What Market are Dish Network, DirecTV In?

Are DirecTV and Dish Network competitors in the subscription video entertainment business, or contestants in the satellite TV business? The answer might actually matter.

Antitrust regulators always are forced to decide what a relevant market is when considering proposed mergers and acquisitions. Back in 2002, a proposed merger of DirecTV and Dish Network was blocked by the Federal Communications Commission and Department of Justice because of antitrust concerns. At the time, the relevant market was deemed to be “satellite-delivered video entertainment,” in essence.

Whether that still is the relevant market could become an issue if another merger of the two satellite companies is considered. The new issues are a dramatic drop in cable TV market share, a halt to satellite market share growth and entry of telcos into the business.

Then there is the clear sense that alternatives such as streaming delivery are about to start displacing all the traditional providers. As a rule, one might argue, it is a waste of time and money to spend too much effort adding regulatory burdens for declining businesses.

Some might argue that was basically what happened with the Telecommunications Act of 1996, the first major reset of U.S. communications law since 1934. The theory was that breaking down barriers to provision of voice services would spur innovation in the business.

One might argue the theory worked, enabling cable operators to seize huge chunks of the voice business. One might also argue the focus of innovation also shifted to the Internet, something unforeseen by regulators and lawmakers.

That’s the same sort of context that could become an issue in further consolidation in the satellite portion of the video entertainment business.

In other words, regulators would have to take another look at the relevant market parameters if

a DirecTV-DISH merger were to be proposed again.

What might have been viewed as an unwanted creation of a monopoly satellite video provider at one point in time might not make so much sense in a mature, perhaps saturated video enterainment business where the clear market leader is losing share, satellite share has stopped growing and powerful new competitors are taking customer share.

Also, there is the sense that the economic fortunes of the video entertainment business are changing, in any case, in ways that could threaten all providers of traditional subscription video entertainment services.

U.K. Mobile Operators Face New £244.5 Million in Annual Spectrum Costs

U.K. mobile service provider costs of doing business are going to rise in 2014, by about £244.5 million, because spectrum fees are rising.

Ofcom, the United Kingdom communications regulator, which has authority to reset spectrum fees to market value, has concluded that 900 MHz and 1800 MHz spectrum used by mobile network operators now is far more valuable, based on the latest fourth generation spectrum auctions.

Ofcom has been considering the fees since late 2010.

Mobile network operators currently pay a combined total of £24.8m per year for 900 MHz spectrum and £39.7m for 1800 MHz spectrum. The new fees will be substantially higher: £138.5m per year for 900 MHz spectrum and £170.4m for 1800 MHz spectrum.

To be sure, spectrum is a nationally-owned resource, and the value of new spectrum has grown, as reflected in auction prices. Ofcom has authority to revise fees in view of market value. One might also note that pricing is one way of allocating spectrum to its highest and best use.

Some also will argue, not without reason,  that giving service providers exclusive control of some blocks of spectrum actually promotes effective and efficient use of allocated spectrum, compared to unlicensed and shared use, where there is no single manager of contention and access.

But service providers will also bear higher costs as a result of the revised fees, all of which will be recovered from customer fees or partner payments.

At some level, one might also note that, in principle, making some unlicensed and shared spectrum available also will create incentives for innovation by providers of access and other services at lower cost than is possible when providers have to recover spectrum acquisition costs.

Annual license fees for 900 MHz and 1800 MHz spectrum

Vodafone		O2		EE*		H3G*
Current	Proposed	Current	Proposed	Current	Proposed	Current	Proposed
£15.6m	£83.1m	£15.6m	£83.1m	£24.9m	£107.1m	£8.3m	£35.7m

* EE and H3G figures relate to holdings after EE’s divestment of 1800 MHz spectrum to H3G, to be completed in October 2015.

No Challengers in Belgium 800-MHz Spectrum Auction

Belgacom, Mobistar and KPN-owned BASE are the only three bidders for new 800-MHz spectrum being auctioned in Belgium. 

Without implying too much, or extrapolating beyond this one auction, in one market, the lack of bids by new contestants (some thought cable operator Telenet might bid) suggests contestants are not confident about their business prospects, should they win spectrum and be able to enter the Belgian mobile market.

