These are not "Normal Times" in the U.S. Communications Market

Under normal circumstances, the unusual success T-Mobile US is having, in terms of gaining subscriber market share, would be a very big story. 

In the present context of fundamental reshaping of U.S. communications markets overall, T-Mobile’s notable successes would be almost a footnote, as we are on the cusp of a major reworking of U.S. market structure.

At the same time as Comcast wants to acquire Time Warner Cable, a move that would make Comcast a dominant power in U.S. high speed access markets, AT&T is possibly going to make a move to become a national provider of video services, while Sprint prepares to rearrange the structure of the U.S. mobile market.

And other megadeals are surely coming. At the same time, the Federal Communications is trying to finalize, once and for all, network neutrality rules that make sense, many would argue.

With all that going on, T-Mobile US operational performance might arguably have less significance.

But T-Mobile’s market share gains are notable.

T-Mobile US net subscriber growth continued in its most-recent quarter, including net additions of 2.4 million, the first quarter that T-Mobile US has added more than two million net additions.

Since launching its marketing assault on the U.S. mobile market, T-Mobile has had four straight quarters where its net additions have topped one million each quarter.

Since the U.S. mobile market is largely saturated, the obvious question is where those customers are coming from, even if some are tablet accounts, as is sustaining net subscriber growth at the other three national carriers.

In the first quarter of 2014, T-Mobile had 67,000 “mobile broadband” (not phones) branded postpaid net additions, principally composed of tablets, compared to 69,000 in the fourth quarter of 2013.

Importantly, T-Mobile US added 1.3 million branded postpaid net additions while also cutting its churn rate on postpaid accounts to 1.5 percent.

Revenue was up but earnings dropped 12 percent. And that is the key strategic issue for T-Mobile US. Its strategy requires continued high market share gains to offset the high marketing costs and lower average revenue per account.

Essentially, T-Mobile is trading gross revenue and profit margin to gain market share. As always in such cases, the strategy can work so long as the company can grow its customer base fast enough that the extra customers compensate for lower average revenue per account.

Gross additions were 23 percent higher, quarter-over-quarter, and 136 percent higher, year-over-year. No other national U.S. mobile service provider is adding that percentage of new customers.

But gross revenue also was boosted by the acquired value of MetroPCS customers T=Mobile US gained by acquisition.

Service revenues for the first quarter of 2014 grew by 33.3 percent year-over-year primarily due to the inclusion of MetroPCS results for the full quarter, T-Mobile US says.

Service revenues increased by 3.3 percent quarter-over-quarter, even though T-Mobile US service plans now reflect adoption of plans with lower monthly service charges.

Branded postpaid average revenue per user (ARPU) decreased quarter-over-quarter by $0.69 or 1.4 percent to $50.01, an improvement compared to the quarter-over-quarter decline of 2.9% in the fourth quarter of 2013.

The issue, many would say is how long T-Mobile US can support such rates of subscriber growth.

All of those questions could appear in quite a different context, though, should several major mergers succeed.

Though only the Comcast deal to buy Time Warner Cable has formally been announced, it appears virtually certain that Sprint will make a formal bid to buy T-Mobile US. And it seems likely AT&T will make an offer to buy DirecTV.

That will mean Dish Network also is in play.

With such wholesale potential changes in the U.S. market, T-Mobile US organic growth will be less the story. A fundamental reshaping of U.S. competitive dynamics will emerge as the bigger story.

After Comcast, AT&T and Sprint Moves, Even More Big Deals are Coming

Ironically enough, Sprint’s main competitors are going to make it easier to convince regulators that its acquisition of T-Mobile US should be approved. For the simple matter is that a major change in U.S. communications market structure is building.

Sprint Corp. plans to make a bid for T-Mobile US as soon as June or July 2014, Bloomberg reports. Many considered that a questionable possibility. But action by other contestants now makes possible an argument that the Sprint deal is only a smaller part of a wider consolidation.

