How Well is U.S. Fixed Network Business Doing?

In the U.S. market, there is a fairly clear bifurcation between fixed network connectivity providers doing relatively well, and those which are not doing so well, even if an argument can be made that the segment as a whole is challenged. 

Tier-one cable operators are generating more revenue and profits from their wireline operations than most telcos are. Large tier-one telcos are doing better than smaller telcos. But AT&T fixed network revenue is slowly declining. 

Verizon fixed network revenue also has been declining slowly. 

source: Verizon

The broader traditional telco market is doing less well, as revenue is dropping. 

S&P Global Ratings

Cable internet service revenue growth arguably exceeds telco growth, which is flat to negative. And cable revenue from fixed network operations is growing. “Overall, we expect top-line growth of about five percent with weighted average margins improving by about 50 bps to approach 39 percent, S&P Global estimates. 

S&P Global Ratings

“We believe cable companies can continue to increase high-margin broadband revenue for the next two years through a combination of subscriber growth and higher prices as subscribers demand faster internet speeds with rising data consumption,” says S&P Global. “We expect that the average number of broadband subscribers will increase by about four percent in 2020.”

S&P Global Ratings

WAN Costs Might be a Bigger Edge Computing Driver than Latency

By 2025, perhaps 75 percent of enterprise data will be generated outside enterprise data centers or cloud data centers, according to Cisco. 

While today only 10 percent of all data is handled at the edge, analysts expect in three years between 50 percent and 75 percent of all data to be produced and processed at the edge,” said Paul Morgan, Global Sales for Manufacturing, Automotive & IoT, at HP Enterprise (HPE).  “Gartner puts the figure at 75 percent.”

And even if latency is an issue for some edge applications, conrtainment of bandwidth costs also matters. If much of that data can be processed locally, wide area network bandwidth costs are lower.

Spectrum Per Customer Matters

One always has to take marketing claims with a grain of salt. So it is with U.S. mobile operator spectrum holdings.

AT&T recently has claimed a dramatic lead in low-band spectrum. This chart shows why AT&T makes the claim. 

AT&T has about 176 MHz worth of low-band and mid-band spectrum, compared to Verizon’s 117 Mhz, Sprint’s 212 Mhz, T-Mobile’s 11o MHz and Dish Network’s 92 MHz. 

Of course, Verizon and AT&T have the most subscribers, so bandwidth per subscriber is less than for Sprint, T-Mobile US or Dish Network. 

source: Wells Fargo Securities

The “spectrum per subscriber” picture is different, though, because one also has to factor in the network load. Operators with more customers "need" more spectrum. And since Verizon and AT&T have "most of the customers," that should affect spectrum available "per customer."

source: Mobile Experts

Spectrum holdings matter, of course. But subscriber loading also matters. Looked at on a bandwidth per subscriber basis, AT&T, Verizon and T-Mobile US are not far apart. Only Sprint has an unusually high amount of spectrum. Dish Network has not launched yet, and will be starting with modest network loading, so it should have relatively high spectrum per customer.

Verizon has 35 percent share of subscriptions. AT&T has 34 percent market share. So those two service providers have a combined 69 percent share of market. T-Mobile US has 17.5 percent share, while Sprint has about 12 percent share, according to Statista.

5G Subscription Forecasts Suggest Asia Will Lead

Market forecasts always are contingent on one’s assumptions, and that is no different for 5G subscription forecasts. It would take a brave leap or unusual definition to conclude anything other than that Asia will have the greatest number of 5G connections in the future, simply because Asia has the most people and the most mobile subscribers. 

Juniper Research anticipates that over 75 percent of global 5G connections will be in the Far East and China. This is due to the early launches in South Korea by all tier one operators, which was followed by significant launches of commercial 5G networks in China. 

GlobalData, on the other hand, suggests that Asia will account for about 65 percent of global 5G subscriptions by 2024 and about 44 percent of revenue. North America will account for 32 percent of revenue by 2024.

At the end of 2019, there were an estimated 4.5 million 5G users in the Far East, roughly 80 percent of the global total, nearly all of them in South Korea, Juniper Research estimates. 

But Juniper also predicts the United States and South Korea will be the fastest adopters of 5G, with 75 percent of all 5G subscribers attributable to these two countries by the end of 2020. That does not make sense to me, but that is what Juniper says. 

