Telecom Return on Investment: Implications for Broadband Policy

Return on investment for major U.S. communications service providers has been falling for about a decade, which means it is a clear trend.

In business terms, that means the largest, best-financed U.S. communications providers face a worsening situation, not a rosy and growing market.

Unless a person believes the U.S. government has access to enough capital to reinvent 90 percent to 95 percent of the nation's infrastructure, something that might cost $300 billion or more, policymakers are going to have to rely on the private sector to do the heavy lifting.

Though we are yet weeks away from knowing what the Federal Communications Commission actually will attempt to achieve as a "national broadband policy," we are years away from knowing how it all will work out.

The reason is that sweeping changes of this sort always result in years of litigation, even once rules are set.

It seems fairly safe to argue that, whatever emerges, the rules will not be as bad as service providers fear, nor as good as some policy proponents would like. So long as the nation requires private firms and private capital to do the vast proportion of the work, policies that negatively affect investment will doom the effort.

Nobody will be completely happy when the rules are announced, or modified and litigated. But rational policymakers will not kill the golden goose. And service providers likely will face some changes they would rather not have to confront. That's just the way these things work.

Mobile ARPU Illustrates Service Provider Issues

U.S. mobile service provider average revenue per user decreased by $0.45 over the last year, says analyst Chetan Sharma.

Average voice ARPU declined by $0.98 while the average data ARPU grew by $0.53.

Therein lies the problem: mobile service providers are growing data revenues, but losing voice revenue faster than they are able to replace the lost revenues.

That isn't to say they will not ultimately succeed in replacing the lion's share of lost voice revenue. But few executives likely believe the substitution will be one-for-one, or greater, at least in terms of broadband access replacing core voice revenues.

source

50% Faster Email Performance Using Akamai and AppRiver

The amount of time it takes users to connect and sync with Exchange was reduced by half when using an Akamai-enabled AppRiver Secure Hosted Exchange solution, reports Compuware Gomez.

In other words, not all email services are created equal. Some can use optimization techniques such as Akamai to improve performance.

"AppRiver's relationship with Akamai is an excellent example of how network optimization can create a differentiated and improved IT service, in this case hosted Exchange," says Peter Christy, Internet Research Group principal analyst.

The enhanced performance also is an example of why overly-strict "network neutrality" rules that do not allow any forms of bit prioritization are problematic. There are lots of reasons to allow users, application and service providers to differentiate services and features, and better performance is foremost among them.

The AppRiver service offers a "one-of-a-kind, optimized hosted Exchange" service. The AppRiver and Akamai service essentially "privatizes" the connection between the user and the Exchange servers in order to create a high-speed virtual private network for AppRiver customers.

"By implementing Akamai's IP Application Accelerator service, AppRiver securely provides fast and reliable hosted e-mail for both wireline and mobile users," said . "Akamai improves the overall global experience for mobile device users by optimizing the Internet and minimizing the impact introduced by oversubscribed wireless networks," says Willie Tejada, Akamai VP.

source

AT&T Will Use Yahoo as Default Search Engine on Motorola's Android-Based Backflip

AT&T apparently will launch the Motorola Backflip, its first Android device, pre-loaded with Yahoo, not Google, as the default search engine. The move is one more example of the growing complexity of value chains in the communications business, where access provider, handset manufacturer and application providers have distinct interests.

In a less-direct sense, the moves also are evidence that the days of the old Internet have changed. These days, there are lots of business deals and arrangements that shape user access to experiences on the Internet and World Wide Web, and which demonstrate that there are numerous "gatekeeper" roles now being played by a variety of participants.

Other Google apps, such as Gmail, Google Maps, Google Talk, Android Market and YouTube, remain.

It’s unclear if T-Mobile will ever have to do the same. It’s been about two years since T-Mobile USA launched its first Google phone, and it has yet to replace Google’s search on Android devces with Yahoo, despite having a similar exclusive partnership with Yahoo.

Last year, Microsoft got exclusive right to manage mobile search and advertising on Verizon’s handsets.

