Consumer Behavior Changes as Cost Changes

Data per bit has huge business model implications that will be more obvious in the 5G era. Consumption of video is the biggest new design issue for mobile networks, since video

is the app that requires the most capacity.

And it should be obvious by now that when access costs fall--either to a fixed price for unlimited usage, a fixed price for “what you typically use” levels, or even close to zero, as in the use of public Wi-Fi, behavior changes.

That was true for AOL when it switched from usage-based dial-up access to “unlimited” access, and is true in the era of public Wi-Fi as well. Big usage allowances mean consumers are willing to use Netflix and other streaming services. But, up to this point, such offers were hard to support on mobile networks, simply because cost per bit on most mobile networks has been an order of magnitude higher than on cabled networks.

But the principle remains: people consume more data, and especially video content, when they do not have to worry about the cost of doing so.

And that is why 5G will be revolutionary. It will, in a growing number of instances, break the traditional cost barrier that has prevented mobile access from becoming a full substitute for cabled (fixed) network internet access.

source: Nokia Bell Labs

Since video arguably is the app with the most-stringent revenue per bit profiles, especially when the internet access provider earns no direct revenue from enabling video access (ISP supplies access bandwidth and usage, but no direct video app revenue), the ability to supply lots of bandwidth for video is a prerequisite for any wireless access platform competing with cabled networks.

Voice and messaging arguably have the highest revenue per bit profiles (possibly as high as dollars per gigabyte) with web browsing somewhere in between (cents per gigabyte).

General purpose internet access arguably has the “best” combination of revenue and cost, though even there a cabled network might earn (retail prices) less than US$1 per gigabyte. Mobile bandwidth  generally costs $5 to $8 per per gigabyte (retail prices), lower than the $9 to $10 it cost in 2016 or so, for popular plans, and less than that for plans containing higher amounts of usage. Higher usage plans might feature costs per gigabyte closer to $3.

That is an internal business model issue for any mobile operator. But more than that is going to change in the 5G era.

source: Bell Labs

If you assume the mobile network cost of delivering a gigabyte will drop 50 percent or more from 4G to 5G, fueled by new spectrum, use of shared and unlicensed spectrum and small cells, then the cost of using a gigabyte of “mobile” access will be closer to the cost of using a gigabyte of “fixed” access, especially on an “actual consumption” basis.

And that is going to open up many new use cases where mobile is a substitute for fixed access. Customers who routinely work from multiple locations, especially on the go, might already find mobile is a functional substitute for fixed access. As prices continue to fall, a greater number of consumers will find their own use cases can be supported with with a fixed or mobile access plan.

If you assume mobile access costs, especially in fixed mode, reduce costs by up to an order of magnitude, then the wireless 5G option might well become a full functional substitute for a cabled network access service.

And that means, for the first time in industry history, that mobile or wireless platforms will be able to compete close to directly against fixed and cabled networks as suppliers of consumer internet access.

Cost Per Bit

Data per bit has huge business model implications that will be more obvious in the 5G era. Consumption of video is the biggest new design issue for mobile networks, since video

is the app that requires the most capacity.

And it should be obvious by now that when access costs fall--either to a fixed price for unlimited usage, a fixed price for “what you typically use” levels, or even close to zero, as in the use of public Wi-Fi, behavior changes.

That was true for AOL when it switched from usage-based dial-up access to “unlimited” access, and is true in the era of public Wi-Fi as well. Big usage allowances mean consumers are willing to use Netflix and other streaming services. But, up to this point, such offers were hard to support on mobile networks, simply because cost per bit on most mobile networks has been an order of magnitude higher than on cabled networks.

But the principle remains: people consume more data, and especially video content, when they do not have to worry about the cost of doing so.

And that is why 5G will be revolutionary. It will, in a growing number of instances, break the traditional cost barrier that has prevented mobile access from becoming a full substitute for cabled (fixed) network internet access.

source: Nokia Bell Labs

Since video arguably is the app with the most-stringent revenue per bit profiles, especially when the internet access provider earns no direct revenue from enabling video access (ISP supplies access bandwidth and usage, but no direct video app revenue), the ability to supply lots of bandwidth for video is a prerequisite for any wireless access platform competing with cabled networks.

