Verizon Gets 69% of Revenue from Mobile; So What About Fixed Network?

In the second quarter of 2014, Verizon generated $31.5 billion in sales. About 69 percent of that was earned by the mobile segment of the business. Fixed network operations now account for 31 percent of revenue.

Verizon had operating income profit margin was 32.5 percent in its mobile segment. In the fixed network segment,  Verizon profit margin on an operating basis was less than three percent, for an overall blended margin of about 14 percent.

Moreover, revenue growth now is driven by the mobile segment of the business, which grew 7.5 percent year over year, even if fixed network revenues grew four percent, year over year, while consumer revenues grew 5.3 percent.

That should raise some obvious--if difficult--questions.

One might argue that since Verizon’s overall results clearly are driven by the mobile segment, which is nearly 70 percent of the whole business, what happens in the fixed segment of the business is important, but not the driver of revenues and profit.

Another thought might occur: why shouldn’t Verizon exit the fixed segment and simply concentrate on the mobile segment?

Some might say that is not a realistic option, since Verizon likely could not find a buyer for all of its fixed network business, even if some parts conceivably could be sold.

The other constraint is that Verizon earns a disproportionate portion of is fixed network earnings from services provided over the fixed network to business customers.

Some $5.9 billion of $9.8 billion in fixed network revenues were earned by sales to business customers, while some $3.9 billion was earned by sales of consumer services.

So even if Verizon was able to sell its fixed network business, to exit the consumer fixed network business, doing so might endanger the nearly $6 billion Verizon earns from business customers.

So aside from the fact that Verizon in all likelihood might not be able to sell its fixed network business, even if it wanted to, doing so would forfeit nearly $6 billion of important business customer revenues as well.

Find out more

At the same time, there arguably are important strategic advantages for Verizon as an owner of fixed assets. To some extent, Verizon benefits in the area of backhaul, where it can rely on its own network, rather than leasing such access.

Verizon also can offload some amount of mobile traffic to its own fixed network. To be sure, Verizon does not benefit as much as AT&T might, given the relatively smaller fixed network footprint Verizon enjoys.

Beyond that, if the fundamental product sold by many telcos is the quadruple play, then the fixed network is necessary because it suppliers two or more of the components of the bundle.

Internet of Things Will Create World's Largest Device Market

“The Internet of Things will be the largest device market in the world,” Business Insider predicts.  “We estimate that by 2019 it will be more than double the size of the smartphone, PC, tablet, connected car, and the wearable market combined.”

And each of those constituent market segments--such as the connected car market--could be substantial for Internet service providers.

AT&T expects meaningful subscriber growth for its connected car services in the next three to five years, and already supplies connections for almost two million vehicles already.

About 500,000 accounts were added in the third quarter of 2014.

In 2015, AT&T expects to serve nearly half of new mobile-connected U.S. passenger vehicles and also expects to serve more than 10 million vehicles by the end of 2017.

AT&T expects revenues from its connected cars to be driven initially by wholesale customer relationships with auto manufacturers, with the opportunity to develop a direct retail relationship with drivers.

Wholesale average monthly revenue per subscriber, paid for by auto manufacturers, is expected to be in the low single digits and retail ARPU, paid for by the car owners, is expected to be similar to that of a tablet on an AT&T Mobile Share Value Plan, or about $10 a month.

The market for cumulative mobile machine-to-machine (M2M) connections will rise from about 110 million connections in 2011 to approximately 365 million connections by 2016, according to ABI Research.

This represents a compounded annual growth rate of roughly 27 percent by 2016 and translates to about $35 billion in connectivity services revenue.

The two largest cellular M2M market segments over the forecast period, by revenue, will be automotive telematics and smart energy, ABI Research estimates.

Automotive telematics, including factory-installed systems such as GM’s OnStar service, aftermarket services such as usage-based insurance, and fleet management systems, will together represent more than $15.5 billion in 2016, ABI Research estimates.

Meanwhile, smart energy, specifically cellular connectivity to smart meters and data concentrators, will represent more than $7.5 billion in 2016.

Device shipments will reach 6.7 billion in 2019 for a five-year CAGR of 61 percent, according to Business Insider. Revenue from hardware sales will be only $50 billion or eight percent of the total revenue from IoT-specific efforts.

