Verizon, Comcast Show 4% Revenue Growth in 3Q 2014; AT&T 2.5%

In a quarter with a lot of moving parts (shift in the way AT&T accounts for device sales, Leap Wireless and Alltel revenue and costs), AT&T reported third quarter 2014 revenues up 2.5 percent versus the year-earlier period.

Verizon reported 89 cents in earnings per share for the third quarter of 2014, compared with 78 cents per share (or 77 cents on a non-GAAP adjusted basis) in the same quarter of  2013. Whether one is happy with those results depends, as always, on expectations.

Some had estimated Verizon would do even better than it did. But Verizon did post significant revenue growth.

Total operating revenues in the third quarter of 2014 were $31.6 billion, a 4.3 percent increase compared with third-quarter 2013, Verizon reports.

Comcast has a different mix of product lines, including theme parks, film production, broadcast TV operations and programming networks.

So although Comcast reported third quarter 2014 revenue that grew about four percent, in line with Verizon and AT&T, Comcast saw higher rates of growth from its broadcast TV segment (7.7 percent growth), a loss in filmed entertainment (-15.2 percent) and  theme park segment growth of 18.7 percent.

In the cable communications segment, video revenue grew one percent, while high speed Internet access grew 9.6 percent. Voice revenues declined -0.5 percent while business services grew 21 percent.

In tandem with Verizon, Comcast reported growth in its business customer segment, almost twice as much overall revenue growth as AT&T reported. As always, segment results are key.

Total AT&T mobile segment revenues, which include equipment sales, were up 4.9 percent year over year to $18.3 billion.

Total third-quarter fixed segment revenues were $14.6 billion, down 0.4 percent versus the year-earlier quarter and down slightly versus the second quarter of 2014.

Mobile service revenues were essentially flat in the third quarter at $15.4 billion, and wireless equipment revenues increased 44.3 percent to $2.9 billion as more customers chose equipment installment plans versus subsidized devices.

Third-quarter mobile operating expenses totaled $13.8 billion, up 7.5 percent versus the year-earlier quarter due to higher equipment costs, network systems expenses and marketing costs, largely attributable to the company’s acquisition of Leap Wireless, and wireless operating income was $4.5 billion, down 2.3 percent year over year.

Revenues from residential customers totaled $5.7 billion, an increase of three percent compared to the third quarter a year ago.

U-verse, which includes high speed Internet, TV and Voice over IP, now represents 64 percent of fixed segment consumer revenues, up from 54 percent in the year-earlier quarter. Consumer U-verse revenues grew 23.2 percent year over year.

As was the case at Verizon, total revenues from business customers declined. At AT&T, business customer revenues were $8.7 billion, down two percent year over year and stable sequentially.

As was the case for Verizon Communications, declines in AT&T business customer legacy products were partially offset by continued double-digit growth in strategic business services (VPNs, Ethernet, cloud, hosting, IP conferencing, VoIP, MIS over Ethernet, U-verse and security services).

Strategic business services grew 14.3 percent versus the year-earlier quarter.

The bottom line for AT&T includes continued revenue growth overall, with gains lead by the mobile segment, and by consumer services within the fixed network segment, as also was the case at Verizon in the third quarter.

Voice was an issue for all three companies, with growth driven by high speed access.

28 Billion IoT Devices to be Connected?

One reason mobile service providers particularly are interested in the "Internet of Things" and machine-to-machine apps is the sheer number of devices that will require communications capability.

Where fixed network connections are a roughly one billion size existing market, mobile is a six billion existing market and IoT might be a 28 billion devices market, in the 2020s, according to equity analysts at Goldman Sachs. 

Even if average revenue per IoT device is, for example, about $5 a month, where a phone might represent $40 to $80 a month in revenue, the sheer number of connected IoT devices creates a substantial connectivity market.

If mobile service providers are able to create a role in other parts of the IoT ecosystem (acquiring roles in the application and service areas, for example), the upside could be quite substantial. 

Why We Need Three Orders of Magnitude More Bandwidth

Nobody would be surprised to learn that over the top video streaming has become a mainstream activity, and that the amount of streaming is increasing.

Most would not be too surprised to learn that video--depending on resolution--requires two orders of magnitude, or perhaps three times more bandwidth than other apps.

So a prediction that some mobile markets might well require 1,000 times more bandwidth (three orders of magnitude) over a relatively short time frame (perhaps a decade) requires only a few assumptions.

One assumes that people routinely will use smartphones with data plans. And one assumes that a growing percentage of total usage will consist of video.

At a high level, use of video automatically drives a two order of magnitude increase in bandwidth consumption, for each minute of usage.