Voice and messaging arguably have the highest revenue per bit profiles (possibly as high as dollars per gigabyte) with web browsing somewhere in between (cents per gigabyte).

General purpose internet access arguably has the “best” combination of revenue and cost, though even there a cabled network might earn (retail prices) less than US$1 per gigabyte. Mobile bandwidth  generally costs $5 to $8 per per gigabyte (retail prices), lower than the $9 to $10 it cost in 2016 or so, for popular plans, and less than that for plans containing higher amounts of usage. Higher usage plans might feature costs per gigabyte closer to $3.

That is an internal business model issue for any mobile operator. But more than that is going to change in the 5G era.

source: Bell Labs

If you assume the mobile network cost of delivering a gigabyte will drop 50 percent or more from 4G to 5G, fueled by new spectrum, use of shared and unlicensed spectrum and small cells, then the cost of using a gigabyte of “mobile” access will be closer to the cost of using a gigabyte of “fixed” access, especially on an “actual consumption” basis.

And that is going to open up many new use cases where mobile is a substitute for fixed access. Customers who routinely work from multiple locations, especially on the go, might already find mobile is a functional substitute for fixed access. As prices continue to fall, a greater number of consumers will find their own use cases can be supported with with a fixed or mobile access plan.

If you assume mobile access costs, especially in fixed mode, reduce costs by up to an order of magnitude, then the wireless 5G option might well become a full functional substitute for a cabled network access service.

And that means, for the first time in industry history, that mobile or wireless platforms will be able to compete close to directly against fixed and cabled networks as suppliers of consumer internet access.

Connecting the Unconnected in Rural U.S.

Some 700,000 U.S. rural homes and small businesses will gain access to high-speed internet access for the first time through the Federal Communications Commission’s Connect America Fund Phase II auction, auction results released today show, and more than half of those 713,176 locations will have service available with download speeds of at least 100 megabits per second.

Connecting 700,000 homes in a nation with perhaps 138.3 million housing units, that might not sound like much. But the 250,000 most-isolated rural locations account for about half the estimated cost of connecting seven million U.S. homes in rural, hard to reach areas.

Of course, the most-isolated areas likely always will be among the best candidates for satellite or other wireless access platforms. Perhaps three million rural locations already buy satellite internet access.

That “cost to reach” logically implies that the great bulk of new investment under this program will support extension of service to new locations that are not the most-isolated, as that provides the greatest efficiency. In other words, service providers logically will connect the new locations in some proximity to current networks, rather than taking on the most-difficult, most-expensive areas .

According to plan, 53 percent of all homes and businesses served with support from the auction will have broadband available with download speeds of at least 100 megabits per second. Some 19 percent will have gigabit service available. And 711,389 locations—all but 0.25 percent—will have at least 25 Mbps service.

It appears a great many of the providers are ISPs using fixed wireless.  

Providers must build out to 40 percent of the assigned homes and businesses in a state within three years of becoming authorized to receive support. Buildout must increase by 20 percent in each subsequent year, until complete buildout is reach at the end of the sixth year.

The auction allocated $1.488 billion in support to be distributed over the next 10 years to expand rural broadband service in unserved areas in 45 states. A total of 103 providers will get funds.

How Much Can the "Median" Household Afford to Spend on Internet, Video, Mobile?

With the caveat that higher-income households might not face so many choices, the cost of linear video subscriptions arguably is a problem for median-income households.

Consider the key issue of ability to pay. There is some evidence that explains why lower-cost streaming alternatives (live TV and non-real time) are growing. Researcher SNL Kagan said in 2015 that DirecTV subscriptions represented as much as 2.4 percent of median household income. That was expected to grow to perhaps three percent of median household income by about 2021.

That is unsustainable, some of us would argue. Increasingly, entertainment video is part of total household spending on mobile communications, internet access and other related services. So the issue is not just how much is spent on video subscriptions, but also how much is spent on communications of all types.

In developed countries, household spending on internet access, for example, is less than two percent, but added to just one linear video subscription could mean that as much as 5.4 percent of household spending is for one video subscription and fixed network internet access.

