600-MHz Spectrum Set Aside Would Imperil the Whole Auction, Study Suggests

After studying data from the 2006 AWS-1 spectrum auction, researchers at the Phoenix Center for Advanced Legal & Economic Public Policy Studies conclude that Federal Communications Commission plans to restrict bidding by AT&T and Verizon, to ensure that small service providers get a significant portion of the awarded spectrum, might imperil the whole auction process.

The reason is the complicated structuring of the two auctions needed to clear former broadcast TV spectrum, and then to auction that spectrum to mobile service providers. One important facet of the auction process is that unless license holders agree to sell their spectrum, there will be no spectrum to auction for mobile service providers.

In other words, the FCC must first convince broadcasters to part with their spectrum, either going out of business, sharing spectrum with other broadcasters or moving to different frequencies. And the surest way to entice license holders to give up their spectrum is to promise high payments for the spectrum.

Restrictive bidding rules might conflict directly with that requirement, the study argues.

In a new study, Will Bidder Exclusion Rules Lead to Higher Auction Revenue? A Review of the Evidence, Phoenix Center for Advanced Legal & Economic Public Policy Studies scholars analyzed data from the 2006 AWS-1 spectrum auction and found that AT&T alone accounted for nearly half of all auction proceeds, even though its winning bids were only about 10 percent of the total.

AT&T and Verizon, directly and indirectly, were responsible for about 70 percent of total auction revenues.

AT&T's efforts--whether it won or not--added a 21 percent premium to final auction prices above and beyond the revenue effects of the typical bidder, the study says.

Verizon's impact was consistent with that of the average bidder, though. In other words, the bidding activity of one buyer--AT&T--drove most of the auction proceeds.

The Phoenix Center study “finds no evidence that AT&T and Verizon reduced the number of bidders for licenses and no evidence to support the claim that lower revenues resulted from these two firms participating in the auction.”

Given these results, the Phoenix Center's study contradicts almost every key aspect of the arguments for restricting the participation of large carriers from the upcoming voluntary incentive auction -- not only did AT&T's and Verizon's participation not deter smaller firms from entering the auction, but AT&T's participation substantially raised total auction proceeds above and beyond the effect of a typical bidder.

Empirical evidence supporting bidder exclusions or restrictions in the forthcoming voluntary incentive spectrum auctions therefore remains weak.

"In order for the voluntary incentive auction to be a success, the FCC must structure its rules to maximize revenue in order to incent broadcasters to participate, pay for FirstNet, and to provide significant funds to help pay off our national debt," said study co-author Phoenix Center President Lawrence J. Spiwak. "Restricting the participation of bidders who provided the lion's share of total auction proceeds in the AWS-1 auction would appear to be counterproductive towards achieving these goals."

Gigabit Access Also Disrupts an ISP's Other Lower-Speed Offers

AT&T says it now is looking at building gigabit networks in up to 100 cities and towns nationwide, including 21 new major metropolitan areas.

The list of 21 candidate metropolitan areas includes Atlanta, Augusta, Charlotte, Chicago, Cleveland, Fort Worth, Fort Lauderdale, Greensboro, Houston, Jacksonville, Kansas City, Los Angeles, Miami, Nashville, Oakland, Orlando, San Antonio, San Diego, St. Louis, San Francisco, and San Jose.

AT&T now has committed to or is exploring 25 metro areas for gigabit networks , including the networks AT&T is building in Austin and Dallas, and the likely networks in Raleigh-Durham and Winston-Salem, N.C.

AT&T faces both strategic and tactic issues as it weighs what essentially are gigabit “spot upgrades.”

At a strategic level, AT&T has to avoid finding itself relegated essentially to the third choice in many markets, behind Google Fiber and a cable operator, as a desired provider of high speed access.

Up to a point, AT&T might also want to discourage Google Fiber building in its fixed network service footprint, and instead encourage Google Fiber to attack elsewhere.