Add in the impact of more smartphone users, as a percentage of total, plus higher-resolution video formats, and the need for 1,000 times more capacity (three orders of magnitude) is a prudent assumption, not a wild extrapolation.

The issue is how it might be possible to supply 1,000 times more bandwidth, and where this is more feasible, on a sustainable basis.

The reason is that most of the growth will have to come from small cell network architectures, even if one assumes a tripling of bandwidth and perhaps a tripling of device performance (antennas, coding algorithms, modulation techniques).

And small cells are most useful in dense urban areas, less useful to impractical in rural areas. That is one reason some believe new ways to release spectrum for mobile and untethered communications is so important.

Some of the available tools will have limited utility in rural or hard-to-reach areas.

source: Qualcomm

Will Shift to Postpaid Shrink MVNO Market?

The line separating postpaid and prepaid mobile services is getting a bit more porous, as costs for single-line postpaid service are starting, in many cases, to approach the recurring cost of a prepaid account.

“If you look at single line pricing, those price points are pretty darn close to what a prepaid customer would pay on prepaid,” said Fran Shammo, Verizon Communications CFO.

The significant difference, some might say, is not just the matter of whether service is paid for in advance, or after service is provided.

“The hurdle is there is a credit check,” said Shammo.

Sprint reportedly has revised its credit standards, allowing more customers to qualify for postpaid accounts, instead of buying prepaid service. That shift in demand is relatively recent, beginning in 2013.

But at least in the single-line segment of the market, it appears as though postpaid now stands to benefit as more former prepaid customers are able to qualify for a postpaid plan.

That should have implications for many providers of prepaid service, at least in the U.S. market, especially mobile virtual network operators (MVNOs) that often specialize in prepaid service.

From 2007 to 2010, North American prepaid grew from about eight percent of total subscriptions to about 12 percent. But changing credit standards and retail price points could put a brake on MVNO subscriber growth.

In fact, prepaid growth had been substantial from 2000 to 2010, though adoption has leveled off since then.

Of course, prepaid is more important for T-Mobile US, AT&T and Sprint than it is for Verizon. Verizon Wireless has only around five percent of its total connections base on prepaid deals, while prepaid accounts for more than 30 percent of connections at AT&T, Sprint and T-Mobile US, according to the GSMA.

The four biggest mobile service providers appear set to add a net 4.3 million postpaid phone subscribers in 2014, according to UBS estimates, compared to just 737,000 in 2013.

Conversely, the U.S. mobile industry saw a big drop in prepaid subscriber additions in 2013 to 1.2 million from 4.5 million the previous year, for example.

The industry should add only 959,000 prepaid subscribers in 2014, UBS says. There were some 74 million prepaid subscribers in the U.S. mobile market, compared to 228 million postpaid subscribers.

Fran Shammo, Verizon Communications CFO, confirmed the trend during the Verizon Communications third quarter of 2014 earnings call.

Noting that during the first nine months of 2014 Verizon prepaid net adds were only 5000 compared with 274,000 in 2013, Shammo added that “we believe that price sensitive prepaid customers are moving to the postpaid market.”

Initially left unsaid was a judgment about whether that means Verizon prepaid customers are moving up to become Verizon postpaid customers, or whether potential prepaid customers are choosing to become postpaid customers on other networks.

Shammo answered that question during the question-and-answer portion of the call. “We see a shift from prepaid to postpaid--not necessarily within our base--because of high quality and strict requirements we have from a credit perspective,” Shammo said.

The latter seems likely, given Verizon’s positioning in the U.S. mobile market. “Growth in wireless revenue and profitability continues to be driven by our high quality retail postpaid customer base,” Shammo said.

In other words, Verizon will continue to focus on the “premium provider” segment of the market.

And that almost certainly means Verizon will continue to shy away from the prepaid segment, and value end of the single-line segment as well.

How Big a Deal is Mobile "Spectrum Exhaust?"

Forecasting is a perilous business, and forecasts "always" are wrong, to some extent. That holds for estimates of Internet bandwidth demand as well, which historically tend to overestimate long term rates of growth.

“The evidence reveals a persistent tendency to overestimate in both number and value,” say researchers Aalok Mehta of the University of Southern California and J. Armand Musey, Goldin Associates, LLC principal.

“Of the past seven Cisco mobile traffic forecasts for North America, for example, overestimates were nearly twice as frequent as underestimates (19 vs. 10),” they say. “Overestimates are also on average of greater magnitude than underestimates (103 vs. 81 PB/month).”

In the case of mobile bandwidth, unexpected developments such as Wi-Fi offload could have had an impact, as users learned to substitute Wi-Fi networks for mobile network demand. True, aggregate Internet demand does not change simply because a different access network is used.

But the specific amount of mobile network demand does change. Such estimates matter for policymakers, Internet service providers and ecosystem participants, as matching supply to demand hinges on the predictability of demand growth forecasts.

