Video Economics Could Crush Mobile Profit Margins

It is easy to overlook the huge change in mobile industry economics as video becomes the chief bandwidth generator on mobile networks. It is hard enough to maintain profit margins for a service created and sold by an access provider; harder still when an access provider does not derive any direct revenue at all from an application.

And that latter problem is precisely why over the top video poses such a challenge for mobile service providers. Even ignoring for the moment the lack of any direct revenue model for over the top video, revenue per bit always has been an issue for broadband services, compared to narrowband services.

In fact, even if mobile service providers might prefer to price according to value, that is difficult for video services, since the perceived price per bit for video is so low, relative to other types of apps.

To be sure, even some thoughtful analysts have been wrong about profit margins. Despite some claims to the contrary, mobile broadband service is profitable. Still, video poses a problem because it is so hugely different, in terms of bandwidth consumption, than any other media type.

Even though McKinsey analysts have argued in the past that a 3G network costs about one U.S. cent per megabyte, the growing problem is video consumption per megabyte, even when a service provider gets paid to provide it.

Consider over the top video, which might be supported by retail mobile Internet plans costing about $10 per gigabyte.

Assume a user is consuming an hour of Netflix, at “best quality,” representing about a gigabyte per hour, or perhaps 2.3 GB an hour. That earns $10 for supplying a gigabyte of usage.

That, in itself, is not a problem, so long as users agree to pay for what they use. But that is the potential problem: it is unlikely users will continue to behave the same way as consumption grows.

According to Ericsson, video traffic on mobile networks grows about 60 percent annually. According to Cisco, mobile video consumption is growing at a compound annual growth rate of 69 percent between 2013 and 2018.

Already on some networks, video consumption is on average 2.6 GB per user per month. At some point, most consumers will reach a point where they either stop consuming more, stop buying bigger plans, or both.

Of the 15.9 exabytes per month crossing the mobile network by 2018, 11 exabytes will be due to video, Cisco says. In 2012, mobile video represented more than half of global mobile data traffic, Cisco says.

If mobile service providers become providers of mobile entertainment services, the basic problem remains. Assume a mobile service provider offers a Netflix style service, and earns $8  a month, while consumers watch five hours a month.

Total revenue might be as high as $58 a month, including the $8 video subscription fee, plus $50 in Internet access fees. The issue is where consumer resistance, or reduced app usage, or offloading, comes into play.

But assume people watch five hours each day of mobile video, the same amount U.S. residents watch. That implies as much as 150 hours of video a month, per subscriber. There simply is no way a subscriber pays $1500 a month in data charges, simply to watch video.

So the practical issue is how much any typical consumer will pay to watch video. And there the economics get tricky. A household of three, for example, might watch as much as 450 hours of video, if there is no shared viewing.

Assume a monthly video subscription price of $90 a month. That implies a cost of about 20 cents an hour. Mobile data charges are $10 per gigabyte, which is roughly an hour of viewing. The economics will break down quickly.

A mobile network designed to handle mostly video has to be designed and operated differently--and at far lower cost--than a network designed for narrowband services. That has been obvious for some time. It now will become a most-practical issue.

Without dramatic cost reductions, video will crush mobile service provider networks and profit margins.

Where Does Verizon See Greatest Churn Danger?

The new Verizon Wireless “More Everything” program seems aimed at shared data plan accounts that buy 3 GB, or less, of Internet data usage each month, rather than heavier users on popular Verizon Wireless shared data plans.

That suggests Verizon sees the immediate churn danger among shared data accounts purchased by single users connecting multiple devices, or two-user or three-user accounts.

The new program features bigger data allowances for the same price formerly charged for smaller data allowances. Some customers will see their data allowance doubled for the same monthly price they paid previously, Verizon Wireless now says.

More Everything customers who choose to enroll in the Verizon Edge device program also will get $10 off monthly smartphone access for data allowances up to 8 GB, and $20 off monthly smartphone access on plans of 10 GB and higher.

Though unlimited U.S. domestic texting has been a staple of new plans across the industry, Verizon Wireless now is extended unlimited international texting, picture and video messaging (MMS).

Each More Everything line also will be able to  use up to 25 GB (or up to 250 GB on a 10 line account) of cloud storage from Verizon Wireless.

Verizon Wireless also is offering price breaks on some additional features, which can be added for no extra charge for three months, then costing $5 a month thereafter.

Among them are Family Base. Also, the Verizon Wireless International Long Distance Value Plan provides rates as low as $0.01 per minute to Canada and Mexico, and $0.05 per minute to many other countries in Latin America and the Caribbean.

