, eventually, if the “connectivity” business continues to shrink, growth will have to be sought elsewhere. And that probably has to happen with acquisitions, rather than internal growth, for reasons of scale.

By definition, communications firms with flat to declining revenue cannot generate growth organically. It will have to be bought. Even T-Mobile US, which continues to take market share from its competitors, sees acquisition (Sprint) as the best way to achieve much more scale.

	Subscribers (millions)	Net Adds (thousands)	Postpaid Adds (thousands)	Postpaid Churn
Verizon	152.65	37	199	0.97%
AT&T	147.26	499	46	1.02%
T-Mobile	75.62	777	686	1.08%
Sprint	53.79	92	87	1.63%
U.S. Cellular	5.05	-	-	-

source: Morgan Stanley

Since most of its competitors have churn rates similar to its own (the exception is Sprint), T-Mobile US gains on its larger competitors simply because one percent losses at a firm the size of Verizon or AT&T represent a larger number that at any smaller firm.

That means T-Mobile US arguably stands to gain share, even at the same churn rates as its larger foes. Still, eventually, all U.S. mobile service providers have to deal with saturated markets and declining average revenue per account.  

Though Comcast and now AT&T are criticized by some for expanding into content ownership, those are prudent moves (some argue) to reposition revenues away from an exclusive reliance on communications products and sources.

source: Morgan Stanley

source: Morgan Stanley

source: Morgan Stanley

What if it is Verizon, Not Google Fiber, that Disrupts U.S. Internet Access?

Within a few years, we likely will count Verizon as the largest U.S. “overbuilder,” not firms such as Google Fiber, Ting or others. The reason is that Verizon is launching an assault as a fixed wireless overbuilder in a number of larger markets, including Los Angeles and Houston, as well as Indianapolis and Sacramento, Calif.

So, in a major irony, it might be Verizon, not Google Fiber, that dramatically disrupts the U.S. internet access market, at least the fixed network part of that market.

Generally speaking, earlier overbuilders have chosen rural areas, small towns or suburban communities as venues. Google Fiber was among the few to have tackled a whole major market such as Kansas City.

Verizon’s attack will matter for a few reasons. Verizon has the resources and brand name to shift national market share in the fixed networks business. Up to this point, no overbuilder has attacked markets big enough to change national market shares and subscriber counts.

And, in its chosen markets, Verizon will be challenging several of the biggest ISPs in the fixed networks business: Comcast, Charter and AT&T. This is not an incremental approach in out-of-the-way or small markets, but a deliberate effort to take significant market share, at scale.

Just how much share Verizon can get is the issue, and how soon it can do so. Verizon suggests its fixed wireless opportunity is about 30 percent of all U.S. homes, so possibly 35 million to 39 million U.S. homes, depending on which estimates one uses.

Market share will matter. New Street Research predicts that Verizon could achieve 24 percent market share in those markets. That would change national internet access market share by about seven percent (using a base of 114 million U.S. homes), or some eight million accounts.

Of course, Verizon might do better than that.

TDS in Sun Prairie, Wisc. gotten 46 percent market share in its first year of operation as an overbuilder That is practically unheard of.  

With possibly hundreds of local governments actively considering launching their own municipal internet access services, and with a growing number of private internet service providers also looking to enter as the third providers in existing markets, it looks as though many more U.S. communities will see a trio of fixed network service providers over the next decade.

How well they might fare, and what the implications are for incumbents, are logical questions.

Ting, the internet service provider that overbuilds telcos and cable TV firms, has argued it can get to about 50 percent market share in perhaps five years in virtually all of its internet access networks, with a first-year goal of 20 percent share.

EPB, a municipal service provider in Chattanooga, Tenn., is the poster child for government-operated triple-play providers, and often is said to have 46 percent market share. That is true if one counts units of service (video, voice, internet access), instead of household account share.

The issue is that when service providers sell multiple services, one has to decide how to measure market share: by units sold, by homes that are active accounts or some other measure. These days, the preferred metric typically is units sold, not homes.

EPB’s internet access share might be about 27 percent, its video share lower than that. Comcast might have 61 percent video share, while EPB might have 36 percent video share.

AT&T also competes in that market, but seems to have low share of video and internet access.

Other earlier overbuilders, focusing on video entertainment, might have been able to reach 10 percent to 15 percent market share.

Many of us would be surprised if Verizon failed to break the 20-percent share market rather quickly. And that means other major ISPs--AT&T, Comcast or Charter--are going to lose that share.

Ironically, it might well be Verizon--not Google Fiber--that pushes the major U.S. ISPs to upgrade to gigabit access on a faster tempo.

Ting Internet Gigabit Network Launches in Centennial, Colo.

Ting's latest gigabit network, in Centennial, Colo., is launching commercial service in an area where Comcast already sells gigabit service, aided no doubt by the assistance of a municipal backbone network built by Centennial for about $5.7 million. That network branches out from the city municipal building. Future fiber lines run along East Dry Creek, East Arapahoe and East County Line roads.

