U.S. Service Providers Earn Vastly More Revenue Per Employee than French Mobile Operators

It has been a rule of thumb that U.S. cable TV operators have operating costs lower than their major telco competitors.

But on one metric--revenue per employee--AT&T and Verizon arguably perform much more efficiently than U.S. cable TV operators.

Comcast, for example, earns about $475,000 worth of revenue per employee.

Time Warner Cable, not among the best managed U.S. cable TV companies, generates revenue of about $436,000 per employee..

The average sales per AT&T employee totaled $495,000 in 2012, up from $209,000 in 2006, and is closer to $529,060 revenue per employee at present.

At Verizon, revenue per employee has been about $669,000, and now is about $682,000 per employee.

At least in part, those gains at AT&T and Verizon can be accounted for by continuous efforts to reduce headcount.

Tier one service providers, no less than other service providers, have been working to control or reduce operating costs for more than a decade, and especially over the last five years, in large part to cope with declining gross revenues (in Western Europe) or margin-challenged revenues (in the U.S. market).

Between 2007 and 2012, AT&T eliminated 67,620 jobs, almost a quarter of its workforce. At least in part, that accounts for average sales per AT&T employee of $495,000 in 2012, up from $209,000 in 2006.

Over the same five-year period, Verizon eliminated 48,000 jobs. Across the industry, telecom employment has fallen by almost 200,000 since 2007, according to the U.S. Labor Department.

Most of those cuts have come in the fixed network business, as mobile segment headcounts have been roughly flat between 2001 and 2008, and have been declining since 2008.

Between 2008 and 2010, the mobile segment lost about 40,400 jobs overall, by some estimates. By other estimates, U.S. mobile business jobs dropped by only about 10,000.

The point is that, by any estimate, most of the lost U.S. communications jobs have come from the fixed network business.

Still, it remains the case that U.S. cable operators have operating cost structures lower than the leading U.S. telcos.

source: Michael Mandel

In 2010, for example, where U.S. telco employee headcount might have been between 432,000 to 455,000, U.S. cable companies likely had between 157,000 to 180,000 employees, according to the U.S. Department of Labor.

Of course, the U.S. cable TV distributor business generated about $90 billion in annual revenue, where telcos generated about $447 billion.

Mobile revenue was about $160 billion in 2010, while fixed network revenue was about $287 billion.

In other words, telcos had revenue five times greater than did cable TV operators in 2010.

But telcos had headcount only about 2.5 times to 2.75 times greater than cable TV companies.

By that measure, U.S. telcos are “more efficient” than U.S. cable TV companies.

AT&T and Verizon will continue to face the challenge of matching operating costs both to market competitors and to revenue generated by each of the lines of business. But it is, in many respects, hard to argue both firms have not been performing well, in terms of revenue per employee.

The French mobile carrier that really has outstanding sales per employee uses a "Wi-Fi-first" approach that U.S. cable operators will take, eventually.

Consider that Bouygues in France has about 11.1 million mobile customers, and nine million employees, while Illiad’s Free Mobile serves eight million mobile customers with 4,500 employees.

source: Le Figaro

Likewise, Bouygues has sales of about 4.17 billion euros, while Free Mobile has sales of about 3.7 billion euros.

In other words, Bouygues generates gross revenue of about 463,000 euros per employee, while Free Mobile earns about 1,777,000 euros per employee.

SFR, newly purchased by Numericable, has mobile revenue of about 1,258,000 euros per employee.

Orange, by way of comparison, apparently generates only about 208,000 euros per employee.

Free Mobile generates an order of magnitude more revenue per employee as does Orange. Even Bouygues generates double the revenue per employee as does Orange.

To be sure, Orange continues to have significant French government investment, so social goals--especially employment--are a consideration for Orange.

To be sure, by some estimates perhaps 33 percent of current employees will retire over the next six or seven years, allowing Orange a chance to gradually reduce the labor intensity of its French operations, assuming the French government will allow that to happen.