While Bing has been installed on several phones, including BlackBerry devices, Verizon’s Motorola Droid and HTC Droid Eris, come pre-loaded with Google’s search as the default.

Default settings still are seen as valuable because many users do not customize their application profiles on smartphones.

New York Times story

No Daily Show, Colbert for Hulu

Viacom will remove “The Daily Show with Jon Stewart” and other Comedy Central television shows from Hulu the week of March 8, 2010, apparently unhappy with the incremental ad revenue the Hulu viewings generate, or other terms of the deal.

You might say it is a skirmish in the wider war over content pay walls and other ways content owners want to preserve the value of their copyrights in the online ecosystem.

Consider the move a vote to protect and preserve the value of multi-channel video distribution. that isn't to say content owners are averse to extended online distribution, only to note that, at the moment, the value of multi-channel revenue streams vastly outweighs what Viacom has been able to realize from Hulu distribution.

Comedy Central apparently will continue to stream full episodes of the shows on TheDailyShow.com and ColbertNation.com, where Viacom might believe it can better profit from restricting the content to its own sites.

Hulu executives say revenue for both “The Daily Show” and “The Colbert Report” had been growing. “In the past 21 months, we’ve had very strong results for both Hulu and Comedy Central, in terms of the views and revenue we’ve generated,” says Andy Forssell, Hulu SVP.

Three of the broadcast networks, ABC, NBC and Fox, own stakes in Hulu. Viacom’s decision may suggest that the economics of Hulu make less sense for content providers that lack equity in the Web site.

It isn't as though online availability now will cease. It is simply that viewers will have to navigate to the Viacom-owned sites.

No Daily Show for Hulu

2009 Was Tough for Cable and Telcos, 2010 Will Be a Bit Better

Fitch Ratings analysts say 2010 will be a better year for telcos and cable providers. There are challenges, to be sure. But the biggest question is whether cable and telco companies will be able to keep finding new revenue sources to replace those being lost.

European telcos face further stagnation of top-line revenues and likely have further to go in the process of cutting operating expenses, say analysts at Fitch Ratings.

The weak economic recovery, continued regulatory pressures, maturing service penetration and strong competition, are some of the key forces putting pressure on cash flow and profit margins.

At the same time, service providers are forced to continually invest in mobile and fixed network upgrades  to keep abreast of burgeoning data traffic demands, Fitch says.

To be sure, operators are introducing new services to replace declining revenue sources. But it "looks unlikely that the network operators will benefit from new service revenues in the way they did from SMS data," Fitch says.

Incumbent cable and telco providers in the United States will face many of the same pressures, including increased amounts of competition, wireless substitution and a sluggish economy.
Traditionally, U.S. telecommunications and cable service demand has lagged economic recoveries, and high unemployment, despite the recovery, as well as pressure in the housing sector will put pressure on 2010 financial results.

Fitch expects this lagging trend to continue and any U.S. economic improvement in 2010 will likely not be reflected in telecommunications and cable results until 2011.

"Although the telecom and cable industry has maintained strong liquidity and free cash flow, macroeconomic woes including unemployment rates and a struggling housing market will continue to limit financial growth for the sector," says Michael Weaver, Managing Director at Fitch.

Fitch estimates that aggregate access line losses for 2009 will be approximately 10.5 percent for retail local telecommunications providers. There was a bit of a change in 2009 as slower losses to cable voice providers was offset by higher business access line losses.
Business and residential access line losses should stabilize in 2010 and continue in the range of 3 million to 3.2 million each quarter, which would represent a yearly loss of approximately 12 percent, says Fitch. There is a statistical artifact here.

As the base of voice lines declines, a fixed number of lost lines represents a larger percentage change than it used to. So although it appears at first glance that line loss is accelerating, that is not the case. The decline is steady, but larger in percentage terms.

The loss of legacy revenue of course heightens the importance of new revenue sources for fixed network operators. Broadband access had been such a driver in the 1990s and early 2000s, but is less significant now that the market is saturated or nearly saturated. Fitch estimates that high-speed access subscriber growth slowed in 2009 to 1.7 million net subscriber additions.

