Will U.S. Mobile Market Structure be More Like France or U.K.?

Will the French mobile market or the U.K. market provide a precursor of developments in the U.S. mobile business?

The U.S. and French mobile markets are unstable, both presently have four leading national contestants, while a major transaction with change of control has occurred in France, while a possible bid to do the same in the U.S. market could be launched within months to two years.

The U.K. market, on the other hand, features more than four national providers, with BT a new entrant. In addition to three firms with more than 15 percent share, there are three additional providers with at least seven percent market share.

Some might argue France resembles the current U.S. mobile market structure, though the U.K. could be more germane if both Dish Network and a cable TV operator operation launch as independent entities, and the legacy mobile carriers do not consolidate.

That could mean as many as six national providers in the market, though most think five or four is a more-likely outcome, even after the entry of Dish Network and a cable operator operation as well.

Illiad’s Free Mobile has disrupted the French mobile market by attacking prices, basing that assault on use of a “Wi-Fi-first” access model that U.S. cable operators also plan to use to anchor a future untethered or mobile access business.

The chief difference at the moment is that the French government now has concluded that ruinous levels of competition exist, and that stable competition, long term, will be served if the mobile market consolidates to three dominant national providers.

In the U.S. market, at least so far, regulators and antitrust authorities have signaled a belief that maintaining four national competitors is necessary. In the French market, government officials now believe competition has reached ruinous levels.

To end a destructive price war, Economy Minister Arnaud Montebourg has argued that the number of mobile operators needed to be reduced. That consolidation further would allow the surviving operators to invest more aggressively in next generation networks.

Matters are more fluid in the U.S. market, though. No matter what view U.S. regulators hold, two additional contestants will enter the market: Dish Network, which must build a network and begin offering service or lose its mobile spectrum licenses, and the asset value the spectrum represents.

Also, the cable industry will enter the market, using a strategy pioneered by Free Mobile.

So while the French government now pushes for consolidation in the country's mobile market--from four providers to three--the U.S. market could potentially see as many as five to six national providers in the near future.

Note that in France, it was Numericable--France’s largest cable TV operator--that has acquired SFR, creating France’s second-biggest communications provider, behind Orange.

"There are two smaller operators that remain, and we can wonder what their future will be unless they merge, which doesn't seem to be on the agenda right now," Montebourg has said.

Consolidation "will happen," Montebourg says. "We will make three operators capable of investing, which will stop destroying jobs and killing each other.”

Many observers would argue that the logical combination would be a combination of Illiad’s Free Mobile and Bouygues. Illiad owns fixed network assets as well as mobile assets.

At the same time, Free Mobile, which is building its mobile network, then would have access to the Bouygues access network, while Bouygues mobile customers would have access to Illiad’s fixed network for mobile data offload.

Since April 2014, the French government has said it will actively encourage mobile market consolidation, a bit of a switch from some earlier thinking that four service providers in the market was preferable to just three in the market.

But there is a difference between the French and U.S. markets. France had just three dominant providers prior to Free Mobile’s market entry in 2012. So a return to three providers would merely restore former market structure.

In the U.S. market, the recent pattern has featured four national providers, even if two more entrants are expected.

Systemic risk to Orange, however, clearly is an issue for some French government authorities,  who believe the danger to jobs is greater than the risk of reduced consumer benefits from competition.

So in one sense, the French market seems headed for fewer providers, while the U.S. market seems headed for more providers, even if Sprint were allowed to merge with T-Mobile US, or if some subsequent deal allowed Dish Network to buy T-Mobile US.

After the expected entry of a cable operation, there still would be at least four national providers, and potentially five. tru

FCC Has to Thread a Needle on Net Neutrality

Predictably, as potential regulation of Internet access as a common carrier service is at least raised by the Federal Communications Commission, opponents and proponents are making clear their respective views on whether such a move would harm, or would not harm, investment in gigabit and other faster networks.