And that will improve Sprint’s chances of winning approval. That isn’t to say it will be easy. But such a bid clearly will be situated differently now that other contestants are moving to consolidate market share as well.

AT&T has approached DirecTV about a purchase. And Comcast wants to buy Time Warner Cable.

If all those possible deals become actual offers, Dish Network is certain to move on its own to find a merger partner as well, as Dish needs to bulk up as its core video entertainment business slows and eventually shrinks, and also needs to find a partner to help it build its new mobile network.

With all of that happening, the Sprint deal to buy T-Mobile US looks less challenging, from a regulatory perspective.

Earlier, it had appeared that Sprint would argue that competition in the U.S. mobile market would be enhanced if Sprint could gain scale by acquiring T-Mobile US. Though Sprint will make that argument, it now has a wider argument, namely that the whole U.S. communications and triple-play market is consolidating in a major way, making its purchase of T-Mobile US less significant than it might otherwise have been.

AT&T, by acquiring DirecTV, would for the first time become a national retailer of video entertainment.

That would not directly help AT&T compete with cable TV companies in the high speed access business, but certainly would add key revenues that would support the investment in higher-speed Internet access capabilities, as AT&T has said it now will do.

Sprint likely will argue it will use the greater scale, after a T-Mobile US acquisition, to use much of its Clearwire spectrum--as orginally was Clearwire’s business model--to support fixed high speed access, adding another competitor to the fixed network high speed access business in many markets.

To be sure, regulators are likely to worry more about the impact of all the mergers on high speed access competition, not consolidation in the video entertainment services segment of the market.

So both AT&T and Sprint are likely to emphasize the ways their proposed mergers would do so.

And more is coming.

With the possibility of a merger with DirecTV off the table, Dish Network would face much more pressure to link up with a firm that could help it build its mobile communications network and help Dish escape being a “satellite-only” communications provider.

Which specific partners might be involved is yet to be determined. But Dish almost has to make a move to keep up.

Verizon would  be the only national service provider that was not involved in a major deal to gain scale, but Verizon has not be thought the best fit for Dish, and Verizon also would face more scrutiny on the spectrum front, as would AT&T, if it had decided to make an effort to acquire Dish Network.

Though many have argued both Dish and DirecTV eventually would be bought by one or more of the U.S. telcos, many had argued Dish would be more valuable for AT&T, because of Dish’s mobile spectrum holdings.

And though the most likely scenarios involve a Dish deal with another access provider, particularly a service provider with core interests in the mobile market, it is conceivable a non-traditional provider with lots of spare cash might decide it is time to make a bold move as well.

Dish has a fair amount of spectrum and no network. But Sprint has designed its own network to accommodate wholesale access by third parties with their own spectrum resources. So it always is possible a Dish asset buyer could turn to Sprint to launch a new network.

Sprint’s big gamble on T-Mobile US just might face fewer obstacles than once feared. With all the other activity, Sprint can argue the merger with T-Mobile takes place within an already consolidating industry.

And the potential turmoil might provide just the opening a new entrant could play to advantage. With the increasing consolidation, a new facilities-based contestant would be viewed as a counterweight to the heft the legacy players are acquiring.

Such market-transforming deals often occur in pairs or trios, the reason being that big deals often are easier to pursue when other big deals also are being considered by regulatory authorities.

Conversely, it often is considered more difficult to pursue follow-on mergers once a big deal has happened, for the simple reason that markets have become more concentrated.

In this case, other contestants would be right to view major moves as easier to accomplish now, rather than waiting for all the other deals to be reviewed and possibly completed.

So watch for more big deals to be attempted.

Consumers Have No Idea How Much They Would Buy of a Product That Isn't Available

Steve Jobs famously maintained that one could not predict consumer demand for a product they never had seen, which is one reason why Jobs never put stock in consumer research.

Likewise, one might argue, all present estimates of the amount of video subscription service “avoided” by consumers is nearly meaningless for predicting consumer behavior in some future market.