With the important caveat that end user demand and “traffic growth” are different items (set high prices and demand will drop, for example), “everybody” might agree that mobile traffic will continue to grow, for the simple reason that more consumers are buying smartphones, which means there are more potential users of the Internet access feature, and more users watch video, the most bandwidth-intensive application of all.

Also, there is a physical dimension to mobile bandwidth forecasts that does not exist to the same degree in the fixed access area.

When traffic is confined to a waveguide (wire or optical fiber), there often are multiple ways to increase available bandwidth. Internet service providers can use multiple wires or fibers, for example.

Up to a point, that spatial division also is how small cells work. But the risk of interference arguably puts limits on the practicality of ever-smaller cells as a means of increasing effective ability to support higher volumes of traffic.

Though some might claim there are no theoretical limits to mobile bandwidth supply, most would admit there are some physical limitations, where it comes to commercially-viable supplied bandwidth, even if network architecture, improvements in coding and modulation, antenna design, commercial tariffs and offloading mechanisms do exist.

Precisely how much mobile or untethered spectrum might be required, and when, remain matters of some debate. Mehta and Musey correctly argue that over-allocation of capital in spectrum resources is unwise.

So is under-investment, says George Ford, Phoenix Center for Advanced Legal and Economic Public Policy Studies chief economist.

The issue in the mobile realm is the time it takes to release additional spectrum for commercial use, as well as the physically-available alternatives for releasing new spectrum.

Verizon 3Q 2014: Revenues Up 4%

Verizon Communications reported 89 cents in earnings per share for the third quarter of 2014, compared with 78 cents per share (or 77 cents on a non-GAAP adjusted basis) in the same quarter of  2013. Whether one is happy with those results depends, as always, on expectations.

Some had estimated Verizon would do even better than it did. But Verizon did post significant revenue growth.

Total operating revenues in the third quarter of 2014 were $31.6 billion, a 4.3 percent increase compared with third-quarter 2013, Verizon reports.

Almost an afterthought these days, Verizon switched access lines (plain old telephone service) declined more than 15 percent, year over year. At that rate, the number of remaining switched access lines will decline by about half in another five years.

By 2023, if current rates hold, Verizon will have lost 80 percent of its current switched access lines.

Of course, at some level, Verizon eventually will lose 100 percent of its switched access lines, as the public switched telephone network actually is retired.

If legacy PSTN lines in service were only replaced, one for one, by IP lines, the change would not be consequential. It has not mattered that mobile voice lines have transitioned from analog to various generations of digital networks, for example.

The problem for the telco fixed network segment of the business is that users are abandoning use of voice lines.

At the same time, the total number of fixed network lines in service is not dropping nearly as fast telcos are losing lines, because market share has been taken by new providers, including cable TV companies, most notably.

The reason the 15 percent annual decline of voice lines is not more consequential is that Verizon is adding new units of high speed access, video entertainment and digital voice at a faster rate than it is losing voice accounts.

Still, total attrition of voice lines (PSTN and IP) is in excess of five percent a year.

One notable observation is the huge disparity between operating income margin between the mobile and fixed network segments, though.

In the third quarter of 2014, mobile segment operating income margin was 31.9 percent and segment earnings (EBITDA) margin on service revenues was 49.5 percent.

In the third quarter of 2013, mobile segment operating income margin was 33.8 percent and earnings (EBITDA) 51.1 percent.

Some might see the dip as an impact of the U.S. mobile marketing wars, as well as the shift by consumers to non-subsidized device plans, which have the impact of lowering service revenues, even if device sales revenue can rise, in the short term.

Compare that performance with results from the fixed network segment. Total revenues were $9.6 billion in third-quarter 2014, down 0.8 percent year over year. So the first comparison is that fixed network revenue declined, while mobile segment revenue grew.

Fixed network  operating income margin was 2.3 percent in the third quarter of 2014, up from 1.5 percent in third-quarter 2013. So mobile operating income margin was an order of magnitude higher than fixed network operating income margin.

In other words, the mobile business is 10 times more profitable than the fixed network business, on an operating income margin basis.  

Fixed network segment earnings (EBITDA, non-GAAP) was 23 percent in third-quarter 2014, flat compared with third-quarter 2013. While fixed network EBITDA was lower than in the mobile segment, earnings margin was not so dissimilar.

Still, consumer revenues were $3.9 billion, up 4.5 percent compared with third-quarter 2013, with FiOS revenues representing 76 percent of the total.

Consumer ARPU for wireline services increased to $125.32 per month in third-quarter 2014, up 10.3 percent compared with third-quarter 2013.

