New Cracks Appear in Video Business Framework

There are some new cracks appearing in the traditional U.S. cable TV framework, which has included an informal “agreement not to compete” against other cable operators, as well as growing friction between all leading video distributors and leading programming suppliers, going well beyond the normal contract renegotiation disputes that happen from time to time.

In an unusual show of support, in recent days Time Warner Cable Inc., Cox Communications Inc. and Mediacom Communications Corp. have each publicly backed DirecTV's position in the firm’s negotiations with Viacom, as each of those companies share a similar concern about the spiraling cost of programming, which is resulting in annual rate increases for consumers that are significantly above the rate of inflation.

And that isn't all. In potentially historic development, Cablevision Systems Corp. appears to be readying a potential competitive challenge to other cable operators in perhaps 44 U.S. markets. That would violate an unwritten understanding among cable operators not to compete with each other.

To be sure, Cablevision is restricting its efforts to broadband access and voice, at least for the moment, avoiding a direct challenge to cable TV operator core video revenues. But the growing tensions between program suppliers and distributors, plus the potential competition between cable operators, show how tensions are growing in the video business.

Illiad "Free" Illustrates Service Provider Responses to Disruptive Attacks

Iliad, which launched its “Free Mobile” service in January 2012 in France, has been wrecking havoc on its competitors France Telecom, SFR and Bouygues Telecom.

Vivendi SFR, for example, anticipates a 2012 earnings decline of 12 percent.

Average France Telecom revenue from each account will fall almost 10 percent in 2012.

The competitive responses by French competitors to Illiad illustrate the possible responses to new competition, and the instances where "better" responses are possible. In this case, service providers had no choice but to embrace the "worst" option, a dramatic drop in retail pricing, either in the form of new tiers of service, or in the form of across the board price cuts.

"Better" options often allow for the possibility of allowing attackers to take some share, but preserving the structure of pricing within the market. In this case, the attack was so serious that sustaining the existing pricing regime was untenable.

Illiad signed up 2.6 million customers through mid-May 2012 offering no-contract service priced at two euros and another at 19.99 euros a month, significantly lower than had been offered by the other contestants.

Predictably, that has caused customer defections, and caused the other competitors to lower their pricing. That, in turn, is slicing revenue. Facing certain revenue shrinkage, the affected service providers are looking to cut costs to bring earnings back into line.

Though service providers sometimes can afford to wait before responding, Illiad's attack allowed no option but the undesirable revision of pricing levels.

In some other cases, service providers have essentially been able to manage a gradual decline of an aging product, such as international long distance, or defer a major move into a new market until both the opportunity and strategic situation were clear. That largely was the case for broadband access services, for example.

But Illiad has disrupted the market pricing framework, with no time for any option other than slashing prices, generally.

Verizon Meets 2Q 2012 Expectations; Future is the Challenge

Verizon met investor expectations for second-quarter 2012 financial performance, with growth fueled by wireless services, while fixed network and enterprise revenue remained flat. At the very least, those results point out the strategic challenges Verizon faces.

"On a national basis, wireline voice revenues are expected to continue their long-term decline, while the mobile market could grow to over $200 billion by 2015," Verizon says.

"Highlighting an overall theme in the telecommunications market, however, wireless voice revenues are expected to be flat to slightly down in the coming years but will be more than made up by rapid growth in data revenues thanks to the adoption of smart phones and the emergence of machine-to-machine services," Verizon also says.

Of course, saturation will be an issue for smart phone-driven revenue gains, while M2M represents a key growth opportunity. At the moment, growth rates for mobile advertising and hosting services also are key growth opportunities, at least on a percentage-growth basis. The problem is that it remains unclear how large is the revenue opportunity, that can be captured by service providers, in hosting and cloud infrastructure, or mobile advertising.

For the moment, it is data revenues that constitute both a logical and large revenue opportunity. 

Segmented by markets, the overall U.S. revenue picture shows that more than half of telecommunications spending is still in the consumer market segment, although the general business and enterprise (large-business and government) markets continue to grow.

A look at Verizon's revenues and recent strategic moves demonstrates the change in demand for telecommunications services over the past several years. 

Wireless services made up approximately 60 percent of Verizon's revenue in 2010, while traditional wireline services are shrinking as a percentage of Verizon's total revenue. 

Within the wireline market, however, Verizon has generated growth in revenues from broadband and video services.  Verizon's FiOS Internet and TV services now account for 54 percent of consumer wireline revenues, while strategic services represent 46 percent of global enterprise revenue.

At year-end 2005, Verizon reported annual operating revenues of $75.1 billion -- with wireline services generating $37.6 billion and wireless services generating $32.3 billion. 