By 2025, Asia will still have more than 60 percent of 5G connections, Ericsson predicts. 

source: Ericsson

Is Structural Separation Still Relevant?

Australia, New Zealand and Singapore are among nations that have instituted a structurally separated telecom network environment, especially regarding the legacy national telecom networks. 

Infrastructure sharing is a more common trend, as when mobile operators agree to share the cost of cell towers. 

Municipal broadband networks represent a similar effort to create more competition, or higher-quality consumer services, using a wholesale approach where one entity builds and operates the network, and any number of retail providers are allowed to use the network to create their own retail efforts.

Compared to two decades ago, there seems less talk about structural separation as a method for either increasing capital investment or limiting the cost of such investment. Municipal networks, building brand new facilities, seems to be the bigger trend in some markets, such as the United States. 

While it might be too early to draw final conclusions, there already is some mixed evidence of the value of such decisions. Some three decades ago, I was part of a study team looking at a proposal by Rochester Telephone Company to divest its local communications monopoly, creating a wholesale framework, in return for which RTC would be granted freedom to enter the long distance business, at that point.

Rochester Telephone won permission from state regulators to split into separate companies: a regulated wholesaler of telephone services named Rochester Telephone Corp. and an unregulated retailer named Frontier Communications of Rochester.

After approval, RTC become Frontier Corp. in 1995. In August 1995 Frontier Corp. merged with ALC Communications Corp., acquiring in that move Confer Tech International, the world's largest dedicated multimedia teleconferencing company. 

Later in the year Frontier acquired LINK-VTC, a videoconferencing services company. A month earlier, Frontier had purchased Schneider Communications Inc., a long-distance voice and data carrier, and its 81 percent interest in LinkUSA Corp., a long-distance services provider, for $127 million. 

Other 1995 acquisitions were WCT Communications, a West Coast long-distance company; Enhanced TeleManagement, Inc., offering integrated telecommunications services in six states; American Sharecom, Inc., a Minneapolis-based long-distance company; and Minnesota Southern Cellular Telephone Co. Frontier also established its first international subsidiary for integrated services, London-based FronTel Communications Ltd.

In 1999 the company was acquired by Global Crossing. In 2001, Global Crossing North America's local exchange assets, including Frontier Telephone of Rochester and Frontier Subsidiary Telco, and ownership of the Frontier name were sold to Citizens Communications Company, which in 2008 renamed itself Frontier Communications.

I have no idea how well the wholesale model actually has worked out in the former Rochester Telephone service area, but it is not clear to me that competition or investment has been significantly different after the structural separation. 

If I had to guess I’d say the emergence of Charter Communications as a telecom services supplier has had more impact on prices and the quality of service than the structural separation.

AT&T Acqusitions Still Controversial, if Necessary

It never is hard to find critics of the Time Warner acquisition or DirecTV before that. While acknowledging that DirecTV has underperformed expectations, one can make the argument that the cash flow advantages still outperformed other assets AT&T might have acquired. 

Organic revenue growth often is tough, and a firm such as AT&T requires huge amounts of free cash flow to support its dividend payments, debt reduction and capital investment needs. Sure, the video entertainment business is changing. But you would be hard pressed to name any other acquisitions AT&T might have made that boosted free cash flow as much as DirecTV. 

Also, AT&T could not have afforded many other high-growth, high cash producing assets that were substantial enough to move the free cash flow needle. Even if mobility and business services produce higher profit margins, AT&T was not in position to acquire more mobile market share, because of antitrust concerns. 

Nor is it clear whether any business segment assets could be acquired domestically or internationally that would be big enough to move the cash flow needle, and also fit a strategic rationale. 

Keep in mind that AT&T always has grown principally by acquisition; only then secondarily by organic growth. Also, there are relatively few consumer services that are highly purchased, and video entertainment is one of those. 

The right declining businesses can throw off lots of free cash flow, and might serve as a foundation to create a next generation of products that have growth prospects. AT&T was betting this would be the case with DirecTV. 

Still, free cash flow is a big driver of AT&T thinking. Sure, now debt reduction is a priority, but that happens when a company’s growth strategy virtually requires big acquisitions.

SpaceX Starlink Constellation Should be Active over Canada and Northern U.S. by June

SpaceX has successfully launched another 40 satellites into low earth orbit, bringing the Starlink constellation of LEO broadband satellites up to 175.