Ting has argued it can get to about 50 percent market share in perhaps five years in virtually all of its internet access networks, an ambitious goal. Comcast's Xfinity gigabit service is already available in Willow Creek for the same monthly rate as Ting will offer.

At least at this point, the share gains will come disproportionately from CenturyLink, which does sell gigabit speeds in Centennial, reaching what appears to be a small percentage of locations, by at least one report.

source: Memim

The Willow Creek neighborhood will be lit first, followed by Walnut Hills and Hunters Hill in Centennial.

The City of Centennial and Ting Internet executed an agreement for Ting’s lease of fibers in the central ring of Centennial’s fiber optic backbone. Ting will lease 12 fibers from the City’s 432 strand fiber backbone for a term of 20 years. When completed with west and east rings, the network will total 50 route miles.

The City will receive a one-time payment of $302,500 for the lease as well as an annual payment of $4,325 (with a three percent annual escalator) for operations and maintenance, the city says. The carrier-neutral network also can be used by other entities who want to pay for access.

In 2013, voters in the 110,000-person suburban city approved a $5.7 million municipal project building three fiber-optic loops that new internet service providers could extend into neighborhoods to bring services in competition with Comcast and CenturyLink.

Ting is pricing its gigabit-speed service at $89 a month, plus modem rental of $9 monthly or a one-time $200 purchase for a modem. And then there’s installation that could run $200, though the company offers promotional rebates that may offset installation charges.

CenturyLink's website doesn't show it offers gigabit-speed service in the Willow Creek neighborhood.

Does Faster Internet Access Cause Economic Growth?

It always is difficult to assess the potential impact of faster internet access in any area. “Areas that receive investment in infrastructure tend to do so because they are expected to grow rapidly in the future,” say researchers at Ipsos MORI.

The point is that investment follows growth potential. So investment might not “cause” growth, but reflects expectations for growth. And that might be an issue with any studies that suggest faster internet access causes economic growth.

The relationship could be merely correlative.

Researchers estimate that U.K. government support for “Superfast” (24 Mbps or faster) internet access between 2011 and 2016 lead to 2.5 million premises getting such speeds that would not have done so without the program. On average, speeds were boosted from about 20 Mbps up to more than 60 Mbps, the report says.

Perhaps another one million premises received superfast coverage one to two years earlier than they would have done otherwise, a report by Ipsos MORI says.

The perhaps more-controversial or potentially disputable portions of the report deal with economic growth outcomes.

source: BDUK

“It is estimated that postcodes benefitting from subsidized coverage saw employment rise by 0.8 percent and turnover grow by 1.2 percent in response to improved infrastructure,” the report says.

Some 49,000 additional jobs were created in areas that got 30 Mbps or faster services. “The total turnover of firms located on those postcodes also expanded by almost £9.0bn (per year) in response to the upgraded infrastructure,” the report argues.

“The productivity of local economic activity, as approximated by turnover per worker, also increased by 0.32 percent as a result of faster available download and upload speeds, accounting for £2.1bn of overall turnover growth,” the authors assert.

“Over 80 percent of these impacts were driven by the relocation of firms to postcodes receiving subsidized coverage,” the report says.

The estimates are fine as far as they go, but arguably overstate the benefits. To sure sure, the faster internet might actually be “causal” if the firm relocations actually were triggered by the availability of faster internet access.

But other areas then also lost those firms, so the net national gain is arguably close to zero, for the activity gained and lost, in local areas. Report authors specifically say they have not discounted the impact of firms relocating from the analysis.

“Making superfast broadband speeds available also appeared to raise the productivity of firms that did not change location while the program was delivered,” the report says, and that is a possibly more-significant finding.

“It was estimated that subsidized coverage raised the turnover per worker of these firms by 0.38 percent, broadly consistent with other estimates of the impact of faster broadband in the UK, equivalent to £1,390 in output per firm per annum,” the report says.

“Assuming the results reflect underlying efficiency improvements,” it is estimated that the program led to a net increase in national economic output (GVA) of £690m by June 20166. The key word there is “assuming.” We do not actually know if the increase happened, or if it did, that those increases can be causally related to faster internet access speeds.

Subsidized coverage also supported “reductions in unemployment in the areas benefiting from the program.” That is probably what one would expect if a number of new firms relocated to the subsidized coverage areas.

It always is difficult to prove causation in such cases, to be sure.

Everything as a Service is a Great Notion; How to Service Providers Make Sense of It?

It probably does not help communications service providers much that some believe the future of business is "subscriptions," not products as such. After all, that is what "service" providers already do.

The notion is more useful for other businesses that traditionally sell "products." The shift from shrink-wrapped enterprise software to cloud-based subscriptions obvious makes sense to software industry suppliers. How well, and how extensively it works in other industries will have to be worked out.

Internet service providers, telcos, cable companies, satellite service providers and other "service" providing entities will have to work much harder to figure out what this might mean.

To be sure, there are other ways to characterize the shift: product focus to customer focus; linear to interactive and dynamic relationships; product to service; products or ownership  to outcomes; one-time revenue to recurring revenue; owning to renting, as described in Subscribed.

Of course, communications service providers have to figure out what to do if their core business always has been “services” rather than “products,” using rather than owning, recurring revenue rather than one-time product sales.