Marketing War is Only the Prelude: U.S. Mobile Revenues Will Decline by 2018

Among developed markets, the U.S. mobile industry has been a revenue bright spot for several years, growing where revenue has been dropping in Western Europe, for example. For several reasons, that is likely to change.

For starters, some forecasters have argued that even global mobile revenue will start to drop, beginning about 2018. Ovum, for example,  forecasts mobile operators will face global revenue decline by 2018 for the first time in mobile industry history.

Western European service provider revenue is predicted to decline by 1.5 percent on a compound annual basis. In the Middle East, average revenue per user will decline 2.5 percent on a compound annual basis.

Africa and Asia will be the exceptions. Africa will grow at a CAGR of 4.2 percent. Parts of Asia-Pacific and Latin American regions will see growth as well, Ovum predicts.

Overall, global connections will grow by by less than four  percent compounded annually between 2012 and 2018, while global revenues will grow at less than half that rate.

According to Ovum, global mobile connections will grow from 6.5 billion in 2012 to reach 8.1 billion by 2018, while annual mobile service revenues will rise from US$968 billion to US$1.1 trillion.

However, global service revenues will contract in 2018 for the first time in the history of the mobile industry, declining from 2017 levels by one percent or US$7.8 billion, Ovum predicts.

Connections in Western Europe will grow by less than one percent, compounded annually,  while revenues will decline at a CAGR of 1.48 percent, said Sara Kaufman, Ovum analyst.

The U.S. market also will decline by about one percent in 2018.

Much of the revenue decline will be driven by falling ARPU, which will continue to decline across all markets by a 2.7 percent global CAGR between 2012 and 2018, says Kaufman.

One might argue that the current mobile marketing war will be part of the reason revenue decline begins.

source:eWeek

source: Analysys Mason

source: Analysys Mason

Comcast Rationale for Buying Time Warner Cable Mirrors Sprint Argument for Buying T-Mobile US

source: comscore

In some ways, Comcast’s justification for buying Time Warner Cable echoes arguments made by Sprint about its potential acquisition of T-Mobile US:  economies of scale.

“In today’s market, with national telephone and satellite competitors growing substantially, with Google having launched its 1 GB Google Fiber offering in a number of markets across the country, and consumers having more choice of pay TV providers than ever before, Comcast believes that there can be no justification for denying the company the additional scale that will help it compete more effectively,” Comcast said.

 

That, in essence, is how Sprint frames any consolidation between Sprint and T-Mobile US. Long term competition with the larger Verizon Wireless and AT&T Mobility will require more scale.

At the moment, by some measures, Verizon Wireless and AT&T Mobility are about four  times bigger than T-Mobile US and three times  bigger than Sprint. In most markets, that might be considered an insurmountable lead.

In a market that is virtually a zero-sum game, few might believe it is possible for the smaller providers to wrest market share away from competitors so much larger.

source: venturebeat

Telcos Lag Cable in Internet Access Speed, for a Reason

U.S. telcos are lagging cable competitors both in speed and net acquisitions, and that pattern has persisted for several years. If one accepts the proposition that the strategic value of any fixed network is its ability to provide low-cost Internet access bandwidth, it might seem self evident that lagging in those respects is a clear business problem.

But it is not so clear. The reason is that telco revenue growth now is driven by mobility services, while the fixed network is vital substantially as a backhaul and offload mechanism, one might argue.

The simple fact is that it is irrational to over-invest in a part of the business that drives perhaps a quarter of revenues, and almost none of the revenue growth.

Telcos have to invest enough to protect the asset, but not so much they cannot earn a reasonable return on that investment. For cable operators, the business case is reversed: cable operators derive substantially all their revenue from services provided by the fixed network.

Though for both telcos and cable companies the challenge is to maintain relevance without overinvesting, telcos have the further requirement to shift investment into the mobile segment that actually drives revenue growth.

So it is not a surprise that the leading telcos seem to invest “enough” to remain relevant, but not much more.

Telcos will respond, should it be necessary, and many would note they already are doing so.

AT&T is the notable example, For U-verse customers, AT&T recently has announced speed increases to be in place by 2015, including an upgrade of about 90 percent of U-verse customers up to 75 Mbps and a further upgrade of 75 percent of U-verse customers to access at speeds up to 100 Mbps.

For IP-DSLAM customers, AT&T plans to supply 80 percent of IP-DSLAM customers with speeds up to 45 Mbps, and enable about 50 percent of IP-DSLAM customers with speeds up to 75 Mbps.