Proponents of Title II Title II regulation include Netflix and Mozilla, though that is not the dominant position. Most app providers are not calling for such big changes, but only for a clear “best effort only” rule for Internet access, as they generally have been doing for years.

ISPs predictably warn of investment slowdowns.

The FCC says it wants public input on reclassifying broadband access a common carrier service as well.

As always, the public positions stake out negotiating positions, in addition to reflecting the perceived business interests of Internet participants and also have political value for the FCC, as a very drastic stick (Title II regulation) will make new "best effort access" rules more palatable for ISPs--and provide political cover for the FCC--after all have had their say.

As always in such highly-political proceedings, the FCC will face strong opposition from some, and strong strong support from other quarters. By essentially moving the goalposts further apart (common carrier regulation on one hand and no effective best effort access rules on the other), the FCC will ultimately have more room to craft a compromise that leaves both sides with something they can live with.

To do so, the FCC will have to thread a needle, in the end choosing not to impose Title II common carrier rules, but also being able to claim it is protecting best effort access, while leaving some room for content delivery networks that stretch all the way to end user locations.

For the moment, we will see the "extremes" of proposed solutions. 

In the end, we will see something that is not a complete victory for proponents of best-effort-only Internet access nor a complete victory for advocates of content delivery features as one possible form of access.

Still, the debate will be fierce, especially initially, until a workable consensus can be crafted and a political consensus reached.

To reach that point, the strongest positions offered by ISPs and some app providers will have to be aired, pressure brought to bear by both sides, and then a workable solution with broad support crafted.

The argument by Internet service providers will be that such regulation will have clear and negative impact on future investment. 

Supporters of common carrier regulation of access services will argue the ISPs are bluffing, and that common carrier regulation will not reduce investment.

But that is why the Title II reclassification is unlikely to happen. There are risks to investment if common carrier rules are applied.

The dispute about future investment is not limited to the U.S. market, though. In Europe, ommon carrier regulation arguably has restricted telco investment in faster networks, while cable TV networks, not covered by common carrier regulations have invested significantly.

The European Commission’s Connected Continent proposals, for example, are a direct response to regulator concern that not enough investment is happening.

The relatively low cost of upgrading cable TV networks, and the widespread availability of cable TV networks in the United States has meant high availability of “superfast” broadband access in the U.S. market, a report by Ofcom, the U.K. communications regulator, suggests.

The high amount of facilities-based competition also has spurred matching investments by U.S. telcos, Ofcom says.

In Europe, where similar  fixed-infrastructure competition is less common, regulators have opted instead for robust wholesale access requirements on telco fixed networks. That has lead to lots of retail competition in the high speed access market, but at the cost of lower investment  in faster facilities.

High speed access provided by cable TV companies, in fact, accounts for much of the higher-speed market share in European Union countries.

McKinsey analysts have estimated it will cost about 200 billion euros to 250 billion euros to upgrade half of EU homes to fiber to the home networks capable of delivering 100 Mbps service.

Though government subsidies will help, the bulk of that investment will have to be made by private firms making rational decisions about the financial return from making such investments.

One might argue that common carrier regulation of Internet access within the EU has contributed mightily to the problem of lagging investment in next generation access faciliities.

An Ofcom report on U.K. broadband infrastructure illustrates the inherent tension between promoting investment in next generation networks and fostering robust competition between suppliers of such services.

Put simply, there often, if not always, is a tension between policies that promote competition and policies that create incentives for investment.

In addition, different nations have historical differences on the supply side that create different outcomes on the demand side.

For reasons having to do with widespread facilities-based cable TV networks being deployed, competition in the United States, for example, is inter-platform (between cable and telco networks), where in Europe, because of less-prevalent cable TV deployment, competition has been intra-platform, based on competitor wholesale access to the telephone network.

Ofcom notes that infrastructure-based competition between local incumbent telcos and local cable companies lead to early investment in faster access networks.

By way of contrast, in Europe fixed-infrastructure competition is less common, so regulators have required that incumbent telcos provide wholesale access to their networks, fostering competition but also creating negative incentives for investment in faster networks.

