Will U.S. Regulators Reach Same Conclusions as French Regulators?

Will U.S. regulatory officials take the same view as do French regulators about how best to sustain and promote competition in the U.S. mobile business? Perhaps they will.

Though European Union regulators still tend to prefer four mobile service providers in each market, rather than allowing consolidation to three, French regulators are concerned that long-term stable mobile markets in France require consolidation.

As with policies that must balance investment with competition, there is an inherent tension between regulatory policies that promote maximum feasible competition and yet also promote maximum feasible investment in next generation networks.

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, Federal Communications Commission regulators and antitrust authorities have signaled a belief that maintaining four national competitors is necessary.

But there are at least some hints that at least one FCC commissioner now is beginning to agree with French regulators.

Commissioner Jessica Rosenworcel reportedly has acknowledged privately that Sprint and T-Mobile US may not remain viable as independent companies. That is the same view now expressed in public by French national regulators as well.

The problem in many fixed network markets is that there is only one ubiquitous fixed network.

So regulators essentially have had to rely on wholesale mechanisms to support competition.

Ironically, such moves also tend to depress facilities investment. The issue in mobile markets is less that of limited facilities, but the ability to sustain long term operations.

And some argue the current structure of four leading U.S. providers cannot last, based on disproportionate differences in revenue, profit and ability to continue investing in next generation networks.

“We believe Sprint and T-Mobile’s lack of capital investment in network infrastructure and spectrum over the past five years were the primary reasons for AT&T and Verizon’s market share gains during that period,” say analysts at BTIG Research.

Likewise, an analysis by New Street Research makes the same point. "Our analysis shows that neither Sprint nor TMUS have enough revenue to cover their fixed costs and it is highly unlikely that both will capture enough new revenue to do so," New Street Research analysts say. “There simply isn't enough revenue in the industry for four carriers to cover their fixed costs unless there is a significant shift in market share."

The analysts also say it is possible that a reduction in U.S. mobile service providers still could provide consumer benefits. In three markets--Netherlands, Greece, and Austria--the number of nationwide competitors dropped from four to three and average pricing in the markets declined 15 percent to 40 percent after the consolidation.

"If the companies merge now, while they are in relatively good shape, the merger will result in lower costs in the context of an improving business, which our data suggests should lead to investment and lower prices," New Street Research believes. On the other hand, "If the companies are only permitted to merge when one has faltered or failed, the combined company will be less well-positioned to compete against the two well-funded incumbents."

Perhaps U.S. regulators ultimately will reach the same conclusions as have French regulators.

New FCC Rules Help Independent Sprint and T-Mobile US, But Promise More Scrutiny of Any Sprint Effort to Acquire T-Mobile US

New rules adopted by the Federal Communications Commission are going to help Sprint and T-Mobile US in upcoming auctions of 600-MHz spectrum, but also will make it more difficult for Sprint to acquire T-Mobile US.

At its May 15, 2014 meeting, the FCC voted to restrict the amount of spectrum Verizon Communications and AT&T will be able to buy in the 2015 auction of spectrum in the 600-MHz band that formerly was used for TV broadcasting.

Assuming 85 MHz to 100 MHz eventually is freed up for reallocation, no more than 30 MHz might be reserved for smaller bidders, including Sprint and T-Mobile US.

On the other hand, the Commission also adopted rules that will make it harder for Sprint to acquire T-Mobile US.

The Commission changed its “spectrum screen” rules used to evaluate mergers and acquisitions in the U.S. mobile business, with the biggest impact on Sprint.

The FCC has indicated it will add about 101 megahertz of Clearwire spectrum to Sprint’s total spectrum holdings, for purposes of determining Sprint’s spectrum position in specific markets.

In some cases, that will trigger a review in which higher acquisition or merger scrutiny occurs, because Sprint will have 33 percent or more of the available mobile broadband spectrum in some markets.

On the other hand, the Commission also now makes a distinction between “lower band” (below 1 GHZ) spectrum and “higher band” spectrum (above 1 GHZ) ownership when evaluating potential mobile mergers or acquisitions.