That is why “everything as a service” possibly is more challenging to apply in the communications business, as in the airline, some media or content and many other “services” companies.

“X” as a service might portend bigger business model changes for the auto industry, which always has sold cars (products), as some big auto companies might--or will-transition to a focus on being “transportation” companies, possibly combining many modes as a seamless offer (cars, trains, planes, local transit, lodging, other amenities).

Perhaps you have pondered the phrase “communications as a service,” used to describe enterprise or business hosted voice services. It works as a way of describing hosted voice rather than ownership of a private branch exchange (business phone system).

It is almost nonsensical as applied to consumer services, which always are services.

It perhaps is obvious to former product suppliers in the computing, application and other intangible product areas that the shift to cloud-based software, from seat licenses, also means a shift to recurring revenue rather than sales of shrink-wrapped software. That is the big “shift to subscriptions” thesis.

How subscriptions (renting rather than owning; on-demand usage rather than ownership; monetizing latent resources) apply to physical products continues to develop). In a sense, Airbnb and Uber make more efficient use of latent resources, with digital interfaces, but still are similar to taking a taxi ride or renting a hotel room.

But there also are other nuances. The big shift described in Subscribed is that traditional product suppliers do not really have much actual knowledge about their actual users. “Subscription companies know their customers,” it is said, have “ongoing one-on-one relationships” with their customers.

Few communications suppliers would agree too much with that argument. Communications services are sold to customers as subscriptions, but there is little one-to-one relationship, little serious knowledge of end user behavior and preferences beyond the use of communications of various types at various places and times.

Nor is it too clear how communications service providers, in their communications roles, can create more one-to-one relationship intensity. That might arguably be true for service provider owned content services, to customize and target advertising. But that is a function of the media role, not the communications role, as such.

In fact, traditional service providers might well find that there is not so much value to be created by intensifying the “subscription” business model itself. What might matter is the ability to bundle products (sensors) with analytics, to create information products to sell to third parties. In other words, creating cross-selling and upselling opportunities.

But that is not the same as saying there are many easy ways to create more “one-on-one intimacy with customers” in the communications sphere, per se.  

S Curves Only Apply to Successful Innovations

Some generally-useful visualizations, such as the S curve, require some qualification. You may think of the S curve as showing the technology life cycle, a product life cycle or an innovation life cycle. The basic idea is that adoption starts slow, hits an inflection point featuring fast growth, but eventually reaches saturation as nearly every potential user or buyer already has become a user or customer.

source: galsinsights

The major qualification is that the S curve applies to innovations, products or processes that succeed in the market. Unsuccessful innovations simply die. Perhaps they go parabolic before they die. The point is that S curves refer only to products, technology and services that actually succeed in the marketplace.

It probably is worth noting that something similar exists for hyped technologies as tracked by the Gartner Group. Between 2017 and 2018, some nine technologies simply disappeared. That is perhaps a good illustration of unfulfilled hype.

source: Gartner

source: Gartner

Live TV is the Next Big Growth Opportunity for Streaming Video

“Live TV” is the new focus for over-the-top streaming video, one might well argue. The reason is that the non-linear, on-demand services (Netflix, Prime, Hulu and others) have begun reaching saturation. What is left largely unfulfilled are “live video” streaming services that mostly represent OTT “skinny bundles” featuring real-time TV programming that are very-direct replacements for linear subscription TV (cable TV, telco or satellite-delivered subscriptions).

Though almost no consumers will ever call them by their bureaucratic name, such virtual “multichannel video programming distributors” (virtual MVPDs) are the new growth opportunity in the consumer video streaming area.

In April 2018, just five percent (4.9 million) of U.S. households streamed content from vMVPDs on their television screens (as opposed to their mobiles, tablets or PCs, perhaps?). That is a 58 percent increase in households from the year before, according to comScore.

Consider the number of subscribers to OTT real-time TV services, compared to subscriptions for Netflix, Amazon Prime and Hulu, for example. In the first quarter of 2018, Netflix had some 54 million U.S. subscribers. Prime Video subs are north of 26 million. Hulu has something more than 20 million accounts, and might be considered a live streaming service as well (though that is not how some of use it).

But the next big wave of growth will come from “live TV” services such as DirecTV Now, which essentially are substitutes for traditional cable TV, telco TV or satellite TV services, but delivered over the top, using the internet.

DirecTV Now, by way of comparison, might hit about 2.8 million accounts by the end of 2018. U.S. live TV streaming services that replace linear subscription TV will hit a combined 9.2 million U.S. subscribers by the end of 2018 and 24 million by the end of 2022, according to analyst John Hodulik.

DirecTV Now, Hulu with Live TV and YouTube TV are projected to be the big gainers over the next five years, Hodulik believes. In large part, that is because traditional linear TV subscriptions still number more than  91.3 million accounts.

So substitute products for traditional subscription TV arguably represent a bigger unfulfilled segment of the business.

But we are going to need less-clumsy nomenclature, to distinguish between OTT “live” TV and on-demand services, as they are different products, fulfilling different needs.