Mobile Dominates Both Broadband Access and Voice, Globally

Mobile voice subscriptions now outnumber fixed voice connections about six to one, globally, and

about 76 percent of all Internet access connections globally use mobile connections, according to the International Telecommunications Union.

In other words, mobile is the dominant way most people use either voice or Internet access. At the same time, the percentage of people who actually buy voice service from a fixed network is declining, both in developed and developing markets.

Those facts have implications for revenue growth, capital investment and business strategy,

shaping not only “who” is in the business but “how” they approach the business and “where” the revenue growth is, which services are growing and which are declining.

In the U.S. market, for example, revenue growth has shifted to mobile segment, with one important exception.

AT&T and Verizon are seeing revenue growth in their fixed network segment, on the strength of high speed access services and video entertainment.

Google Fiber likewise anchors its service with gigabit high speed access service, complemented with video entertainment. Note that Google Fiber does not offer branded voice service. To be sure, Google has said it would have offered voice service, were the regulatory burdens not so high.

Still, Google Fiber shows that high speed access and video entertainment are the lead apps for a fixed network business.

Even smaller telcos, despite losing money overall, are seeing growth in high speed access services.

In the first quarter of 2014, for example, Fairpoint data and Internet services revenue grew nearly 11 percent, year over year, from $14.9 million to $19.9 million, largely on the strength of services sold to business and organization customers.

Data and Internet services revenue also increased sequentially in the first quarter, for the fifth consecutive quarter, Fairpoint Communications says.

Voice access lines. on the other hand, declined 6.8 percent year-over-year as compared to 7.8 percent decline a year ago.  

That provides just one example of a change in the value of a fixed access network. Whether a fixed network service provider is Google Fiber, Fairpoint Communications, AT&T or Verizon, value increasingly is anchored in high speed access, with video entertainment being the important second app.

Among the possible ramifications of U.S. industry consolidation that could happen were regulatory authorities to approve Comcast’s purchase of Time Warner Cable, an AT&T bid for DirecTV and a Sprint acquisition of T-Mobile US, not to mention any others that also could follow in the immediate wake of such restructuring, is impact on high speed access services.

Comcast would become the largest supplier of consumer high speed access in the United States. AT&T might be able to devote most of its fixed network bandwidth to Internet access services. And Sprint might find it has to re-enter the fixed network Internet access business, as a condition of getting approval for its mobile merger.

Still, overall, since global  revenue and subscriber growth is driven by mobile services, not fixed network services, capital investment will skew towards mobile networks as well, as each incremental unit of fixed network investment produces less incremental revenue than a similar unit of investment in mobile assets.

But the shift in value for fixed networks is clear. In a new twist, fixed Internet access networks provide value as a key way to backhaul mobile Internet traffic.

In some cases, up to 80 percent of mobile traffic is offloaded to Wi-Fi networks, for example.

And fixed network coverage is likely to remain rare. By the end of 2014, fixed broadband penetration will reach about 10 percent of homes globally.

And as consumers seem to be abandoning fixed network voice services in both developing and developed regions, additional investment in new fixed networks is likely to remain limited, wherever it does not already exist.

Some 44 percent of all fixed broadband subscriptions are in Asia and the Pacific, and 25 percent are in Europe. So 69 percent of fixed broadband connections are in those two regions.

In contrast, Africa accounts for less than 0.5 per cent of the world’s fixed broadband subscriptions, and despite double-digit growth over the last four years, penetration in Africa remains very low.

Africa, the Arab States, and CIS are the only regions with double-digit fixed broadband penetration growth rates.

The Americas region stands out with the lowest growth in fixed broadband penetration, estimated at 2.5 per cent and reaching a penetration rate of around 17 per cent by end 2014.

Europe’s fixed broadband penetration is much higher compared with other regions and almost three times as high as the global average.

source: ITU

The point is that the value of fixed networks has to change: such networks cannot provide value as voice vehicles. Instead, high speed access and mobile network offload, plus video entertainment, are emerging as the long-term value of fixed networks.

But where fixed networks operate, revenue growth will be driven by Internet access services.

By the end 2014, there will be almost three billion global Internet users, 66 percent of which live in the developing world.

But mobile networks will supply 2.3 billion of those total connections, or about 77 percent of all Internet access connections.

By way of contrast, there were at the end of 2013 about 1.16 billion fixed voice lines in service, according to the International Telecommunications Union. More importantly, the ITU suggests fixed telephone penetration has been declining for the past five years.

The ITU data suggests there will be about 700 million fixed network high speed access lines in service, or about 60 percent of the number of voice lines. Over time, that percentage is going to grow, at least in part because voice now has shifted to mobile networks.

There will be, at the end of 2014, about seven billion mobile phone users. Some 3.6 billion of these will be in the Asia-Pacific region, and the developing world will account for 78 percent of the world’s total mobile subscribers.

In Africa and Asia and the Pacific, mobile penetration will reach 69 percent and 89 percent, respectively in 2014.

