Western Europe, U.S. Service Provider Revenue Growth Strategies Diverge

source: ABI Research

The acquisition of SFR, the second-largest communications provider in France, by cable TV company Altice, which operates Numericable, the largest French cable TV business, is the first step in a new wave of consolidation in the French communications markets, which now routinely includes the formerly-separate entertainment video business.

The next step likely will involve market consolidation between mobile provider Bouygues, which had lost its bid to acquire SFR itself, and Illiad, owner of Free Mobile, the low-cost mobile service provider which has been attacking the French mobile market with low-price offers.

The French market rearrangement also suggests some differences from the drivers of U.S. communications market consolidation.

Consolidation in the U.S.cable TV and telecom industries has occurred on separate tracks: up to this point the key mergers have been intra-industry rather than inter-industry.

That suggests revenue growth strategies have largely been viewed as a matter of amassing additional scale within each industry--cable TV and telco--without a fundamental requirement for trans-industry positioning.

Verizon and AT&T have pinned their hopes largely on continued growth of their mobile businesses, even though both own significant fixed network assets. Likewise, cable operators have seen subscriber growth primarily as a matter of gaining more scale within the cable TV business.

source: Venturebeat

In Western Europe, mobile service providers indicate by their acquisitions that revenue growth likely cannot come from the mobile segment alone, though scale helps. 

And Altice sees additional revenue growth for itself as coming primarily from cross-industry acquisitions.

In large part, that is a result of Altice’s large cable TV market share, which offers little remaining out of territory gains, as well as an emphasis on quadruple-play offers expected to drive revenue growth.

The other issue is that aggregate telecommunications revenue has been dropping in Western Europe for some years.

Because of that trend, the “grow from mobile” strategy, which continues to underpin AT&T and Verizon strategies, is viewed as untenable in Western Europe.

Instead, growth is seen as coming from quadruple-play offers that combine mobile with fixed network triple-play services. That, in turn, is a way of acknowledging that each contestant will have a harder time growing by adding subscribers, and instead must sell a wider range of products to a smaller or slowly-growing number of subscribers.

Many observers think Bouyges still has to make a key acquisition, as it now finds itself roughly in the position of Sprint in the U.S. mobile market, trailing the top-two providers by some distance.

Verizon Wireless has about 32 percent of U.S. mobile subscribers, while AT&T Mobility has about 29 percent share. Sprint has about 18 percent subscriber share, while T-Mobile US has about 12 percent share.

Share of revenue and profits is another matter. Sprint and T-Mobile US are losing money, while only Verizon Wireless and AT&T Mobility actually are profitable.

And most of the revenue earned in the market is earned by AT&T Mobility and Verizon Wireless.

Verizon earns about 38 percent of U.S. mobile service provider revenue. AT&T gets about 34 percent of revenue.

Sprint gets about 17 percent of revenue, while T-Mobile US generates about 11 percent of revenue.

The point is that Bouyges, Sprint and T-Mobile US all face similar challenges: they are far behind in market share, in markets where scale matters, long term.

But Bouyges will face some of the same regulatory issues it would have faced had its bid for SFR been accepted.

That deal would have vaulted Bouyges into first place for French mobile market share, but also likely would have engendered opposition from French regulators, who continue to desire a minimum of four service providers in the market.

Any combination of Bouyges and Illiad would raise the same issue, but only at a lower level of market share held by the new company.

Orange (France Telecom) has about 40 percent share of the mobile market. Numericable now has 30 percent market share. Bouyges has about 17 percent share, while Illiad has about 10 percent share.

Combined, Bouyges and Illiad would have about 27 percent market share.

source: Gigaom

Sprint and T-Mobile US face a similar issue in the U.S. mobile market, as U.S. regulators likewise prefer a mobile market lead by four major national suppliers, and oppose a reduction to three leading providers.

Can Sprint and T-Mobile US Survive a Protracted Price War?

There are any number of reasons why regulators prefer that the U.S. mobile market continue to feature four national contestants, instead of the three that would remain if Sprint an T-Mobile US were to merge.

The issue is whether that is possible, long term, irrespective of what regulators might prefer.

Sprint, though growing revenue, continues to show an operating loss, and has since at least 2006. T-Mobile has been on a subscriber upswing since the start of 2013, but profits and net income are the issue.

T-Mobile US net income dropped by nearly 90 percent in 2013, for example, the direct result of a successful subscriber market share attack.

Total T-Mobile US revenue in fourth quarter 2013 rose 10.2 percent after taking into account the acquisition of MetroPCS.

But branded postpaid average revenue per user fell by 2.9 percent. Cost per new customer rose by $10 during the quarter to $317.

As a result, T-Mobile US's fourth-quarter cash flow (leaving out non-recurring items) dropped 7.8 percent from the third quarter of 2013.

