Which Firms Will Lead the Next Generation of Video Aggregation?

As surely as night follows day, one already can predict that as consumer demand for unbundled, on-demand access to TV series content is satisfied, the fragmentation of desired content on many different distribution services will lead to dissatisfaction with the unbundled approach, leading suppliers and distributors to try and recreate the linear video subscription bundle.

As leading over the top video distributors work to create unique,  “must see” video series that create product differentiation, many consumers will find they are buying multiple subscriptions.

As always, that is going to create demand for a bundled approach that allows convenient access to multiple services. That is why numerous suppliers are creating new devices that can aggregate video from multiple sources and display that content directly on a TV.

That creates a “logical” or “virtual” bundle rather than the formal bundle now sold as “cable TV.” Only this time, the distributors are Amazon, Google, Apple and others.

That also is why some linear video distributors already have moved to add Netflix access to standard TV decoders.

In principle, the new aggregators (Apple TV, Amazon Fire and Google Chromecast) threaten to rival or displace traditional aggregators, over time, allowing consumers to create their own bundles.

Though there is risk for traditional programmers as well--who might well see far smaller audiences--the new aggregators should make it easier for consumers to buy and then watch content from multiple independent sources.

The habit of getting and watching over the top television already is well established.

Some 77 percent  of U.S. adults say they regularly watch television shows using either cable TV (55 percent) or satellite TV (23 percent), while 43 percent view streamed video. About  67 percent of Millennials report they watch streamed video, according to Harris Interactive.

About 38 percent of respondents say they've subscribed to premium cable TV channels in order to watch specific shows, while 24 percent have subscribed to one or more streaming services for the same reason, Harris Interactive reports.

Among those who regularly watch television shows using streaming, 74 percent use a computer to do so, while 55 percent use a television (attached to a set-top box, a game system or a television with integrated online capabilities).

About 37 percent watch on tablets, including 63 percent of tablet owners. Some 30 percent watch on smartphones, including 42 percent of smartphone owners.

It isn’t clear how those preferences might change, though, as more content traditionally available only from a bundled linear video subscription gets “unbundled,” albeit slowly.

Looking specifically at streaming TV's likely "core" constituents, half of those who list streaming among their top venues for television shows say they've subscribed to streaming services for access to specific shows, according to Harris Interactive.

In the near term, that means more fragmentation of the video subscription business, as consumers buy discrete services to get access to a couple of lead unique series (“House of Cards” or “Orange is the New Black,” for example.

Also, there is new potential for creation of “premium” services. About 40 percent of respondents say they would be willing to pay more for a service that allowed them to stream current shows ad-free.

About 37 percent of respondents report they  would pay more for a streaming service that allowed them to temporarily download TV episodes, for when they're away from an Internet connection.

As you would guess, streamed video gets viewed on a variety of screens. About 85 percent of respondents report they most often watch TV on an actual TV (live feed, recorded or on demand). That is down from about 89 percent in 2012.

Streaming use, meanwhile, has grown from 20 percent of respondents in 2012 to 23 percent in 2014. Among Millennials, 47 percent of respondents say they use alternate screens, while use of TVs has dropped from 77b percent to 68 percent.

About 23 percent of respodnents say they're watching more online or streaming television in 2014 now than they were a year ago.

Some 37 percent say their online or streaming viewership is unchanged over the last 12 months while seven percent say they watch streamed content less than a year ago.

Half of respondents say they expect no change in viewing habits over the next year. Some 18 percent say they think they will watch more streaming or online video in the next 12 months.

Some four percent of respondents think they will watch less online or streamed video.

The Harris Poll included 2,300 U.S. adults surveyed online between April 16 and 21, 2014.

Does Product Reinvention in Telecom Work, Long Term?

Frontier Communications Corporation is launching a text messaging feature for business voice accounts that allows  business fixed network numbers to support text messaging. That is a primary example of one way service providers try to prop up the fortunes of a declining product.

