Can Voice Input Become a Platform?

Voice now is a growing consumer interface; a rival method for search and e-commerce; an input method replacing keyboards and screens. Whether voice input becomes a platform, and how that platform gets monetized, is among the next set of issues.

source: eMarketer

What 5G Fixed Wireless Means to Verizon

As it looks to launch 5G fixed wireless service out of region, Verizon seems convinced that video services are an important part of the value proposition. Among U.S. tier-one service providers, Verizon sees the greatest upside from attacking other fixed network service providers outside its core fixed network footprint.

There are obvious reasons. Verizon has the smallest fixed network footprint , and believes it can expand its network to reach as many as 39 million U.S. homes outside the core Verizon fixed network geography using 5G fixed wireless.

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.

AT&T Now is a "Modern Media Company"

This slide from the AT&T quarterly earnings call tells you quite a lot about how AT&T sees itself, and how differently it sees itself from its past. AT&T is said to be “a modern media company.” The building blocks of that business include content, advertising, distribution networks and high-speed networks.

Sure, AT&T has business (enterprise) operations and assets in Latin America and Mexico. Its single biggest revenue generator still is consumer mobility. But all those assets are infrastructure to support content, advertising and distribution, AT&T now emphasizes.

source: AT&T

Honolulu

It’s summer, so I was reading the book Honolulu (really enjoyed it). The protagonist is a Korean picture bride, and my maternal grandmother was a picture bride.

That got me to thinking about when my maternal grandfather immigrated to Hawaii.

Here is the Port of Honolulu record of his arrival, in 1905, on the steamship Korea, at age 15.

He worked in the cane fields, like everybody else. Probably hated it, like everybody else. 

Eventually he became the now stereotypical Korean corner grocer (some things do not seem to have changed much). 

Grandma met him for the first time on the docks. 

"People" Versus "Households" Can Make a Huge Difference

Fewer people in the U.S. market subscribe to linear video subscription services than in the past, that is clear. But there are some possible subtle qualifications worth noting. Traditionally, linear video subscriptions were purchased by “households,” much as traditional voice services were purchased.

Over-the-top subscriptions are purchased by people, as are mobile subscriptions, the key import being that the universe of potential OTT video subscriptions is far larger than the potential universe of linear video accounts.

So comparing OTT subscriptions and linear video accounts is not exactly an “apples to apples” exercise.

Overall, 186.7 million U.S. adults will watch linear TV (cable, satellite or telco) in 2018, down 3.8 percent over 2017, according to eMarketer. Whether that corresponds in a linear way to subscriptions is not so clear, since most U.S. households are multi-person.

According to eMarketer, the number of cord-cutters (adults “who have ever cancelled pay TV service and continue without it”) will climb 32.8 percent in 2018 to 33.0 million. Again, it is a nuance, but if a single household with three residents “drops service,” it is conceivable that the number of people reporting they are cord cutters is three, not one.

source: eMarketer

Headline Numbers on Linear Video Hide Other Trends

By now, nobody is surprised to hear that linear video subscriptions continue to drop or that over the top subscriptions are growing. In aggregate, there are more U.S. paid streaming accounts than linear accounts in service.

Net changes in revenue and accounts are harder to describe, as every quarter and year, some new accounts are added on both linear and streaming ledgers, partly because of churn (customers switching providers), sometimes because of moves (accounts are cancelled at one location but possibly added at another location), temporary suspensions.

In fact, linear revenue might actually be growing, even as accounts dwindle.

Netflix has some 55 million U.S. accounts, while Amazon Prime has some 90 million subscribers. All the largest linear video providers together have about 92.2 million accounts.

But since linear subscriptions represent many times more revenue than a typical linear video subscription, revenue losses are happening, even for firms such as AT&T that sell both linear and streaming video, and even when the net change in streaming accounts offsets the loss from linear accounts.

source: Statista

Total revenue is another story, as monthly subscription revenue earned by a linear account can be an order of magnitude greater than the revenue from any single OTT streaming account.

source: Ovum (Informa)

Among the bigger issues is the rate of decline of linear subscriptions, which seems to be accelerating. Net changes (including new accounts and customers switching providers) typically mean the gross losses are less than headline numbers might indicate.

In 2017, for example, the major U.S. providers lost about 1.5 million accounts, up from some 760,000 in 2016, according to Leichtman Research Group.

The big swing was that streaming services owned by the linear providers gained 1.5 million accounts, nearly the amount lost by the two satellite services.