Potential deals by firms with more than a third of total spectrum in the lower bands (AT&T and Verizon, primarily) will face higher merger or acquisition scrutiny.

But Sprint and T-Mobile US, after the 600-MHz auctions, might also  find themselves with combined lower-frequency holdings that trigger more scrutiny, in some markets.

On the other hand, in the future, if Dish Network were to try to acquire T-Mobile US, Dish would likely benefit, since Dish owns no spectrum in the lower frequencies, and even with T-Mobile US assets would be unlikely to trigger the more-intense regulatory review.

The spectrum screen is the way the Federal Communications Commission accounts for existing spectrum market share when creating bidding rules. Up to this point, much former Clearwire spectrum has not been counted against Sprint’s total spectrum holdings.

The new screen would mean Sprint exceeds a threshold of about a third of all spectrum in specific markets. That means Sprint would face new and higher scrutiny if it were to try and acquire T-Mobile US, especially after a successful 600-MHz auction.

“If a proposed transaction would result in a wireless provider holding approximately one third or more of available spectrum licenses in a given market, that transaction will continue to trigger a more detailed, case-by-case competitive analysis by the Commission,” the FCC said.

That rule change does not affect Sprint’s ability to bid on the set-aside 600-MHz spectrum, though.

AT&T Bid for DirecTV Really Isn't Puzzling

AT&T’s potential deal to acquire DirecTV will strike many as puzzling, given the deal’s inability to directly affect either AT&T’s mobile business, its international profile or fixed network business.

To some extent, the potential bid has been triggered by the Comcast bid to buy Time Warner Cable, a deal that would vault Comcast clearly into leadership of the U.S. high speed access business, though keeping its overall video subscriber market share below a 30-percent level that draws regulatory scrutiny.

When a key competitor in a supplier’s core market makes a move that promises to make it stronger and bigger, rivals typically have to respond.

To be sure, AT&T might well have preferred an opportunity to expand internationally. But deals large enough to make a difference, available at reasonable cost and relatively likely to win regulatory approval arguably did not exist.

source: National Broadband Plan

And a new threat in its core market likely also affected strategic thinking. As difficult as “broadband” and “video” have been for U.S. telcos, in terms of capital investment intensity and financial return, it now is clear that the future of fixed networks is bound with high speed access and video entertainment.

And in that sense, AT&T has to take seriously a jump in market share for high speed access, by Comcast, to 40 percent of the U.S. market, making Comcast the undisputed market leader.

That has strategic implications for all other major competing service providers.

To the extent that fixed networks have a clear value and rationale, it is as suppliers of the highest-bandwidth platform, delivering connectivity at the lowest cost of any platform, on a cost-per-bit basis.

Source: UBS

In that regard, it is high speed access itself which becomes the foundation service, but video entertainment has emerged as the lead application for such a network, beyond Internet access.

Perhaps not far behind is the value of the fixed network as a means for offloading traffic from a mobile network, the most-important indirect driver of value for the fixed network.

So it is not so much Comcast’s gain in video subscriber share that are most important, from AT&T’s perspective. It is the immediate market share lead in high speed access which is most important.

What is very clear is that, with a few exceptions (Verizon FiOS and Google Fiber, plus a few independent ISPs), cable-provided high speed access operates faster than telco high speed access. Cable TV suppliers also are winning the battle in terms of net new high speed additions as well.

Some might argue that acquiring DirecTV does very little to help AT&T extend its potential high speed access footprint. That is true.

But there are other important elements. DirecTV would supply high-margin revenue and cash flow that AT&T can use to upgrade its fixed networks for faster speeds and video services.

And there are few acquisitions AT&T actually can make in the U.S. market in its core triple play and quadruple play markets. Regulators already rejected AT&T’s effort to buy T-Mobile US, as that was deemed to reduce mobile competition too much.

