Subscriber Growth Still Matters

Some observers might argue that the mobile industry errs when it continues to measure progress, in part, as a function of subscriber volume (number of accounts or users). In some ways, that makes sense.

The corollary is that in many markets, even organic growth might be secondary to growth by acquisition. Still, how to measure organic growth remains an issue.

Fixed network operators long ago started to emphasize revenue units or revenue per account, especially since it became clear that “subscriber growth” was likely to become muted. In other words, revenue sold to a smaller number of customers, rather than revenue earned by gaining customers, was the salient metric.

Mobile service providers are starting to move that direction as well. Verizon Wireless no longer reports “revenue per user (subscriber)” but only “revenue per account.” In part, that is preparation for a new wave of growth fueled by devices with lower average recurring revenue, including tablets and sensors (Internet of Things or machine-to-machine services).

To be sure, service providers also can grow the amount of revenue they earn from each account, but the driver remains the number of subscriber accounts, at least in terms of what can be accomplished organically.

If the market is largely a zero-sum game, so long as a firm does not lose customers, it gains primarily by growing revenue per account.

On the other hand, a focused effort to protect or acquire some accounts might be among the most-lucrative ways to affect revenue. For starters, some accounts, especially multi-line “family accounts,” are more resistant to churn, but also feature higher revenue.

Parks Associates consumer data show that almost 50 percent of U.S. mobile phone service customers did not change providers over the last 10 years. A disproportionate share of those accounts likely are family accounts.

According to Parks Associates, about 25 percent of respondents changed service providers only once in 10 years. So 75 percent of the market is highly resistant to change.

Just 13 percent of respondents switched providers three times or more (about once every three years or so).

That suggests the real battle to shift consumer allegiance would be fought over about 13 percent of customers. Under those conditions, any significant change in postpaid market share will be a stubborn affair.

But anything that dramatically affects propensity to change, especially for the churn-resistant family accounts, would be significant.

According to the CTIA, the average revenue per user in 2012 was about $49 a month. But Verizon Wireless average revenue per account was much higher, about $153 a month, on the strength of its large base of family accounts.

AT&T does not report revenue per account, though AT&T reported average revenue per wireless customer of $65 for the fourth quarter of 2012. But analysts at Cowen and Company peg the average AT&T account bill at $141 per month.

The Cowen survey also found that 68.5 percent of postpaid respondents were paying for family plans, with 26.1 percent on individual plans and 5.4 percent on corporate plans.

An older 2011 survey by PriceWaterhouseCoopers suggested perhaps 47 percent of accounts were family plans. The percentage of AT&T Mobility and Verizon Wireless accounts undoubtedly was higher, even then.

The point is that changes in subscriber numbers still matter, but matter most if something happens to increase subscriber propensity to change service providers, especially among the higher-value family accounts.

New Coalition to Lobby for More Unlicensed Spectrum

A new coalition formed to push the U.S. Federal Communications Commission to release more unlicensed spectrum, called WifiForward, includes cable companies Comcast Corp., Time Warner Cable and Charter Communications, Google and Microsoft.



Notably, WifiForward does not include the largest U.S, telcos, for reasons you will understand. 



Mobile service providers, for a couple of reasons, prefer licensed spectrum. They can control quality, for example. But it also is obvious that licensing provides the highest "scarcity" value, creating better conditions for monetizing spectrum and also preventing other competitors from using that spectrum to compete.



Applications providers prefer unlicensed spectrum since they are users of networks based on spectrum, not providers of services earning revenue based on the access. Unlicensed spectrum makes Internet access more available, at lower cost, than otherwise would be the case.



Cable operators also have reasons for wanting more unlicensed spectrum released. Though cable operators have tried for decades to create an independent role in the mobility business, U.S. cable companies essentially have abandoned the effort. 



Instead, cable companies hope Wi-Fi will be a way to enter the untethered communications business without having to create full mobile assets of their own. 



In essence, cable companies continue to hope that untethered communications will create new revenue opportunities for them, both as retailers of service and suppliers of wholesale capacity.

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.