But there are plenty of tactical issues as well. Keep in mind that for about the past year, AT&T has been touting its “Project VIP” upgrade program, promising many households access at 45 Mbps.

Now “U-verse with GigaPower” becomes the “headline offer,” with likely implications for the way AT&T packages all slower-speed offers as well. So far, AT&T has suggested it will price gigabit access at $70 a month if consumers allow AT&T to harvest usage data, and $80 a month otherwise.

But that, like Google Fiber, is going to create new consumer expectations, namely that a gigabit service “should” cost about $70 to $80 a month. On a cost per Mbps basis, that has implications for the pricing of the U-Verse VIP service at 45 Mbps, for example.

At $70 a month, the implied price of 1 Mbps of speed is about seven cents. So the implied price of a 10-Mbps service would be 70 cents a month. A 45-Mbps service “should” cost about $3.15 a month.

And that illustrates a range of tactical issues AT&T will face if its GigaPower offer is offered more widely, namely the impact of the offer on all other AT&T high speed access offers. As consumers reset their expectations, ISPs including AT&T will face excruciating challenges adjusting their rate cards.

To be sure, gigabit offers also will create incentives for users to upgrade to gigabit speeds. But it will be quite a complex undertaking to adjust all access efforts to account for gigabit value-price offers.

Aereo Case is early 21st Century Equivalent of Betamax Decision

Aereo, and the broadcast TV networks and their local affiliates, will have a key U.S. Supreme Court hearing on April 22, 2014, when broadcasters challenge the legality of Aereo's “subscription broadcast TV online” service.

It would not be inappropriate to argue that the outcome of the case will reshape "broadcast TV" as much as the Betamax decision reshaped video entertainment in the 1980s, when broadcasters argued that use of a VCR was similarly illegal.

ABC, CBS, NBC and other major broadcasters allege that Aereo is no different from cable and satellite firms that “retransmit” broadcast TV content, and therefore must pay the same sorts of fees as video entertainment distributors.

Aereo argues it is simply providing an over the air antenna on behalf of its customers, who stream the signals over the Internet.

Aereo might lose, and discover its business model is untenable. Aereo might be deemed lawful, undoubtedly leading broadcasters to try and get the U.S. Congress to pass a new law making Aereo unlawful.

Ultimately, if the Supreme Court decides in favor of Aereo, and the Congress declines to make such services unlawful, all sorts of new business models might emerge. Broadcast networks might decide to create their own version of Aereo. Telcos and cable companies might do the same. One or more broadcasters might try to buy Aereo.

In virtually all of those scenarios, local TV broadcast affiliates probably lose, as distribution would then bypass them. In other words, many local TV stations, which are distribution networks for video entertainment, might find it difficult to impossible to exist, after most video entertainment has shifted from linear to on-demand and Internet-delivered modes.

The value of a local TV station arguably lies in the network programs supplied to it by the national TV networks. If those networks shift to on-demand delivery, what role remains for a local broadcaster?

Though national TV networks have a huge stake in the outcome of the case, local broadcasters face an existential crisis.

Already, local TV broadcasters face a long-term structural decline, as viewership and advertising revenues drop, even if not so dramatically, yet.

New sources of revenue, especially “retransmission consent” revenue (payments to broadcasters by video service providers for the right to retransmit their signals) has provided an offset to advertising dips.

In 2012 BIA/Kelsey estimates that retransmission consent contributed an average 6.5 percent of total local television stations revenues.

Such payments are expected to grow to 9.5 percent by 2017. Video distributors now pay at least $3.3 billion in retransmission fees to local broadcasters. That might go away, should Aereo be deemed lawful.

The national broadcast networks have threatened to abandon over the air broadcasting and  become the equivalent of “cable networks.” Already, though there are about 117 million U.S. homes theoretically able to receive local over the air signals, about 102 million U.S. homes get those signals from a video distributor.

Loss of network programming likely would doom most local TV broadcasters, eventually.