The reason is simply that It is difficult to measure demand for  a product that is not available yet.

A November 2013 survey by Verizon Digital Media Services found significant consumption of non-linear video by Millennials, something that likely is surprising to nobody.

source: eMarketer

The survey found 13 percent of Millennials making do without any linear TV service, while some nine percent of other people did so.

But the important questions of whether consumers will pay for some future form of on-demand video, and how much, cannot be determined on the basis of present consumption, since the content many would pay for is simply not available.

But there are other issues as well. At present, one reason many Millennials do not buy linear TV services is actual lack of interest in the value proposition. Some simply do not believe they need to have access.

Others might do so if the value-price relationship were different. In fact, if the price-value relationship changes, it is possible that behavior could shift significantly.

Mobile Internet Providers in Asia Face Demand Uncertainty

Source: Asiabriefing

One of the great challengers mobile service providers face in much of Asia is how much demand there will be, in the future, for mobile Internet access, and how to supply that demand at prices users can afford.

The other problem is that present trends might not predict future behavior.

Mobile data consumption patterns in Asian countries might show “mean” (arithmetic average) of about a gigabyte a month, but the median (half use more, half use less) consumption is more on the order of 300 MB to 400 MB.

On the other hand, present consumption trends are likely skewed by use of mobile devices or dongles to support PC usage. Also, usage is further skewed by users in some countries, compared to others, as Nielsen data suggests.

In the Asia-Pacific region, about one percent of subscribers account for 29.2 percent of upstream traffic and 18.5 percent of downstream traffic, as well as 18.7 percent of aggregate bytes each month, Sandvine reports.

So “average” consumption is skewed by dongles or tethered access to support PC operations.

Smartphone data consumption patterns arguably are quite different, at least for the moment.

Still, Ericsson predicts, smartphone usage could approach a gigabyte a month for smartphone users in Asia by about 2016.

Source: Statista, Sandvine

To be sure, even those patterns do not tell us much about how demand will change as more Asian users get smartphones and start to consume more data.

And patterns could be quite different between the more developed and still developing parts of the mobile market.

But it would be a reasonably safe bet that consumption will grow to match developed Asian norms, over time, even if not at quite identical volumes.

Nearly half of all the data was consumed by video features and apps, according to Sandvine’s second half 2013 report. And, without, a doubt, appetite for video is going to be key.

So unless one wishes to argue that consumers in South Asia and Southeast Asia will not consume much video entertainment, something few likely would be willing to build a business plan upon, demand eventually is going to grow to gigabytes a month.

Mobile ISPs therefore are going to have to craft new strategies to stimulate and supply demand at prices consumers can afford. That is always a challenge in any developing market, of course.

But it will be an important challenge to supply networks that match expected demand, with infrastructure costs as much as an order of magnitude or two orders of magnitude cheaper than is possible today, using traditional mobile or fixed networks.

Present forecasts likely are unable to capture the non-linear development of Internet access in the region, though. The shift from feature phones to smartphones, role of new access platforms, relentless development of affordable smartphones and even the rates of growth in household income all are going to render today’s assumptions incorrect.

Netflix Speed on Comcast Network Improves 65%

In the US, the average speed on the Comcast network for Netflix streams grew 65 percent, from 1.51 Mbps in January 2014 to 2.5 Mbps in March 2014, after the two firms agreed to interconnect directly.



Though speed and packet delay are two different issues, it arguably is the case that unpredictable packet arrival times cause more quality disruption of video streams than absolute bandwidth. 



Direct connections, caching and use of content delivery networks are a few of the standard ways ISPs and app providers work to ensure better end user experience. 



New proposed Federal Communications Commission network neutrality rules intend to allow voluntary commercial agreements between ISPs and app providers to extend content delivery networks all the way to the end user, where today CDNs operate over the backbone networks, but not in the access network.



