What Impact on AT&T or Verizon from Marketing War?

Verizon, AT&T net mobile adds

Has the U.S. mobile marketing war finally begun to show in Verizon and AT&T financial performance? Not so much, at least not yet.

Operating results seem to be showing some pressure, but it is hard to distinguish background market maturation trends from the specific impact of T-Mobile US attacks.

AT&T first-quarter 2014 consolidated revenues of $32.5 billion represented growth of 3.6 percent. 

Verizon total operating revenues in first-quarter 2014 were $30.8 billion, a 4.8 percent increase compared with first-quarter 2013 and the company’s highest quarterly growth rate in the past five quarters.

The mobile segments of AT&T and Verizon face market maturity, of course, so slowing growth rates would not be unexpected. The issue is whether higher levels of competition are affecting mobile segment gross revenue, profit margins or subscriber gains.

Total Verizon mobile segment revenues were $20.9 billion in first-quarter 2014, up 6.9 percent year over year. AT&T reported seven percent mobile segment revenue growth.

Clearly, at the top line, it is hard to see any clear negative impact from higher levels of competition.

But there is a significant nuance in terms of mobile segment revenue sources. Verizon mobile service revenues in the quarter totaled $18 billion, up 7.5 percent year over year.

Retail service revenues grew 6.7 percent year over year, to $17.2 billion. That means device revenue was less than $3 billion of quarterly mobile segment revenue.

At AT&T, mobile service revenue grew service revenues grew about 2.2 percent, compared to four percent, in the same quarter a year ago.

In other words, Verizon is growing mobile service revenue about 4.5 percentage points more than AT&T is growing its own service revenue.

Verizon retail postpaid average revenue per account increased 6.3 percent over first-quarter 2013, to $159.67 per month.

On the other hand, mounting price competition seems to be hitting Verizon mobile profit margins.

In first-quarter 2014, Verizon mobile operating income margin was 35 percent and segment EBITDA margin on service revenues was 52.1 percent, compared with 32.9 percent and 50.4 percent, respectively, in first-quarter 2013.

In other words, Verizon profit margins dropped, year over year.

AT&T added many more net mobile subscribers than did Verizon in the first quarter, though. AT&T net additions increased by 1,062,000 in the quarter, led by 625,000 postpaid net adds and 693,000 connected device net adds, the strongest postpaid

growth in five years.

Verizon Wireless added 549,000 retail net connections, including 539,000 retail postpaid net connections, in the first quarter.

Those figures are significant because Verizon started to pull away from AT&T in the key net postpaid additions category about the fourth quarter of 2010.

And it appears that virtually all of Verizon’s first quarter net subscriber gains came from tablets, not phones.

Verizon added a net 539,000 retail postpaid connections, down from 720,000 net additions a year ago.

But Verizon signed up 634,000 net new tablet connections. In other words, Verizon lost net phone customers, though growing on the strength of tablet connections.

AT&T clearly is benefitting from tablet net additions as well.

Even after T-Mobile US reports its own quarterly earnings, we might not have a clear picture of what the marketing war is doing, both financially and operationally, in part because tablets now are fueling so much of the net subscriber growth at AT&T and T-Mobile US, in particular.

But the long term picture might not be so different from a scenario where T-Mobile US had not kicked off a marketing battle, Strategy Analytics has argued.

In fact, Strategy Analytics think the U.S. mobile market will remain stable through 2018, with little change in market share.

Among the top four carriers, Verizon Wireless stays on top and T-Mobile on the bottom, while only Sprint gains more than a percentage point in share, Strategy Analytics forecasts.

Global Internet Access Speeds Grow; Mobile Use Might be the Bigger Trend

source: zeroseven.com

Global average Internet connection speeds continued to improve in the fourth quarter of 2013, with a quarterly increase of 5.5 percent, reaching 3.8 Mbps, on average, according to the Akamai Technologies Fourth Quarter, 2013 State of the Internet report.

In the fourth quarter of 2013, average connection speeds on surveyed mobile network providers ranged from a high of 8.9 Mbps down to a low of 0.6 Mbps, Akamai says.

Average peak connection speeds above 100 Mbps were observed at several providers, while 3.1 Mbps was the slowest seen.

But it is the growth of mobile Internet adoption, more than the raw speed increases, that are most notable.

Based on traffic data collected by Ericsson, the volume of mobile data traffic increased by 70 percent from the fourth quarter of 2012 to the fourth quarter of 2013, and grew approximately 15 percent between the third and fourth quarters of 2013.

As always, “average” means little. Despite the improvement, half of the countries or regions listed among the top 10 in global average connection speeds actually saw small declines quarter over quarter.

Also, despite a 1.1 percent decline in average connection speed, South Korea held the top spot from quarter to quarter, reporting the highest average connection speed of 21.9 Mbps.

United States access speeds increased, on average, about two percent, leading to an overall average Internet access speed of 10 Mbps.

Overall, 133 countries or regions ended the year with higher average connection speeds than the year before, contributing to a speed increase of 27 percent  from the end of 2012.

Global average peak connection speeds recovered from a small decline in the third quarter of 2013 with improvement of 30 percent to 23.2 Mbps in the fourth quarter.

About 138 qualifying countries or regions, and all of the top 10, saw higher average peak connection speeds than in the third quarter.

Year over year, global average peak connection speeds increased 38 percent compared to the fourth quarter of 2012.

Quarter-over-quarter, the global broadband adoption rate grew 4.3 percent, with 55 percent of all connections to Akamai taking place at speeds of 4 Mbps or above.

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.