Assuming SpaceX continues putting satellites in orbit at a rate of 60 satellites per launch, 11 more Falcon 9-Starlink missions this year will meet the 800-satellite threshold for "moderate" levels of internet coverage. That could happen by June 2020. 

By the end of 2020, there should be about 1,500 Starlinks in orbit. Internet service providers in Canada and northern parts of the United States, take note: Starlink will be able to supply consumer and business internet access across those regions by about June. 

It is not yet clear how Starlink will price its service. Right now, geostationary bandwidth represents perhaps 0.6 percent of consumer internet access connections, according to Northern Sky Research. 

source: Northern Sky Research

Forecasts must assume dramatic reductions in earth station costs, with consumer pricing not too far from current expectations, if LEO-based internet access is to be competitive with GEO service and fixed networks (wired and wireless). 

In many regions, internet access does not reach high levels until consumer prices drop below about five percent of gross national income per person. In the United States and Canada, competing with other alternatives will require getting recurring service costs even lower, into the one percent range, most likely, as that is where existing consumer services are priced. 

source: NSR

Of course, in the early going, price subsidies are likely to be important, as earth station gear will likely not enable low consumer service prices. Longer term, it is possible that LEO service winds up being more important for business customers than consumers, though.

How Will Industry Replace $35 Billion in Annual Revenue Losses Every Year?

Globally, mobile operator voice revenue will drop to $208 billion by 2024 from $381 billion in 2019, Juniper Research now forecasts. That is not a new trend, as voice revenue has been under severe pressure for two decades, and not principally because of VoIP substitution. 

After about 2000, consumers began to place more and more of their long distance calls directly from their mobiles, instead of landline phones, in large part because of financial inducements to do so. The net impact, shown here in the U.S. market, was a decline in fixed network calling, a decline in purchasing of fixed network voice lines, and, as a consequence, a decline in voice revenue. 

source: National Exchange Carrier Association

In fact, one can argue that it was a shift of consumer demand to mobility, with domestic long distance calling included at essentially no charge, that drove mobile demand.

Starting about 2001, a domestic long distance call might still have cost an additional 10 cents per minute on a fixed line, but a zero incremental charge when calls were placed from a mobile device. 

That disrupted the industry profit model, which was built on long distance revenue. 

source: Technology Policy Institute

Of course, competition did not help, either, and that process had already been driving lower prices, since at least 1983. 

source: FCC

If Juniper Research estimates prove correct, $173 billion worth of revenue will be removed from service provider ledgers, in total, between 2019 and 2024, to the tune of roughly $35 billion annually. Those are significant numbers, as all that revenue has to be replaced, somehow. 

For any single service provider, no matter how large, $1 billion in annual new revenues is not easy to acquire, harder still to build. 

source: U.S. Department of Justice

All that is why some observers believe connectivity service providers must discover or create a few new and big sources of revenue to replace voice, messaging and now even video entertainment revenue. My own prediction is that the new revenues will have to have magnitude of about 50 percent of present revenue in 10 years.

More Fios Price Transparency

Some service providers may not like the idea, but greater price transparency seems to be coming to the consumer part of the fixed network business. 

For decades, U.S. cable TV and telco service providers have relied on service bundles (dual play, triple play, sometimes quadruple play) to create value, partly by offering discounts for such packages. The other angle was that bundling allowed service providers to sell more units of products consumers did not actually want. 

Many consumers buy triple-play packages containing landline voice only because the overall price is less than buying internet access and video entertainment. 

That strategy now is loosening, if not fully unraveling, in large part because two of the constituent services--voice and linear video--have diminishing demand. 

So Verizon has moved to what it calls Mix and Match on its Fios fixed network service, allowing  customers to buy Internet and TV plans without use of a traditional bundle. The upside for consumers is that it is no longer necessary to buy a bundle to get the best prices. 

Price transparency is a big advantage. In a traditional triple-play bundle, it is not possible for customers to determine what each constituent service costs. Under Verizon’s Mix and Match format, all prices are transparent: consumers know exactly what each component costs. 

Under Verizon’s new plans, it is clear that residential home phone service (probably before taxes and fees) is rated at $20 a month, internet access costs $40 to $80 a month, depending on speed tier, while video can cost $50 to $90. 