And AT&T has, since 2006, not been in the market to expand its overall fixed network footprint for several reasons. Higher returns from mobile services are a primary reason. But market share issues exist.

source: http://www.leichtmanresearch.com/press/031714release.html

AT&T’s fixed network market share (looking only at the telephone industry), measuring either by subscribers or revenue, is the highest of any telco, reaching more than 40 percent share of voice or high speed access connections.

AT&T’s fixed network passes about 50 million U.S. homes, or about 42 percent of total U.S. homes.

AT&T holds about 47 percent of “telco” high speed market share, for example, though only about 20 percent of total U.S. ISP high speed access accounts.

The point is that, within the U.S. telephone industry, AT&T already arguably has reached a size where any further acquisitions would be challenged on competitive grounds.

http://www.tefficient.com/Blog-State-of-industry/

The upshot is that AT&T cannot easily make domestic acquisitions in the fixed network or mobile realms. Buying DirecTV, though, changes only AT&T’s small video service market share.

In 2013, for example, AT&T had only about six percent share of the linear video subscription business. DirecTV had about 21 percent share. So a combined entity would have only about 27 percent market share.

The point is that AT&T would face far fewer regulatory opposition by making a DirecTV acquisition, and almost no chance of approval were AT&T to propose buying additional mobile or fixed network market share.

The other issue is that AT&T (originally SBC) has grown primarily through acquisition, not organic growth.

AT&T bought Pacific Telesis for $16.6 billion in 1997, Ameritech for $73.2 billion in 1999, AT&T for $16.1 billion in 2005 and BellSouth for $85.2 billion in 2006. Those deals primarily gres its fixed network business.

AT&T Mobility similarly was built on acquisitions. In 2000 BellSouth Mobility and SBC merged to form Cingular. In 2004 AT&T Wireless was bought. IN 2006 AT&T Mobility acquired the former BellSouth interest in Cingular.

AT&T Mobility also acquired Dobson in 2008 and and Centennial in 2009, as well as Leap in 2014, with the failed bid for T-Mobile US in 2011.

A DirecTV acquisition is one of the few deals of any magnitude that AT&T can make, with hopes of winning approval.

The bid might seem puzzling. It really isn’t.

Driver Licenses are Key Feature Consumers Desire for Mobile Wallets

It is hard to say whether lack of familiarity, convenience. security, habits, cost or other “perceived value” issues are the key barriers to wider use of mobile wallets by consumers.

It might be simple enough to argue that consumers still do not understand what a mobile wallet is. Even for consumers who understand the concept, the practical use of a mobile wallet might yet represent major inconvenience, given the fragmentation of suppliers and retail partners that means no consumers can be sure where they can use their mobile wallets.

All that was to be expected. Products such as tablets can reach significant penetration rather quickly because the rest of the infrastructure, including widespread Wi-Fi, apps, end user behavior, business models, quality broadband (at least for purposes of supporting video apps, a key tablet app) and even familiarity with the touch interface are established.

Looking only at near field communications, most of the infrastructure has to be created, from handsets to apps to networks to retailer adoption and terminal upgrades or replacement. Other ways of handling communications between mobile payment apps and devices with retailer terminals can be used.

But illustrates the fragmentation problem. Not only are there numerous suppliers, but rival technology approaches and retailer networks are at an early stage.

For that reason, it might take as much as a decade or more before there is significant penetration, even after consumers start to see real value. That pattern is not unusual.

Even a decade after banks introduced the capability, only about 30 percent of bank customers 65 or older used automated teller machine cards, even if 70 percent of users younger than that adopted the habit of using ATM cards.

source: website optimization

To be sure, though some studies suggest that at least half of smartphone owners are familiar with the concept of mobile wallets, it is possible awareness is less than that. Also, in addition to fragmentation and therefore inconvenience, the value proposition is therefore limited.

For example, some argue that consumers want more than just the ability to pay for things using their mobile wallets.

Of 500 consumers surveyed in a TSYS mobile wallet survey, the top three ranking contents of today’s physical wallet were the driver’s license, payments cards, and insurance cards, in that order.