That itself often is one part of a two-pronged effort to maintain revenue growth. Adding value to an existing product hopefully enhances a particular product enough to slow or arrest rates of decline.

The other challenge is to create new lines of  business and sources of revenue to displace declining lines of business.

Some are more sanguine about ways to change the value of voice services than are others.

When confronted with a sustained drop in average revenue per minute of long distance usage, AT&T essentially decided to harvest the revenue stream rather than reinvent the product, turning its attention instead to measures that would create new lines of business.

In 1991 AT&T bought NCR in an effort to enter the computing business. NCR eventually was spun out as a separate company.

In 1993 AT&T entered the mobile business by buying McCaw Cellular.

AT&T bought the largest U.S. cable TV company in 1998, and MediaOne, in 2000, becoming the largest provider of cable TV services in the U.S. market, only to dismantle the strategy and sell those assets in 2001.

In 2005, AT&T was acquired by SBC Corp. The point is that, in essence, AT&T never was able to create new lines of business big enough to displace the older revenue sources.

Still, “harvesting” legacy revenues while creating new lines of business is the fundamental strategy for any service provider facing challenges in its original lines of business. History also suggests the task is fraught with uncertainty.

Arguably, most such efforts essentially fail, in the sense that the firms simply are acquired by other firms, and cease to exist.

But there is a difference between transforming a whole industry, or a whole firm, and changing key revenue sources and product lines. Whole industries and firms can manage big transitions more easily than they can manage to reverse the fortunes of a declining and key line of business.

Frontier Communications hopes, at the very least, to slow the rate of decline of its business voice lines.

So far, it has not found any solution for arresting the decline of the consumer voice business, even if bundling arguably has proven the most-successful tactic so far, in the consumer business.

Frontier Texting and high-definition voice are both examples of efforts to reinvigorate voice services by “adding more value,” enhancing the core functionality in some customer-significant way.

Whether such techniques can do much more than slow the rate of decline is the issue. At the moment, there is virtually no evidence that this sort of product revamping actually can reverse a product line’s decline, though one might argue such measures slow rates of decline.

That is worth doing, so long as other growth initiatives also are underway.

What the industry has yet to prove, though,  is that it actually can enhance legacy products enough to reverse losses.

In other words, there is a strategy challenge: should capital be invested in revamping legacy products, and if so, how much? The alternative is to harvest revenues, deploying available capital into creating new lines of business.

Though industries sometimes can reinvent themselves, the issue is whether specific products can be reinvented, and if so, how often that actually happens. At a high level, the global telecom business has managed to replace declining revenue sources with new sources.

Mobile revenues have supplanted long distance revenues, while video and high speed access revenues have replaced voice revenues. Some firms have shifted from a reliance on consumer customers to business customers.

But that really does not address the specific challenge of adding enough value to a declining product to stem losses long term, or possibly reignite growth.

Backhaul Increasingly is a Strategic Matter for ISPs

Backhaul sometimes is a strategic advantage or key impediment for one or more service providers, as well as an important driver of operating cost. Backhaul often accounts for as much as 25 percent of total operating cost for a mobile service provider, for example.

As transmission networks become more dense, using small cell and carrier Wi-Fi architectures, for example, backhaul will be a major issue, mostly because the cost of backhaul has to scale to much-lower levels than has been the case for mobile and enterprise backhaul prices.

Where a traditional enterprise backhaul had substantial revenue generated by the link, a carrier Wi-Fi or small cell might have close to zero incremental revenue generated by the link.

The cost of backhaul also has been a key impediment for ISPs seeking to provide higher access speeds in regions distant from an Internet access point.

When the “Broadband Technology Opportunities Program” was launched in 2008 to promote high speed access advances in rural areas, you might have predicted that most of the money would be spent to create or augment access facilities.

Instead, middle mile backhaul facilities received significant funding. The reason was simple enough: in many rural areas, it is the backhaul to Internet points of presence that is the key impediment to faster end user Internet access.

You might argue that is the case in many parts of South Asia and Africa as well. There is little point in creating new access networks where backhaul is insufficient to support those access assets and potential customers.