The building block, in most cases, will likely be internet access, the one service all fixed network service providers will use to anchor their business models. 

Customers then can buy linear service in a new way, choosing five channels from the palette of 200 networks, using YouTube TV or buying a linear package of 300 or 425 channels. 

Once upon a time, cable TV gross profit margins were in the 40-percent range. Today, most are probably lucky to get 10 percent net margins. Small telcos and cable operators never were able to earn much--if anything--offering video services. And there is some evidence that streaming service margins are lower than linear. 

Also, profit trends have flipped. A decade or two ago, video profit margins outstripped those of internet access. Up to this point, it has mostly been small telcos and cable companies in rural areas that have pondered abandoning video services. Now Verizon is signaling that it does not see the upside, either. 

source: Verizon 

Market Share Shifs after Disney+ Launch?

Market share shifts are inevitable as new video streaming services launch. Here is what one analyst believes will happen as Disney+ launched in late 2019. 

source: eMarketer

How Much Agility is Possible?

The problem is that large organizations with lots of regulatory scrutiny and long-lived, sunk assets might be incapable of agility, to a large degree. 

How Much Will Households Spend on Video Streaming?

Are U.S. streaming video subscription customers already showing signs of reaching the limit of willingness to spend on such services? One survey has been interpreted that way. The majority of respondents to a survey (59 percent) are not willing to pay more than $20 a month for any single streaming TV service, according to a recent survey of more than 2,600 U.S. consumers sponsored by The Trade Desk, a supplier of programmatic ad buying. The survey was conducted by YouGov. 

Some 75 percent of consumers indicated they would not pay more than $30 a month for video streaming. A couple of caveats are in order. Consumers taking surveys often casually say they will or will not do something. Those responses often do not match with their actual behavior. 

And, obviously, it is in the business interest of a programmatic ad buying firm to convince wider sections of the market that advertising support is required to reduce overall end user cost.

The money quote: “The survey indicates a willingness from consumers for streaming services supported by ads, particularly if the format and pacing of commercial breaks differ from traditional TV content,” The Trade Desk says.

The issue, as always, is that consumers prefer ad-free formats, but also prefer not to spend too much money on such content. Hence, the delicate balance of revenue models: recurring payment with no ads, recurring payment with some ads or lots of ads but no recurring payments. 

It’s all about perceptions of value, as consumers prefer no ads, but will tolerate them, up to a point, to save money. “Given the choice between getting something for free or paying for the exact same thing, they’ll make the choice to get it for free,” said Randall Rothenberg, Interactive Advertising Bureau CEO. 

“Consumers are willing to view ads if it means their subscription costs go down,” The Trade Desk notes. That tendency can be seen in toleration of advertising across multiple formats and venues.  

It is possible to argue that the willingness to spend responses will prove incorrect. Many of us would be quite comfortable with forecasts that total spending on streaming video could top $40 a month, and for significant numbers of consumers will reach about $80 a month to $100 a month. 

And there are heavy-user households that likely already are spending more than that on total video entertainment (linear plus over the top services). Another survey taken in 2019 already found at least five percent of consumers willing to spend $70 or more on video streaming services per month. 

The other issue is that content is going to fragment onto different services. And some surveys suggest a clear majority of viewers will buy a whole service to see one particular favored show. So no matter what consumers now believe, they will be confronted with a more-fragmented content market that creates new incentives to buy multiple streaming services. 

The point is that it is not unreasonable to expect that most households will not ultimately find they spend much less than they do at present, for video services.

Amazon Fire TV for Rural Service Providers

Amazon now is opening up its Fire TV platform to partnerships with communications service providers. The Fire TV Edition for Operators is available today in North America, Europe, India and Japan.

After successfully introducing Fire TV partnerships with Tata Sky in India and Verizon in the United States, Fire TV is now expanding the device offerings available to operators across several continents, including rural connectivity partners in rural U.S. markets where traditional linear video services are unprofitable for the service providers. 

Amazon is working with the National Cable Television Cooperative (NCTC) to enable its members the ability to deliver low cost Fire TV streaming media players directly to their customers. 

NCTC has over 750 members, including independent cable and telecommunication operators, delivering service to 16 million broadband and eight million video customers.

Analysys Mason 2020 Predictions

It is nice to see a set of predictions that are not "blue sky" for a single-year period.