Operating Results "Stable" for Leading U.S. Telcos, Cable

Despite all the challenges, ranging from mature markets to limited sources of new revenue to heightened competitive pressure, U.S. telecom and cable companies still are expected by Fitch Ratings to turn in stable operating results that are resilient to changes in the economy.

But Fitch also believes the service providers have a bit of wind in their sails, as Improvements in economic conditions, particularly stronger employment and housing trends, will lead to a healthier overall operating environment.

That stability is perhaps surprising given recent trends. Overall, wireless net additions among the three largest mobile service providers dropped 77 percent to 596,000 units during first-quarter 2013, year over year.

To the extent there were gains, Fitch Ratings points to tablet accounts as the driver, creating a more stable and predictable revenue stream for mobile operators. But subscriber gains are not seen as the way mobile service providers will make revenue gains. Instead, it is more spending on usage plans that will be key.

Big slowdowns also occurred in the video services segment. Fitch estimates that the largest video service providers gained 201,000 net video subscribers in the first quarter of 2013, representing a 53 percent decline year over year.

The slower growth reflects the high penetration of video subscription households in the U.S., the mature video service product, tepid economic and housing recovery and, to a lesser extent, competition from alternative distribution platforms.

Fitch points out that the largest incumbent local exchange carriers “continue to transform their consumer businesses into broadband- and video-focused models.” In fact, at Verizon and AT&T, those gains are “sufficiently mitigating the ongoing secular and competitive pressures of their respective consumer landline businesses.”

That is not so much the case for much-smaller telcos, as video entertainment is a scale business. Under those conditions, lack of scale also means lack of margins.

Such prospects are one reason the AT&T Project Velocity IP initiative will extend IP-based wireline broadband service to approximately 57 million customer locations (both consumer and small business) representing 75 percent of the customer locations within the company’s 22-state service area by year-end 2015.

In the remaining 25 percent of customer locations where it will not be economically feasible to upgrade the wireline network to faster broadband speeds, the company will offer a 4G Long Term Evolution solution instead.

AT&T intends to expand its U-verse platform to a potential market of 33 million

customer locations as part of the initiative, adding 8.5 million customer locations to the 24.5 million locations already able to buy U-verse service.

About 90 percent of U-verse customers will have the capability to receive speeds up to 75 Mbps and 75 percent will be able to buy 100 Mbps service.

In other cases, where AT&T has concluded it cannot afford to build full U-verse connections, and DSL has to be used (about 24 million locations), speeds up to 45 Mbps will be available to 80 percent of DSL-served locations, while half will be able to receive 75 Mbps service.

AT&T estimates that 75 percent of its U-verse TV subscribers have triple- or quad-play service with the company, pointing out the strong reliance on video and broadband services in driving AT&T revenues. U-verse triple-play subscribers generate $170 of average revenue per user a month.

Verizon likewise reports that 66 percent of its FiOS subscriber base buy a triple play package and generate $150 a month ARPU. The need for broadband and video revenues is obvious.

In aggregate the ILECs lost approximately 0.966 million wireline voice connections during the first quarter of 2012, compared to a net loss of 1.105 million for the same quarter of 2012.

Verizon’s residential voice connections declined by 5.6 percent on a year-over-year basis, while AT&T’s consumer voice connections dropped 12.5 percent. CenturyLInk’s overall access line loss was 5.7 percent.

LTE is Going to be a Fixed Network Alternative

You always can get an argument about whether broadband Internet access provided by Long Term Evolution networks is a reasonable substitute for fixed network high speed access. But it already seems clear that the substitution of LTE for fixed network fiber access is going to become a reality for quite a substantial number of potential customers.

AT&T's Project Velocity will extend IP-based wireline broadband service to approximately 57 million customer locations (both consumer and small business) representing 75 percent of the customer locations within the company’s 22-state service area by year-end 2015.

In the remaining 25 percent of customer locations where it will not be economically feasible to upgrade the wireline network to faster broadband speeds, the company will offer a 4G Long Term Evolution solution instead.

That is one way of saying that up to 25 percent of households located within AT&T's fixed network footprint ultimately will only be able to buy LTE for higher-speed access, and will not have access to a hybrid fiber-copper network.

As always, different network solutions make sense in higher-density areas, such as cities and suburbs, compared to what is feasible in rural areas. One size never fits all. That mixed network approach virtually assures that LTE will be used as a substitute for fixed network high speed access.

The debate is over, for practical purposes. In at least some cases, LTE will be a functional substitute for fixed network access.

Growth, not Liquidity is Issue for U.S. Telcos, Cable

A review of U.S. cable and telco firms suggests liquidity is not a problem for most, according to Fitch Ratings. But mature markets, limited opportunities for revenue growth and heightened competition are issues.

In the first quarter of 2013, liquidity in both telecom and cable TV segments overall remained strong, with 89 percent of committed facilities available for borrowing and total liquidity exceeding aggregate 2013, 2014 and 2015 maturities, Fitch Ratings said.

In other words, most of the firms have sufficient cash to operate their businesses. But the report also points out the key concerns contestants face.  

