Telco High Speed Access is Defensive, Cable High Speed Access is Offensive in Nature

To some extent, cable operators and many telcos have different strategic imperatives where it comes to high speed access services. 

For cable operators and telcos owning only fixed assets--not mobile--the network is the foundation for nearly 100 percent of revenue.

For telcos with significant mobile assets, the fixed network represents less than half of total revenue, and little of the revenue growth. 

source: High Speed Internet

For AT&T and Verizon, mobile revenue has grown in the 30 percent annual range, in 2013.

For AT&T, fixed network data services revenue (enterprise, small business and consumer) represents about 28 percent of total revenue. 

In recent quarters, mobile has driven about 53 percent of revenue, and virtually all the growth.

source: High Speed Internet  

To be sure, the fixed network is becoming an important strategic asset for mobile service providers, as a way to supplement mobile data access.

Also, virtually everybody expects today’s linear video services to shift substantially to “over the top” delivery, which will add to the value of a high speed Internet access connection. 

So the fixed network remains a substantial asset, even for firms such as Verizon and AT&T that earn the majority of their revenue, and nearly all the revenue growth, from mobile services.

Still, strategic considerations are key. Cable companies and fixed-only telcos must invest in their core asset.

source: Seeking Alpha

Mobile-mostly service providers such as Verizon and AT&T, and mobile-only providers such as Sprint and T-Mobile, have to weigh the returns from investing in mobile, versus fixed access.

So it is that Verizon, which made a big bet on FiOS, has concluded it must presently avoid several new big city builds, as the financial returns are not deemed adequate.

AT&T, on the other hand, has stepped up the pace of its U-Verse builds, and even is upgrading some areas for gigabit access, in response to competition from Google Fiber.

source: IP Carrier

But the strategic imperatives are matched by results on the ground.

Since about 2009, cable high speed access has pulled away from digital subscriber line, in terms of top speed. The Docsis 3.0 standard supports top downstream speeds of about 105 Mbps. AT&T’s U-Verse (fiber to a neighborhood with copper drops) can achieve about 24 Mbps.

To be sure, telcos can install very high speed DSL or fiber to the home. At the moment, though, telcos are losing DSL customers faster than they are gaining subscribers for their faster broadband offerings.

During the second quarter of 2012, for example, cable companies took a 140 percent share of broadband new additions, according to UBS Research telecom analyst John Hodulik.

source: Seeking Alpha

In fact,  cable high speed net additions are soundly outpacing telco net additions. In 2013, for example, the top cable companies added a net 2.2 million high speed access connections, compared to 477,000 for top telcos.

Just how much telcos must invest--and where--is the issue. Fixed network operators, without mobile assets, have to invest to stay competitive, or risk losing their businesses.

AT&T and Verizon have to balance investment between the mobile and fixed segments. So for cable, investments in high speed access--as is the case for Google Fiber--are offensive in nature, designed to take market share.

For many telcos, such investments largely are defensive, intended mostly to protect market share.

"Managed Services" Fare Worse Under Amended Connected Continent Legislation

After initial passage of Connected Continent legislation by the European Commission, the proposals are now headed for review by the council of ministers. But key amendments now have been added to the proposed legislation by members of the European Parliament.

The original language allowed for exemption from the “best effort only” rules for consumer Internet access for “specialized services.” That language was meant to allow ISPs to create and sell managed services such as voice and video entertainment, with quality of service mechanisms.

To be sure, some might argue the changes of wording are subtle. According to the amended text, ISPs will be able to prioritize traffic for managed services, so long as the packet prioritization is not to "the detriment of the availability or quality of internet access services" offered to other companies or service suppliers.

The original text instead simply said that the specialized services could be provided as long as they "do not substantially impair the general quality of internet access services."

The amendments now specify that any managed services must not affect availability or quality of Internet apps, period.

Service providers obviously will object, since all services now are moving to delivery by a single set of physical assets, delivering best effort Internet access as well as managed services such as voice and video entertainment.

Almost by definition, setting aside bandwidth for managed services will affect the total amount of access bandwidth available for all purposes and applications supported by any access link.

“Specialized service” is defined as an electronic communications service optimized for specific content, applications or services, or a combination thereof, provided over logically distinct capacity, relying on strict admission control, offering functionality requiring enhanced quality from end to end, and that is not marketed or usable as a substitute for internet access service.

Perhaps nobody would argue that voice service and linear video subscriptions are prime examples of such services. But one also might agree that the amendments essentially ensure that future online streaming services could not be classified as “managed services.”

The amendments specify that “providers of internet access, of electronic communications to the public and providers of content, applications and services shall be free to offer specialized services to end-users.”

But “such services shall only be offered if the network capacity is sufficient to provide them in addition to internet access services and they are not to the detriment of the availability or quality of internet access services.”

In other words, using rules yet to be developed, it might be unlawful to create a managed video streaming service, if doing so negatively affected best-effort Internet services. The devil is in the details, one might well argue.  

What constitutes “sufficient network capacity?” What does “negatively affect” mean, in quantifiable terms?

Already modified since original passage, it is reasonable enough to expect further changes when ministerial officials start to grapple with the implications.

Might even the ability to deliver linear video services using Internet Protocol be impaired? What access bandwidth implications would follow, if service providers want to deliver linear video using IP?

To be sure, the legislation tries to deal with two separate problems, including ISP blocking of lawful applications, and the extent to which new managed services can be created. In the U.S. market, the former is dealt with under Internet Freedoms principles that already make unlawful any actual ISP blocking of lawful apps.

The Connected Continent legislation conflates the two problems, first outlawing lawful application blocking (a good idea) but also limiting the creation of new services that actually might need quality of service mechanisms (packet prioritization).

The outcome remains unclear, as further changes could come. That incentives to invest in networks will be affected is uncontestable, even if the impulse to constrain anti-competitive behavior also is reasonable.

Some might argue remedies for anti-competitive behavior already exist. If so, innovation and investment also could suffer, even if the reasonable goals of permitting consumer access to all lawful apps, and preventing unfair business practices, are the formal goal.

Will Google Fiber and AT&T Both Build Gigabit Networks in San Antonio?

Competition works. With Google considering building a gigabit network in San Antonio, Texas, AT&T now also says it is thinking about expanding U-Verse "GigaPower" service for San Antonio.



We should not be surprised. That pattern of Internet service providers investing either to capture a lead, or more commonly, to stay competitive, has tended to be the pattern in the competition between cable companies and telephone companie since the advent of high speed access. 

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.