100% Price Increases for Video Subscriptions Cannot Continue Indefinitely

Disruption on a major scale of the U.S. video entertainment ecosystem seems highly unlikely, for the moment, despite building pressures that suggest the current pattern cannot last forever.

Virtually every observer notes that U.S. cable TV prices have grown at least 100 percent over a decade, at least double the underlying rate of inflation, as measured by the consumer price index.

Many would rationally argue that cannot continue for decades more, as the value-price relationship will grow unappetizing. 

Should current rate increases prevail, in 10 years a typical consumer could be paying $200 to $300 a month for the equivalent of today’s “expanded basic” package, while other prices grow less than 33 percent over a decade, and possibly less.

Perhaps enough value will be added that such prices are deemed reasonable. But many would argue that seems unlikely.

Since 2000, the U.S. consumer price index (which excludes housing prices)  increased by about 34 percent, while another index, the “Everyday Price Index,” which includes such costs, shows a 57 percent increase between 2000 and 2012.

Even using the EPI figures, cable TV prices have grown nearly twice as fast between 2001 and 2011 as average consumer prices, and as much as three times as much by some standard measures, for example.

Video prices subscription prices In Multnomah County, Oregon, for example, grew by about 100 percent from 2000 to 2011, exceeding the background consumer price index and the everyday price index.

Some might point to services such as Netflix, available for roughly $10 a month, and compare that to an HBO subscription, which might cost $15 a month, and see a way for single channels to be sold at retail for about $10 to $20 a month on a stand-alone, streamed basis.

If similar economics prevailed for most networks generally, whether any given subscriber is better served buying a la carte, or buying a subscription, hinges on the number of channels or programs normally viewed.

If single channels could be purchased for $15 a month, then a consumer now paying $90 a month would break even at about six channels. A household habitually viewing more than six channels still would come out ahead simply buying a bundled subscription. But nobody really knows what economics of unbundled channel access actually would emerge.

Some argue that essentially little change would occur, and that typical households might wind up paying about the same amount each month, in an unbundled scenario where customers can buy channels one by one.

Studies by the Federal Communications Commission are inconclusive about whether unbundling would, or would not, save money. One of the studies suggested  “consumers that purchase at least nine networks would likely face an increase in their monthly bills” when buying a la carte.

Likewise, one of the studies suggested bill increases ranging from 14 percent to 30 percent under a la carte, while the other suggests a consumer purchasing 11 cable channels would face a change of bill ranging from a 13 percent decrease to a four percent increase, with a decrease in three out of four cases.

The point is that it is very hard to tell, conclusively, what might happen if providers shifted to a la carte viewing. 

Nor, given content owner preferences and contract clauses, are we likely to find out very soon. 

In truth, video distributors have little discretion about where to place channels (most contracts for ad-supported channels require placement on the most-viewed tier of service), and no freedom to sell any channel a la carte.

But the system has to break at some point.

source: FCC

Internet Fragmentation or Just Routing Changes?

There has been concern expressed for at least a decade that the “Internet” is becoming less “open” than it once was, and the reality is that such concerns are legitimate. “National” Internet restrictions are relatively common, and there now is the added concern in some quarters about ways to prevent traffic from crossing into the United States, because of privacy and spying concerns.

But the issues are relatively more complicated than sometimes stated, in part because virtually all networks are moving to use of Internet Protocol, but not all IP networks are part of the public Internet. Many private networks exist that are functionally and statutorily not part of the Internet, or the public network.

Enterprise networks and video entertainment services provide prime examples. But there are nuances; lots of them.

Some have suggested that Brazil, which wants more domestic Brazilian application activity, to reduce its reliance on U.S.-based applications, represents one form of  a “fracturing” of the Internet.

In practice, the Internet has been moving that way for some time, both in terms of language-differentiated apps and services, as well as content regulation. 

Still, in part there also are moves which are strictly at the physical layer, such as creating more in-nation infrastructure or more in-region infrastructure. Such efforts might not actually represent direct fragmentation at the application layer, but only routing efficiency.

Some might say a call to keep more “intra-German” traffic flowing “within Germany” is precisely that sort of thing, and not some wider fragmentation of the Internet in Germany, as some seem to suggest.

The main problem is that it is harder than sometimes supposed to confine data in such ways. Modern webpages are assembled, not simply “accessed” whole. A story on a news site might have  Facebook “Like” buttons, a Google+ “+1″ button and a Twitter button, for example, making it harder to ensure that all data remains exclusively contained on national networks.

Still, changes in routing and fragmentation of the Internet are conceptually distinct; one does not necessarily represent the other.