Some doubt much will be tolerated on that score, making it tough for Orange to get its cost structure in line with its major competitors, precisely at the point that SFR now will be able to marry cable TV services and fixed line high speed access with mobile service, more directly challenging Orange.

Also, Orange carries significant long term debt on its books as well, perhaps 30 billion euros. Paying down that debt on the basis of existing cash flow seems unlikely in the extreme.

For its part, Bouygues now seems likely to cut employees by a significant amount, in an effort to align its revenue per employee more closely with those of Free Mobile.

French Mobile Service Providers Have a Revenue Per Employee Problem

It often is possible to suggest that operating costs for incumbent service providers are too high, for the level of competition in their core markets. Lower operating costs are an advantage attacking service providers, large and small, often employ when competing with incumbents.

Sometimes, though, even attackers can find their costs out of line with other key competitors.

Consider that Bouygues in France has about 11.1 million mobile customers, and nine million employees, while Illiad’s Free Mobile serves eight million mobile customers with 4,500 employees.

Likewise, Bouygues has sales of about 4.17 million euros, while Free Mobile has sales of about 3.7 million euros.

In other words, Bouygues generates gross revenue of about 463 euros per employee, while Free Mobile earns about 1,777 euros per employee.

SFR, newly purchased by Numericable, has mobile revenue of about 1258 euros per employee.

Orange, by way of comparison, apparently generates only about 208 euros per employee. That is perhaps a measure of how much more costs need to be cut at Orange, to compete long term in the French mobile market.

Free Mobile generates an order of magnitude more revenue per employee as does Orange. Even Bouygues generates double the revenue per employee as does Orange.

To be sure, Orange continues to have significant French government investment, so social goals--especially employment--are a consideration for Orange.

To be sure, by some estimates perhaps 33 percent of current employees will retire over the next six or seven years, allowing Orange a chance to gradually reduce the labor intensity of its French operations, assuming the French government will allow that to happen.

Some doubt much will be tolerated on that score, making it tough for Orange to get its cost structure in line with its major competitors, precisely at the point that SFR now will be able to marry cable TV services and fixed line high speed access with mobile service, more directly challenging Orange.

Also, Orange carries significant long term debt on its books as well, perhaps 30 billion euros. Paying down that debt on the basis of existing cash flow seems unlikely in the extreme.

For its part, Bouygues now seems likely to cut employees by a significant amount, in an effort to align its revenue per employee more closely with those of the other competitive French mobile service providers.

Time Warner Cable, not among the best managed U.S. cable TV companies, generates revenue of about $436,000 per employee.

The average sales per AT&T employee totaled $495,000 in 2012, up from $209,000 in 2006. At Verizon, revenue per employee has been about 669,000.

So at least for the moment, U.S. tier one service providers are vastly outperforming French mobile operators in terms of revenue per employee.

source: Le Figaro

What Impact from Netflix $1 Increase for Streaming?

source: Quartz

The medium-term implications of a $1 a month price increase for Netflix streaming plans are not yet clear, as existing streaming customers will continue to pay the older prices for two years. So churn should not be material, in the near term.

The real issue is whether the price increase will slow net additions, and if so, for how long.

Some now wonder whether an Amazon Prime subscription price increase from $80 annually to $100 annually, or a $1 a month increase for new Netflix consumers will slow the growth of online video market. At the margin, temporarily, one would guess the answer has to be “yes.”

A slightly higher price for the most-popular Netflix streaming package will cause some consumers to think a little harder. Still, an increase from $8 to $9 a month is relatively slight, in absolute terms, and far less than the $4 to $6 monthly increases linear video subscribers see every year.

For most new consumers, and in two years the base of current customers, the decision context is not the $1 a month price increase. The decision to buy a streaming video service will be evaluated against the cost of broadcast TV, linear video subscriptions, the cost of rival streaming alternatives, and the value each option represents, as well.

source: FCC

And the “value” of a Netflix subscription, or Amazon Prime, will grow over time as both firms invest in original programming.