Wi-Fi also now is an essential part of the backhaul strategy for most mobile service providers, allowing carriers to offload half or more of total Internet access traffic from the mobile network to the fixed network.

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

In similar fashion, deployment of mobile cell capacity likewise drives growth of demand for backhaul. And though much attention has been focused on the impact of new small cells and carrier Wi-Fi, standard macrocell deployments can be important as well.

“Over the past several years of experience, a fairly strong correlation between domestic carriers, aggregate CapEx and our level of organic growth in American Tower” can be seen, said Jim Taiclet, American Tower Corp. CEO. “For example, from 2010 to 2012, we saw aggregate spend on wireless CapEx of about $25 billion to $30 billion supporting our organic core growth rates in the range of seven percent to eight percent during those years.”

In 2013, when U.S. mobile service provider capital investment grew to nearly $35 billion a year, American Tower has seen revenue growth of nine percent.

Backhaul bandwidth demand scales in other ways beyond the number of tower sites and radios, though.

Between 2012 and 2013, average daily U.S. smartphone data consumption grew by almost 40 percent, while connected tablet usage increased by over 50 percent. And then there is mobile video, consumption of which might grow an order of magnitude between 2013 and 2018, according to Cisco projections.

Small cell deployments will have an impact, but American Tower presently generates 95 percent of its revenue from macrocell sites.

And one big question is how much incremental demand Sprint might drive, as it activates new 2.5 GHz capacity.

As an example, said Taiclet, Sprint would have to add 30,000 to 40,000 transmission locations to have 2.5 GHz coverage match the existing 1.9 GHz network footprint. That could possibly double the number of tower locations operated by Sprint.

All of those examples--Wi-Fi offload, small cell backhaul, existence of backhaul facilities in emerging markets, additional 2.5-GHz cell sites and BTOP funding--illustrate the roles backhaul often plays as a strategic matter for mobile service providers, not merely a tactical necessity.

Enventis Sale Illustrates Rural Telco Dilemma

Another acquisition by regional telco Consolidated Communications, which now is acquiring Enventis Corporation, formerly HickoryTech, illustrates the pattern of “growth by acquisition” for Consolidated Communications and other regional telcos that formerly primarily earned their revenues from telecom services, mostly voice, sold to rural consumers.

In recent years, leading regional telcos that formerly could have rightly been called “rural telcos” have grown not just by acquiring assets, but by changing the nature of their businesses, becoming largely suppliers of services sold to business customers.

In most cases, such transformations have been accomplished through acquisitions, especially of service provider operations that historically have focused on business customers.

Almost by definition, that strategy cannot work for all rural telcos. An acquisition strategy requires access to capital, plus geographical proximity, management expertise and reasonable existing scale.

Windstream and Frontier Communications, for example,  are among larger regional service providers whose strategies are based on growth from business customers.

After the acquisition, the larger company (Consolidated  plus Enventis) will have $785 million in revenue and $332 million in adjusted EBITDA for the 12 months ending March 31, 2014.

Enventis currently serves approximately 39,000 access lines, has 21,000 high-speed internet customers, 12,000 digital TV customers and 90 fiber-to-the tower sites.

As has been the case for Windstream Communications and Frontier Communications, business revenues have proven to be crucial for Enventis, and increasingly also are the story for Consolidated Communications.

Enventis created a regional fiber network spanning 4,200 route miles that enables facilities-based business customer operations in Minnesota, Iowa, North Dakota, South Dakota and Wisconsin.

Enventis says it earns 80 percent of revenues from its business and broadband services segments.  That is the good news.

The bad news is that Enventis is losing voice lines and revenue, as well as associated equipment revenue, about as fast as it is gaining business revenues, Internet access and video services revenue.

That, as much as anything, illustrates the fundamental problem many fixed network service providers are facing.

Enventis arguably had been doing a good job creating new revenues to replace lost legacy revenues.

Even so, Enventis is running to stay in place.  