Mobile Data Consumption Will Grow an Order of Magnitude in 5 Years

Global mobile data traffic to reach almost 13.5 terabytes per month in 2018, iGR forecasts, propelled by a combination of more mobile data users and higher consumption by each user.

The iGR estimate is that, in 2013, approximately 1.4 million terabytes of mobile data traffic flowed over the world’s cellular data networks per month, and by 2018, iGR forecasts mobile data traffic will rise to 13.5 million terabytes per month.

Few would be surprised by such forecasts. Cisco has estimated global mobile data traffic grew 81 percent in 2013, reached 1.5 exabytes per month (1 exabyte is 1,048,576 terabytes)

at the end of 2013, up from 820 petabytes per month at the end of 2012.

What might be more relevant is the contribution various types of devices will have, as drivers of total data consumption. Notebooks and tablets represent higher rates of usage, but smartphones are more prevalent.

Smartphones will be the devices driving the overwhelming majority of data traffic, Cisco predicts.

Asymmetrical Traffic Dominates Networks; Will Affect Interconnection Wars

Asymmetrical traffic demand has been a technology and business issue in the networks business for some time, and is becoming an issue again as video traffic starts to dominate all traffic types, and networks have to be fundamentally redesigned to account for the new traffic characteristics.

The biggest single change is that IP network traffic increasingly is dominated by highly-asymmetrical entertainment video.

Metro traffic will surpass long-haul traffic in 2014, for example, and will account for 58 percent of total IP traffic by 2017.

Metro network traffic will grow nearly twice as fast as long-haul traffic from 2012 to 2017, propelled by the increasingly significant role of content delivery networks, which bypass long-haul links and deliver traffic to metro and regional backbones.

Likewise, content delivery networks will carry 51 percent of Internet traffic in 2017, up from 34 percent in 2012.

Globally, IP video traffic will be 73 percent of all IP traffic (both business and consumer) by 2017, up from 60 percent in 2012. The sum of all forms of video (TV, video on demand [VoD], Internet, and P2P) will continue to be in the range of 80 and 90 percent of global consumer traffic by 2017.

But significant business issues are raised, not just technology and architectural issues.

Though some of the implications mostly are about efficiency, many of the traffic-related issues have revenue and business implications.

In years past, the Federal Communications Commission has had to consider situations where asymmetrical traffic flows have cost implications for service providers that are one-sided and distort the normal economics of traffic exchange.

Historically, the assumption was that traffic would be symmetrical, both inbound and outbound on any single network, and then symmetrical across network boundaries. That had obvious implications for network design and also the arrangements whereby networks compensated each other for terminating or carrying traffic.

But business relationships between networks have been, and will be, affected by various types of arbitrage, especially when traffic flows or retail rates are asymmetrical.

Traffic pumping, also known as access stimulation, is a controversial practice by which some local exchange telephone carriers in rural areas of the United States inflate the volume of incoming calls to their networks, and profit from greatly increased intercarrier compensation fees.

They do so by operating inbound toll-free calling services services where traffic is, by definition, unbalanced. Back in the days when dial-up Internet access was the norm, the same sort of arbitrage existed.

Modem pools could be located where favorable long distance termination rates could be leveraged.

Phantom traffic is another form of interconnection arbitrage.

Granted, IP network interconnection is governed by different rules than common carrier services.

But the same potential for arbitrage can exist, if networks with highly-unequal traffic flows are forced to interconnect on a settlement-free basis. That already is an issue for interconnecting content delivery networks or networks handling video applications such as Netflix, which by definition are characterized by huge downstream flows and almost no upstream traffic.

For that reason, the potential for arbitrage will exist, if IP networks are forced to interconnect on a settlement-free basis. Proponents naturally will put the best light on such mandatory, settlement-free interconnection by arguing it is necessary to maintain lawful content access.

In other words, the mandatory settlement-free interconnection will be couched in “equal access to content” or “network neutrality” terms.

Others might say the issue is business arbitrage.

And that potential arbitrage will grow as all public IP network traffic comes to be dominated by content, specifically entertainment video.

Google Fiber Coming to More Cities? Probably

Google Fiber now is available in three U.S. cities, but Patrick Pichette, Google CFO suggests people should "stay tuned," when asked whether additional cities will be added. 



Since the middle of 2013, Google execs have been saying that Google Fiber actually was a money maker for Google, not an experiment, or simply a way to apply pressure on other major ISPs to upgrade their speeds.



Some might say the evidence since 1983 suggests that improvements in Internet access speed grows at almost the rate Moore's Law would predict.

		Annualized Growth Rate	Compound Growth Over 10 Years
Nielsen's Law	Internet bandwidth	50%	57×
Moore's Law	Computer power	60%	100×

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.