That's a rational conclusion. The three licenses up for award each offer only 2 paired 10 MHz spectrum allotments (10 MHz up, 10 MHz down), not enough for a competitive operation, would-be contestants seem to have rationally concluded.

Some Regulators Want More Investment, But European Telcos Have a Profit Problem

Neelie Kroes, European Commission Vice President of the European Commission, responsible for the Digital Agenda for Europe, has a tough job, and so do telecom service providers these days.

It would be fair to say European communication tariffs have been relatively high, compared to U.S. tariffs, perhaps for obvious reasons, such as the fact the the U.S. market is continent-sized, meaning international tariffs do not apply, where in Europe a substantial amount of calling, texting and Internet usage occurs on an international basis. 

It is fair enough to argue that European regulators believe promoting competition leads to benefits for consumers (lower prices, more choices). It would also be fair to say pro-competitive policies in Europe have worked as predicted. 

It would also be fair to note that what is good for consumers sometimes is not so good for providers, since one person's cost is another person's revenue. 

The conundrum is that policies that promote competition also can depress service provider ability and willingness to make investments in next generation networks. Since telcos operate in private capital markets, inability to generate financial returns sufficient to assure lenders they safely can make loans to telcos is a big problem. 

Distressing though it might be, the service provider business case for next generation network investments is harmed, not helped, by pro-competitive policies that have the effect of depressing earning potential.

Competitive service providers who lease wholesale facilities would disagree, as they are helped by the pro-competitive policies. But investment in the networks everybody uses is an arguably different matter.

Kroes objects to cash being funneled to shareholders, rather than invested in the network. 
"My wish is that the money will be spent in your sector, and not put in shareholder's pockets," Kroes says. 

The problem is that unless carriers pay shareholders the expected dividends, and maintain share prices, the ability to attract investment also wanes. So the catch is that profits, dividends and share prices bear directly on ability to invest in networks. 

In that regard, roaming rate reductions, which are good for consumers, paradoxically also make it harder for service providers to justify next generation network investment. 

Europe is not alone in facing that challenge. U.S. regulators likewise confronted the issue, and concluded that for structural reasons (the existence of two fixed network competitors in virtually every market), wholesale access (which depressed network owner revenue) was not preferable to competition between network owners. 

In other words, where Europe had tended to favor policies that promote competition but arguably reduce incentives to invest in next generation networks, U.S. regulators chose to spur investment, while trusting that fixed network operator competition would be sufficiently robust to yield consumer benefits as well.

Some (not most competitive providers, for obvious reasons) service providers would disagree about the degree of competition, but how many end users, in any customer segment, would claim they really are worse off, pay more and have fewer choices and new services than before? Precious few, one guesses.

That is not to say European regulators or service providers can make the same choice. The U.S. market structure (competing cable and telco broadband networks in virtually every market) cannot be replicated easily in Europe, if at all. 

So a tough balancing act will have to happen. Oddly enough, the benefits of competition and investment stand opposed, to a large extent. 

Mobile Internet Access Drives Telecom Industry Growth

Between 2013 and 2018, U.S. mobile Internet access will drive revenue growth in the mobile business, which in turn drives revenue in the telecom business as a whole, according to Atlantic-ACM.

Atlantic-ACM predicts mobile data (mobile broadband and mobile Internet access) will grow from $79 billion in 2013 to $130 billion in 2018, including access revenues and services bundled with that access.

The vast majority of this growth and revenue has been, and will continue to be, concentrated among the big four mobile operators, AT&T Mobility, Verizon Wireless, Sprint and T-Mobile US, Atlantic-ACM says.

Mobile TV Winners and Losers

Mobile video consumption is reaching levels that will conceivably enable new businesses, recast several industries and likely accelerate change within the video ecosystem. Netflix and YouTube might be clear winners. Leading mobile service providers could be big winners. Smaller programming networks could be winners.

Prospects are less obviously helpful for fixed network service providers unable to provide a mobile consumption option, local TV broadcasters or some larger programming networks. 

There is a growing reason why mobile service providers and likely traditional TV subscription providers are looking at mobile delivery: that is where consumption is growing fastest, and where perhaps half of all video gets consumed in the U.S. market.