In 2012, T-Mobile US posted operating margins of 9.6 percent; this figure shrank to 4.1 percent in 2013.

Debt burdens also are rising. T-Mobile US has announced capital spending plans of $4.3 billion to $4.6 billion in cash, compared to projections of cash flow before cash interest and taxes of $5.7 billion to $6 billion.

The point is that a continued marketing war will hit earnings at potentially all the four national carriers, but will eventually harm Sprint and T-Mobile US even more, as those two carriers do not have the financial strength of AT&T and Verizon.

Already weak, compared to AT&T and Verizon, Sprint and T-Mobile US would eventually be weakened further by a prolonged marketing war.

Such numbers are the reason some might argue that long term competition in the U.S. mobile market would be strengthened were Sprint to buy T-Mobile US.

The combined company would have more than 50 million postpaid subscribers, much closer to Verizon Communications' 95 million and AT&T's 70 million-plus postpaid customers.

Some might argue that since none of T-Mobile US customers are on contract, they are susceptible to churn.

That only reinforces the point: as feisty as T-Mobile US is, and Sprint might become, both service providers are dangerously smaller than AT&T and Verizon, a fact that would be critical if a price war saps revenues at all four carriers.

The point is that, one way or the other, the U.S. mobile market is likely to consolidate further, no matter what the Federal Communications Commission and Department of Justice might prefer.

But that market-driven contraction will come when both Sprint and T-Mobile US are even weaker than they are at present.

Capital budgets are just one example of the disparity.

Google Ponders Wi-Fi-First Mobile

A rumor that Google is pondering whether to become a mobile operator would be but the latest indication that Google and other application providers remain unconvinced legacy access can be relied upon to operate in ways that are optimal for application provider business models.

Such musing by Google would parallel similar thinking about the quality of fixed network high speed access that eventually lead to the launch of Google Fiber.

Google also has in the past invested in municipal Wi-Fi, airport Wi-Fi, commercial Wi-Fi at Starbucks locations and even invested in Clearwire. Google also is testing unconventional says of supplying Internet access to billions of people living in the global South, using steerable balloons.

It is easy enough to speculate that Google could create a mobile virtual network operator business. 

That would allow the fastest market entry, with nearly national coverage. But such a move also would mean Google is bound by the network features and capabilities, as well as cost structure, of the wholesale agreement.

Wi-Fi is the other obvious network platform, with a different set of advantages and drawbacks. Incomplete coverage and ability to support fully mobile communications are among the chief drawbacks.

So a "Wi-Fi first" hybrid model would make more sense, something other MVNOs also prefer.

Using Wi-Fi alone would be simpler if Google were interested mostly in a content-access service that did not require mobility as a primary attribute, but only defined “place-based” access. That’s the definition of the Starbucks Wi-Fi effort.

Also, if Google were interested in vertical market apps, perhaps enterprise focused, Wi-Fi-only approaches might also be a more-reasonable solution. That might be appropriate for some “Internet of Things” or machine-to-machine apps.

To the extent that Google primarily would be interested in a mobile consumer service, the issue is whether enough advantage can be gained using a Wi-Fi-only approach, compared to a Wi-Fi-first model.

Wi-Fi already supports a mix of end user at-home, at-work and public venue access, without a primary requirement for on-the-move roaming between cells, and Google does not need to supply the at-home, at-work access and most of the public hotspot access.

On the other hand, neither does that provide the "data" that operating as a primary access provider would deliver.

At this point, the only easy way to provide constant application connectivity--and gain the data--is to use a big national mobile network, even when defaulting to Wi-Fi when possible. And that is likely to remain the case for some time.

So the issue is how much room Google might have, in an MVNO context, to create retail offers that serve its needs and also are distinctive and valuable enough from a consumer perspective to underpin a large business, even if using a Wi-Fi-first model.

At least initially, Google is said to be looking at a “Wi-Fi first” model in areas where Google Fiber operates, with default to the mobile network only when users are outside Wi-Fi zones.

Just how extensible that approach might be is the issue. Though it undoubtedly will be easier in the future, coverage is an issue at the moment.

Will Spectrum Auctions Enhance Competition?

Making new spectrum available is one of the traditional ways regulators can introduce more competition into a market. 

Perhaps rarely is the business environment so turbulent as in the U.S. mobile market, where a pricing war has broken out after years of stability, major blocks of new spectrum are going to be made available, and regulators face a new round of industry consolidation.

And regulators face a very tricky challenge. They must weigh the impact on competition and investment if four national mobile providers consolidate into three. 

They have to design spectrum auction rules that presumably encourage competition at the same time the auctions raise revenue and make additional capacity available. 