There would be other ripples. If broadcasters abandoned their spectrum, would it be repurposed for mobile and other services?

http://www.biakelsey.com/Company/Press-Releases/130409-BIAKelsey-Sees-Trend-of-Local-Television-Stations-Reaping-Increased-Revenues-from-Retransmission-Fees.asp

Will Access Costs Need to be an Order of Magnitude Lower in Global South?

“Heads I win, tails you lose” is an aphorism about “unfair” coin tosses that applies to Google and Facebook. To a significant extent, both firms can correlate revenue growth with the growth of “people who use the Internet.”

Internet service providers have no such luxury. China Mobile grows revenues primarily when people use its branded services, not when people get Internet access from any other ISP.  

That correlation of revenue in the case of Google and Facebook, and the causation of revenue for any other ISPs, explains why Google’s business behavior is so different from that of any other ISP.

Though partly an ISP itself, Google actually can grow revenue whenever additional Internet users can be created. With growth largely saturated in the developed world, Google (and Facebook) have turned their attention to how to add billions more users in the developing world.

Correlation is not causation, it always is important to remember. It is not actually the case that the incremental users “cause” Google’s revenue to grow.

Rather, in an indirect way, the growth of Google users creates a more compelling business case for advertisers to use Google venues. So revenue “follows” user growth, even if the user growth does not directly drive the revenue creation.

How different a process that is, compared to the revenue model for AT&T or Orange, where each new customer actually represents direct revenue.

That, simply enough, explains Google’s serious interest in seeing “everybody” get connected to the Internet.

Of course, as you might suppose, eventually, when “everybody” does get connected, revenue growth--to the extent it historically has been correlated with growth of the Internet user base--app providers such as Google will face new revenue growth issues.

At that point, at least for its Internet app businesses, Google’s interest will shift from user growth to average revenue per user growth, as often happens in most other businesses reaching maturity.

But to sustain growth beyond the present era, both Facebook and Google will have to retool their business models to chase “something else” that drives rapid and sustained growth, after growth from the current model slows and then largely ends.

It is that longer term “what will we do next” question that underpins Google’s experiments with driverless cars, robotics and now drones, even if drones might also play a role in the more-immediate issue of getting billions of new Internet users connected, as rapidly as possible.

Also, as with most other businesses, not all customers are equal. In Google’s case, the value of incremental users likewise is unequal.

“In the most recent quarter 53 percent of Google’s revenues came from the U.S. and U.K.,” says Horace Dediu. “Five years ago the proportion was 61 percent.”

source: Horace Dediu

That matters for ARPU since U.S. and U.K. is at least $86 per user, while users in the “rest of the world” represent about $12 per user.

Google’s “rest of world” category includes many developed countries such as all of Europe and Japan, where getting additional users will be quite incremental.  

Without any doubt, the fact that most of the remaining users will be added in the emerging markets is key.

The problem for Google is that it has an order of magnitude less income per user. In part, that is why Google and Facebook spend so much time trying to figure out whether there is a cheaper, faster way to bring Internet to billions of people who do not have access to the Internet.

If one assumes revenue upside is an order of magnitude lower than at present, then access costs, all other things being equal, have to be an order of magnitude lower as well.

Aside from providing a big challenge for new providers, those assumptions also will affect revenue potential for fixed network and mobile service providers as well.

As has been true for much of the telecom business over the last couple of decades, getting costs aligned to revenue remains a key challenge for access providers.

Why Does Amazon Want to be in the Smartphone Business?

Without a doubt, the U.S. smartphone market is vibrantly competitive, and potentially will become more so as Amazon enters the market with its own branded smartphone, while Google’s Project Ara tries to stimulate the growth of a modular approach to devices.

At the same time, a furious marketing assault by T-Mobile US is, at least for now, threatening to destabilize the market, not just by shifting incremental market share towards T-Mobile US, but also potentially changing both retail packaging and pricing practices industry wide.