You would be hard pressed to figure out whether changing consumer demand or different supply modes drive revenue changes in the video entertainment market, though it takes a mix of both.

For the first time ever, customers of Verizon’s FiOS TV service are being allowed to watch live television on their mobile devices when they’re out of their homes, and disconnected from their home’s Wi-Fi network. That’s a big step, but just a step, as the new feature applies to just nine channels, including BBC America, BBC World News, EPIX, NFL Network (iPad-only), HGTV, DIY, the Tennis Channel and Scripps Networks Interactive channels, Food Network and Travel Channel.

As often is the case, smaller competitors have taken the lead, not the biggest networks. Just how much pressure for change will now be exerted is the question.

The other question is how much of a boost the new Verizon feature, and others that assuredly will eventually follow, will increase the importance of mobile video as a revenue stream for mobile service providers.

AT&T, for example, plans to launch a TV delivery service using some Long Term Evolution spectrum. It seems unlikely AT&T will launch a “standard” subscription video service, as it has limited spectrum.

Some suspect AT&T will want to provide localized broadcasting of events, or other information services (weather, news, alerts) of broad interest in a local market. Think of that application as making AT&T something of a local over the air TV broadcaster.

That isn’t to say fixed network providers without mobile assets have no options. Verizon is allied with major U.S. cable operators in agency agreements that allow each to sell the other firm’s products.

But there still are gross revenue and profit margin implications, as simply acting as a sales agent does not provide the gross revenue or profit margin of a service sold on an “owned” basis.

So video subscription providers will want to move with their audiences, delivering the same content on mobile and tablet devices, out of home or in home, as they now do inside the home. That’s the whole idea behind TV Everywhere efforts.

Whether that represents a “new” market, or simply a new way to support an older market, is a matter of debate, in some ways. In some cases, it is both. You might argue that Netflix and other streaming services are a “new” business, while out of home streaming offered by cable, satellite and telco TV services is an extension of an existing business.

In any event, 2013 probably will be the first year ever in the United States that video consumption on devices other than televisions surpasses traditional TV viewing. That’s the demand side of the equation, but that consumption pattern also is enabled by availability of Netflix and YouTube, among other suppliers.

The most significant growth area is on mobile. U.S. adults will in 2013 spend an average of two hours and 21 minutes per day on non-voice mobile activities.

That includes mobile Internet usage on phones and tablet, while mobile device is up nearly an hour from 2012 levels.

The report says that adults are watching their televisions slightly less—with a daily intake of four hours and 31 minutes this year, seven minutes less than in 2012.

The typical U.S. adult will spend over five hours per day online, on non-voice mobile activities or with other digital media, compared to four hours and 31 minutes watching television.

Daily TV time will actually be down slightly in 2013, while digital media consumption will be up 15.8 percent.

Measurement, in an era where people frequently multitask, is a key issue. Estimates by eMarketer include all time spent within each medium, regardless of multitasking.

Consumers who spend an hour watching TV while multitasking on tablet devices, for example, are counted as spending an hour with TV and an additional hour on mobile.

Such multitasking also drives an increase in the overall time people spend with media each day, which eMarketer expects to rise from 11 hours and 49 minutes in 2012 to 12 hours and 05 minutes in 2013.

The key finding is that time spent with mobile has come to represent a little more than half of TV’s share of total media consumption.

In-App Purchases are Becoming a Dominant Mobile App Revenue Model

Once upon a time, some observers gushed about the revenue opportunities mobile apps represented for developers, though it always has been clear how important mobile apps were for the device and mobile operating system suppliers.

It is starting to look as though the direct app purchase opportunity is more limited than expected, while in-application purchases (mobile commerce) are emerging as the key revenue model for developers, at least in Asian markets.

In other words, the freemium model has gotten traction, where developers give away free access to an app, and then features and add-ons for those apps.

In-app purchases generated 76 percent of all revenue in the Apple App Store for iPhone in the United States in February 2013, for example.

At least 90 percent of all such revenue was generated by in-app purchases in the Asian markets, which include Hong Kong, Japan, China and South Korea, Distimo data suggests.