In 2010, net new additions should slow further to 1.4 million accounts. But make note: Fitch believes wireless broadband substitution now is poised to become a material factor in line growth.
Multi-channel video likewise has been a growth driver for Verizon and AT&T, but also is slowing. Fitch estimates that net new video customers will grow by two million subscribers in 2009, slowing in 2010 to approximately 1.5 million.
Commercial service revenue will face a roughly flat situation in 2010 after 2009 declines over six percent for wireline companies. In 2010, commercial revenue will grow about one percent.

In total, Fitch estimates that aggregate wireline revenues will decline in 2010 near the mid-single-digit range, a modest improvement over 2009. EBITDA will similarly fall in aggregate by a low- to mid-single-digit range for the industry as benefits from headcount reductions offset losses of high-margin legacy services.

Cable operators also saw accelerating video subscriber losses in 2009 with a reduction of approximately 2.75 percent. Subscriber losses are the result of weak new home growth, but more important, they are the result of competitive erosion from direct broadcast satellite and telco video offerings.

The cable basic subscriber erosion rate will accelerate in 2010 as competitive pressure remains fairly constant, but there will not be the lift from digital television conversion that boosted cable performance in the first and second quarter of 2009.

Fitch estimates that basic subscriber erosion will increase to approximately 3.5 percent in 2010. High=speed access additions also slowed materially for cable  operators in 2009, and Fitch expects subscriber growth of approximately 1.7 million in 2010.
New DOCSIS 3.0 services should help cable operators in the commercial space, though.

Cable telephony subscriber growth rates fell rapidly in 2009 with a reduction of over 40 percent, but with operators still adding two million net subscribers. Fitch estimates that cable telephony net additions will fall to 1.4 million in 2010 as wireless substitution and weak housing-starts affect results.

Cable operators successfully increased their share of the small business and home office market in 2009. Fitch estimates that commercial service revenue increased by approximately 25 percent for cable companies in 2009.

In 2010, operators will start to move up to the mid-size business customer segment in 2010. Fitch estimates that cable revenues will increase in the three percent to five percent range in 2010 and that firm margins will lead to a similar level of EBITDA growth.

Fitch estimates that the total wireless subscriber base grew by about five percent in 2009 andwill slow to four percent in 2010.

Post-paid net additions declining by 42 percent for 2009 compared to a 36 percent decline in 2008. However, data services and advanced devices such as smartphones, netbooks and aircards kept post-paid gross additions relatively flat in 2009. That might not be too comforting, as it shows churn rates are greater than new customer acquisition.
Fitch estimates that prepaid net additions will increase by nearly nine million in 2009 compared to approximately five million for post-paid. Fitch expects that pre-paid additions will again achieve in 2010 a level similar to 2009.

Voice average revenue per user (ARPU) continues to erode at a growing pace approaching double digits in 2009 in part due to lower roaming revenue. This trend will continue in 2010 and at a level equal to or even higher than 2009.

Data ARPU growth has limited the impact of voice ARPU erosion on total ARPU, which has remained relatively steady. Fitch continues to believe that strong data growth will again be achieved in 2010.

In aggregate, Fitch forecasts that wireless revenue will increase in the mid- to high-single-digit range in 2010 and that margins may erode slightly because of higher marketing and retention costs and the success of unlimited prepaid plans.

Fitch expects that capital expenditure will be flat in 2010. Free cash flow increased by 20 percent in 2009 as companies materially reduced capital expenditures.

Fitch believes that FCF will again increase in 2010 by approximately 10 percent due to modestly higher aggregate EBITDA and continued low levels of capital expenditure.


Fitch Ratings

Do People Pay for "Access" When "Buying Content"?

James McQuirvey, Forrester Research VP, thinks people often pay for "access" when they "buy content." It's a complicated idea, in some ways. The point is that "access" still provides lots of ecosystem value.