For AT&T, the concerns are competitive pressures, particularly associated with switched access lines. Also, the weak economy is affecting business revenues. AT&T also faces long-term spectrum requirements, which will cause it to spend money to catch up. Meanwhile, AT&T also is stepping up its spending on share repurchases.

At Comcast, limited revenue growth opportunities outside of its core triple-play service offering and its aggressive policy of returning capital to shareholders are seen as issues.

At DirecTV, an aggressive policy of returning capital to shareholders and lack of revenue diversity, plus a narrow product offering are issues. As with the cable providers, a mature U.S. video entertainment business also is an issue.

Time Warner Cable faces a weak economy and competitive pressure negatively affecting its free cash flow margin, subscriber growth and revenue. Financial leverage is another issue.

For CenturyLink, the issue is limited ability to drive new revenue growth.

At Charter Communications, elevated financial leverage is an issue, especially if Charter succeeds with its plans to grow by acquisition. Also, Charter has relatively weaker service penetration than most of its peers. Competition is an issue, as it new revenue growth outside of its core triple-play offerings.

Will Regulators Allow Consolidation Wave to Begin in Europe?

An important test of regulator will to allow significant consolidation in the European Union telecom business is about to begin.

KPN has agreed to sell its German operation E-Plus to Telefonica Deutschland, in an 8.1 billion euros ($11 billion) deal that has to be approved by European Commission authorities.

If approved, Telefonica Deutschland would have 30 percent mobile market share. Deutsche Telekom and Vodafone each would have 35 percent share.

Equally important, regulator approval undoubtedly will stimulate additional deals. An important matter is the number of major providers in each market, as some national regulators have insisted that four is the minimum number of providers necessary for competition. The Telefonica Deutschland deal obviously would reduce the number of strong national mobile players in Germany to three.

In recent deals such as in Austria where operators sought to take markets from four to three players, regulators have demanded concessions such as spectrum divestments and pledges to offer competitive wholesale access to rivals.

So approval is by no means assured. But KPN’s competitive situation in Germany illustrates the importance of spectrum and customer assets, as KPN trails its other competitors in that respect. Simply, KPN’s operation is too small.

As of the end of March 2013, E-Plus (KPN) and Telefónica Germany had a combined 43.3 million mobile customers in Germany.

E-Plus had around 24 million customers, with eight million postpaid. O2 has just under 20 million clients, with around 10 million postpaid customers.

What really seems to matter is the number of postpaid customers, since the average revenue per user for a postpaid account is so much higher than a prepaid account. 

Prepaid ARPU is  is six euros a month, while post-paid ARPU is 27 euros a month.  

Also, prepaid accounts tend to churn more than postpaid accounts.

Verizon Introduces 500 Mbps Service

If you think Google Fiber shows Google is crazy like a fox, think again: Verizon has begun deploying a new top-tier FiOS Quantum Internet access service, featuring speeds of 500 megabits per second download and 100 Mbps upload.

The 500/100 Mbps speed is initially available in parts of every FiOS market, and Verizon will deploy the service throughout the entire FiOS footprint into 2014.

For consumers, the 500/100 Mbps speed is available as part of a bundle or in stand-alone fashion, starting at $309.99 per month for a double play or $329.99 per month for a triple play with a two-year agreement.

For small businesses, the new top speed is only offered on a stand-alone basis, starting at $369.99 per month with a two-year agreement. The service also is available to consumers and small businesses on a no-contract, month-to-month basis.

Verizon's 500 Mbps service is an obvious response to Google Fiber’s ability to change consumer expectations on the speed front, though Verizon will not try to compete directly on the price front.

Indonesia Regulators to Raise SIM Prices Two Orders of Magnitude

One of the more basic economic insights is that raising the price of a product reduces demand for that product. 

So it is that Indonesia’s Telecommunications Regulatory Body plans to hike the price of subscriber information modules to a minimum of IDR 100,000 ($10), from current prices as low as IDR 2,000 ($0.2).

That might sound like a clear anti-consumer move. But the rationale is more nuanced. Monthly churn in the Indonesian mobile market is about 20 percent a month, meaning the equivalent of a complete turnover of the national customer base every five months.

Whatever difficulties that poses for service providers, it also is a consumer problem to the extent that all that churn is accompanied by a high rate of customer telephone number turnover.

The culprit would seem to be the high use of prepaid service enabled by mobile SIMs. In this case, the regulator hopes to reduce the amount of churn, and the associated number of inactive telephone numbers.

There is another angle, though. Regulators say higher SIM prices will reduce the use of “SIM boxes” that can fraudulently route international calls so that it appears to the telco to be a local call.

Such practices are not terribly unusual, and cause an estimated service provider revenue loss of US$77 million every year in Indonesia.

Southeast Asia Tablet Sales Up 100%

Sales of tablet computers across Southeast Asia have doubled over the last 12 months to reach 6.1 million units, according to GfK Asia. About 43 percent of all computing appliances sold in Southeast Asia were tablets.

Across Singapore, Malaysia, Thailand, Vietnam, Indonesia and Philippines, sales of tablet devices between June 2012 and May 2013 increased 101 percent, GfK Asia says.

Indonesia was among the volume leaders for tablet sales, accounting for nearly 1.3 million units, marking a 141 percent rise year-on-year. In the Philippines, tablet sales grew 322 percent over 12 months.