A growing preference for on-demand viewing across almost every demographic also will have impact on the “value” of such subscriptions, increasingly over time.

Absolute demand for for television, as a product, also seems lower in younger households.

We are likely to see a test of the value-price proposition later in 2013, if Dish Network succeeds in launching a lower-price streaming service featuring linear TV channels. That offer, presumably priced at $20 to $30 a month, for a smaller package of linear channels, could surface demand for linear video among resisters, or latent demand for such a product by existing customers.

Should that effort succeed, and should other major suppliers launch similar offers, demand for the new linear video packages might be significant, indeed, as linear video subscription price elasticity seems to be growing negative, if it is not already negative.

In other words, a one percent increase in retail price should lead to more than a one percent decrease in buying. That does not seem to have happened, in the linear video entertainment business.

The reason is the emergence of triple-play packages that effectively discount the value of constituent services. So while stand-alone video subscriptions might indicate the magnitude of price increases, it increasingly is the case that most buyers do not pay those prices.

source: Market Realist

Though it is presently a reasonable assumption that some Netflix or video streaming customers have chosen to buy Netflix in place of a linear subscription service, most Netflix subscribers seem to be buying Netflix as an incremental addition to their video entertainment service.

What does seem to be true is that many Netflix subscribers are substituting Netflix for a premium channel such as HBO. And Netflix and other streaming services such as Amazon Prime and Hulu are driving growth of the over the top and linear video service offerings of  subscription video on demand services as well.

In the first quarter of 2013, for example,  the number of viewers watching television shows using SVOD services increased 34 percent, compared to the same quarter of 2012, NPD Group reports.

In fact, streaming video subscriptions grew four percent in 2012 and 2013, while premium TV channels declined six percent. At the beginning of 2014, 32 percent of U.S. households subscribed to a premium channel, while 27 percent subscribed to a streaming video service.

Some 7.6 million Internet-owning Americans can be classified as “cord-cutters” who don’t subscribe to cable TV, according to Experian Marketing Services, representing perhaps 6.5 percent of households.

Still, since at least 27 percent of U.S. households buy Netflix or some other video streaming service, most are supplementing a traditional video subscription. More than 80 percent of Netflix and Hulu subscribers, for example, say they buy both a linear video subscription and a streaming video subscription.

The point is that neither Netflix nor the other streaming services are “mostly” a substitute for linear video subscriptions. Instead, Netflix supplements purchasing of video entertainment.

Nor is the relationship between product price and buy rates so clear. A cable TV, satellite TV or telco TV subscription can cost more than 10 times what Netflix does. Nor have virtually annual price increases for linear video products significantly increased overall linear video churn. Instead, most of the Netflix-only behavior seems to be anchored in some households, namely Millennial and younger households (18 to 34).

U.S. video subscribers grew every year, until flattening in early 2013. For all of 2013, the linear video market lost about 105,000 total subscribers, on a base of 105 million subscribers.

Is price an issue? Yes. So is “perceived value.”

Availability of reasonable partial substitutes also is an issue for the first time.  It wasn’t until widespread availability of satellite alternatives that significant numbers of consumers switched providers. But that did not slow the growth of the whole market; it just shifted market share while overall market growth continued.

Is Common Carrier Regulation of High Speed Access Now Possible?

Though it recently had seemed that common carrier regulation of high speed access was not within the realm of possibility, Federal Communication Commission Chairman Tom Wheeler now says he will ask for public comment on whether that should be an option for promoting "Internet openness."

That request for input, and any possible FCC proposals related to the input, are part of the FCC's on-going effort to create viable network neutrality rules.

Though proponents want such reclassification in the belief that such rules will prohibit content delivery services all the way to the end user, or raise costs for providers of streaming services. that probably is not the case.

Opponents of such reclassification might argue that high rates of network investment will suffer, making an already-difficult business case even worse.

