Is Windstream REIT the Beginning of a Trend?

Windstream is spinning off its fiber and copper networks and other real estate into a new real estate investment trust, and then lease use of the assets to support its communications business.

Basically, creation of the REIT allows Windstream to deleverage.

Windstream expects to retire approximately $3.2 billion of debt as part of the transaction, resulting in the company deleveraging to 3.3 times “debt to adjusted operating income before depreciation and amortization” immediately at closing.

So the new speculation is whether other larger service providers, such as Comcast, AT&T or Verizon Communications, not to mention likely candidates Frontier Communications and CenturyLink, might also take such a route.

In part, the value comes from shifting leverage to the REIT operations, thus reducing leverage for the retail operating part of the business. Also, in part, the value comes from tax benefits that should lead to higher cash flow available to the non-REIT company that remains.

The tricky part is that the core network becomes something like a master limited partnership. Are executives comfortable with that arrangement?

Such moves to spin off network assets into separate REITs are not precisely the same as creating structurally separated “network” companies. Those sorts of proposals would turn the network into a wholesale supplier of connectivity to all who wished to pay the network company for services.

U.S. telcos and cable companies traditionally have been loathe to do so. A REIT presumably would have the ability to avoid wholesale obligations greater than would have been the case under the existing arrangements.

But there would be at least some uncertainty.

Still, any chance to significantly deleverage would be helpful to most service providers looking to boost cash flow and ability to invest in strategic growth opportunities, something Windstream touts as a key benefit of its REIT move.

By One Classic Test, U.S. Telecom Markets Remain Unstable

Most big markets eventually take a rather stable shape where a few firms at the top are difficult to dislodge.

Some call that the rule of three or four. Others think telecom markets could be stable, long term, with just three leading providers. The reasons are very simple.

In most cases, an industry structure becomes stable when three firms dominate a market, and when the market share pattern reaches a ratio of approximately 4:2:1.

A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest, according to the rule of three.

In other words, the market share of each contestant is half that of the next-largest provider, according to Bruce Henderson, founder of the Boston Consulting Group (BCG).

Those ratios also have been seen in a wide variety of industries tracked by the Marketing Science Institute and Profit Impact of Market Strategies (PIMS) database.

By those rules, most mobile markets, globally, are unstable. Using those ratios, the U.S. fixed network business also is unstable. So are some other related markets.

Many have noted the concentration of smartphone profits by just two suppliers--Apple and Samsung--for example.

A couple of important additional ratios seem to be important. Under certain conditions, competitors can reach a point where destabilizing the market is viewed as dangerous.

A ratio of 2:1 in market share between any two competitors seems to be the equilibrium point at which it is neither practical nor advantageous for either competitor to increase or decrease share, Henderson has argued.

That would seem to explain why marketing attacks in stable markets are not designed to upset market share, but only to hold existing share.

Any competitor with less than one quarter the share of the largest competitor cannot be an effective competitor. In a market where the largest provider has 30 percent share, that implies an attacker has to gain at least 7.5 percent share to remain viable.

There are some very-important strategic and tactical implications. Virtually any market that does not yet have the “rule of three” pattern and the 4:2:1 market share structure is going to be unstable, unless there are government-imposed restrictions on competition that allows the market structure to change.

But when markets are allowed to consolidate, growth is key. All competitors who survive must grow faster than the market average.

All except the two largest share competitors will be either losers and eventually eliminated or be marginal cash traps reporting profits periodically and reinvesting forever.

Anything less than 30 percent of the relevant market or at least half the share of the leader is a high risk position, long term.

Firm strategy also therefore is clear: cash out of any position quickly if the number-two market position cannot be gained, or aim to take the number-two spot.

Definition of the relevant market and its boundary barriers becomes a major strategy evaluation. In other words, knowing “who else is in our business?” is necessary before any firm can assess its market share position and challenges.  