The IoT will result in $1.7 trillion in value added to the global economy in 2019, based on  hardware, software, installation costs, management services, and economic value added from realized IoT efficiency.

Find out more

The enterprise sector will lead IoT investments, accounting for 46 percent of device shipments this year, but that share will decline as the government and home sectors gain momentum. By 2019, government will be the leading sector for IoT device shipments, Business Insider predicts.

Nobody knows for sure, yet, how big IoT will be, and how much revenue mobile service providers, among others, might stand to make. But estimates suggest IoT is a “billions of dollars” sized mobile access services opportunity.

EC Deregulates Fixed Network Voice Because Voice is "Going Away"

One of the key characteristics of competition in any market directly affected by the Internet, and that is most markets, is that old boundaries become quite porous. Where it might once have been possible to clearly define “who our competitors are,” that is tougher in Internet-affected markets.

“Telcos” now routinely compete not only with other fixed network providers, but also mobile service providers, cable TV companies, DirecTV, Skype, Google and WhatsApp. Sometime relatively soon, some telcos will compete with Facebook as well.

Some telcos compete with Netflix and YouTube as well, the simple reason being that, over time, effective substitutes become more prevalent.

There are important regulatory implications, since communications regulators always have a dual role.

Among the most-important considerations for any regulatory body is the fundamental health of the industries regulated, the counterpoint to promoting and protecting consumer welfare and interests.

And there is room to argue that the fundamental health of the communications services industry is an open question, under dynamic conditions. Why as the European Commission deregulated fixed network voice services?

It isn’t just that plenty of competition exists. The EC also is facing declining revenues for the whole industry. Sooner or later, that means less ability to invest in the next generation of facilities.

To reiterate, EC regulators have twin objectives. They must protect consumers and promote consumer welfare. But EC regulators also must try to ensure the fundamental ability of the industry to keep investing.

It might not be easy to balance the twin objectives. But maintaining balance arguably is harder under conditions when end user demand is shifting, undermining industry revenue streams.

To be sure, regulators have the obligation of protecting consumer welfare. But they also have the obligation to ensure the industry supplying communications remains viable and healthy.

That is a point recently reiterated by the European Commission's Digital Agenda staff.

“Regulation must be targeted and balanced in a way that addresses the true obstacles to effective competition in the sector: an excessive regulatory burden on operators would stifle investment and innovation,” a Commission paper argues.

“Too little regulation” also can be a problem, if it limits competition. “Regulation must promote...efficient investment and innovation in the interest of end users,” the staff paper argues.

Also, a  “dynamic and forward-looking” approach that recognizes evolving market conditions also is necessary, the paper

In other words, markets might be effectively competitive, without additional regulation. Barriers to entry might likewise disappear over time, either for technological reasons or because earlier policies have succeeded.

Find out more

Intermodal competition, as when facilities-based cable TV providers or independent Internet service providers enter a market are able to compete with telcos, can change competitive dynamics as well. In other words, effective competition can exist even when formal regulatory mechanisms are not in place.

Convergence of previously distinct markets also could increase competition. Also, end user demand changes over time.

That is why the EC recently decided to deregulate voice services within the European community.

70% of 3Q 2014 Net Mobile Adds Will be Tablets

As we near release of third quarter 2014 earnings, observers will be looking at net subscriber additions to assess how the mobile marketing wars are going.

As has been the case recently, the net new subscriber gains might present only a partial picture. To be sure, a net add is helpful. On the other hand, no matter how many new accounts are added, it is the composition of net new accounts that also matter.

Over the last year, growth has essentially shifted to tablet devices being added, not so much phone accounts.

Perhaps 30 percent of those net new accounts, over recent quarters, have been lower-yielding tablet accounts, rather than phone activations. The reason is that a tablet added to an account might represent $10 a month in incremental revenue.

A phone account might represent $40 to $80 in incremental revenue.

Many observers would expect to see net additions in the million-account range from Verizon, T-Mobile US and AT&T. Sprint likely will lag, with perhaps 250,000 to 300,000.

The only shocks would be if aggregate gains were substantially lower overall gains, or if any of the individual contestants did markedly better or worse than those expectations.

As has been the case recently, T-Mobile US is the carrier with subscriber gains most likely to surprise to the upside.

T-Mobile US already has said that, in August 2014 the company had its best month ever in terms of postpaid net adds.

