U.S. Communications Market in Great Flux; Regulate Forward, Not Backwards

As U.S. regulators potentially are called upon to approve or reject a number of industry-transforming deals (Comcast acquisition of Time Warner Cable; Sprint acquisition of T-Mobile US; AT&T purchase of DirecTV or a Dish Network purchase of T-Mobile US), U.S. cable TV operators are preparing yet one more effort to enter the U.S. mobile business, after decades of struggling to do so.

The point is that although each specific deal will have to be considered on its own merits, the full range of deals, and coming capabilities, hints at the new competitive pressures to come in the U.S. mobile business.

Right now, U.S. regulators desire to maintain a U.S. mobile structure of four national providers, at a time when the two biggest leaders (AT&T and Verizon) have market share and financial strength dwarfing the two smaller providers (Sprint and T-Mobile US).

All of the possible deals will have ramifications for the U.S. mobile market, directly or indirectly. Consider the deals with indirect impact. Comcast’s bid to buy Time Warner Cable would have direct impact primarily in the high speed access market, where Comcast would become a dominant supplier of broadband access, with 40 percent U.S. market share.

Traditionally, that is a problem, as any major supplier with 30 percent share is deemed to have market power. But that broadband access share also would provide Comcast with an immediate ability to populate each access node as a public Wi-Fi hotspot, as Comcast, as are other cable operators, now are deploying new dual-mode routers with integrated public Wi-Fi capabilities, in addition to a subscriber private network.

That, in turn, would underpin a facilities-based approach to mobile service, using a “Wi-Fi-first” approach similar to that used by Republic Wireless, Scratch Wireless and TextNow Wireless.

AT&T’s potential bid to buy DirecTV would primarily expand AT&T’s share of the U.S. video entertainment market, vaulting AT&T into the top ranks of U.S. video entertainment providers, second perhaps only to Comcast.

Indirectly, though, that deal would bring enough new video subscribers, revenue and cash flow to allow AT&T more heft in what has now become a “triple-play” or “quadruple-play” communications market.

And though Verizon has tested and rejected a dual-access DirecTV plus mobile terminal able to supply both broadband and fixed Internet access, that approach might eventually prove useful to AT&T, though it would not be absolutely necessary to create a voice-video-Internet access triple-play service.

AT&T would be in position to create a national triple play based on use of DirecTV for video entertainment, and Long Term Evolution for voice and Internet access, even if the networks were not directly integrated using one terminal. Consumers already can use the Wi-Fi hotspot features of their smartphones to create such capabilities, while AT&T already sells the Home Base terminal that provides fixed LTE access.

Indirectly, then, that deal would change AT&T’s position in the mobile market.

Either a Sprint deal to buy T-Mobile US, or a Dish Network deal to buy T-Mobile US would directly rearrange market share in the U.S. mobile market, the first deal reducing the number of current players to three, while the latter deal would preserve four contestants.

But even if Sprint were to win approval to buy T-Mobile US, U.S. cable operators are expected to launch their own national mobile service, based in large part on use of the dual-mode Wi-Fi boxes, plus wholesale capacity sourced from one of the national mobile providers.

That would once again eventually create a situation where there were four national mobile providers, again.

The point is that the U.S. communications now is in a state of great flux. No decisions made on legacy market share will capture the future state of competition or the number of contestants able to lead the market.

As some would argue the Telecommunications Act of 1996 actually missed the point in major ways by stimulating voice competition at a time when the Internet was reshaping communications, regulating on the basis of legacy facts in the mobile market could miss the market as well.

Even though some might argue AT&T’s new national reach, after a DirecTV acquisition, would only create a bigger AT&T, such a move also would allow AT&T to provide more competition to cable on a national basis, something AT&T cannot do at present, in the fixed networks business.

If one assumes that cable entry into mobility also would create significant pressure on legacy mobile providers, then AT&T’s retail mobile market share would fall, as would Verizon’s share, though one carrier would gain some amount of wholesale revenue.