Some might argue that is fine for the moment, but will be superseded in turn by even faster speeds. Still, it would not be surprising if telcos lagged, and did not lead, the market.

Time Warner Cable Agrees to be Acquired by Comcast

Tine Warner Cable has accepted a $45 billion acquisition offer from Comcast, after rejecting earlier offers from Charter Communications, and presenting the Federal Communications Commission with another test of U.S. service provider market power.

The new twist is that the merger might not be most significant for its impact on video markets, though that will be an issue, but for the impact on high speed access markets. And though it is formally unrelated, the potential Sprint acquisition of T-Mobile US could be affected as well, if Sprint concludes either that the Comcast purchase of Time Warner Cable is likely to fail, or that it is likely to be approved.

Though regulators will look at the impact on relationships between video content owners and distributors, the tougher questions are likely to revolve around the impact on high speed access markets, even though there is almost no overlap of Comcast and Time Warner Cable operating areas.

Few would question the centrality of broadband access for fixed network service providers. And few would argue with the notion that cable tends in most markets to be the top provider, in terms of market share.

On the other hand, recent experience suggests that the DoJ would be willing to approve a Comcast acquisition, after deal adjustments.

In 2013, the DoJ sued to block major deals in the beer and airline industries, but both mergers were eventually allowed after concessions. Some think that is the likely outcome for the Comcast acquisition of Time Warner Cable as well.

The unknown, for Sprint, is whether that also would work for its desired acquisition of T-Mobile US.

Ironically, the amount of market share lost by cable operators, collectively, over the last decade to satellite and now telco competitors will make the Comcast deal easier than it would have been in the past. By 2012, the U.S. cable industry market share had dipped below 60 percent.

Without that loss of share, Comcast already would have well exceeded an informal rule that no provider can serve more than about 30 percent of U.S. customers without triggering antitrust review.

A formal Federal Communications Commission rule to that effect had been in effect until 2001, when the FCC rule was declared unlawful. The FCC adopted a new version of the rule in 2007, but that version again was struck down by an appeals court in 2009.

The U.S. Court of Appeals for the District of Columbia Circuit said the FCC "failed to demonstrate that allowing a cable operator to serve more than 30 percent of all cable subscribers would threaten to reduce either competition or diversity.”

Still, most executives voluntarily prefer not to push the informal limit, so Comcast likely will shed enough subscribers to stay at or below the 30 percent limit.

Time Warner Cable had been the second=largest U.S. cable operator; Comcast clearly the largest. Comcast has about 21.6 million subscribers, while Time Warner Cable has about 11.4 million customers, for a combined total of about 33 million, out of 92.5 million U.S. video subscription customers.

By that reckoning, where the market is defined as all video subscription customers, instead of just “cable customers,” Comcast would have 34 percent market share. That means Comcast will have incentives to divest up to four percent of the newly-acquired customers, to stay at 30 percent share.

Since the beginning of 2010, Time Warner Cable has has been losing customers, at least 2.05 million video subscribers, or approximately 16 percent of its subscriber base.

That is one good reason for the recent interest in an acquisition by both Comcast and Charter Communications. An acquirer would assume it can do better.

It is possible the deal could falter, especially if Comcast equity price dips significantly. It also is possible there could be adjustments if Time Warner Cable’s equity price were to rise substantially. And Charter could raise its bid, though most seem to think that is unlikely.

Instead, Charter likely would be offered a chance to buy the customers Comcast would shed.

U.S. merger law is governed by the Hart-Scott-Rodino Antitrust Improvements Act, under which the Federal Trade Commission and the Department of Justice evaluate mergers for their impact on fair competition. By current law, all mergers that are valued above $66 million must receive approval to go forward. But deals smaller than that can be reviewed whenever the Department of Justice believes a deal would affect competition in an industry negatively.

The Comcast acquisition also must be reviewed by the Federal Communications Commission as well.

Merger activity can heat up in a particular industry for various reasons, such as poor overall growth prospects for the industry, underperformance by one player within the industry, or opportunities to grow more profitability through synergies. Consolidation expectations within the cable TV industry have begun to heat up due to all three of these drivers.

Auto, Health and Fitness Lead M2M Opportunities?

There are good reasons for mobile service provider interest in machine-to-machine services: M2M represents the likely next wave of revenue growth for the industry, collectively. The issue is that M2M represents numerous vertical  markets, not a single revenue segment.

At least for the moment, automotive applications and health and lifestyle segments seem to be getting attention, mirroring end user interest.