Of those surveyed by TSYS, 55 percent said they would like their driver’s license available as part of their mobile wallet service. Obviously, there are institutional barriers to that one particular desire.

So in order to fully make the switch and ditch the physical wallet, these essential components need to be added to the mobile wallet. In fact, 47 percent of consumers surveyed said that they would use mobile wallets more if they contained everything in their physical wallet.

The point is simply that mobile wallets are going to take some time to reach mass adoption levels.

Real-Time Video Entertainment Drives 63% of Fixed Network, 40% of Mobile Internet Access Bandwidth Consumption

It is a truism in the high speed access business that today’s “heavy users” are tomorrow’s “typical users.” And nothing will provide more confirmation of that theory than future consumer behavior, if and when the same content now available from linear video services shifts to Internet delivery.

Already, real-time entertainment is responsible for over 63 percent of downstream fixed network bytes during peak usage periods.

During peak period, real-time entertainment traffic also accounts for over 40 percent of the downstream bytes on North American mobile networks as well.

In a future market where significant amounts of former linear video viewing are shifting to over the top Internet delivery, the amount of bandwidth consumed by even “typical” consumers will increase by orders of magnitude.

Consumers who do not buy linear video services consume roughly an order of magnitude more data than consumers who rely on linear video services for most of their video consumption, the data suggests.

“Cord cutters” are U.S. ISP customers in the top 15th percentile of streaming audio and video usage. And while it is impossible to ascertain directly, Sandvine assumes those consumers are using streaming as a primary form of entertainment.

That suggests a high likelihood those consumers either do not buy traditional linear video entertainment services, or have access to such services but do not find them as compelling as over the top alternatives such as Netflix, Amazon Prime or Hulu.

“Typical subscribers” in the 15th to 85th percentile of data consumption likely are streaming on a regular basis, Sandvine says, and arguably represent “most” U.S. consumers in terms of behavior.

In other words, these days most consumers stream some amount of video or audio.

“Non-Streamers” represent the bottom 15th percentile of users who stream less than 100 MB of audio or video each month.

Those statistics have direct bearing on future market trends, when it will be possible for consumers to stream much of the content they otherwise would watch as part of a traditional linear video subscription.

The implication is that demand for Internet access bandwidth will skyrocket, even as buying of linear video services declines.

Assuming 1.5GB of data for each hour viewed, and assuming relatively equal high definition and standard definition content viewing, subscribers with “cord cutting behavior” could be consuming on average roughly 100 hours of video each month, or 25 hours a week or roughly 3.6 hours a day.

The top 15th percentile of video users actually consume the majority of monthly network traffic, while the bottom 15th percentile of users consume only 0.5 percent of data.

Again, that suggests the scale of future demand for Internet access data demand. If and when today’s linear video content is widely available over the top, the typical consumer will have behavior very similar to current behaviors of the heaviest users, at a minimum.

For the first half of  2014, mean fixed network (“average”) usage was 51.4 GB, a slight sequential increase from the 44.5 GB seen in in the second half 2013 report.

Over the same period, median fixed network (half of respondents use more, half use less) monthly usage also saw a small sequential increase moving from 17.6 GB to 19.4 GB.

But many ISPs predict 30 percent to 40 percent annual growth rates for aggregate demand, in 2014.

	“Cord Cutter”	Typical Subscriber	“Non-Streamer”
Mean Monthly Usage	213 GB	29 GB	4.5 GB
Mean Real-Time Entertainment Usage	153 GB	13 GB	40 MB
Streaming Share	72%	45%	1%
Average Hours of Streaming	100	9	>1
Share of Total Traffic	53.9%	45.7%	0.5%

source: Sandvine

High Speed Access Strategy Key for Telcos as Video Shifts to Over the Top Mechanisms

Many observers believe that, in the future, the lead revenue generator for U.S. cable TV companies will in fact be high speed access, not video entertainment.

Whether that is the case for telcos is harder to predict, though most would argue high speed access likewise will be foundational for fixed network telcos.