For many, the key immediate question is whether Amazon should enter the smartphone business at all, and what the upside could be. Skeptics argue that is a distraction Amazon does not need. Others point out that the smartphone is a complicated device, in terms of application functionality, and that creating a valuable device able to take market share therefore also poses a risk.

But some might counter that such concerns also surrounded the launch of the Kindle tablet as well, and Amazon claims users of Kindles generate more transactions for Amazon. As early as 2012, Kindle drove about 10 percent of Amazon revenue, some estimate, driving perhaps $6 billion in revenue, even if relatively little actual profit on sales of hardware, music, streaming video or apps.

Some would argue Amazon earns a little on sales of book content and advertising. But Amazon often thinks long term, and media sales represent about 45 percent of total revenue, at the moment. As that revenue shifts to digital delivery, the Kindle ecosystem should become much more valuable.

Similar thinking likely drives interest in selling an Amazon smartphone. To the extent that connected devices now are content consumption platforms, the smartphone would provide the same sorts of advantages as the Kindle.

“In addition to the income that smartphone sales would create, it would support Amazon’s expansion into the content-delivery field,” said Tom Caporaso, CEO of Clarus Marketing Group.

But that might be the most significant value for Amazon. Smartphones and tablets are becoming more important platforms for e-commerce. In 2014 alone, the value of mobile-initiated e-commerce could grow about 24 percent, according to eMarketer, representing perhaps $17 billion in 2014 sales volume.

Beyond that, Amazon would be in position to learn much more about the context of user behavior related to commerce, Amazon’s key business. “An Amazon smartphone would provide another large wellspring of information” in that regard, argues Caporaso. “Augmenting its existing customer knowledge with GPS data, user information, shopping behavior, and other personal and demographic details could help Amazon hone its customization efforts.”

That should pay dividends in the form of loyalty and therefore both higher purchasing levels and repeat purchasing.

Amazon could stumble, of course. But the logic of how a smartphone plays into its core retailing buisness is clear enough.

Tablets are Driving Net New Mobile Connections in U.S. Market

Tablets with mobile connections now are driving net connection growth in the U.S. mobile market for most of the largest national service providers.

Mobile tablet connections grew about  46 percent in 2013, according to researchers at NPD.

For AT&T, in particular, tablet subscribers are a large part of what's driving net subscriber additions. Some  440,000 of AT&T's net new postpaid subscribers in the fourth quarter of 2013 were tablet connections.

“Connected devices” (tablets, principally) drove net mobile additions at AT&T during the third quarter of 2013, as did U-verse broadband services in the fixed network segment.

AT&T added nearly one million net mobile subscribers, including 63,000 mobile postpaid accounts and 192,000 prepaid accounts.

But connected device net adds were 719,000, or 73 percent of net additions.

Verizon Wireless added 625,000 tablet subscribers in the fourth quarter of 2013, but nearly one million more handset subscribers in the fourth quarter.

Sprint added 58,000 net new postpaid subscribers in the fourth quarter and 466,000 tablet subscribers.

T-Mobile US alone seems to be adding more phone than tablet connections. But that is likely why T-Mobile US has launched its new connected tablet  promotion.

New Street Research predicts Verizon Wireless will find that many of the predicted 485,000 net subscribers for the first quarter of 2014 will be do so to connect their tablets.

AT&T Mobility is expected to add 229,000 net new subscribers in the quarter, again on the strength of tablet accounts.

Sprint probably will lose 247,000 postpaid accounts, but tablet additions will help.

T-Mobile US, which has been showing strong quarterly net additions for more than a year, "could easily add" 1.1 million net new subscribers in the first quarter of 2014. T-Mobile US might be the carrier that adds the greatest percentage of traditional phone accounts.

Source: NPD

TV Paradigm Shift?

When major scientific theories (paradigms) are about to change, one encounters confusion. When an accepted scientific paradigm is about to change, scientists find they have to work harder to fit existing data to an older theory.