And they have to do so in a dynamic environment where the long-term outcomes are unclear, no matter which way policy is set. Some might argue it is self evident that four contestants are better than three.

Others argue the market will not support four contestants over the long term, and that three strong competitors will provide better consumer outcomes, and promote investment as well. 

Looking only at earnings, it is clear the market is unstable. Where 2013 mobile earnings for Verizon were about $34 billion, and where AT&T earned about $26 billion, Sprint earned about $5 billion while T-Mobile US earned $5 billion as well.

The contestants are far from evenly matched, in other words. And some would say the long-term market structure cannot support four competitors so unevenly arrayed. 

What policies might be created to affect the outcome is the issue. The smaller mobile carriers argue for spectrum set-asides, especially in the important upcoming 600-MHz auctions. 

But that holds risks. Doing so would reduce the revenue the auctions would generate. That might not be so big a problem, except for the fact that the FCC is holding a two-stage auction, and has to induce TV broadcasters to give up their spectrum first, before mobile service providers can bid to acquire the spectrum.

Spectrum prices, in other words, will have a direct bearing on whether the auctions even are possible. Complicating matters is the desire expressed by Sprint to buy T-Mobile US, and the impact such a deal would have on Sprint willingness and ability to bid for new 600-MHz spectrum.

Already burdened by debt, Sprint might not be able to afford both a T-Mobile US acquisition and significant new 600-MHz spectrum, no matter what the bidding rules. And in that case, will there really be any more than two bidders, namely AT&T and Verizon, something the FCC might well want to avoid.

Nor is it clear Sprint will bid in the next auction of AWS 3 spectrum. That 65 MHz of new mobile spectrum in the 1695-1710 MHz, 1755-1780 MHz, and 2155-2180 MHz bands is in some ways going to be unappetizing for all the four major carriers.

The incremental spectrum gains are likely to be fairly minor (10 MHz gained by any single carrier is a likely result). And the big 600-MHz auction lies ahead.

Also, there is a novelty. The 2155-2180 MHz portion of the AWS 3 band already is licensed for use by Federal users.

So that spectrum will be available only on a shared basis with the new commercial users. That is a first for formerly-exclusive license issuance. But shared spectrum is likely to be considered less valuable than exclusive-use spectrum, and will therefore likely lead to lower market prices than other similar exclusive-use spectrum.

Also, in the case of AWS 3, there are indications that Sprint is not too interested in bidding.

Dish Network, on the other hand, is viewed as the likely bidder for unpaired spectrum Dish can pair with its existing AWS 4 spectrum.

The point is that it is not clear the AWS 3 auction will have as much impact on the fortunes of the leading mobile providers as other coming developments.

More importantly, it is not absolutely clear what the FCC can, or should do, with respect to enhancing competition in the U.S. mobile market. A reasonable observer might well argue that Sprint and T-Mobile US simply are too small to compete against AT&T and Verizon, long term.

Source: BTIG Research

Sprint Will Pay ETDs for New Framily Customers

Sprint has launched a limited-time offer for new customers who switch to a Sprint Framily plan from another service provider. 



Sprint will pay early termination fees such new customers might incur when switching, as well as buying the old phone, up to $300. Sprint will pay up to $350 worth of ETFs for each new line switched. 



The offer is available at Sprint stores and online at Sprint.com from April 4 through May 8, 2014. 



The limited time promotion likely is a reflection of the potential costs of such a program. 



The Sprint offer illustrates the growing mobile price war in the U.S. market, and also the way the leading service providers often attack, launching limited-time promotions that limit financial exposure and also create a sense of urgency about switching. 

When Will Telco Fixed Network Access Lines Stop Falling?

source: Larribeau Associates

When will U.S. fixed access lines stop falling? And what stable level of lines should be expected?

Will lines stabilize at a third of their peak, half, or even more?

Right now, it is hard to say.

In 2000, there were more than 180 million access lines in service, and telcos supplied nearly all of them, either on a retail or wholesale basis.

And matters are not made easier by terminological confusion. Some count "access lines" as "voice lines."

Others might include high speed access in the total. Some count only telco-supplied lines, while others include cable-provided lines.

Others might count a "voice service" as a line, even if delivered over a high speed access circuit.

The point is that the telco line erosion will halt, some day. The issue is when, and at what level that will occur. The other issue is total market size, including lines sold by competitors. In principle, telco lines could drop even if the market does not contract.

Technology Futures, which has been a remarkably accurate forecaster in this regard, thinks it is conceivable U.S. telcos ultimately will find a stable base at around 100 million access lines, on the assumption telcos collectively get and keep about half the number of U.S. high speed access lines.

JSI Capital Advisors has estimated there could be just 40 million U.S. telco access lines in service by 2020.

Some might argue that is possible if one counts only narrowband voice lines in service. For example, Technology Futures has estimated U.S. telco narrowband lines could dip to as few as 50 million by 2020.