Ofcom also argues that retail pricing policies have differing impact on demand, though some might attribute much of the difference to supply constraints, in particular the longer average loop length in the United States, compared to Europe.

80% of Surveyed Small Businesses Believe "Wi-Fi as Amenity" is Important

Some 80 percent of small businesses surveyed on behalf of Time Warner Cable Business Class believe their customers expect free WiFi, and also rank it as a top way to attract new customers, but only 43 percent of businesses offer it.

The survey also found that 41 percent of respondents do not use a website in their day-to-day business, and 54 percent are not using social media to promote their business.

Of course, it comes as no surprise that a survey conducted on behalf of a specific service provider finds that potential customers need to buy more of that service provider’s services to compete.

But it might be significant that offering Wi-Fi as an amenity is viewed to have such positive business value.

“The survey reveals that the top ‘must have’ services for small business are fast, reliable internet access; clear, reliable phone service; and reliable WiFi service at their business location,” says Time Warner Cable.

While a majority of businesses are evaluating their technology bi-annually or annually, 33 percent claim they have been negatively affected by outdated technology, and 35 percent are fixing tech problems themselves, Time Warner Cable says.

AT&T Deal For DirecTV Soon?

AT&T reportedly is within weeks of making a firm bid for DirecTV, a move in keeping with AT&T's (SBC) growth strategy over the last couple of decades, which is to get bigger fast using acquisitions. 

Verizon, in contrast, has emphasized organic growth. 

As always, there is disagreement about the value of such a deal. Some think AT&T will not gain as many synergies from the deal as some expect, since the network platforms are distinct. That line of thinking suggests a better approach would allow AT&T to bundle multiple services using a single platform.

But "better" in principle does not take into account the realities of what AT&T can accomplish, in its actual markets, with expected close regulatory scrutiny, at reasonable cost, without damaging its credit rating and debt load.

Any significant-sized deal to acquire additional fixed network assets or mobile assets would almost certainly be rejected by the Federal Communications Commission and Department of Justice, as any big deals in those areas would boost AT&T above 30 percent market share, a trigger for regulatory objection.

In that regard, the Comcast bid for Time Warner Cable would give the new Comcast about 40 percent share of U.S. fixed network high speed access share, even if video entertainment share or voice share would raise fewer issues. 

That level of Internet access market share (40 percent) typically would be a huge warning sign that regulatory opposition is certain. 

In that sense, an AT&T bid for DirecTV would face fewer obstacles than Comcast's bid for Time Warner Cable.
Comcast says it would divest about three million accounts, as part of the acquisition, to keep video share under a 30-percent market share level.

But some will argue it is high speed access share that is critical, going forward, not video share. 

And that is one complication for regulators and antitrust authorities looking at fixed network acquisitions and mergers. What is the relevant market: all triple-play services taken together, or market share in each discrete market (voice, video entertainment and high speed access)?

Even more complicated are evolving quadruple-play markets, where U.S. cable operators, not just telcos, soon will be competing against each other, and against other contestants with a single lead app (mobile-only, or satellite-only).

In fact, many observers already believe that, in the future, cable operators will make most of their money from high speed access, not video entertainment and other services. If so, then the strategic change in market structure is high speed access, not video.

Any Sprint effort to buy T-Mobile US would not so much face opposition because it vaults Sprint above the 30 percent market share test, but because it reduces the number of national U.S. mobile service providers from four to three.

That is a major concern of regulators in many mobile markets. 

Comcast Acquisition of Time Warner Cable Would Vastly Boost Comcast's High Speed Access Share

Cable operators have generally been winning market share in the fixed network high speed access business in the United States. Where Cox Communications, CenturyLink and Verizon are generally expected to see flat revenue growth, AT&T is projected to lose market share, while Comcast and Time Warner Cable are expected to gain share. 

Combined, Comcast and Time Warner Cable would grow vastly more than all the other competitors, in the event of a successful Comcast purchase of Time Warner Cable.

source: Consumerist

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