When a paradigm is accepted,most scientific progress occurs incrementally, by the accumulation new data that then is fitted into the paradigm. When anomalies start to appear often, it can be a sign that the paradigm is wrong.

Eventually, the inability of the older paradigm to explain and predict leads to a revolution in thought and the establishment of a new paradigm. The point is that coherence tends to  be a problem at times when paradigms are preparing to shift.

Such paradigm shifts might be likened to times when eras of technology are changing, as well, without overplaying the analogy. Of course, what changes when eras of technology change are revenue models built on consumer behaviors and buying preferences.

Perhaps one sign of the looming change are viewership studies that product discordant data.

Make no mistake, linear (scheduled) TV is still overwhelmingly the preferred method for watching TV, with 84 percent of U.S. adults who watch television watching live, in real time, according to BroadStream Solutions, despite the popularity of digital video recorders, mobile, PC and tablet viewing.

A separate study by Experian Marketing Services confirms that watching streaming or downloaded video on any device is connected `to higher rates of cord-cutting, the abandonment of linear TV altogether.

But it is not clear how devices such as Chromecast, Kindle Fire TV, Roku or Apple TV, and use of mobile or untethered appliances will change viewing habits.

The fastest growth of “non-traditional” viewing is watching streamed or downloaded video on a television, Experian Marketing Services says.

For instance, while adults who watch video on either a tablet or smartphone are 1.5 times more likely than average to be cord-cutters, those who watch streaming video on a television are 3.2 times more likely to be cable-cutters.

Furthermore, those who say that they use their television primarily for watching streaming or downloaded video are 5.7 times more likely to be cord-cutters.

Clearly, at least so far, watching video on portable personal device is not an alternative to linear TV, though watching streamed video on a TV display could be developing in that way.

The ability to stream or download video directly to the television “seems to be the tipping point,” Experian Marketing Services says.

“We should expect to see the number of cord-cutters grow” as that behavior becomes more common, Experian Marketing Services argues.

Mobile service providers clearly are thinking there is a mobile opportunity as well, even if the study by BroadStream Solutions also suggests that, at the moment, very few Americans want to watch on smaller screens.

That study suggests about two percent of respondents “prefer” to watch on tablet devices. A similar two percent prefer to watch on mobile devices. Some four percent prefer to watch on desktop PCs and about seven percent prefer to watch on notebook PC screens.

On the other hand, the study by Experian Marketing Services found that “mobile is the first screen for online video,” with 24 percent of adults reporting they watch video on a smartphone every week.

Nearly 25 percent of  all adults and 42 percent of smartphone owners watch video on their phones during a typical week, Experian Marketing Services reports.

So there’s a bit of data that doesn’t quite fit. People might not “prefer” to watch on a small screen. Yet there is much evidence that is what they do.

And one useful rule for tracking trends is to pay attention to what people do, not what they say. What already seems to be clear is that lots of people are watching video on small screens regularly.

They also are watching more streamed video on standard TV displays.

But behavior is changing. Most studies are likely consistent in reporting that people do not watch much video on small screens, compared to large screens, and not so much long-form content. But all that continues to change.

One explanation for those findings is that people need to own small screen devices in order to use them. And the Experian data suggests dramatically different behavior by people who own tablets and smartphones, compared to people who do not own such devices.

Also, one might argue that connected game consoles provide the same function, where it comes to watching online video on a TV, as a Chromecast, Kindle Fire TV, Roku or Apple TV box. And note the vast difference in behavior for viewers who own a game console.

Just 10 percent of adults report using a game console to watch streamed video every week. But 25 percent of console owners report they do so. The same differences can be observed for owners of smartphones and tablets.

Anomalies can sometimes signal that technological eras are about to make a transition. So watch for more signs of contradictory evidence on viewing habits as the base of users of streaming TV devices, smartphones and tablets increases.