To some of us, that forecast of remaining narrowband lines seems too high, as it suggests half of all U.S. telco lines will be narrowband in 2020. 

That just seems unlikely in the medium term, and virtually impossible in the long term, as legacy time division multiplex networks are decommissioned in favor of Internet Protocol networks.

Though it will remain possible for a narrowband copper connection to handle 2020 IP services, it will be difficult. Nor, in practice, will telcos struggling to reach lower costs want to maintain two separate networks.

The bottom line is that it is reasonable to argue that U.S. telco fixed network service providers might eventually reach a “stable” base of between 63 million to 100 million homes, each home buying at least one service.

One might note that U.S. cable operators had in 2013 about 57 million video accounts in service. 

Taken together, one might therefore guess that total fixed lines in service could be between 100 million homes and 120 million homes, about 66 percent of the 2000 level.

JSI Capital Advisors has estimated there could be just 40 million U.S. telco access lines in service by 2020.

Some might argue that is possible if one counts only narrowband voice lines in service. For example, Technology Futures has estimated U.S. telco narrowband lines could dip to as few as 50 million by 2020.

To some of us, that forecast of remaining narrowband lines seems too high, as it suggests half of all U.S. telco lines will be narrowband in 2020. That just seems unlikely in the medium term, and virtually impossible in the long term, as legacy time division multiplex networks are decommissioned in favor of Internet Protocol networks.

Though it will remain possible for a narrowband copper connection to handle 2020 IP services, it will be difficult. Nor, in practice, will telcos struggling to reach lower costs want to maintain two separate networks.

The bottom line is that it is reasonable to argue that U.S. telco fixed network service providers might eventually reach a “stable” base of between 63 million to 100 million homes, each home buying at least one service.

Most service providers likely would be quite happy if the market stabilized at that level. And, at some point, it is likely that a fixed access line will be a high speed connection, not a "voice line." That would tend to suggest erosion will be driven as much by market share shifts as actual market contraction.

Demand shrinkage is one issue. Market share lost to other contestants is the other issue affecting incumbent telcos.

Overall demand for fixed voice lines is dropping. The "lines" that will be permanently lost are those lines which formerly would have been used to support home fax machines, "teenager lines," or dial-up access lines, as well as lines that shift to mobile usage.

It might be reasonable to suggest half of former consumer lines could disappear, under those conditions, though business lines might largely remain more stable.

Just as important, though, is lost market share.

For many of us, the notion that communication services have life cycles has proven quite unsettling, even though most people would agree that product life cycles exist for other products.

Ownership of private autos now is projected to fall by 16 percent in North America by 2030, according to ABI Research, driven by a shift of population to urban areas where it is possible or desirable not to own a car.

So the question is when North America might reach peak auto, as many have talked about peak oil production.

And it should be obvious that product life cycle peaks have become uncomfortably common over the last decade.

International calling revenue and long distance calling revenue already have peaked in the U.S. market. By at least 2003, long distance revenues were eclipsed by mobile revenues for the first time, even though long distance had been the industry revenue mainstay for many decades.

Dial-up Internet access also peaked around 2001.

The number of fixed network voice access lines peaked in 2000.

Text messaging is likely to reach its peak, in North America, in a couple of years.

We already, in North America, have passed the time of “peak fixed network access line” sales, for example.  It seems 2000 was the year when fixed network voice lines reached a peak, for example, and have been declining ever since.

We soon will reach peak text messaging, in terms of revenue. The point is that we now should have become accustomed to the idea that legacy revenues have peaked, or will peak shortly, for nearly the full range of legacy products sold by communication and video entertainment service providers.

That, in turn, is driving both tactical and strategic behavior. In the near term, service providers will attempt to prolong the life of declining products, while searching for big replacement revenue sources.

source: SBC

Fixed network fixed access lines used for voice  began in 2000 and has continued unabated since then, driven in part by a shift of voice consumption to mobile networks and market share lost to cable operators and other independent Internet service providers.

Precisely how to measure “lines” is a bit subjective, though. These days, service providers prefer to cite “product units” or “services” rather than “lines” as the appropriate metric, where units of video entertainment, voice or high speed access all are counted as discrete units.

Still, the total number of active connections does matter, as it is difficult to impossible to sell additional units to a household that does not already buy at least one product. Competition from cable operators or independent ISPs such as Google Fiber is one reason. But most primary consumer voice demand also has shifted to mobile networks.

The net result is a market where any single fixed network services provider might well expect to sell at least one service to only about 30 percent to 35 percent of all homes in any market, at best.

In that framework, it is conceivable that U.S. telco homes served could dip as low as 63 million or so, calculated as 35 percent of 180 million homes served in 2000.