How Can Cable and Telcos Replace 1/2 of Current Revenues in 10 Years?

One fundamental assumption I make about cable and telco service provider revenues in developed markets is that such firms must plan on replacing about half their current revenues over the next decade or so. The reason is simply historical observatiion.

In developed markets, that already has happened at least once in the telco business as well as the cable TV business. And it seems likely a second wave of revenue source replacement is underway.

That isn’t to say that both cable and telco service providers in developed markets will have to replace about half their current revenues every 10 or so years, “forever.” I just can’t see that far. But it might be reasonable to assume both telcos and cable will have to do so at least once over the next decade.

In 1977, U.S. telcos earned about half their revenue from long distance services. But as long distance revenues shriveled, mobile services arose to take the place of long distance revenue that was lost.

The most-recent quarterly earnings report from Comcast shows the same sort of trend in the U.S. cable industry, where Comcast video revenues have shrunk to about 52 percent of total Comcast revenue, while other access network services now contribute 48 percent, and are growing.

At some point, Comcast will earn less than half its revenue from its legacy video entertainment business. And that is to focus only on Comcast’s “local access” business.

In fact, including the NBC Universal contributions, it already is true that Comcast earns less than half its total revenue from cable TV distribution. In fact, cable TV video distribution operations now account for only 33 percent of total Comcast revenue.

Telcos already have been through one such transformation, as overall revenue now has shifted from “long distance” to wireless, at least for the tier one U.S. providers. The next set of transitions will see the revenue contributions from mobile voice and text messaging dwindle in favor of new sources.

One might also note that, of Comcast’s total access operations revenue, “dumb pipe” high speed Internet access now accounts for 24 percent of total revenue.

Assume for the sake of argument that half of the business revenues also are derived from dumb pipe high speed access. That would imply a total of about 27 percent of Comcast revenue earned from dumb pipe services.

That also illustrates another facet of cable operator strategy: dumb pipe services are a crucial foundation for 48 percent of Comcast’s total revenues.
Comcast’s second quarter 2012 financial results show revenue growth in the video segment, but also lost customer share. Though revenue was up 2.8 percent, Comcast lost 176,000 video accounts.

Overall revenue of $9.9 billion included growth of total revenue per video customer of eight percent, to $149 a month. But most of that increase was from services provided by voice, broadband access and business services.

Since Comcast lost 176,000 video units, the overall growth of revenue generating units of 138,000 came from broadband and voice additions.

To be sure, video revenue remains crucial, at $5.1 billion in quartterly revenue. But high-speed broadband access now contributes $2.4 billion in quarterly revenue, and revenue from that segment grew 8.9 percent.

Comcast added 156,000 net high-speed access  customers in the quarter, for penetration of 36 percent. Consider what that statistic means, though. In the past, a telco or cable services provider would build a network that would have, as customers, perhaps 75 percent to 98 percent of all households passed by the network.

These days, no service provider gets more than a fraction of that, from any single service. That is why the triple play has become so important. The only way to earn enough revenue from a much smaller base of customers is to sell each remaining customer a wider range of services.

At the moment, it also is correct to note that, although revenue from voice and business services is growing, broadband remains the driver for most of Comcast’s revenue. Together, high speed access and video account for 76 percent of Comcast’s revenue in the quarter.

Voice revenue contributed $889 million in revenue, and Comcast added a net 158,000 accounts, to reach 18 percent penetration.

Business revenue increased 34.2 percent to $582 million, while advertising generated $552 million, Comcast reported.

But you might say the specific revenue components are fairly close to “noise,” in the broader strategic picture. The big challenge is the need to replace half of current revenues in a decade or so.

As Comcast already has shown, the way forward likely depends on “getting into new lines of business” might be the only viable strategy.

Internet Connected TVs to Reach 650 Million by 2017

The number of residential TVs connected to the Internet using Blu-ray players, set-top boxes and consoles or using native TV connections, will reach almost 650 million by 2017, Juniper Research argues. 


That is among the underlying changes that will eventually help change the attitude of content owners about many forms of "Internet direct" content distribution, as potentially unsettling as that prospect now appears. 


In fact, some might even argue that Internet-connected TV sets will be only the second most important change in consumption habits. There is an argument to be made that tablets could emerge as an even bigger enabler. 


Though the ability to view desired content on a TV will remain a mainstay of the professional entertainment video business, the ability to consume video on tablets already is clear.


In fact, if one assumes that user experience with video consumption on smart phones, PCs and tablets is becoming widespread, and in some instances a preferred consumption mode, then Internet connected TVs might be only one mode among many.


Forrester Research, for example, estimates there will be two billion PCs in use by 2016, excluding tablets. 


Forrester expects total tablets sales will growfrom 56 million in 2011 to 375 million in 2016. Given that a majority of tablets will be retired within three years of purchase, Forrester forecasts that there will be 760 million tablets in use globally by 2016. One-third of these tablets will be purchased by businesses, and emerging markets will drive about 40 percent of sales.


