How Soon Will Video Join Voice and Messaging as a Declining Service?

Sooner or later, every legacy service offered by cable TV or telco service providers will face competition from rival services or simply dwindling demand. Up to this point the material impact has been seen most clearly only in voice, where serious financial losses have been felt for more than a decade. But disruption now is being seen in the text messaging space as well.

Globally, telecom revenue is growing. But not in Western Europe, it appears. The mobile industry’s combined revenues from voice, messaging and data services in the EU5 economies (United Kingdom, France, Germany, Spain and Italy) will drop by nearly 20 billion Euros, or four percent a year, in the next five years, and by 30 billion Euros by 2020, according to STL Partners.

The obvious implication is that mobile service providers in the United Kingdom, France, Germany, Spain and Italy will have to create new revenue streams worth 30 billion Euros, just to stay where they are, by 2020.

Though the trend is not always quite so obvious in the U.S. and Canada telecom markets, erosion of fixed network voice lines is assuming alarming proportions in some markets, including the United Kingdom.  

Some 65 percent of 500 U.K. chief information officers surveyed by Vanson Bourne on behalf of Virgin Media Business believe fixed network telephones “will disappear from everyday use within five years,” Virgin Media Business says.

Separately, analysts at STL Partners estimate that, with 2009 representing an index point of 100, U.K. fixed network voice revenues will have shrunk by 50 percent by 2014. Keep in mind, that is an estimate that use of fixed network voice lines will be cut in half in just five years.

The latest report on U.S. fixed network voice connections by the Federal Communications Commission suggests that voice connections declined three percent between June 2010 and June 2011.

Sooner or later, video entertainment services will hit a wall as well, and the price-value relationship is the problem. Every January, it seems, providers of video entertainment raise their prices, typically outpacing the rate of inflation.

For the most part, that remains the case for 2013.

DirecTV plans to increase the prices of its programming packages by an average of 4.5 percent, starting Feb. 7, 2013, a move DirecTV attributed to  higher programming costs.

The company said the programming costs it pays to owners of television channels will increase about eight percent next year, the Wall Street Journal reports.

Dish Network will increase the price of its core TV bundles between seven percent and 20 percent in January 2013, with most packages rising $5 a  month.

AT&T U-verse prices also are going up in 2013.

In 2012, Comcast, DirecTV and AT&T  raised rates as well. If nothing changes, NPD expects the average subscription video bill to reach $123 by 2015 and $200 by 2020.

Bernstein Research analyst Craig Moffett points out that, over the last five years, programming costs at DirecTV have risen 32 percent, for example.

But perhaps more importantly, those increases are accelerating, with costs rising upwards of 10 percent year-over-year. "This is a train wreck in the making," says Moffett.

Some programmers point the finger at ESPN and the other sports networks. ESPN says its prices are justified by the high ratings the network gets. Some might say sports programming constitutes as much as half of all programming expenses.

But prices, in relationship to value, are becoming a bigger problem.

Can the Cable Industry Save Itself?

Sometimes an industry seemingly is incapable of saving itself. Some might say the video entertainment business could be among them. The issue is less the long term future, where consumers increasingly have the ability to buy what they want, item by item, and more the intermediate period, where rising costs might encourage quite a few consumers to stop buying.

To be sure, it is hard to see much material impact from “video cord cutting” so far.

Though some would say there is clear evidence of “cord shaving,” where customers drop premium services even while keeping “basic” video services, most “hard numbers” (subscriber counts, for example) suggest that abandonment fo video services remains a potential threat, but is not a clear present danger.

But even cable operators know that costs are rising at dangerous rates, and will make the product less attractive. Speaking about the problem of sports programming costs that threaten to undermine consumer appetite for the video entertainment product, Liberty Media CEO John Malone said it “might be time for the Federal Communications Commission or Congress to step in.”

“The only way it is going to change in the short run is for government to intervene,” Malone said.

If you know anything about Dr. Malone, you know what a truly astonishing statement that is.

Lots of observers think video subscription costs, and especially sports network costs, are out of control.

But when a legendary industry executive and notable opponent of government regulation says something like that, you know something profoundly important is going on.

Malone is warning that the business faces big trouble, and might not be able to save itself without direct intervention by regulators or Congress to restrain programming costs. Of course, it also should be noted that Malone calls for regulators to restrain programmers, not distributors.

But Liberty Media has stakes in both programming and distribution, so the observation is not the sort of “help my business, and hurt the other guy’s business” talk one often hears in troubled industries.