In that case, the net losses by linear providers were about zero, even if the switch was from higher-revenue linear to lower-revenue streaming accounts.  

source: cg42

source: UBS

For Regulators and Suppliers, Competition and Investment are Inversely Related

Communications regulators and service providers always face a cruel tradeoff: over the long term, investment that boosts revenue tends to be inversely related to the amount of competition.

So regulators always face policy tradeoffs. Regulators can emphasize investment or competition, but arguably not both--at high levels--equally and simultaneously. Up to a point, competition creates incentives for investment. But only up to a point.

The reasons are obvious enough. If regulators take a wholesale-based approach, with one network serving all retail providers, the facilities provider’s incentives to invest are limited by government policy. By definition, all retail providers get access at the same rates and terms and conditions. So, as competition increases, incumbents who generally build the wholesale facilities lose ever more market share.

Facilities-based competitors find that incentives to invest increase as the number of competitors is effectively limited (by merger, less wholesale market entry), since contestant market share increases. And that means higher gross revenues and generally higher profit margins.

Also, investment in internet access facilities is something of a zero-sum game.

Internet access providers long have known that there is no linear relationship between data consumption and revenue earned for providing that access. On the other hand, there is a somewhat linear relationship between cost per bit and data consumption.

New data from the U.K. Department for Digital, Culture, Media & Sport shows that although mobile customer spending on mobile internet access is roughly flat between 2012 and 2016, data consumption and cost per bit show a relatively inverse and linear relationship.

As mobile data consumption increased by an order of magnitude over those years, the cost per bit dropped by an order of magnitude.

The business model implication is clear: increasing end user data consumption does not lead to revenue increase.

source: Department for Digital, Culture, Media & Sport

How Many Gigabit Networks in U.K. Market?

Where facilities-based fixed communication networks compete, business models always are contingent on market share. Where just two equally-skilled and financially-endowed contestants face each other, it is reasonable for each competitor to expect take rates of 50 percent, on a network that passes every location.

That strands half the invested capital in the access network. In practice, since adoption is never 100 percent, the addressable market theoretically is less than 50 percent for each supplier.

Additional competition reduces the potential market share yet further. In the U.S. market, some 20 to 30 percent of households already are mobile-only for internet access, reducing the potential share for two competitors to no more than 40 percent each.

source: Deloitte

Mobile substitution also will, in the 5G era, vastly complicate the fixed network business model. “The distinction between fixed networks and mobile networks is increasingly being eroded,” the report says. “In some places 5G could provide a more cost effective way of providing ultra-fast connectivity to homes and businesses.”

Such substitution already has happened for consumer voice, and consumer internet access and subscription video are the next big areas of potential shift.

That poses further threats to the fixed network business model, as potential market share will will even further in the direction of mobile platforms.

In the U.K. market, for example, BT’s network passes nearly every location, but BT itself has about 37 percent market share, according to a new report by the U.K. Department for Digital, Culture, Media & Sport.

Wholesale customers on the Openreach network include Sky (24 percent share), TalkTalk (12 percent) and smaller providers. There also are some facilities-based providers operating on a localized basis.  

Virgin Media is the primary facilities-based competitor and has 20 percent market share, while passing a bit more than half of U.K. households. It might not be unreasonable to argue that Virgin will be the first operator to offer gigabit internet access at scale, as a disproportionate share of UK. customers with faster speeds are on the Virgin network.

Housing density is the other key variable. About a third of U.K. households are in areas dense enough that as many as three competing gigabit networks can be built. That logically includes the Openreach, Virgin Media and one additional competitor on a local basis.

Perhaps half of U.K. households might be in areas dense enough that two gigabit network providers can survive.

About 20 percent of homes are in low-density areas where only a single network is likely to be possible (subsidized or not).

So the study sees three basic deployment scenarios. In areas representing 80 percent of U.K. homes, two or more gigabit-capable networks are possible. That includes larger cities and towns.

Other, less dense areas might support only a single network. That might include about 10 percent of all U.K. homes.

Very rural areas, representing about 10 percent of homes, will need subsidies to support building of a single new network.  

The big unknown is the degree of mobile substitution, which will make the business case for fixed networks tougher.

35% of U.S. Hispanic Households are Mobile Only for Internet Access

Mobile substitution, long a feature for voice services, now is a growing reality for internet access. According to CTIA data, 20 percent of U.S. households rely exclusively on their mobile devices for internet access, up about 54 percent from 2015 levels.

That trend is even more pronounced in Hispanic households, where 35 percent of smartphone users rely solely on mobility for internet access; lower-income households and younger households.

source: CTIA

Bundling or Tying is at Heart of EC Charge Against Google (Always Is)

The European Commission argues that by tying use of the Android OS and Google Play to a phone supplier's offering of Google's search engine and browser, Google quashed potential competition. 