Then one has to add mobile service, which in a four-person household could be close to $200 a month, or perhaps another five percent of household income. So now more than 10 percent of median household income would possibly be spent on mobility, TV and internet access.

That exceeds what most median households probably could afford to spend (again, with the caveat that higher income households might spend more than that amount).

In 2016, the entire household entertainment budget in the United States was about four percent of average income before taxes in 2016, for example.

source: Nscreen Media

According to another estimate, U.S. households spend 5.6 percent of their household income on “entertainment,” but that includes spending on pets, tickets to events, audiovisual equipment such as TVs, hobbies and other services that include video subscriptions. Other U.S. Bureau of Labor Statistics data for 2016 suggest households spend about five percent of income on “entertainment.”

But a study by Pew Research suggested in 2016 that U.S. households spent only about 2.3 percent of income on entertainment.

The implications are clear. Whether you believe a household will spend two percent or five percent of income on entertainment, that budget does not change much. In 1996, Pew researchers say households spend about $1444 on entertainment. In 2016, that amount was $1496. That is the median spending for households with two working parents and two children.

On a per-capita basis, that is only about $374 in 2016, but s single linear video subscription at $80 a month would have represented $960, or 64 percent of the total family budget for all entertainment.

Also, keep in mind that healthcare spending in 2016 was about eight percent per household, according to the Bureau of Labor Statistics.  Even spending on clothing is nearly And recall that pet expenditures also are considered “entertainment.”

If you want to know why a shift to lower-cost video subscriptions is happening, part of the reason is that traditional video subscriptions cost too much, as a percentage of total available entertainment spending.

source: Creditloan.com

Still, some 63 percent of U.S. households have both linear TV and at least one streaming service as well, according to Leichtman Research Group. But more change is coming. In the second quarter of 2018, more live streaming accounts were added than linear accounts were lost. In fact, live streaming accounts grew as much as four times faster than linear accounts were lost.

In the second quarter, the major linear service providers lost about 417,000 accounts, while six million to seven million live streaming accounts were added.

In addition to Netflix, Amazon Prime and other streaming services that provide non-real-time content, there is a new class of “live TV” streaming providers that are certain to become more important, as they are an even more-direct replacement for linear (live TV) services.

In the second quarter of 2018, for example, such co-called “virtual multichannel video programming distributors (vMVPDs) added 868,000 net accounts.

The total number of vMVPD accounts then reached 6.73 million, an increase of 119 percent, year over year.

Linear TV accounts (cable, satellite, IPTV, vMVPD) fell to 93.78 million, according to Strategy Analytics.

source: Strategy Analytics

Linear Video Demand Might be Stronger Than You Think

New Cord Evolution research from GfK MRI shows that 71 percent of all US consumers say they have cable, satellite, or telco TV service and have no plans to drop it. This includes the majority of the crucial 18-to-34 age group (58 percent), as well as 69 percent of people ages 35 to 49, and 80 percent of those 50 and over.

Two decades ago, the thinking often was that younger consumers inevitably would start to behave as did older age cohorts. Very few now are so sure.

But there remains a big difference between demand for various forms of entertainment subscriptions and demand for entertainment. The former might change; the latter arguably does not. So the form of supply is likely to evolve.

But cord cutting--the shift to internet-delivered content services--does not diminish demand for such content. And even linear forms of delivery might decline rather slowly if suppliers are able to tweak the value proposition.

Virtually nobody disputes the notion that consumers are less inclined to buy linear video services these days, or that streaming alternatives are the new choice for most consumers, either as a complement or substitute for linear subscriptions.

But entertainment video substitution might--or might not--not take the pattern of voice substitution, in terms of simple abandonment an older landline product and a shift to mobile substitutes.

And demand change was more complicated than we often suppose. In addition to the value of mobility, cellular phones personalized voice communications. Where voice was a service “to a place,” mobile telephony changed the context to “communications with a person.”

So mobility represented higher value, not just a change of cost function.

At the same time, the value of internet apps and experiences also changed the role of the devices, lead apps and volume of interactions.

In the case of landline voice, customers in developed regions simply are abandoning their landlines, as mobility provides a satisfactory or preferred use mode. People in the U.S. market also are simply calling less, as more communications take other forms.