Of course, over the longer term, Malone seems to agree that the business will be changed, in any case.

"People will watch and pay for what they want, it is kind of inevitable," he said. In essence, that could undermine much of the business model for subscription video services. It remains possible that today’s video entertainment suppliers remain key distributors, but perhaps more along the lines of Netflix.

But whether those changes will be good for all distributors or programming suppliers is the issue. A reasonable person would argue that programmers will not be able to charge as much as they can at present, if users are able to buy what they want, and only what they want.

Nor, one might argue, will distributors make as much money, either. If consumers can buy direct, and save money, they will.

Some distributors, ranging from Time Warner Cable to Dish Network have made efforts recently to begin dropping networks, moves intended to send signals to programmers that the days of ever-climbing programming costs are coming to an end. 

Even the head of the major U.S. cable trade industry association says there is a growing threat of regulator intervention if the industry cannot restrain price inflation.

One wonders whether the industry can save itself.

If January is Coming, So are Video Subscription Price Hikes

Every January, it seems, providers of video entertainment raise their prices, typically outpacing the rate of inflation.

For the most part, that remains the case for 2013.

DirecTV plans to increase the prices of its programming packages by an average of 4.5 percent, starting Feb. 7, 2013, a move DirecTV attributed to  higher programming costs.

The company said the programming costs it pays to owners of television channels will increase about eight percent next year, the Wall Street Journal reports.

Dish Network will increase the price of its core TV bundles between seven percent and 20 percent in January 2013, with most packages rising $5 a  month.

“As an industry we have seen increases in double-digit percentages,” said Dish spokesman John Hall. 

AT&T U-verse prices also are going up in 2013. 



In 2012, Comcast, DirecTV and AT&T  raised rates as well. If nothing changes, NPD expects the average subscription video bill to reach $123 by 2015 and $200 by 2020.

Bernstein Research analyst Craig Moffett points out that, over the last five years, programming costs at DirecTV have risen 32 percent, for example. 

But perhaps more importantly, those increases are accelerating, with costs rising upwards of 10 percent year-over-year. 

"This is a train wreck in the making,"  Moffett has said. 

Dynamic Pricing Rankles Some, but it is Just Supply and Demand

SideCar, a peer-to-peer instant ride-sharing app, plans to double its suggested donations for drivers on New Year’s Eve, effectively instituting “surge pricing.”

Uber, a similar service, used dynamic pricing in 2011, on New Year's Eve. The practice will bother some, but in principle it is simply a way of matching supply and demand. Some will say it borders on price gouging, or is, in fact, price gouging.

It's hard to say where the boundary between "gouging" (with its implication that a supplier is taking unfair advantage of buyers) and "supply and demand" (the price of a scarce commodity will rise when demand rises and supply is fixed) lies, but supply and demand fluctuations are a reason why prices for virtually any product tend to shift up or down.

Communications service providers tend not to have such flexibility, in part because regulators will only tolerate so much fluctuation, in part because users tend to prefer fixed and known pricing, even when their usage might vary, and in part because the ability to dynamically price communications products at the retail level is not always possible (rating systems or billing systems might not be able to do so).

Up to this point, service providers have used a simpler "differentiated" pricing scheme, the perhaps-classic example being pricing of voice calls on mobile phones. International calling is most expensive, domestic calling tends to be modestly priced while calling during off-peak periods (evenings and weekends) can be nearly or virtually "free."

Some might suggest that "congestion" pricing (bandwidth becomes more expensive at times of high demand) is a similarly beneficial way to match supply and demand on broadband access networks.

"Value" pricing is another concept that incorporates supply and demand dynamics, but also seems to provoke opposition from some who think it is another form of gouging.

Any number of observers have speculated or argued for "innovative" pricing models for broadband access services, with some arguing for  "value-based" pricing. Some might argue mobile service providers are using Long Term Evolution to shift in that direction.

Based on a survey of 65 mobile operators offering LTE services, about half "have used the deployment of LTE as an opportunity to introduce a new form of pricing for mobile broadband services."

The new strategy, which supersedes the earlier unlimited data model, uses download/upload speeds as well as data allowances to differentiate on price, says Wireless Intelligence.

The speed-based tariffs are most common in Europe, where 90 percent of mobile service providers surveyed offer them. These tariffs are less popular across the Middle East, Asia Pacific and Africa, and least prevalent in North America and Latin America.

That’s a step in the direction of using tariffs that match service features in a more-differentiated way, even if not such a major step towards dynamic pricing.