But many would argue Android is not a monopoly. There are other choices, aside from Android and the iPhone OS. But few end users or phone manufacturers have chosen to use those alternatives. Tying or bundling always raises issues, though. 


source: Statista 

Will Autonomous Vehicles Increase Video Consumption?

Executives at AT&T seem certain that new video screens are going to emerge as passengers start spending more time in autonomous vehicles. The argument is that if people are riding, but not required to drive, then video viewing time might well increase beyond present levels.

The biggest potential changes might come from people with long commutes, though even users of autonomous or even ridesharing vehicles for shorter trips around town would logically become potential new audiences.

Consumer behavior still is a barrier for subscription-based or pay-per-view approaches. Consider an airliner a ridesharing vehicle. How many passengers do you notice buying a video entertainment service during the flight? Not many.

Ad-supported content obviously will have a bigger potential audience, and especially for ridesharing services, rather than auto owners. The immediate problem is that the economics of substituting ridesharing for auto ownership, in most parts of the United States, do not exist.

Using Uber or Lyft (or a taxi) for episodic travel often makes more sense than renting a car. What is not yet clear is whether it will soon make sense to use ridesharing instead of owning a car, in some instances.

It probably is easy enough to argue that car ownership still makes more sense, financially, than full time ridesharing for most families and individuals, in most areas of the United States.

Some attempt to include “cost of your time” in calculating the benefits of ridesharing, compared to car ownership, but most of us cannot name another individual who really would consider that value in trying to assess ridesharing versus auto ownership.

Assume the cost of most Uber or Lyft rides is about $2 a mile. Assume you really need to move about 12,000 miles a year. The ridesharing might then cost about $24,000 a year. The Internal Revenue Service uses a figure of $0.545 per mile for use of autos for business purposes.

So owning a vehicle and using it 12,000 miles a year represents about $6,540 a year (including depreciation of the vehicle, insurance and operating expenses, but not parking).

At such rates, ridesharing represents out of pocket costs about four times higher than owning a vehicle.

So while many of us would consider ridesharing as a full alternative to auto ownership, the economics do not yet work, for people who live in suburban areas, or even in many urban areas other than New York or San Francisco.

There are Limits to How Much Mobile Data People Want to Consume

As much as connectivity is untethered and mobile; as important as internet apps now are in the mobile value proposition; as much as consumers keep increasing their data consumption, we tend to vastly underestimate consumer behavior as a moderating influence on mobile data consumption.

An analysis of mobile tariffs and mobile data consumption by Tefficient found only a weak correlation between average revenue per user and data usage, for example.

That is not what one might expect. The analysis shows that, in most countries, mobile data consumption is 3 Gbytes per month, or less, no matter whether overall recurring charges are high or low.

That seems to fly in the face of both economics and the Tefficient data, which also shows that mobile data prices and usage are directly correlated (high price leads to low usage; low prices lead to high usage). So something else is at work.

source: Tefficient

Among the logical explanations for those findings are that mobile subscriptions represent a bundle of features, including messaging, voice, device rental, plus possible bundling with other services (fixed network voice, fixed network internet access, mobile or fixed video subscriptions) that affect unit cost. So mobile data is one of many determinants of retail recurring costs.

Also, Wi-Fi offload plays a role, representing a majority of mobile device data access in many markets. End user behavior also matters, as it seems people use mobile data in different ways than data used while stationary (at home or at work).

source: Tefficient

Still, the Tefficient data suggests even at low prices, people only want to do so many things, or spend so much time, on mobile internet apps. And that is reflected in mobile data usage.

Ironically, the one development that changes the overall usage curve is the use of 5G platforms to supply fixed access.

Verizon Will Flip Mobile Economics Upside Down

Verizon is going to flip mobile network economics upside down as it builds commercial 5G-based fixed wireless capabilities.

Make no mistake, this is a fundamental reworking of assumptions about mobile network cost and retail pricing of mobile data consumption.

The big challenge for firms such as Verizon, which want to build new 5G-derived platforms to supply fixed wireless, is that doing so will fundamentally challenge traditional thinking about the cost of wireless networks.

Fundamentally, network cost will have to be radically lower if the 5G platform, operating in fixed mode, is going to be competitive with fixed network usage and retail prices. Basically, cost per gigabyte has to drop by an order of magnitude (10 times) or more, if any 5G-based network hopes to compete, head to head, with fixed network internet access.