The boost in Netflix performance on Comcast, after the direct connection, suggests that such techniques do matter, especially for voice and video services.

Google Aiming at Municipal Wi-Fi Again?

Google's direct revenue model scales almost in linear fashion with the number of people using the Internet, in large part because Google apps represent such a huge share of user engagement time with Internet apps.



That is why Google now appears to be considering deploying Wi-Fi networks in towns and cities served by Google Fiber. The new Google Wi-Fi effort obviously would leverage infrastructure assets Google Fiber has created. 

In fact, about 60 percent  of all Internet end devices and users exchange traffic with Google servers during the course of an average day, according to Deepfield.

That finding is based on all traffic from computers, mobile devices, game consoles, home media appliances and other embedded devices. Google’s device share is much larger if traffic  from computers and mobile devices, and not the other devices, is considered.

Google analytics, hosting, and advertising play some type of role in over half of all large web services or sites, according to Deepfield.

Since 2010, in fact, Google represented just six percent  of Internet traffic. In 2013, Google accounted for nearly 25 percent of Internet traffic on average.

Only Netflix represents a larger share of total bandwidth, but Netflix peaks last only for a few hours each evening during prime time hours and during Netflix cache update periods in the early morning.

The point is that Google revenue grows as the base of Internet users grows.

Those facts explain why Google Fiber exists, why Project Loon exists, why Google owns assets in the solar powered drone business, why Google has experimented with municipal Wi-Fi, is the new provider of Wi-Fi for Starbucks in the United States, created Android and Nexus.



Ubiquity of Internet access also is why Google has invested in spectrum or firms owning spectrum, for the purpose of providing Internet access. 

What Will New Network Neutrality Rules Bring?

No blocking of lawful content has been U.S. Federal Communications Commission policy since 2005, and a policy guide since 2004. Transparency likewise has been policy since 2005.

In 2010, the FCC added new network neutrality rules that eventually were struck down in the courts, largely because the court ruled the Commission did not have authority to issue the rules, which essentially mandated that nothing but “best effort” Internet access could be provided by any fixed network Internet service provider.

Though much hinges on the details, FCC Chairman Tom Wheeler argues that the original principles still will be reflected in the new proposed rules. As always before since 2004, the new rules will specify that no lawful content can be blocked and that ISPs must act transparently in making information about terms and conditions of service, as well as network management policies, available to subscribers.

The new arguably new interpretation to the original rules is that “ISPs may not act in a commercially unreasonable manner” by favoring their own applications and services. In the past, that notion has more strictly insisted on “best effort only” delivery of all Internet traffic.

You can make your own judgments about whether the new proposed rules simply affirm the older rules, or in fact actually change them.

Opponents of the proposed rules will argue that the FCC’s new network neutrality rules actually change the concept dramatically, allowing ISPs to negotiate with app providers for quality of service guarantees that were prohibited before.

The new rules presumably will establish both a baseline for best effort Internet traffic, as well as allowing for voluntary commercial agreements with content and app providers to provide quality of service mechanisms like those provided on the backbone of the network by content delivery networks such as Akamai.

In that one sense, the new network neutrality rules actually can be viewed as changing the key provision of the older network neutrality rules, namely that all packets would receive “best effort only” delivery.

The new rules presumably will allow managed services--content delivery networks to the end user location--so long as all applications can purchase such features on the same terms as any apps owned by the ISP itself.

So, oddly enough, though many considered network neutrality dead when the courts struck down the original rules, a resurrected network neutrality regime--though keeping the name--arguably implements just the policies the original framework aimed to implement.

Predictably, original net neutrality supporters will not like the change, while ISPs will be relieved.

Perhaps the way now is cleared for creation of any number of managed services that ensure the quality of video streaming and voice services using Internet delivery.

Apple, a user of content delivery services itself, wants just that from Comcast, for example.

We'll have to wait for issuance of the proposed rules to find out for sure. But it sure sounds as though a major change is coming.