The point is that linear video cord cutting might take more-subtle forms than we think, at least in part because content contracts make linear services the only way to get some content, or make the cost of access to much desired content too complicated or expensive any other way.

There are, in other words, many instances where a “lower price for the content you want” strategy will prevent or slow the rate of cord cutting.

In the case of entertainment video, the value of a linear subscription endures, for many consumers. It is the perception of price and value that generally leads to abandonment. That is why “skinny bundles” should work: such bundles change the value proposition.  

Nor are streaming services a complete alternative to linear services. That is why so many people try to “cut the cord” and find the present alternatives not as attractive as once believed. Sports content, for example, often cannot be obtained except as part of a linear bundle.

Value also is why so many people buy both linear and over the top streaming services, or buy multiple streaming services.

In the case of text messaging, people switched to substitute apps, so that in the United Kingdom, for example, the typical user now sends fewer messages in 2017 than in 2012.

The big legacy providers of linear video will continue to reprice and repackage linear offers in ways that boost value while containing retail cost.

source: eMarketer

What is Impact of Industry Concentration on Competition?

Mobile virtual network operators--especially smaller MVNOs--are warning that a proposed merger merger between T-Mobile US and Sprint will lead to more concentration and higher prices. Such warnings are as expected as the touted advantages claimed by industry segments evaluating any major changes in industry policy.

In some ways, it cannot be argued that the proposed merger makes the market more competitive. By definition, the merger reduces the number of major competitors in the market. Granted, on some measures the U.S. market still is less concentrated than some other major mobile markets.

And there is an argument to be made, in many segments of the communications business, that greater scale has become a fundamental requirement. And, in principle, a bigger number-three contestant could use its greater scale to push even harder at industry pricing levels and the value proposition.

But few observers seem to expect more competition as the end result of a merger between Sprint and T-Mobile US.

Even if one is of the opinion that merger rules are more relaxed now than under the prior presidential administration, some quantitative tests always are used by the Department of Justice when evaluating proposed mergers, and immediate past precedent might be a key issue.

The proposed merger of AT&T and T-Mobile in 2011 was scuttled because the Hirschman Herfindahl Index (“HHI”) would have increased by 700 points in an industry already classified by the HHI and highly concentrated. The HHI is a standard tool used by regulators globally and will be used again as Sprint and T-Mobile US propose to merge.

It is not incorrect to read the DoJ’s objections to that earlier merger as opposition to any merger between two of the four nationwide providers of mobile wireless services: AT&T, Verizon, T-Mobile and Sprint.

The proposed merger of the third- and fourth- largest U.S. mobile companies would increase the HHI by over 400 points, meaning market concentration, in an industry already deemed highly concentrated (if less concentrated than some other markets), would increase.

“Like the failed AT&T and T-Mobile merger a few years ago, the proposed merger between Sprint and T-Mobile will be presumed anticompetitive and thus heavily scrutinized by antitrust authorities,” says George Ford, Phoenix Center for Advanced Legal and Economic Public Policy Studies chief economist.

To be sure, executives from T-Mobile US and Sprint say the additional scale provided by the merger will allow the bigger firm to continue to be aggressive in attacking prices, or will allow the firm to invest in 5G at a faster rate.

But I have yet to find an equity analyst who believes that will happen. Quite the reverse is expected, in fact: less price competition in the U.S. mobile market. An oft-noted conclusion is that a bigger number three firm would have less need for price cuts as a primary competitive weapon. Not is that view confined to equity analysts and market researchers.

Nor will some market watchers think the recent DoJ opposition to the AT&T acquisition of

Time Warner--a vertical merger of the type that tends not to be challenged--is a good omen, on that score. If DoJ objects to a type of merger that usually is not viewed as problematic, what is DoJ going to do with a type of merger that, by definition, will be viewed as problematic?

To be sure, the telecom industry virtually always has been concentrated for most of the past 150 years. But the level of concentration grew more than 100 percent between 2000 and 2014.

Percent Change in Market Concentration and Regulation 2000-2014
Industry	HHI Index
Hospitals	11%
Health Insurance	79%
Banking	100%
Telecom	101%
Airlines	16%
Auto Industry	-34%
Energy	31%
Average Change	43%

source: American Action Forum