Malaysia to Subsidize Smart Phones for Youth to Encourage 3G Use

One basic "rule" of economics is that consumption of any product or service for which there is demand can be increased by lower prices. And that is what Malaysia will do to encourage younger users to ditch their 2G feature phones for 3G smart phones.

The Malaysian Communications and Multimedia Commission, as part of its "Youth Communications Package," will subsidize  (MYR 200 or ($65 US) purchases of 3G smart phones costing no more than MYR 500 ($163 US).

The idea is to encourage use of mobile broadband and encourage youth in rural areas to get connected.

The rebate is available for buyers earning less than RM 3,000.

According to the MCMC, 89.6 percent of users polled earn less than RM 3,000. And some 87.3 percent of mobile users surveyed are still using basic or fearture phones without smart phone capabilities.

The rebate is also only allowed for Malaysians between the ages of 21 and 30.

Internet is Splintering, Irrespective of ITU Decisions

Is the Internet splintering? The question has been relevant for parts of the last decade, and some observers might argue there are reasons why a fragmentation of the Internet could happen, or has already happened.

One recent development--an International Telecommunications Union conference that many see as leading to government censorship of content--illustrates the issue.

Some argued strongly that allowing governments to control and censor content could spit the Internet into two parts: One free and open one, the other closed and censored, depending on which country you are in.



But such legitimate concerns also have other somewhat more logical drivers as well. One might argue that even when any human being can communicate with any other human being, the original and still most-powerful value of the Internet, as a practical matter, users are functionally self-segregated, most of the time, by shared language, culture, economic relationships, friendships, application preferences, devices, operating systems and so forth.

In fact, one might argue that the formation of communities, which does not conflict with the "any to any" nature of the Internet, itself creates practical and self-chosen "islands."



In other words, although it is important that "anybody can connect with anybody else," as a practical matter people communicate and share with a fragment of all Internet users. And there are powerful commercial reasons for doing so, as the notion of an "Internet platform" suggests.

That does not mean a free and open Internet is incompatible with use choices to self segregate. The former is the capability that allows the latter. The point is that legal (de jure) Internet freedom has the logical corollary of a tribalized (de facto) use of that fully open resource.

Yes, the Internet should remain an "any to any" medium. But people will naturally form communities on a voluntary basis. Formal limits on the "any to any" communications function are harmful.

But on a practical level, people will voluntary fragment their use of the Internet. In that latter sense, the Internet will inevitably lead to "fragmentation," in the sense of people forming voluntary communities.

Dish Challenges Softbank Purchase of Sprint

As expected, Dish Network is raising public policy questions about the wisdom of the Federal Communications Commission approving the SoftBank investment in Sprint. 

The raising of such objections is not unusual whenever a material event occurs that one or more contestants believes will be, or could be, harmful to its own financial interests, irrespective of any larger public policy interests. 

In the case of Dish, which plans to launch its own Long Term Evolution fourth generation (4G) network, the SoftBank purchase of Sprint allows Sprint to create its own LTE network faster, and to use much more of Clearwire's spectrum assets. 

A stronger Sprint means a stronger competitor to Dish, which will need to get traction in the highly-competitive LTE and mobile markets rather quickly, and will likely face Sprint as a major competitor in the "value" segment of the market.  

Dish wonders in a formal filing to the FCC whether a foreign company should "control more spectrum below 3 GHz than any one other company in the United States?"

Dish asks whether Sprint staggered its acquisition of Clearwire "in two steps in an effort to avoid  meaningful Commission review?" 

Dish also raises the question of whether the FCC needs to look at the competitive implications of the changed spectrum ownership. 

Some of the potential objections are procedural, some relate to evaluating the impact of the merger on market competition and some raise "foreign ownership" or broader "fair trade" issues.

The filing of such comments is a normal and expected part of the review process. A similar flurry of comments and questions were raised by competitors who objected to AT&T's bid to buy T-Mobile USA. But virtually every proposed FCC action will have consequences for contestants in some section of the communications business, and that always leads to filing of comments.


Even apparently "operational" issues, such as the accuracy of maps, can be the subject of serious filings with the Commission. The reason is that those maps play a role in helping the FCC determine where to allocate support for rural broadband. 

Contestants who want to stave off funding for competitors will try to point out that a particular area is in fact not "under-served," and therefore the local telephone company does not need more support. Telcos, on the other hand, have a vested interest in proving an area is under-served, and furthermore that the telco is the best recipient of the funding.