In 2013, access line revenue dropped 12 percent, access revenue declined seven percent, broadband revenue was up five percent and other revenue dipped seven percent. Total telecom segment revenue declined four percent.

Offsetting those losses, the fiber segment grew revenue 11 percent in 2013, while equipment revenues declined one percent (revenue was down 22 percent in the first quarter of 2014).

Enventis reported first quarter of 2014 net income of $2.1 million, an increase of 27 percent year over year.

Earnings before interest, taxes, depreciation and amortization totaled $12.1 million in the first quarter, an increase of 11 percent.

Revenue totaled $44.2 million and was down nine percent from first quarter 2013, primarily due to lower equipment sales, which were down 35 percent year over year.

Services revenue, which accounts for 77 percent of the company’s revenue, increased two percent year over year.

Revenues from “Fiber and Data” was $17.7 million, up six percent year over year. Operating income was $2.9 million, up 80 percent year over year, with net income amounting to $1.7 million, an increase of 81 percent year over year.

In the “Equipment Segment,”  Enventis revenue totaled $12.2 million, a 29 percent decrease year over year. Support services related to equipment sales was $2.2 million, a 19 percent increase from first quarter 2013.

Operating income totaled $486,000, a 41 percent decrease year over year. Net income totaled $287,000, a 41 percent decrease compared to the first quarter 2013.

In the “Telecom Segment,”  Enventis earned $14.4 million, down two percent year over year. Broadband service revenue grew five percent, offsetting part of the voice revenue decline.

Net revenue was $1.9 million.

The longer term issue might have been whether growth could be sustained.

Enventis predicted total 2014 revenue (gross, net, cash flow) would be about the same as 2013 results.

In 2013, Enventis revenue was $189.2 million, up three percent. Operating income in 2013 was $17.6 million, down nine percent.

Net income in 2013 was $7.7 million, down $566,000 from 2012.

Prior to the acquisition, Enventis had forecasted 2014 revenue between $189 million and $199 million, with the main trend being growth of business and broadband revenue and declines in voice revenue. In other words, revenue growth was most likely going to amount to $5 million, on an annual basis.

Net income was expected to be in a range of $6.4 million to $8.4 million, possibly less than earned in 2013.

EBITDA in 2014 was expected to be in a range of $47 million to $49.5 million. In 2013, EBITDA was $47 million.

The big story, however, is that new revenues would not offset all the legacy services losses.

Enventis expected flat to slightly-higher 2014 gross revenue, flat net income and EBITDA. So despite the robust new revenue growth, Enventis was on track to see revenues, profits and cash flow stall.

And that, as much as anything, illustrates the problems even successful rural telcos face. Despite healthy “new services” revenue growth, service providers might be losing traditional revenues as fast, or faster, than they can grow new revenues.

"No Business Case" for Voice over LTE, At Least, Not Yet

“VoLTE rollouts are taking off, but “There is no business case,” at least yet, for voice over Long Term Evolution, says Stéphane Téral,Infonetics Research principal analyst.

To be sure, that could change over time, and some might argue that high-definition voice services already operating on over 100 global GSM networks do have a business case, mainly related to boosting the value of carrier voice services, and thereby stemming churn.

Some might argue the effort to add value as a means of protecting voice revenue streams is an issue in the over-the-top voice app market as well.

“Japan-based Line has topped Skype as the market leader, capturing roughly a quarter of worldwide active users in 2013,” says Diane Myers, Infonetics Research principal analyst for VoIP, UC, and IMS.

In a manner similar to high-definition voice, Line has added new unique features, including stickers and games that change the product.  

Myers also notes that “most providers in this space are making very little money per user, an unsustainable business model for many independent companies”

That said, revenue for over-the-top mobile voice apps will experience 12 percent compound annual growth rates between 2013 and 2018.

The inability to create a sustainable revenue model therefore is an issue both for over-the-top and carrier voice services, one might argue.