Shifts in market share at equivalent prices for equivalent products depend upon the relative willingness of each competitor to invest at rates higher than the sum of market growth rates and the inflation rate. In other words, if markets are growing at two percent, and the inflation rate is two percent, than a leading contestant has to invest at rates greater than four percent annually.

Anyone who is not willing to do so loses share. If everyone is willing to do so, then prices and margins will be forced down by overcapacity until someone stops investing.

The faster the industry growth, the faster the shakeout occurs, Henderson has argued. There also is one rule that applies directly to the U.S. mobile market: near equality in share of the two market leaders tends to produce a shakeout of everyone else.

That is the case for Verizon Wireless and AT&T Mobility, and underpins the argument advanced by Sprint and T-Mobile US that they cannot prosper, long term, unless they merge.

The market leader controls the initiative. And though equity holders do not like the practice, cutting prices to maintain share is the “right” strategy. Any market-leading firm that chooses to maintain near-term operating profit while losing share, will not survive.

If the market leader, under attack, prices to hold share, there is no way to disrupt the market, unless the company with number-one share runs out of money to maintain market share, Henderson has argued.

One might argue about why such patterns are seen, but market share seems directly related, typically, both to cost and profitability. In other words, cost and profit margin are functions of market share.

Under most circumstances, enterprises that have achieved a high share of the markets they serve are considerably more profitable than their smaller-share rivals, according to the Marketing Science Institute and Profit Impact of Market Strategies (PIMS) database.

The ratio 4:2:1, representing market shares in telecom markets, is key. That pattern suggests the market is stable. At the moment, it is hard to identify too many telecom markets that fit the pattern well.

And tells you what you need to know about market disruption. It is possible, because markets are unstable.

Nashville to Get AT&T Gigabit Services

AT&T, which is evaluating 1-Gbps networks in as many as 21 metropolitan markets, has definitely decided to build a gigabit network in Nashville.



The AT&T "GigaPower" network will provide services offered over an all fiber network featuring symmetrical upload and download broadband speeds up to 1 Gigabit per second. 



It is likely AT&T already has concluded that at least some neighborhoods in those 21 metro areas will provide a positive business case for gigabit Internet access, and simply wants expedited permitting and other agreements from cities of the sort Google Fiber has pioneered. 



There are several important associated changes. AT&T historically has been a proponent of "fiber to neighborhood," rather than "fiber to home" for its next generation networks. AT&T now will be shifting to a "fiber to home" access architecture where gigabit services are offered. 



The other huge change is retail pricing and packaging. Few U.S. consumers had appetite for gigabit access when it cost $300 a month. But lots of consumers have concluded that a gigabit per second service costing $70 to $80 a month is attractive. 

Cambodia Government Wants to Nationalize Mobile Infrastructure

A new Ministry of Posts and Telecommunications draft law in Cambodia proposes to nationalize telecom infrastructure such as cabling networks and towers. 

If the draft law is approved, telecom companies will have to rely on government-controlled infrastructure providers, after first divesting their networks.

The law also apparently would require all operating companies to return their operating licenses as well. 

You can imagine what such a law, if approved by the National Assembly, is likely to do to the telecom business in Cambodia. 

U.S. Broadband Faster, More Available Than in Europe, Study Finds

On some measures, U.S. consumers have access to, and use, faster Internet access services, more than consumers in Europe, in large part because U.S. policies have encouraged investment, compared to European policies that historically have been more focused on wholesale access to encourage competition.

It also would be fair to note that most communities have access to at least two facilities-based providers, a fact that arguably has encouraged investment in upgraded facilities.

Google Fiber’s entry also has had a direct impact, encouraging other Internet service providers to drop their prices to $70 to $80 a month for gigabit access, and to invest in such facilities.

Some would argue Google Fiber’s decision not to allow wholesale access, and thus reap the benefits of capital and operating investments, is one example of how there are incentives to invest. Google Fiber cannot be compelled to sell wholesale access, especially at low rates, to other competitors.

A far greater percentage of U.S. households have access to Internet access at 25 Mbps or faster, the study argues.