Penetration rates in the CIS, Arab States, the Americas and Europe have reached levels above 100 percent and are expected to grow at less than two percent in 2014.

But even mobile connections are shifting in the direction of adding mobile Internet access. Globally, mobile broadband penetration will reach 32 percent by end 2014; in developed countries, mobile broadband penetration will reach 84 per cent.

In developing countries, mobile broadband adoption will be 21 percent.

Mobile broadband penetration levels are highest in Europe (64 percent) and the Americas (59 percent), followed by CIS (49 percent), the Arab States (25 percent), Asia-Pacific (23 percent) and Africa (19 percent), the ITU says.

By end 2014, 44 percent of the world’s households will have Internet access. About 31 percent of households in developing countries will be connected to the Internet, compared with 78 percent in developed countries.

More than 90 percent of the people who are not yet using the Internet are from the developing world.

In Africa, almost 20 percent of the population will be online by end 2014, up from 10 per cent in 2010.

"Freedom for Me, Regulation for Thou"

“Permissionless innovation” is one way of describing the reason innovation in the Internet app space has been so rapid.

But some might argue that freedom for me, regulation for you is the way beneficiaries of “permissionless innovation” want providers of enabling services to be treated. To be sure, every business, and every industry, has vested interests where it comes to each specific revenue and business model.

The other way of putting this is to note that every business wants high prices for its own products, and low prices for all the inputs it sources from ecosystem partners.

That is why many application industry executives want the U.S. Federal government to regulate Internet access in ways that essentially would limit market prices and revenue models for the providers of a key Internet revenue model input.

Expecting industries and firms to do otherwise is unrealistic. But our history with highly-regulated access services does not offer lots of hope that innovation will be high, and prices competitive, under such conditions.

Some will argue that such outcomes were produced by highly-regulated but monopolistic access markets, but will not apply to highly-regulated suppliers in competitive markets.

Some might argue this is tantamount to arguing that managed information services should be regulated.

That is a key concept, as it essentially attempts to revise the historic treatment of traditional data services, which have been considered unregulated information services.

Generally speaking, the trend in regulatory thinking has been not to regulate, or regulate with a light touch, managed services and information services. Cable TV, over a process of 50 years, has been treated in an oscillating way, sometimes more regulated, sometimes less regulated.

But the main trend has been deregulatory. Network-delivered satellite video has tended to benefit even more than cable TV providers have, in such matters. Telcos tend to be covered by most of the rules applying to cable TV entities.

Recently, with the advent of Google Fiber, local regulators have tended to want to relax rules to entice Google Fiber to build networks, not requiring network facilities to be built citywide, for example, but allowing spot builds only in parts of a city or community.

“Permissionless innovation” has worked very well. One might argue it also would provide benefits in the access services business as well, even if some for whom such service otherwise would be a cost of doing business, it could raise the cost of doing business.

What is Happening with Service Provider Mobile Phone Market Share?

It is difficult to determine precisely how mobile phone share is changing in the U.S. market, in large part because a vast majority of actual new accounts in the market represent connections of tablets, not phones.

But T-Mobile US is the clear winner in phone account market share.

Sprint and Verizon actually lost postpaid phone accounts in the first quarter of 2014, while AT&T gained about 312,000 net postpaid phone accounts.

But T-Mobile US gained a net total of 1.8 million branded new accounts, including branded postpaid net additions of over 1.3 million. Only about 67,000 of those net adds were tablet connections.

In the first quarter of 2014, for example, Verizon Wireless, which had added more than two million net accounts in the fourth quarter of 2013, experienced a huge slowdown, adding just 539,000 net new accounts.

But note, Verizon actually lost 138,000 monthly postpaid phone customers in the first quarter. In other words, all of Verizon’s growth came from tablets, not phones.

AT&T gained about 625,000 net new postpaid accounts, of which about 313,000 were tablet connections.

The point is that account growth in the overall market was in the first quarter of 2014 driven by just two trends: T-Mobile phone gains and tablet connection gains at Verizon, AT&T and Sprint.

T-Mobile US, and to a lesser extent AT&T, were taking share of phone accounts while Verizon and Sprint were losing share.

To the extent there was net growth of subscribers at Verizon, it was because of tablet connections.

That suggests the T-Mobile US marketing attack is working, and that even Verizon, which had hoped to avoid losses, now has to react, as it also is losing phone market share.

The complicating factor is that two separate trends have to be separated, namely market share shifts in the crucial postpaid phone segment, as well as the growing connected tablet trend. “Net addition” trends, in other words, will have to be separated into phone and tablet accounts, to judge what is happening in terms of service provider market share.

That also applies to T-Mobile US expectations about its own market share growth. T-Mobile US CEO John Legere has suggested T-Mobile US, with 49 million customers, could reach 75 million subscribers in 12 months.  

That would require adding about 26 million net new subscribers, about 6.5 million a quarter, something no mobile service provider has done since perhaps 2008.