To be sure, scale is an issue. There were eight networks and about 12 million VoLTE subscribers worldwide in 2013, mostly in South Korea. But voice is a scale business. A feature has value when it can be used on both ends of a connection, not just one end. VoLTE therefore has to become ubiquitous before its advantages will be consistently experienced.

By the end of 2014, Infonetics expects an additional 30 commercial VoLTE networks to launch and VoLTE subscribers to increase to 51 million.

In 2013, there were 1.5 billion mobile VoIP (mVoIP) subscribers worldwide, the bulk consisting of OTT applications.

The majority of OTT mVoIP application usage continues to occur in the Asia Pacific region, particularly in China, South Korea, Japan, India, and Indonesia.

Observers will disagree about what voice strategy makes most sense for carriers or app providers. “Add more value” is one logical approach. “Harvest” is another rational approach.

So far, it isn’t clear which strategy makes most sense, for specific service providers in specific markets.

T-Mobile US Zero Rates Speed Tests

T-Mobile US does not count bits consumed as part of speed tests against a user data usage allowance. Of course, some network neutrality supporters will--as they have with other pro-consumer issues, stretch the concept to the point of intellectual incoherence and silliness.

Worst of all, the intellectual incoherence leads to outcomes that are not consumer friendly, not conducive to innovation, and not enabling differentiation and creativity.

“Network neutrality” has been stretched unnaturally to argue against zero-rating applications usage, something Facebook and other app providers think has merit as a way of providing value to users of mobile Internet access in undeveloped regions. The charge is that doing so does not “treat all bits the same.”

Those on the other side of the net neutrality debate have argued against the concept precisely because it does prevent innovation, creativity and new ways of providing end user value.

In large part, such anti-consumer outcomes result because the language and concepts used to support network neutrality are, as a judge might rule in the case of a statute that is fuzzy in its language or conception, “overly broad.”

In trying to sweep many different types of problems into a bumper sticker slogan (“treat all bits the same”), we wind up in the classic “when all you have is a hammer, every problem looks like a nail” situation.

There are a couple key errors made by supporters of net neutrality that lead to anti-consumer, anti-competitive outcomes, even when net neutrality is supported precisely because it is supposed to be pro-competitive.

Supporters conflate two different principles--that no lawful app can be blocked by an Internet service provider, and that no lawful app can have quality of service measures applied to it.

Lawful apps should not be blocked by a government or an ISP, of course. But even there, the rule is not always clear cut. Should a non-profit group or business be able to block lawful apps? Should a parent? Should a school be able to block even some lawful apps? How about phishing emails, text or social emails?

You get the point: there are some areas where exceptions even to the “no blocking” rule might be helpful, desirable and wanted by consumers and Internet end users.

But “content blocking” can be dealt with--entirely--without invoking a different principle at the heart of network neutrality.

Net neutrality supporters argue against the lawfulness of content delivery networks. CDNs routinely are used by major app providers--paying for services or spending money to create their own CDN features--to speed up the performance and quality of their apps.

Does that give an advantage to firms that can afford to buy CDN service or build their own CDN networks? Of course. Should that be lawful? Net neutrality supporters say such quality of service mechanisms should, in fact, be unlawful.

Unfortunately, the bumper sticker slogan used to argue in favor of net neutrality contains the mental straightjacket that makes the concept increasingly--and obviously--unworkable, anti-competitive anti-consumer.

By simplistically arguing that “all bits should be treated the same,” net neutrality step over from a prescriptive remedy (enforcing a remedy to an existing problem) to a proscriptive (to make illegal something that might or could happen)

And therein lies the problem.

By prohibiting quality of service mechanisms, net neutrality supporters also prevent further development of innovative, consumer-friendly and user-desired features.

Zero-rating of some apps clearly increases use of popular apps in markets where the cost of Internet access is high. But “treating all bits the same” prevents zero rating, and increases the cost of using such apps for consumers who cannot afford to pay very much for access.

Exempting “speed test” data consumption, or even zero-rating delivery of content by Kindle users, provides clear end user value in the same way. People can use apps without incurring extra charges.