But the latest data from the Sandvine first half 2014 Global Internet Phenomena Report show the implications of a future shift to significant over the top, Internet-delivered video content of the sort people typically have purchased as part of their linear video entertainment services.

For starters, U.S. subscribers with “cord cutter” behavior consume 11 times--more than an order of magnitude-- streaming content and over seven times as much total data as a “typical” subscriber, Sandvine says.

Real-time entertainment is responsible for over 63 percent of downstream fixed network bytes during peak usage periods.

During peak period, real-time entertainment traffic also accounts for over 40 percent of the downstream bytes on North American mobile networks as well.

And all of that is happening even before most of the content provided by linear video subscriptions has been made widely available for over the top Internet-based viewing.

If U.S. cable TV operators continue to lose market share, in part because of competition from satellite and telco TV providers, but more significantly long term because demand for traditional linear video subscriptions erodes, and if consumption of new products shifts to Internet delivery, then high speed access revenue potential grows.

But that shift also suggest the exposure telcos face on the fixed network front as fixed Internet access networks become primary means of watching video content, including real-time events and content, not just pre-recorded or archive material.

The big issue is how much capability is required for telcos to remain competitive in the high speed access market, under conditions when some would argue cable TV operators and some ISPs, are better placed to upgrade efficiently.

Cable operators and Google Fiber already are taking most of the net new additions in the high speed access market, with the possible exception of Verizon, where it provides FiOS Internet services.

But Verizon already has halted further FiOS deployments, in large part because the business model is questionable. AT&T recently has decided to invest more heavily in its high speed access networks, with spot deployments featuring speeds as high as 1 Gbps.

Cable operators and some independent ISPs might well have an edge over the telcos in terms of business model, and might be able to justify significant investments where telco planners might struggle to justify capital investment.

And, to be sure, “raw speed” might not be the key business model issue to be faced. Instead, it is other matters such as the fundamental value-price relationship, charging by usage, and consumer ability and willingness to pay, that are more crucial than actual potential top speeds, even if marketing platforms are affected directly.

Indeed, one might argue telcos would be better off to craft retail offers that are good enough to support streaming video access and mobile Internet traffic offload, at reasonable prices, rather than compete head to head with the cable companies, Google Fiber and others, for headline speed.

But that will require a sober assessment of perceived value. If others provider gigabit access for $70 to $80 a month, and if telcos match those prices, as AT&T is doing, then prices for slower-speed packages will have to adjust lower as well.

Where a 20-Mbps or 40-Mbps package might cost $40 to $50 a month, in markets where gigabit access is available for $80, 50 Mbps service might have to be priced at just about $4 (assuming the cost of a megabyte of speed “costs” about eight cents) to $8 a month.

That would represent an order of magnitude less revenue per subscriber, per month, unless pricing were somehow shifted in such a way that consumers were comfortable with a “usage” billing model, and stopped evaluating offers based on headline speed.

But there are ways to do so. Mobile Internet access already generally has moved to a consumption-driven model, not a “peak speed” model, with little subscriber resistance.

And that is a likely key component of future retail packaging by telcos: de-emphasis on headline speed and a concurrent shift to volume of consumption. That largely is the shift already made in the mobile business.

In other words,  “raw speed” improvements might not be as crucial for telcos as the cost and packaging of Internet access plans. In other words, telcos might not generally be able to compete with cable headline speeds.

Instead, telcos will likely have to emphasize “good enough” speeds supporting all key end user apps, at prices that reflect usage, which compare favorably with alternative offers.

In that regard, the most destabilizing offer is the unlimited usage, $70 a month, symmetrical gigabit offer fielded by Google Fiber and some others.

The other alternative is simply to avoid selling lower-speed offers, shifting to a simple 50-Mbps, 100-Mbps, 300-Mbps or 1 Gbps offer, as local market competition requires, with no slower speed options, as is the case in the mobile Internet access market.

de-emphasize their competition in consumer high speed access, instead operating access networks suitable for offloading mobile traffic, and instead shifting capital to mobile and other revenue segments with higher revenue and growth potential.