In other words, if a supplier wanted to reach Internet-connected users with a video entertainment product, it will make as much sense to focus on tablets, PCs and smart phones as it does to include TV set viewing, as users of those non-traditional TV screens will vastly outnumber users of traditional TV sets. 

Why Does Google Care So Much About "Speed?"

The primary reason Google has such a fundamental interest in promoting faster deployment of higher-speed access services of all types, such as the 1-Gbps symmetrical fixed network access Google Fiber is getting ready to deploy in Kansas Ctiy, Mo. and Kansas City, Kan., is that Google has a vested business interest in the speed with which Web pages get loaded.

Simply, speed means more ad inventory gets viewed. Google’s research shows that if search results are slowed by even a fraction of a second, people search less (A 400 millisecond delay leads to a 0.44 percent drop in search volume).

And this impatience isn’t just limited to search: Four out of five internet users will click away if a video stalls while loading. The average web page takes 4.9 seconds to load, and in a world where fractions of a second count, that’s an eternity, Google has argued.

So speed makes a difference for use of some applications, perhaps most. Speed makes a difference for ad-driven and commerce-driven revenue models, as well.

When Edmunds, a leading car review destination, re-engineered its insideline.com site to reduce load times from nine seconds to 1.4 seconds, ad revenue increased three percent, and page views-per-session went up 17 percent.

When Shopzilla dropped latency from seven seconds to two, revenue went up seven-12 percent and page views jumped 25 percent. Shopzilla also reduced its hardware costs by 50 percent.)

With faster access, people become more engaged, and when people become more engaged, they click and buy more, Google argues.

Facebook "Mobile Only" Activity Grows 23% in One Quarter

In Facebook's first filing of a "10 Q" report with the U.S. Securities and Exchange Commission, Facebook reported that 102 million people accessed Facebook solely from mobile in June 2012, a  23 percent increase over the 83 million "mobile-only" users in March, 2012, Facebook's first 10 Q report indicates.


That shows the urgency Facebook needs to apply in the effort to go "mobile first," as Apple and Google already have done with arguably more revenue success. 


The 10 Q report notes that 18.7 percent of Facebook's 543 million monthly mobile users don’t even visit Facebook's "desktop or PC" formatted site.


That means huge exposure for Facebook in the advertising revenues area, and might account for the steady decline of Facebook's stock price since the initial public offering. 


So far, Facebook's approach is the "sponsored story," which first was available to advertisers in February 2012.


But you might argue mobile versions of sponsored stories are quite a bit more effective than sponsored stories viewed on a PC screen. Those mobile "ads" may receive as high as 13 times the click through rate of sponsored stories delivered to PC screens, the filing suggests. 

In U.S. Market, Cable Broadband Increasingly is Preferred to Telco Broadbvand

In 2006, U.S. telcos as a whole were adding more high-speed access customers than U.S. cable companies. Since 2008, cable companies have been adding more high-speed access customers than telcos, with the gap really opening by 2010.


During the second quarter of 2012, cable companies took a 140 percent share of broadband flow during the quarter, according to UBS Research telecom analyst John Hodulik notes.


Given the commanding telco ownership of the strategic wireless business, the continued slow decline of the telco consumer voice business, again largely to the benefit of cable operators, plus the heightened importance of the business customer segment, all might suggest that the tier-one U.S. telcos quietly have decided to focus their efforts on wireless services, with fixed network attention increasingly focused on business customer accounts. 


Some of us would say, in fact, that the U.S. leaders in consumer local access, in the future, might be the cable providers, while the telcos remain dominant in wireless and business services. 


That isn't to say that telcos can afford to give up on fixed network consumer accounts; simply that the approach has to be "mobile first," "business second." In the consumer segment, telcos will basically try to stay "close enough," without real expectations of sustaining market leadership in consumer services. 


That will be a huge change in U.S. communications industry dynamics, but it is hard to predict any other outcome, extrapolating from current trends. 

M-Commerce Growing to 24% of Total E-Commerce by 2017

The mobile commerce market is expected to account for 24.4 percent of overall e-commerce revenues by the end of 2017, according to ABI Research.

In 2011, the mobile online commerce market doubled in size to $65.6 billion in transaction volume.
Still, mobile commerce is a relatively small percentage of the overall e-commerce market, though growing at a much faster rate.

Tablet Ownership Now at 34%

Some 58 percent of American consumers now use smart phones (76 percent among those under age 44), while tablet usage has grown from 0 to 34 percent in two years, according to Frank N. Magid Associates.


By mid 2013, the smart phone audience will increase 53 percent from 99 million to 151 million users, and the tablet audiences will more than double, from 51 million to 106 million users, Frank N. Magid Associates predicts. 


Among consumers planning to purchase mobile devices in the next 12 months, 51 percent already own a tablet, while 75 percent already own a smart phone.