Verizon, for example,  has capped its FiOS deployments to about 19 million homes passed, enough network to reach about 70 percent of locations served by Verizon’s fixed network. Obviously, that means 30 percent of the network never will be upgraded for FiOS.

Is that a gamble? Certainly. It means Verizon will continue to lose market share to cable TV and possibly other ISPs over time, as Verizon is unable to offer equivalent speeds as its key competitors, and also is unable to compete fully in the video subscription business, at least using its fixed network.

But some would argue it is likely Verizon might not even recover its cost of capital by extending FiOS to reach another 20 percent to 30 percent of its fixed network customers.

The reason is simply that FiOS is unlikely to attain long-term penetration rates in excess of much more than 40 percent, either for Internet access or video services, where it operates.

FiOS Internet penetration was 39.5 percent at the end of fourth-quarter 2013, meaning that Verizon was able to sell a high speed connection to about four homes out of 10 it passes.

FiOS video penetration was 35 percent. In other words, Verizon also could sell a subscription video service to 3.5 out of every 10 homes it passes. For the most part, FiOS customers buy two or three services, with triple-play packages seemingly most popular.

The FiOS network passed 18.6 million premises by year-end 2013. Perhaps 68 percent of FiOS customers buy a triple-play service. Most of the rest likely buy a two-product bundle of Internet access and video.

That might imply FiOS overall penetration of about 50 percent (assuming 90 percent of FiOS customers buy a dual-play or triple-play service) while about 10 percent of households only buy a single service.

For the sake of argument, assume Verizon gets a long-term, sustainable penetration rate of 50 percent. On any new FiOS builds, that implies, at a network cost of $750 per home, a network cost of $1,500 per customer, plus about $600 to install a drop.

In a typical 100-home neighborhood, that suggests network investment of about $75,000 and drop install costs of about $30,000, for a combined per-customer cost of about $105,000.

Assume that 70 percent of the FiOS customer homes generate about $150 a month in revenue, some 20 percent generate $100 a month and about 10 percent generate $50 a month worth of revenue.

That works out to about $63,000 in annual triple-play revenue; $12,000 in dual-play revenue and about $3,000 in annual single-play revenue, for total gross revenue of $78,000.

Assume operating cost of about $46,800 (assuming gross margin is about 40 percent). That would suggest net revenues (before dividends) of about $31,200.

Assuming half of net revenues has to be reserved for dividend payments, That might imply just $15,600 in profits from that 100-home neighborhood. Even if Verizon had no interest payments, it might take nearly seven years to reach breakeven.

Over a 10-year period, that further implies profits of about $4,680 or perhaps four percent annually. The issue is whether that actually covers Verizon’s cost of capital. If actual 10-year profits are anywhere close to this simple analysis, it isn’t clear the investment makes sense.

Analysts at the Yankee Group suggest that it is difficult to create a fiber-to-home business plan with a payback in five years or less, unless penetration is at least 30 percent. Average revenue per user matters, but less so than adoption, Yankee Group analysts suggest.

So the issue is that the financial return is less than what might be expected from investing elsewhere, at best.

If penetration does not hit 50 percent, Verizon might earn less than the cost of capital borrowed to build the networks. In other words, Verizon could actually lose money on big new FiOS builds.

And this simple analysis assumes a 50-percent take rate. Others believe FiOS take rates are in the 40-percent range today.

That 19 million homes "passed" doesn't necessarily mean served. Four years ago, about the time it was deciding to put the brakes on its FiOS expansion, Verizon sold service to nearly 60 percent of the households in its service territory. Now, Verizon gets as customers fewer than 40 percent of homes passed by the network, according to Michael Hodel, a Morningstar Inc. analyst.

And Google Fiber shows the danger.

Google Fiber has captured 75 percent share of high speed access homes it passes in certain medium-to-high income Kansas City neighborhoods, according to Bernstein Research. But even in the lower-income neighborhood surveyed, adoption of Google Fiber’s paid service seems to have reached 27 percent.