The larger point is that, if a Sprint deal to buy T-Mobile US is not launched, or not approved, the number of leading national U.S. mobile contestants likely could expand to five.

Dish combining with T-Mobile US would create a much-stronger competitor with similar advantages to an AT&T than owned DirecTV. For the first time, T-Mobile US could compete nationally with a triple-play or quadruple-play capability, depending on how one wishes to characterize the ability to sell video entertainment, voice, Internet access and mobile phone service using a satellite and mobile network.

The point is that markets are quite unstable. Though each discrete deal has to be evaluated separately, the combined impact of all the changes might yet provide reasonable amounts of competition across the triple-play and quadruple-play markets, even if each single deal appears to reduce competition.

Netflix Boosts Streaming Plan Prices, Grandfathers Existing Users for 2 Years

Netflix is increasing the price of its $7.99 a month U.S. streaming plan by one dollar, to $8.99 for new members.

Netflix also is adding a new $7.99 plan with standard-definition image quality viewing on any one screen at a time.

Current Netflix members get to keep their current price for two years, enjoying HD-quality movies and TV shows on any two screens at the same time.

Most observers would attribute the price increase to funds Netflix needs to create more original programming.

What remains to be seen is the impact on Netflix customer churn, and customer growth rates.

Subscription service price hikes often are troublesome in markets where there is significant competition, since customer defection is a possibility. And Netflix will over the next year or two find out what the higher prices do for take rates and churn.

In a recent survey, six percent of Netflix consumers who use the streaming service said they would cancel their subscriptions if the monthly price climbed by $1, a YouGov survey found.

Netflix ran into a huge problem when it repriced its services to emphasize streaming delivery in 2011.

Netflix lost about a million subscribers after the 2011 pricing change was announced, while the Netflix stock price plunged more than 80 percent before rebounding beginning in August 2012.

In that move, Netflix eliminated a popular “DVD plus streaming” plan costing about $10 a month, in favor of separate DVD rental and streaming plans each priced at about $8 a month.

This time around, Netflix will apply the higher charges only to new customers, grandfathering existing users for two years. That should effectively minimize any immediate churn potential.

And Netflix is not talking about potential 60 percent price hikes, but something more on the order of 13 percent on an $8 base.

Many would therefore suppose there could be some new friction on the new subscribers front, but almost no damage to the existing base of customers.  

Public Wi-Fi Illustrates Primary Use of Fixed Network as Mobile Backhaul

Global public Wi-Fi deployments reached a total of 4.2 million hotspots in 2013, and will continue to grow at a compound annual growth rate  of 15 percent between 2013 and 2018, to exceed 10.5 million hotspots by the end of 2018, according to ABI Research.

Among the global Wi-Fi hotspots, 68.6 percent of Wi-Fi is in Asia-Pacific, followed by 12.3 percent in Latin America, nine percent in Europe, 8.7 percent in North America, and 1.4 percent in Middle East and Africa.

Offload of mobile Internet access traffic is a primary reason for using public Wi-Fi.

“Global mobile data traffic will grow to 190,000 petabytes in 2018, from 23,000 petabytes in 2013,” said  Marina Lu, ABI Research analyst.

That is one reason why many are bullish on use of 5-GHz Wi-Fi as a backhaul solution for mobile service provider small cells. U.S. cable TV operators likewise view Wi-Fi as a major platform for supporting either mobile or untethered access services and devices, on a facilities-based network.

The simple thinking is that if 80 percent of mobile Internet data access is offloaded to Wi-Fi, then just 20 percent of potential mobile data demand might need to be sourced to create a full mobile or untethered network service.

A mobile service then might be able to operate at lower costs, when sourcing capacity from a wholesale provider of mobile access.

Alternatively, it might be possible that an untethered access service that is not billed as supporting full mobile access could be supported by Wi-Fi hotspots.

In Asia-Pacific, China alone has deployed 620,000 Wi-Fi hotspots, of which 420,000 have been built by China Mobile, followed by China Telecom with 128,000 hotspots, and China Unicom with 72,000.