Ironically, the fear that service providers would not be able to afford to build and operate such networks seems to be proving manageable.

In other words, there is reasonable hope that 5G networks offering orders of magnitude better performance also will be affordable enough to compete head to head with fixed networks as suppliers of internet access.

“A prerequisite for continued data usage growth is that the total revenue per gigabyte is low,” say analysts at Tefficient. In some markets, such as the United States, Canada and Switzerland, where tariffs actually have been high and usage has been low, a disruptive challenge is coming from (of all things) Verizon, one of the biggest incumbents in the market.

source: Tefficient

What Verizon must do, in using 5G fixed wireless to compete head to head with other fixed network internet service providers, is flip the economics on its head.

Where tariffs are low, usage is higher, as you would expect. And that is the case in the U.S. market, which has high mobile data tariffs, and low usage. To compete against fixed network service providers, Verizon will have to be operate as a supplier of low tariff, high usage services, the polar opposite of where it is now in its mobile business.

And that is among the most-astounding facets of the strategy of using 5G both as a fixed wireless and a mobile platform. Such a blending arguably would have been impossible before the era of commercialized millimeter wave spectrum, cheaper small cell radios, fiber-deep networks, better radios and modulation techniques, cheap signal processing, massive multiple-input, multiple-output radios and even new ways to integrate unlicensed and shared spectrum.

Taken together, all those technologies are the foundation of Verizon’s effort to flip the network cost model so much that it can literally move from being a  “high cost, low usage” provider to being a successful supplier of “low cost, high usage” internet access, in a single mobile generation.

That is the underappreciated aspect of 5G fixed wireless.

What Else Could AT&T Have Done, Instead of Buying Time Warner?

With the caveat that the DirecTV and Time Warner acquisitions by AT&T remain controversial in some quarters, the arguments for both remain simple enough:

• AT&T’s core businesses are shrinking
• AT&T has to generate new revenues at scale
• AT&T needs that revenue to generate high free cash flow, to pay its high and growing dividend
• AT&T has done so historically mostly by acquisition
• Beyond which, AT&T has to reposition itself as has Comcast, in additional areas of the internet ecosystem

AT&T needs to generate lots of free cash flow to support its dividend payouts, which historically range between 50 percent and 100 percent of free cash flow. That is hard to do on a declining base of revenues, even if AT&T did not have a strategy of constantly raising its dividend over time.

          AT&T Dividend Payout Ratios (Dividends as a Percent of Free Cash Flow)

source: Seeking Alpha

Among the primary objections to the DirecTV and Time Warner acquisitions was the amount of debt AT&T would have to take on. This is a valid concern. AT&T has to execute on its plan to significantly reduce debt levels over several years.

Supporters of the DirecTV and Time Warner acquisitions might point out that without big acquisitions, AT&T would have had trouble sustaining free cash flow and its dividend strategy, as organic growth was not high enough to accomplish those tasks.

And it is hard to imagine where else AT&T could have found logical acquisitions that the company could afford, and that fit its core business strategy. Whatever else one might say, media assets have a lower multiple of price to equity than most other assets in the internet app and platform space, in computing or business services.

And a rational observer would likely agree that any big acquisitions must have some reasonable hope of synergy. Consumer video entertainment and video content assets are big enough to “move the needle” for AT&T.

Though we might debate the wisdom of the DirecTV deal, it seems to be working, at least in its role as free cash flow producer. Many have argued that AT&T should instead have made bigger investments in its network. Some of us do not see how that would have generated incremental revenue and free cash flow fast enough to matter.

For AT&T and other developed market tier-one telcos, huge new revenue sources must be found to replace shrinking connectivity revenues.

source: Seeking Alpha

AT&T’s first quarter revenue revenue trends (legacy business, prior to Time Warner impact) show the basic problem: the core business is declining. That trend compares with a “whole-industry” revenue picture that  is generally flat to just slightly positive.

                           AT&T First Quarter Revenue Trends

source: Seeking Alpha   

You can see the same trend for AT&T free cash flow, in the first quarter of the last three years.

            AT&T Free Cash Flow, First Quarter, Last Three Years

source: Seeking Alpha

In the end, one must ask what else could AT&T done with its capital to produce an immediate boost to revenue and cash flow, at higher levels or at less cost. Even if AT&T might have preferred investing in internet app provider assets with higher growth, such assets are quite expensive, compared to media assets.

Sure, acquiring assets in the coming internet of things space would be sound, but cannot move the needle on current revenue and free cash flow.

Sure, AT&T might fail to execute well, or might be tripped up by some other exogenous event. But the fundamental thinking is sound enough.