Five years later, at year-end 2010, Verizon reported annual operating revenues of $106.6 billion -- with wireline services generating $41.2 billion and wireless services generating $63.4 billion. In addition to changing market demand and technology, part of the change in revenue mix was due to divestitures of traditional wireline assets combined with acquisitions of wireless assets.

Consumer Values Have Changed, Gartner Says

Of 10 consumer macro trends shaping the technology, media and service provider markets over the next 10 years, perhaps the most important is the shift to “value” as consumers reset expectations in response to sluggish global growth, analysts at Gartner now say.

“All 10 of these trends converge around questions of value, what consumers value enough to pay for, how consumers' values are changing, and how technology and service providers can respond to this to increase their sales and margins,” Gartner says.

Consumer technology markets are being redefined by consumer cuts of  discretionary spending in the wake of successive financial and economic crises.

Still, consumers seem to put a higher value on media and communications products in times of recession as they cut back on more-expensive substitutes, Gartner argues.

In addition to more “recession-friendly” marketing messages, a greater range of "affordable" or value product options, more-strenuous customer engagement efforts, and improved customer experience efforts, will be required.

Over time, there has been a closing of the classic "digital divide" between the haves and have-nots in terms of access to basic technology products and services. At the same time, there has been an acceleration of product update, upgrade and replacement cycles.

Acceleration should in theory give consumers more spare time to do the things they want. In reality, they experience the reverse. Therefore, the most valuable product that service providers can deliver to consumers is extra time in the day to do things that they want or need to get done.

Products and services that help consumers fill their time more productively and/or pleasurably are the most compelling, Gartner argues.

Global Telecom Industry Has Made a Historic Leap in Serving People in Developing Regions

 A high-level study sponsored by Alcatel-Lucent and conducted by the ENPC (Ecole des Ponts ParisTech) illustrates an important and historic change in global communications, especially the decades-long effort to figure out how to provide communications to billions of human beings who had not previously “made a phone call,” much less “used the Internet.”

In recent years, the concern has shifted dramatically to mobile service for the “next billion” people, or Internet for the next billion people, where in the 1960s and 1970s the issue was providing “phone service” to the “next billion” users in developing countries.

What has gone somewhat unnoticed is the truly stunning progress, globally, in getting communications services to users in developing regions, where once policy makers struggled to anticipate how that could be done with legacy technology, namely fixed networks.

Without too much fanfare, the answers have emerged organically from use of mobile and Internet technologies.

With six billion mobile users globally in 2011, usage of mobile phones has become a truly planetary phenomenon, and has largely erased the “divide” between people in developed countries and people in developing countries, in terms of ability to use communications.

Call Volumes Fall, on Both Fixed and Mobile Networks in U.K.

Overall time spent using voice communications fell by five percent in 2011, Ofcom, the U.K. communications regulator, reports.

“This reflects a 10 percent fall in the volume of calls from landlines, and for the first time, ever, a fall in the volume of mobile calls by just over one percent, in 2011,” Ofcom says.

According to Ofcom, 96 percent users 16 to 24 are using some form of text based application on a daily basis to communicate with friends and family; with 90 percent using texts and nearly three quarters (73 percent) using social networking sites.

By comparison, talking on the phone is less popular among this younger age group, with 67 percent making mobile phone calls on a daily basis, and only 63 percent talking face to face.

Is Cablevision Clearband or OMGFast the Opening Gambit of a Historic Move?

Cablevision apparently is selling a fixed wireless broadband Internet and telephone service in Florida, using the Clearband or OMGFast brand names, charging subscribers $29.95 monthly for a 50 Mbps Internet connection that competes with Comcast and Time Warner Cable, at least in the voice and broadband access areas.  


Moreover, Cablevision also appears to own  licenses in 45 total markets. Cablevision acquired MVDDS licenses in 45 markets in 2004, including New York, Los Angeles, Chicago, Philadelphia, San Francisco, Miami, Cleveland, Nashville, and Tampa-St. Petersburg. 


Federal Communications Commission cross-ownership rules likely would require that Cablevision sell the New York license, or limit its broadband wireless service to parts of the market in which it doesn't market its Optimum digital cable, phone and Internet products to subscribers.

Cablevision, almost singularly among top U.S. cable operators, thus appears ready to break ranks in a major way with its other top U.S. cable operators in respecting an informal "we don't compete with each other" understanding.


It wouldn't be the first time. Cablevision in the past has backed satellite direct broadcasting efforts that would similarly have competed with cable operators around the United States.  


It isn't clear what Cablevision might be thinking about operations elsewhere. But if Cablevision decides to "overbuild" in some or all of its other areas, it would be historic, marking the first time a top-10 U.S. cable operator has decided to compete with other cable operators in their franchise areas.