Ignoring for the moment prepaid subscriber accounts or average revenue per account or average revenue per user, Verizon has something more than 95 million postpaid contract accounts.

AT&T has more than 72 million. Sprint has about 30 million customers, while T-Mobile US serves something more than 22 million postpaid accounts.

But T-Mobile US serves as many as 47 million accounts, including prepaid accounts.

In the second quarter of 2013, Verizon had more than 118 million total subscriptions in service, while AT&T had nearly 108 million. Sprint had more than 53 million.

Were T-Mobile US to even approach 75 million total accounts, it is likely that gains would be driven by prepaid and tablet net new additions.

On the other hand, if current net additions trends continue, T-Mobile will pass Sprint, for the first time, to take the third position for U.S. mobile market share, within a year.

But mobile share increasingly is not the same thing as phone postpaid accounts, phone accounts including both postpaid and prepaid accounts. And that means future analysis of U.S. mobile market share will have to pay attention to phone and tablet accounts, in addition to postpaid and prepaid accounts.

U.S. Mobile Subscriber Share	Q2 2013 (ranking by subscribers, retail + wholesale)	source: Strategy Analytics
	Carrier	Subscribers (millions)
1	Verizon Wireless*	118.194
2	AT&T	107.884
3	Sprint	53.258
4	T-Mobile US	44.016

How Long Will U.S. Mobile Price War Last?

No price war ever lasts forever, in the communications business. So one might well ask how long the present U.S. mobile price war will last, though some might argue there is no real price war going on.

A reasonable expectation might be that we are less than half way through, with an ultimate duration of about two years of unusual efforts at price disruption, to be followed by a period when the leading contestants have adjusted enough to show they can weather the attack, and the attacker or attackers find they have gained share, but now have to switch to improving profits.

But that forecast also assumes no other major changes in U.S. market conditions, including such mundane occurrances as a major economic recession, major changes in regulatory policy or major merger activity in other parts of the communications market that intensify or diminish the importance of the mobile price war and market share positions.

One might also argue the price war will last as long as T-Mobile US believes it should continue to attack. So long as T-Mobile US can continue to add a couple million net new customers every quarter, the war is likely to continue.

If the rate of net additions starts to flatten, then T-Mobile US will have to begin weighing a shift in strategy from price disruption to earning profits. Right now it is too early to say T-Mobile US has any reason to change course.

In fact, T-Mobile US might actually believe its rate of net additions is about to escalate.

What matters is the impact on consumer welfare and supplier strength, after such a price war. Ironically, even if number-four T-Mobile US has launched an attack aiming to vault higher in the market share rankings, history suggests the effort could well end with stronger positions for Verizon and AT&T.

Ironically, a price war launched by an upstart often ends with the top firms in a more dominant position. The reason is simply that price wars hit profit margins and gross revenue per account, something a leading service provider can afford to absorb.

Often, smaller providers simply find they are unable, at some point, to maintain profits at all, and go out of business, or are absorbed.

Also ironically, regulator and policy maker efforts to sustain a market structure with four national providers, to provide competition, however successful in the short run, likely will fail in the long run.

The argument is that any mergers between the two smaller U.S. mobile service providers should be opposed because such a move would reduce competition. But market forces alone, under conditions of a price war, will weaken both the smaller firms. True, earnings will be pressured at the two bigger carriers as well.

But AT&T and Verizon have the financial strength to take the blows. Sprint and T-Mobile US ultimately are likely not to withstand the financial pressure.

Price wars, typically launched by smaller and upstart firms, tend to reduce average revenue per account, even if generating more gross revenue.

Eventually, that tends to lead to most of the smaller firms disappearing, either through acquisition by other larger firms or bankruptcy.

Consumer welfare might also be worse, eventually, as the additional competitors leave the market.

The present price war launched by T-Mobile US therefore will not last forever, and the issue is what market structure will remain when the war ends.

Though U.S. antitrust authorities and communications regulators might well oppose any merger between Sprint and T-Mobile US, the ultimate result is likely to be no more than three larger competitors, under any circumstances.

Verizon and AT&T still will be the largest firms in the market. The surviving third carrier is likely still to be twice as small, in terms of subscribers or revenue, as either AT&T or Verizon. Nor would it be implausible that, eventually, the top provider could gain share double that of the second provider, while the second provider (in terms of market share) has double the share of the third provider.

Some idea of what could happen is provided by the French mobile market, which has endured a two-year price war, ignited by Illiad’s Free Mobile.

And Orange CFO Gervais Pellissier thinks the French mobile price war that began in January 2012 is about to taper off.

"We are maybe not totally out of the tunnel but we do see positive trends," Pellissier said.

To be sure, Orange has had to cut costs to hold profit margins steady on lower sales because of the price war. In its most-recent quarter, Orange earnings fell about 3.8 percent, but profit margins were steady at about 31 percent.

But that is the point: Orange seems to have survived the war. Illiad has gained share, but even Illiad might be reaching a point where it now wants to turn attention to profits, rather than market share gains.

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.