In Latin America, Brazil’s carrier Oi has completed its target of 500,000 Wi-Fi hotspots by the end of 2013, ahead of the 2014 FIFA World Cup, ABI Research says.

The point is that Wi-Fi--public hotspots, at-home access and carrier Wi-Fi--now functions as a major backhaul mechanism for mobile service providers.

Quality of Service Revenue Will be Tough to Generate

Enhanced services revenue always has been tough to generate.

Some years ago, when conducting an analysis of enhanced services potential for dial-up and broadband access providers, it became clear that the overwhelming percentage of total direct revenue available to most ISPs, especially independent and smaller ISPs, was the basic access service itself, and not the value of bundled security apps, advertising or public Wi-Fi hotspot access.

In the voice services market, voice mail once was a separate, add-on feature, as was caller identification. Both those former revenue-generating services now are merely features of a voice line, fixed or mobile, in the U.S. market, for example.

In some respects, one might consider long distance revenues an ancillary revenue source generated by a voice line. But even that revenue stream has, for domestic calls, been eliminated, in the U.S. market and some others.

In growing markets, such as China, enhanced services might still add up to 22 percent of basic access revenues. But the point is that even there, the actual access line generates nearly 80 percent of gross revenue.

So it would not be a surprise to predict that new forms of ancillary or enhanced services will likewise represent a small percentage of total access line revenue, even if such services prove attractive to end users.

“Sponsored data,” like toll-free calling services, where a commercial or other enterprise pays for customer usage, might be used by Internet app providers, as Amazon uses AT&T access to support delivery of Kindle content.

But there are a number of practical obstacles, argues analyst Dean Bubley. Bubley sees similar problems for quality of service features which could be created by mobile service providers.

That would be in keeping with historic patterns, where the bulk of revenue comes from “access.” That is likely to remain the case for hosting and cloud services as well, not simply cable TV or linear video service, voice, Internet access and messaging.

Deutsche Telekom Obviously Wants a Sprint Acqusition of T-Mobile US

Acknowledging the significant opposition by U.S. regulators and antitrust officials, T-Mobile says it is "open" to an acquisition of T-Mobile US by Sprint.

Of course T-Mobile is open to such a deal: it would allow Deutsche Telekom to liquify its T-Mobile US holdings and deploy the capital elsewhere.

Deutsche Telekom's willingness to sell is not a secret. Whether U.S. regulatory and antitrust authorities would approve such a deal, and with what conditiions, is not clear at all.

Apple And Samsung Have 106% Of The Smartphone Industry's Profits

In the smartphone business, some things haven't changed: Samsung and Apple continue to represent the only two smartphone suppliers that actually make profits on sales of smartphones.



Apple earned 65 percent of smartphone profits while Samsung earned 41 percent, in the first quarter of 2014, according to Canaccord Genuity.



Whether Nokia, Motorola, Blackberry and HTC can move from losses to gains is not clear. Nor is it clear when that might happen. 



Recent moves by leading U.S. mobile service providers away from device subsidies is not going to help, as those moves could, or should, depress the rate at which customers replace their smartphones. That implies lower sales turnover, which would not help efforts to improve profit margins. 

Will Netflix, Amazon Prime Price Hikes Do Lasting Damage?

Will Netflix and Amazon Prime find planned subscription price hikes have long-term negative impact? Though there might be near term impact, there is reason to believe there will no significant long term impact on subscriber growth or perceptions of value.

The reason is past Netflix experience with significant price hikes, as well as most history of price hikes in the subscription video business.

To be sure, subscription service price hikes often are troublesome in markets where there is significant competition, since customer defection is a possibility.

But there are cases where price hikes, even annual and significant price hikes, do not seem to do much damage to take rates.

Subscription TV has proven to be such a market, at least until quite recently. Despite virtually annual price increases that outstrip general inflation rates, the overall linear video subscription business had grown virtually without a dip until 2013 or so, when overall subscriptions dipped for the first time, ever.