Should results such as those persist, Bernstein Research predicts that Google Fiber could attain and hold market share of perhaps 50 percent for its paid service, and about 10 percent penetration of its free service, within three to four years.

That would prove a difficult challenge for cable and telco Internet access and video service providers competing with Google Fiber, as it would imply that cable and telco ISPs collectively would have less than 50 percent share of high speed access market share.

In many markets, cable providers have 58 percent share, while telcos have 42 percent share. The Bernstein research also suggests Google Fiber quickly has grabbed seven percent to 15 percent video entertainment market share as well.

That implies cable could dip as low as 29 percent high speed access share in Google Fiber markets, while telcos could drop to 21 percent share. In addition, it is conceivable that cable TV and telco providers also could face a loss of perhaps 20 percent video entertainment market share as well.

In Wornall Homestead, the highest household median income neighborhood ($116,000 average household income) 83 percent of respondents were buying Google Fiber service.

Of those customers, 15 percent of homes were buying the $120 a month high speed access plus video subscription package.

About 53 percent opted for the $70 a month gigabit access service.

Also, some 15 percent had chosen to use the free 5 Mbps Internet access service.

In Community College, the neighborhood with the lowest household median income neighborhood ($24,000), 27 percent of homes were buying Google Fiber service.

About seven percent were buying the video-plus-Internet access package.

Some 19 percent have bought the 1 Gbps access service. Also, about seven percent of homes opted for the free access service.

In other potentially bad news for cable and telco competitors, all of the Google Fiber users indicated they would not buy a rival gigabit access service, presumably even when the rival service was offered at the same price as Google Fiber.

For some years, suppliers of high speed access service at 50 Mbps or 100 Mbps have encountered some resistance to such offers.

Google Fiber shows that the issue is the perception of value, compared to price. Google Fiber has not had similar resistance to a 1-Gbps service offered at $70 a month, less than most other ISPs had charged for the 50-Mbps services.

Should Google Fiber or other fixed network suppliers decide to build in a wider range of U.S. markets, both telcos and cable TV companies would face new pressures, including higher capital expense to match Google Fiber speeds, plus a new pricing umbrella that could drive prices of all slower speed offers downward.

That would create new pressures to reduce operating costs, as the option of raising prices to recover the bandwidth upgrades would be limited to impossible.

But Title II regulation could create a situation even worse, as raising prices might prove difficult.

T-Mobile Wants Breakup Fee, Brand Name and Management Continuity as Part of Sprint Acquisition Bid

T-Mobile US reportedly wants a $1 billion breakup fee in case any proposed Sprint acquisition of T-Mobile US were to fail to gain regulatory approval. Obviously learning from the damage caused by the failed AT&T effort to buy T-Mobile USA, T-Mobile US also wants assurances its brand and some of its management team would remain after a merger.

The latter rules--keeping the T-Mobile US brand in play--would seem an effort to avoid the damage T-Mobile US sustained while the AT&T acquisition bid remained in regulatory review. In practical terms, it means T-Mobile US would keep up its marketing focus during any review process.

Such a provision would shift nearly all the risk of an ultimately-rejected acquisition to Sprint. Ironically, an eventual Sprint bid for T-Mobile US might occur at a point where T-Mobile US has leapt ahead of Sprint, currently the third-biggest national mobile provider, in terms of market share.

In a year or so, T-Mobile US is likely to have displaced Sprint as the number-three U.S. mobile company, in terms of subscribers. In that event, the number-four carrier would try to buy the number-three carrier.

Also, somewhat unusually, the leadership of the new company likely would come from the acquired firm.

Eventually, one of the two firms will be absorbed, and possibly both, by some other entity, even if no effort is mounted to merger Sprint and T-Mobile US immediately, or in a year or two.

In fact, Sprint is likely to become the most disadvantaged bidder in upcoming 600-MHz spectrum auctions.