On a national basis, 82 percent of U.S. consumers can buy access at 25 Mbps or faster, compared to 54 percent of Europeans.

In rural areas, 48 percent of U.S. rural consumers have access to 25 Mbps or faster services, compared to 12 percent in Europe, according to a study by Christopher Yoo, University of Pennsylvania law school professor.

The study also found that the United States had 23 percent fiber-to-premises coverage, compared to 12 percent in Europe.

The United States also has 86 percent coverage of Long-Term Evolution (4G LTE), compared to 27 percent LTE coverage in Europe.

U.S. download speeds during peak times (weekday evenings) averaged 15 Mbps, below the European average of 19 Mbps, however.

During peak hours, U.S. actual download speeds were 96 percent of what was advertised, compared to Europe, where consumers received only 74 percent of advertised download speeds.

U.S. consumer experience in the areas of latency and packet loss also was better than in Europe.

U.S. broadband “stand-alone” prices were cheaper than European broadband for all speed tiers below 12 Mbps.

U.S. broadband was more expensive for higher speed tiers. The caveat is that most U.S. consumers do not appear to pay “stand-alone” prices for fixed network broadband, typically buying bundles that in essence discount prices.

Consider that 97 percent of AT&T customers bundle their video subscription service with other AT&T services.  Cable providers have 75 percent or more of their subscribers on a bundle of video and broadband, AT&T notes.

Standard coverage is available in 99.5 percent of U.S. households and 99.4 percent  of European households. Standard fixed coverage is available in 95.8 percent of U.S. households and 95.5 percent of European households, the study found.

Mobile broadband coverage at 3G speeds also fall within quite similar ranges, covering

98.5 percent of U.S. households and 96.3 percent of European homes.

Yoo attributes a regulatory “light touch” for higher U.S. investment in broadband and expanded access to high-speed internet in the US compared to Europe.

The University of Pennsylvania Law School study also showed that Europe’s treatment of broadband as a public utility, which some net-neutrality advocates are pushing for in the US, has hindered internet access growth there.

The study notes that, in Europe, where telecom service revenues have fallen by more than 12 per cent since 2008, the financial return for investing in next-generation networks is less promising, since those facilities must be leased to competitors, allowing them to avoid building their own networks.

Those rules also reduce the “scarcity value” of new networks, though.

“The empirical evidence thus confirms that the United States is faring better than Europe in the broadband race and provides a strong endorsement of the regulatory approach taken so far by the US,” said the study, which was written by law professor Christopher Yoo.

The differences in regulatory regimes also contributed to $562 of broadband investment per household in the US versus $244 per household in Europe, where regulators treat broadband as a public utility and promote service-based competition where new players lease existing facilities at wholesale cost.

U.S. policy has emphasized facilities-based competition by firms that can build new facilities, and then reap any rewards, without enabling competitors.

U.S. policy also shows the importance of competition between cable TV and telcos. Although many advocates regard telco fiber to the home as the primary platform for faster networks, the data suggest otherwise.

In Europe, DOCSIS 3 (39 percent coverage as of 2012) and VDSL (25 percent) both contribute more to fast network coverage than does FTTP at 12 percent.

In terms of actual subscriptions, the distribution skews even more heavily towards cable connections (DOCSIS 3), with 57 percent of subscribers, followed by FTTP at 26 percent,

and VDSL at 15 percent.

Even if one were to focus exclusively on FTTP coverage, the data clearly give the edge to the U.S. market. As of the end of 2011, FTTP service was available in 17 percent of U.S.

households and 10 percent of European households. By the end of 2012, FTTP service increased to 23 percent of U.S. households and 12 percent of European households, the study found.

But mobile Internet access now is more important than ever. As of the end of 2011, Long Term Evolution networks covered 68 percent of the U.S. population and eight percent of European households.