Many would argue future price hikes will occur in a different business context, though, where the business is flat to shrinking, and with competitive offerings gaining subscribers as well. And one might well argue that the online video entertainment business is at a very early stage.

That might bear a greater resemblance to the earlier days of cable TV, allowing a situation where adoption keeps growing despite price increases.

And Netflix will over the next year or two find out what higher prices do for take rates and churn, much as Amazon will find out what price hikes for Amazon Prime do for take rates and churn.

To be sure, consumers might suggest there is some danger of churn. In a recent survey, 14 percent of Netflix consumers who use the streaming service said they would cancel their subscriptions if the monthly price climbed by $2.

The YouGov survey also found that if prices were hiked by $1 a month, just six percent of Netflix streaming customers reported they would cancel their subscriptions.

But consumers often do not act as they indicate they will. Just as often, consumers say they will not do something, and do.

That sort of disconnect might be more common when surveys deal with behaviors and attitudes. But the danger of misleading survey results is rather common, even for most commercial products.

Perhaps the biggest problem area is the accuracy of end user remarks about potential future behavior. Quite often, the reported expected behavior does not materialize.

There are two other areas of concern. Consumer surveys often are inaccurate when used to ascertain why consumers behave in certain ways, or might behave in certain ways. That limits ability to shape promotional strategies, for example.

Also, end user surveys relying on self-reported reasons for past behavior can err, as the actual reasons consumers made a purchase decision might later be described in other ways.

Such error can occur especially when asking “how much would you pay” for a proposed product.

When asked, consumers often will choose the lowest price. But actual buying behavior is a mix of perceived value, product quality and features, in relation to a specific price.

That is tough to capture is a survey.

Also as Steve Jobs, Apple CEO noted, consumers have no way of evaluating the value of a product they never have seen.

Netflix and Amazon won’t face that sort of problem. Consumers generally understand the product and the value. What remains uncertain is possible falloff from current users who deem price increases out of proportion to value.

Amazon has hiked Amazon Prime prices about 25 percent, as did Netflix several years ago, for new customers. That lead to significant customer churn for Netflix, at least temporarily. But subscriber growth continued, after the hiccup.

Amazon is gambling a similar hiccup might occur, but would quickly prove to be a temporary phenomenon.

Netflix ran into a huge problem when it repriced its services to emphasize streaming delivery in 2011, losing about a million subscribers after the 2011 pricing change was announced.

In that move, Netflix eliminated a popular “DVD plus streaming” plan costing about $10 a month, in favor of separate DVD rental and streaming plans each priced at about $8 a month. That might have represented a 60-percent price hike for consumers who wanted DVD and streaming access.

This time around, Netflix will apply the higher charges only to new customers, grandfathering existing users for perhaps a year or two.

And Netflix is not talking about potential 60 percent price hikes, but something more on the order of 13 percent or 25 percent, on a base of $8 a month or $16 a month.

That earlier experience might suggest why Netflix believes a price increase of one or two dollars, applied only to new customers initially, and to all customers eventually, will not be detrimental.

Though Netflix took an immediate hit of about a million customers in the wake of the big packaging change in 2011, net customer additions have recovered to the point that the long-term impact seems nil to non-existent.

In its first quarter of 2014, Netflix added four million net new streaming subscribers, up from about three million steaming customers, year over year.

Netflix gained 2.25 million net new U.S. subscribers and 1.75 million international subscribers, for a total of 48 million global members, including 35.7 million in the United States.

IN 2013, about 30 million of those customers bought streaming plans, compared to about 7.5 million customers on DVD rental plans.

But Netflix is growing, arguably a result of providing a reasonable price-value relationship, and plans what might be considered modest price increases.

As a rule of thumb, raising prices for a product people want will tend to depress volumes purchased.

But consumer appetite for video entertainment tends to suggest value is high enough, in most cases, to overcome price resistance.

At least, that is what one historically would have predicted, given virtually annual price increases for cable TV, satellite TV and telco TV subscriptions.

Netflix and Amazon Prime might find similar results, this time around.