"We had our biggest net add postpaid month in the history of the company in August, with 552,000 postpaid net additions,” according to CEO John Legere. The company also had 208,000 prepaid net adds in August.

That suggests T-Mobile US could easily break one million net postpaid additions for the full quarter.

Spectrum Futures 2014

Find out more

In the third quarter of 2013, T-Mobile US added about 672,000 net accounts. In the second quarter of 2014 T-Mobile US added more than a million net new accounts.

Since about the second quarter of 2013, phone account growth has been rather low by historical standards, with tablet additions driving connected device growth.

Of course, there are average revenue per user (or unit) implications. A tablet addition can represent $10 a month incremental revenue, while a phone, especially a smartphone, can represent $40 to $80 worth of incremental revenue.

Assuming net adds come in at about 3.4 million for the quarter, that might represent about 2.4 million tablet connections and about a million phone accounts.

How Uber, Lyft, AirBnB Have Lessons for the Communications Business

The sharing economy (peer-to-peer economy, mesh, collaborative economy, collaborative consumption) represents a shift in the way human and physical resources to create, produce, distribute or consume goods and services.

Think of Fon, BitTorrent, Uber, Lyft, AirBnB, eBay or Craigslist.

A related and fundamental concept is that resources are rented rather than owned. In other words, people rent cars instead of owning them, for example. A business might be created out of allowing travelers arriving at airports to rent the vehicles of other travelers who have parked their cars at the airport on trips of their own.

It might be easy to extrapolate too much from the trend. One attribute of today’s successful “sharing” models is that they are built on new ways of using resources created in more-traditional ways, and based on “owned” assets that can be used more intensively.

In a nutshell, sharing of owned assets is a way of wringing more usefulness out of assets that occasionally or frequently are idle.

It might be stretching matters to imply much more than that angle. The sharing economy is about effective, better and more efficient use of resources.

In telecommunications jargon, sharing helps alleviate the problem of “stranded assets,” investments that have been deployed and paid for, but which are not being actively used.

In many ways, licensed spectrum has a stranded asset element. Many blocks of scarce communications spectrum useful for communications networks are lightly used, most of the time, for one reason or another.

In some cases, the licensed military or government users have spectrum resources that need to be available, but are not necessarily used all the time, or much of the time.

In other cases, the licensed frequencies might be used a lot in some geographies, but are lightly used in other geographies, even if the licenses are national in scope.

So one new element of thinking, in some quarters, is that it might be possible to relatively quickly, and efficiently, put unused capacity to work by sharing licensed spectrum.

Find out more

In the U.S. market, sharing of 500 MHz worth of spectrum is being looked at in the 3.5 GHz frequencies, for example, as well as at 210 MHz to 512 MHz.

The idea is similar to resource sharing in the consumer space: make better use of available assets in ways that grow overall value and utility, while compensating asset owners.

Google to Release Biggest Phablet?

Google in October 2014 is expected to to release its largest-screen-ever device, with a screen measuring 5.9 inches diagonally.

The Nexus device,  code-named Shamu after a popular killer whale, will feature a screen larger than the iPhone 6 Plus, which features a screen measuring 5.5 inches, and the Samsung Galaxy Note, featuring a screen of 5.7 inches.

In 2011, phablets accounted for one percent of global smartphone shipments. In 2014, phablets  will account for 24 percent of the market, according to Strategy Analytics.

The phablet category arguably has emerged because the function of a smartphone has changed.

In the past, a phone was about “calling,” so small size arguably was an advantage, making it easier to fit a phone into a pocket or purse. Then texting and email became more important, emphasizing the advantages of a keyboard.

These days, those functions have been augmented, or supplanted, by Internet access, content consumption and transactions.

That calls for new features. Screen size and browser support then become more important.

It is just an anecdote, but I can remember the growing unhappiness I experienced as a BlackBerry user who really appreciated the email functionality, but also was finding that email  support was less mission critical than Internet access and browser-accessed apps.

In other words, though I expect a phone to handle voice and support texting, the most-important criteria is usefulness for app and browser support.

For others, the value also includes the device functioning as a music player platform, or a playback device for entertainment video.

For all those reasons, phablets make sense.

The emergence of tablets also arguably is having an impact. As users once often had to juggle leaving the house with a notebook, a phone and a music player, they today often have to choose between notebooks, tablets and phones.

