J.D. Power Confirms What You Thought: People Love Their iPhones

Intel, ARM, HP, Dell Forecast Lower Revenues: Why?

There are clear signs that PC-related and some leading semiconductor firms expect weakening sales for at least the coming third quarter. So the natural question is "why?" Some might suspect a shift of consumer buying demand in favor of tablets, and away from PCs. 

But others might say the slowdown is caused more by generally deteriorating economic conditions, in Europe and elsewhere. 

Intel expects its third-quarter sales to be between $300 million and $1.9 billion lower than previous forecasts. Many see this as a sign of the weakening PC market, especially after HP and Dell posted such disappointing results in part because of a slowdown in PC sales.

ARM, the company that provides the IP inside chips for virtually all of the smart phones and tablets out there, also warned that it anticipates slower sales ahead. 

ARM customersTexas Instruments and Qualcomm also have said they expect a slowdown in holiday sales of devices. Some might say that hints at buyer fatigue. 

Intel is saying demand is affected by several trends, including original equipment manufacturers reducing inventory in advance of the Windows 8 launch, weaker PC demand and slower sales in emerging markets. 

You might say that several trends all are pushing in a downward direction. 

Why Verizon Believes "Cord Cutting" is Real

Even though Verizon is a significant supplier of video entertainment subscription services, Verizon executives have in the past not been shy about video cord cutting being a "real," not just "potential" form of end user behavior. 

 In 2010, then Verizon CEO Ivan Seidenberg argued that young people in particular are "not going to pay for something they don’t need to.” You might argue that is an unusual thing for an executive with millions of video subscribers to say, especially since virtually all cable TV executives say video cord cutting is quite insignificant at the moment. 

“We take the over the top issue with video very seriously,” Seidenberg said. “I think cable has some life left in its model…but that it is going to get disintermediated over the next several years.” 

And Verizon's views apparently have not changed. That is one reason why Verizon has formed a joint venture with Redbox to create a streaming movie service able to be purchased by any U.S. household with broadband access. 

More recently,  Maitreyi Krishnaswamy, head of Verizon FioS TV, reiterated the belief that streaming behavior and receptivity to video cord cutting continues to grow. 

"No, that trend is not stopping. It's growing," Krishnaswamy said. "The question is, is it growing enough for us?" What Krishnaswamy means is that the absolute numbers of people willing to consider buying less-costly video tiers of service is the current issue, while fuller streaming behavior remains a bit off into the future. 

"Is the migration to a-la-carte enough that we can go that route?" she rhetorically asks. "It's not something we can do overnight, but definitely something we've been looking at."


Strategically, cable operators have much more to lose from cord cutting, as they have more share of the video subscription business. But cable operators already acknowledge that their future revenue prospects come in other areas, such as business services. 

And though Verizon's FiOS network is fast enough that less video revenue and more broadband revenue is a viable revenue opportunity, that might not be so true for other service providers with less-capacious networks, including satellite providers, telcos with digital subscriber line not reinforced with significant fiber trunking. 

Still, as a strategic matter, Verizon clearly believes streaming delivery is a real threat to the traditional subscription TV business. 

Moody's lifts U.S. Wireless Industry Outlook

Moody's Investors Service has raised its outlook on at least some parts of the U.S. wireless industry to "positive" from "stable," saying AT&T's AT&T Mobility and Verizon Wireless should see their free cash flow increase sharply in 2013. 

The completion of Long Term Evolution fourth generation network construction work will help both leading carriers. 

Free cash flow is expected to increase almost 11 percent in 2012 on a combined basis for all nine carriers Moody's follows. 

For 2013, that number should rise to between 12 percent and 14 percent. But that figure shows how misleading an "industry average" number can be, when just a few contestants have a disproportionate share of customers and market share. 

But the smaller carriers, including Sprint Nextel Corp., MetroPCS Communications Inc.and Clearwire Corp., should continue to struggle, Moody's says.

At Verizon and AT&T, customer churn is expected to stay low. That might not be so true for all the other providers. 

Landline losses continue to hit at service provider revenue, but Moodys etimates the impact will get smaller, in larger part because voice revenues will dip below 30 percent of total wireline revenues in 2014, down from 44 percent two years ago. 

Access lines fell eight percent in 2011, but "as revenue from voice services becomes a smaller part of overall revenue, its drag on revenue growth will get easier for carriers to overcome – either by modest growth in data and TV revenue, or by cutting costs," said Moody's.

And that is not true just for service providers with big mobile operations. You might not be surprised that AT&T and Verizon generate 35 percent to 38 percent of landline revenues from voice services.

But even Windstream generates about that same percentage of revenue from voice services. Other fixed network service providers such as Frontier and FairPoint likewise obtain 45 percent of revenues from voice.

CenturyLink gets 40 percent of its landline revenues from voice services, the rest from other sources. 