Both AT&T and Verizon have the financial strength to prevail in the auctions. T-Mobile US is likely the biggest beneficiary of bid rules favoring smaller carriers.

Sprint does not have the financial firepower of AT&T and Verizon, but likely will be barred from bidding against T-Mobile US for the reserved spectrum.

Time and tide might not be running in Sprint’s favor.

The Irony of Proposed ISP Title II Common Carrier Rules: Paid Prioritization Would be Lawful

It is not surprising at all that AT&T resists common carrier regulation of broadband access services. Nor is it surprising that some Internet app providers call for imposing such rules. As always, for every public purpose there are corresponding private interests.

AT&T believes its business will be restricted if common carrier rules were applied to Internet access services, while the app providers believe their financial interests would be helped.

AT&T says “calls for reclassification of broadband Internet access services as a Title II telecommunications service would cause risks and harms that dwarf any putative benefits, all but scuttle the administration’s ambitious broadband agenda, and would not, in all events, preclude the paid prioritization arrangements that seem to be the singular focus of reclassification proponents.”

In large part, AT&T argues that common carrier regulation would limit access provider revenue enough that rapid investment in faster networks would be hampered. To be sure, opponents often say that is just posturing.

But widespread experience in the European market, and arguably some evidence in the U.S. market, suggests there is a clear trade-off between the goals of competition and investment.

In that regard, the trade off is similar to that for minimum wage laws, which trade off the number of jobs (raising minimum wages results in some shrinkage of jobs) for higher wages earned by workers who have jobs.

European policymakers successfully have encouraged widespread competition, at the cost of retarding investment in faster Internet services. In the U.S. market, Verizon moved ahead with its FiOS deployments only after it was made clear that mandatory wholesale access rules would not be applied to such deployments.

If the U.S. National Broadband Plan really does require $350 billion in additional investment, then discouraging investment is not helpful, in that regard.

Common carrier regulation not only would likely lead to price controls, but also mandate wholesale access rules that would effectively lower expected return from investment in faster access facilities.

Ironically, common carrier regulation might actually impose costs on content providers, especially providers of video content, since Title II regulation would require reciprocal compensation payments whenever one network delivers far more traffic than it accepts.

That means app providers such as Netflix, Amazon Prime, Hulu and others would be required to pay terminating compensation to “eyeball networks,” especially consumer Internet access provider networks.

End user retail prices for Internet access also would grow by the amount of universal service taxes imposed on Title II services.

In a supreme ironic twist, imposition of Title II rules on ISPs also would make lawful quality of service mechanisms of the sort network neutrality proponents desire.

Is Illiad Free Mobile the Cable Blueprint for Mobile Service?

Some observers had thought Sprint would the mobile service provider to launch a disruptive attack on U.S. market packaging and pricing. Instead, T-Mobile US has usurped that role.

But more disruption is certain to come. As part of the CableWiFi effort, Comcast, Time Warner Cable and Cox Communications and Cablevision allow roaming for all of their subscribers to the public Wi-Fi footprint of perhaps 200,000 hotspots.

But more is coming, as Comcast and Cablevision already are introducing at-home routers that support both the subscriber’s private Internet access as well as a new public network. That would mean millions of new public hotspots supported by the cable networks.

In 2010, Cablevision Systems Corp. began testing dual-mode phones able to access both Wi-Fi and mobile networks, something firms such as Republic Wireless and Scratch Wireless already have commercialized.

In other words, Iliad’s Free Mobile, which disrupted the French mobile market, appears to be the model for U.S. cable operators looking to enter the mobile business. Free has based its service on similar public Wi-Fi connections enabled by its fixed network customer high speed access connections, while using wholesale mobile capacity for connectivity when no usable Wi-Fi connection is available.

Free grabbed four percent market share in about three months after launch. By the end of 2013, Free had eight million customers, about 12 percent share of the French market, just behind Bouygues.