A phablet can reduce the need to carry one extra device.

ISP Business is Likely to Become More Challenging

Unless something rather unusual happens, it is likely that U.S. Internet access providers--and by direct implication cable TV and telco service providers--will in the future face tougher business models.

There are a few reasons. For starters, competition in the mobile and fixed segments of the business has heated up, and likely will get more intense. In the fixed networks business, telcos and cable TV high speed access providers now face Google Fiber and possibly other new ISP initiatives.

In the mobile segment, Sprint now is actively challenging T-Mobile US for the role of price disruptor. So now two of four national providers are attacking retail prices and packaging in a mobile marketing war that shows no signs of lessening.

All of that is going to cause pressure on gross revenue as well as profit margins, right at a point where access providers must invest heavily in their core networks to accommodate must-faster access speeds (gigabit fixed network speeds and fourth generation mobile network investments).

At the same time, new potential rules related to network neutrality will shape access provider revenue models, most likely in a more-limiting way. Regulating Internet access services using a common carrier framework also is a live issue, and likely would be worse, for ISPs.

Find out more

In addition to reimposition of net neutrality rules for fixed operators, extension of “best effort only” access rules for consumer mobile services could be imposed for the first time.

The consumer impact could be substantial, though industry participants differ significantly on the direction of the impact. App providers think consumers would be better served under either net neutrality or common carrier rules.  ISPs take the opposite view.

The net effect of possible future rules will be that “brute force” bandwidth upgrades will remain the dominant way of providing quality of service, compared to potential alternative network management methods.

That means more capital investment, and possibly less revenue, than otherwise would be the case if ISPs were better able to shape services to match end user priorities.

The best example is voluntary end user specified priorities for latency and jitter sensitive services such as voice and video conferencing.

In the business segment, other applications where low latency is important might include in-field sales reps interrogating inventory databases in real time.

Just how much bandwidth upgrade investments might be affected by new rules is unclear. A compelling argument can be made that major ISPs must now upgrade, for core business reasons, unrelated to policy changes.

For fixed network ISPs, the upgrade to gigabit networks is underway, irrespective of any other considerations. Some might argue the same is true of 4G Long Term Evolution network speeds.

In that sense, new network neutrality policies might be viewed as an irritant, at the margin. Common carrier regulation could have quite more impact, though.

It isn’t surprising that cable TV companies, telcos or Internet service providers oppose common carrier regulation, while ecosystem partners sometimes favor such regulation.

Common carrier regulation implies, and often imposes price controls, as well as shaping permissible features, terms and conditions of service.

When value in the Internet ecosystem is highly uncoupled--app providers can reach any customer so long as those customers have Internet access--”access” is an input to an app provider’s business.

For an ISP, access is the business. That explains the prevalence of past debates about dumb pipes and smart pipes.

Current efforts by the Federal Communications Commission to shape regulation of Internet access inevitably will affect revenue models for app providers and access providers alike.

The reason is that  there almost always are shifts in competitive fortunes within the ecosystem when pricing-related or quality-related rules are changed.

The Telecommunications Act of 1996 opened up competition in the local exchange market for the first time. AT&T, MCI and scores of new competitive local exchange carriers believed they would, as a result.

Major changes in wholesale discounts--not to mention the acquisition of both AT&T and MCI by former Bell operating companies--eventually reshaped competitive fortunes. Facilities-based cable TV companies emerged as the single biggest beneficiary in the consumer market, even if many CLECs were able to sustain themselves in business customer markets.

Dynamics in the ISP--and therefore broader telecom business--likewise will be affected once the current regulatory reset has occurred.

That is not to say the outcome is ordained. But under the best of circumstances (from an ISP point of view), restrictions are going to increase.

Whether that is dangerous or not depends on one’s view of industry health. The issue is whether the U.S. access provider market is robust and profit rich, or becoming less robust and less able to afford investment in new facilities.

That is important, long term, since any government policies that limit some important ways of boosting revenue, at a time of product maturation, will consequently lead to lower investment. That is an issue European telecom regulators are dealing with.

On that score, there is some disagreement about growth prospects for future telecom global revenue. Some predict slow but rather steady growth. Others think a slowdown could happen. 

The one scenario virtually nobody believes is that, after the new regulations, whatever the outcome, ISPs will have an easier time growing revenue, creating new products and innovating.