Amazon isn’t the only content company to bundle content with delivery. TV and radio broadcasters do the same. So do cable TV, satellite TV and telco TV providers. End users have “no incremental charge” access to content, or pay for a content service, that does not impose additional bandwidth charges.

The old adage that “nothing is free” applies here as well, in ways that promote use of the Internet, use of apps and access to content. Some entity decides it has a vested interest in subsidizing use of network bandwidth to encourage use of its product.

Consumers derive value as a result, and suppliers can innovate.

But “no blocking of lawful apps” is a principle that does not require a prohibition on innovation.

Users can enjoy “best effort access” to the Internet--the way consumers now use the Internet--without proscribing all other innovations that add value for consumers, app providers or access providers.

Quality of service can provide clear end user value when networks get congested. Some apps, especially video and voice, are highly susceptible to packet delay. When networks get congested, customers and end users might well prefer to apply QoS mechanisms to those apps.

Worse, the “treat every bit the same” actually prevents other forms of innovation, including zero rating of some apps, that provide clear end user and customer value.

That’s the problem with bumper sticker solutions to too many other problems that could be remedied by other means.

Protecting the Internet requires much more than simplistic slogans.

Mobile Now 66% of Total U.S. Internet Connections

Though it still makes sense, conceptually, to separate fixed network Internet access services from mobile Internet access services, mobile connections now vastly outnumber fixed connections.

Overall, mobile Internet connections represent about 66 percent of all Internet access connections. The distinction is important because blended averages of access speeds, including both fixed and mobile connections, can obscure the differences between platforms.

In June 2013, 15 percent of fixed connections (13.8 million connections) were slower than

3 Mbps in the downstream direction.

At the same time, 46 percent of mobile connections (83.7 million connections) were slower

than 3 Mbps in the downstream direction.

Some 70 percent of fixed accounts (66.3 million connections), more importantly, operated at 6 Mbps or faster in the downstream direction.

About 36 percent of mobile accounts (or 64.7 million connections) operated at 6 Mbps or faster in the downstream direction.

The divergence is even greater for access at speeds of 50 Mbps or 100 Mbps. No mobile connections operated at 25 Mbps or faster, while 22.2 million fixed connections operated at 25 Mbps or faster speeds.

In other words, about eight percent of fixed connections offered 25 Mbps or faster speeds, while  no mobile connections could do so.

Also, a negligible number of fixed wireless or satellite connections likewise were able to deliver speeds of 25 Mbps or higher. That basically is the long-term difference between fixed and mobile Internet access.

The fastest networks will always be fixed networks. Overall,  three-tenths of one percent of fixed connections operate at 100 Mbps or faster.

About 33 percent of fixed network connections are supplied by telco digital subscriber line, another eight percent by fiber to premises access, for a telco total of about 41 percent of fixed network connections, according to a report by the Federal Communications Commission.

Cable TV companies supply about 56 percent of fixed network connections.

Fixed wireless suppliers represent less than one percent of fixed network connections. Independent ISPs also supply less than one percent of fixed network accounts.

Satellite providers supply about two percent of “fixed” network connections.

The number of connections with downstream speeds of at least 10 Mbps increased by

118 percent over June 2012, to 103 million connections, including 58 million fixed connections

and 45 million mobile connections.

The number of mobile subscriptions with speeds over 200 kbps in at least one direction grew to 181 million, up 18 percent from June 2012.

Between June 2003 and June 2013, total business and residential fixed network connections grew from 23 million to 94 million, a compound annual growth rate of 15 percent per year.

Over the same ten-year period, residential fixed-location connections grew from 21 million

connections to 86 million connections, also at a compound annual growth rate of 15 percent per year.

There are some 94.2 million fixed Internet access connections in service, and 181.4 million mobile Internet connections.

In June 2013, there were 70 million fixed and 93 million mobile connections with download

speeds at or above 3 megabits per second (Mbps) and upload speeds at or above 768 kbps as

compared to 57 million fixed and 43 million mobile connections a year earlier.

source: FCC