How Do You Get to Nearly100% Broadband Adoption?

If you think about the matter only casually, it is obvious that people have no use for connectivity services for devices they don't own and use. Video entertainment subscriptions have not historically made any sense for people who do not own TVs. 

Likewise, buying broadband access has not historically made any sense for people who do not own computers. 

But all that is changing. These days, it can make sense to buy broadband access to support connected game players. In some cases, it can make sense to buy broadband to support Internet-connected TVs or Roku style boxes.

Increasingly, it also makes sense to consider the value of a fixed network broadband connection to offload smart phone traffic from a mobile network, or to support new devices such as tablets. 

Someday, it likely will make sense to buy a broadband access connection to view a substantial amount of entertainment television as well. 

The point is that making broadband available to people does not automatically assure adoption. In past years, there sometimes has been a tendency to conflate "availability" (can I buy it?)  and "adoption (did I buy it?)." 

In the U.S. market, we have gotten about as far we can get, in terms of adoption, based on the historic adoption drivers, namely computers that need Internet access. Leichtman Research Group says nearly 90 percent of U.S. households that use a laptop or desktop computer at home also subscribe to a broadband Internet service. 

Just five years ago, 65 percent of households with a computer also subscribed to a broadband service. You might argue that the growth to 90-percent adoption shows a change in the way computers are used. Where PCs once might  be useful in a non-connected usage mode, these days a PC is most valuable and useful when connected to the Internet. 

The rapid growth of tablet usage will represent another part of the change, namely that much of the value people derive from the use of computing devices and the Internet now revolves around content consumption. 

Also, over time, use of fixed networks to support tablet and smart phone connections will become more important as well. 

And all of those subsidiary device use cases are what will eventually drive fixed network broadband adoption above 90 percent, reaching perhaps 98 percent of households. 

Leichtman Research Group research also found that higher-income households are much more likely than lower income households to use computers at home, and to subscribe to residential broadband services, as you might expect. 

Some 91 percent of all households with annual incomes over $50,000 subscribe to a broadband service at home, compared to 68 percent of households with incomes of $30,000, $50,000, and 47 percent of households with incomes under $30,000

Some 41 percent of households with annual incomes under $30,000 do not have use computer at home, compared to three percent  of households with incomes over $50,000. 

The one caveat is that wireless broadband might be the way virtually every household is connected to the Internet. Already, a significant percentage of users find mobile broadband access and a smart phone satisfies enough of a person's Internet requirements to make mobile a practical alternative to buying fixed network broadband access. 

So the answer to the question of how to drive broadband adoption to virtually 100 percent of households is to assume a range of devices will provide the driver, not just PCs. 

Annual Household Income	Use a Computer at Home	Internet at Home	Broadband at Home
Under $30,000	59%	52%	47%
$30,000-$50,000	84%	78%	68%
Over $50,000	97%	97%	91%

Global Internet Backbone Traffic Grows 40% in 2012

International Internet capacity growth fell to the lowest pace in five years, decreasing from 68 percent in 2008 to 40 percent in 2012, TeleGeography says, though international Internet bandwidth continues to grow rapidly, more than doubling between 2010 and 2012, to 77 Tbps. 

That should not come as a terrible surprise. There is a "law of large numbers" at work here. Every new venture that gains end user traction shows high growth rates at first, from a low installed base. As the base of users or customers grows, growth rates naturally slow. 

With the installed base of capacity usage now a large number, growth rates are destined to slow, for the same reason. 

Average international Internet traffic grew 35 percent in 2012, down from 39 percent in 2011, and peak traffic grew 33 percent, well below the 57 percent increase recorded in 2011.

On the other hand, content delivery networks and local caching technologies do reduce the need for new long-haul capacity by storing popular content closer to the end-users. 

Apple TV is Not About the "TV"

Apple TV will succeed not as a "TV" or a "decoder" but only as a service offering the professional video people normally expect to see on a video subscription service, which makes Apple TV a tougher battle than creating a successful MP3 or smart phone ecosystem.

In creating the iTunes and iOS phone ecosystems, Apple faced a weakened music industry and a fragmented mobile service provider industry.

The video ecosystem is highly entrenched and used to dealing with potential disrupters. In addition, Apple faces formidable other viable contenders, including Amazon, Google and Microsoft, Bloomberg argues. But winning will require extensive licensing agreements with content owners and video distributors who are historically suspicious of interlopers that threaten to undermine the control content owners now exercise in the ecosystem. 

Without access to large amounts of that content, any effort to "change," "reinvent" or "disrupt" TV is destined to fail.

Cable and media companies are concerned that a better-designed Apple product will undermine their business model, says Walter Price, an investor with RCM Capital Management. 

“It’s a tough problem because the cable companies and media companies are not very enthusiastic about the prospect of Apple creating a better user interface,” said Price.