By the end of 2012, LTE coverage increased to 86 percent of the U.S. population and 27 percent of European households. Note the difference in data collection, though. European dat is “by household.” U.S. data is by “person.” That understates European coverage figures, to the extent that households have more than a single occupant.

On the other hand, average download speeds at peak periods are higher in Europe, compared to the United States.  

Verizon Wireless Applies Congestion Management for Customers on Unlimited Usage Plans

About 22 percent of Verizon Wireless customers are on unlimited usage plans. Of those customers, about five percent are deemed by Verizon Wireless to be "heavy users" consuming 4.7 Gbytes a month of data, or more.



So Verizon now manages data connection speeds for users on unlimited Long Term Evolution 4G plans, at specific cell sites experiencing congestion or high demand, while those heavy users are being served from the congested, or potentially-congested cell sites, while the congestion lasts. 



The speed management practices are applied to the heavy users only when congestion at congested cell sites exists, and there is no throttling of speeds after such events. 



Verizon customers on metered plans will not be affected, Verizon says. 



"Admission control" traditionally has been a key means for preserving quality of experience on networks facing high demand at peak hours. 



Internet access services traditionally have not used such mechanisms, and simply degrade under load. 



Observers might disagree about whether admission control is the best way to preserve quality of experience at times of high network demand. But it does work.

High Speed Access Soon Will Be Biggest Revenue Source for Cable TV and Telcos

High-speed data subscriber numbers will surpass video subscribers for Moody's-rated cable companies in the next year, says Karen Berckmann, Moody’s senior analyst.

The longer-term revenue and profit impact is a bit unclear at the moment. Video average revenue per customer is higher than that of high speed access--nearly double--but net revenue after paying content costs is nearly the same.

Assume a monthly average of about $80 a month for a video subscription. Content providers typically $35 of the billed amount. So “net” revenue for the distributor is about 56 percent, or roughly $45 a month, before operating and marketing costs, depreciation and amortization or taxes.

By way of comparison, a typical monthly high speed access account might generate $45 or so, monthly.

The point is that both revenue streams are roughly equivalent, on a per-account basis, even if video generates more gross revenue.

The other issue is the strategic importance of high speed access as the future revenue driver for any provider of fixed network services. For a cable operator, voice remains a distant third as a driver of revenue, behind video and high speed access.

For most telcos, voice still represents more than half of total revenues, but is declining steadily, while high speed access and video revenues are climbing. At some point, it seems inevitable that voice becomes the smallest of the three anchor services (high speed access, video, voice) for either telcos or cable TV providers.

Ability to substitute other video providers also arguably is easier than switching high speed access providers, as satellite is not competitive.

“An operator that loses a customer to FiOS or uVerse is likely to lose that customer entirely, whereas one losing a customer to Dish Network or DirecTV could still maintain a broadband relationship,” Berckmann says.

That is another way of illustrating the strategic importance of high speed access: it is a service satellite providers, or most fixed wireless providers, will not be able to replicate, as speeds climb to gigabit levels.

“Fewer video customers means lower programming costs (which are paid on a per subscriber basis) and servicing the video product tends to be the most challenging and costly part of the business, so margins could benefit from the mix shift,” Berckmann says.

The downside is the loss of scale, which could lead to higher per-customer costs in the video segment.

Any way one looks at the matter, high speed access is emerging as the anchor product for cable TV and telcos. Video entertainment will emerge as the second largest revenue source for both cable TV and telcos, while voice is the smallest revenue source.

Several trends are responsible for those changes. Voice has shifted decisively to mobile, shrinking the total fixed network voice market. And mobile-enabled texting and messaging apps have displaced demand for voice sessions, as well.

At the same time, over the top product substitututes are displacing voice, and eventually video entertainment, increasing the value of a high speed access connection.

At the same time, Wi-Fi has become a key access method for computing, mobile apps and other content, including video entertainment. That means more of the value of a fixed high speed Internet access connection is driven by the ability to enable content and communications apps.

Fundamentally, the only key service not expected to see either wholesale displacement or significant reductions in demand is high speed access.