Total FiOS revenues grew 13.4 percent, to $3.2 billion, comparing third-quarter 2014 with third-quarter 2013.

It is possible to attribute the slight decline in fixed network segment revenues to the business customer segment.

Sales of strategic services to enterprise customers increased one percent, to $2.1 billion, compared with third-quarter 2013.

Strategic services include private IP, Ethernet, data center, cloud, security and managed services.

Still, overall sales in the enterprise and wholesale weakened, year over year.

New revenue streams from machine-to-machine and telematics totaled $150 million in third-quarter 2014, or more than $400 million through the first nine months of 2014, an increase of more than 40 percent year to date, from a small base.

Net income for the third quarter was $3.79 billion, which fell year-over-year from $5.58 billion.

Total revenues from the mobile segment were $21.8 billion, up seven percent from the previous year. Service revenues totaled $18.4 billion.

The mobile segment added 1.53 million retail net connections, and at the end of the third quarter the total retail connections the company had was 106.2 million.

Total revenues for the fixed network segment were $9.6 billion, up 0.8 percent from the previous year. Out of this, consumer revenues made up $3.9 billion.

Most service providers likely would be very happy to post results of the sort Verizon just did, in terms of revenue growth and profit margin, on the mobile or fixed network sides of the business.

U.S. Mobile Broadband Passes 90% Penetration

In the United States, as elsewhere, mobile Internet capability has become an important means for eliminating access divides.

We have seen this pattern before. As recently as the 1980s, policy analysts and regulators might have legitimately been concerned about how to eliminate the gap between people who could make a phone call, and those who could not.

Already, it is fairly clear that mobile devices and networks also will close the gap between people who have access to the Internet, and those who do not.

“Mobile phones are becoming more common among historically disadvantaged groups” and the “adoption gap is shrinking across demographic and socioeconomic groups,” NTIA reports.

Already, mobile Internet access has 91 percent or higher adoption, where fixed broadband has about 79 percent adoption.

In fact, use of mobile phones now is “no longer statistically significant” across racial groups, NTIA reports. In 2011, 86 percent of Whites used mobile phones, compared to 84 percent of African Americans and 83 percent of Hispanics.

In 2012, however, adoption among African Americans and Hispanics grew to 87 percent each, while adoption among Whites grew more slowly to 88 percent, NTIA says.

The point is that use of mobile broadband now is an important way people choose to use the Internet and Internet apps and services, even when fixed access is available.

Mobile broadband networks (with speeds of at least 3 Mbps download and 768 Mbps upload) are available to 97.5 percent of U.S. population as of June 30, 2013. Equally important, 90 percent of U.S. residents had access to 4G service, defined as service with download speeds of at least 6 Mbps, as of the end of 2012.

Mobile phone use among those with family incomes below $25,000 and among disabled Americans each increased by four percentage points, growing from 73 percent to 77 percent for lower-income families and from 68 percent to 72 percent for disabled residents.

Similarly, mobile phone use among seniors 65 and older grew by four percentage points between 2011 and 2012, from 68 percent to 72 percent.

NTIA’s “Exploring the Digital Nation: Embracing the Mobile Internet,” is based on a U.S. Census Bureau survey in October 2012 of more than 53,000 households, and found that U.S. residents were increasingly using their mobile devices to engage in applications that they might have previously done on a desktop or laptop computer or not at all.

Between July 2011 and October 2012, the report found big increases in mobile phone users 25 and older who used their devices to download mobile applications (22 percent to 32 percent), browse the Web (33 percent to 42 percent), check their email (33 percent to 43 percent), and use social networks (22 percent to 30 percent).

The point: in the United States as elsewhere, mobile Internet access often is the preferred way of using the Internet. Mobile access closes gaps between haves and have-nots, in part because mobile access and apps seem to represent the ways many people prefer to use the Internet.

When combined with advances in mobile Internet connectivity, some form of broadband, whether fixed or mobile, is now available to almost 99 percent of the U.S. population, the National Telecommunications and Information Administration now reports.

“Internet availability” is one problem, “Internet usage” is a separate problem. The former deals with the ability of a potential consumer to buy, the latter with the willingness to do so.

Availability is related to adoption, but not in a strictly linear way.

There remain some consumers who say they do not buy Internet access (particularly fixed access) because it is “too expensive.”

U.S. fixed network Internet access now is purchased by 72 percent of households. That leaves 28 percent of homes that do not buy, as of  October 2012.

Over a quarter of these non-users, representing over seven percent of American households, did not go online at home primarily because it was “too expensive.”

But a lack of need or interest remain the main reasons why people do not buy fixed network Internet access.

About 48 percent of non-using households gave this reason in both 2011 and 2012, NTIA reports.

Not owning a computer, or a suitable computer was the reason cited by 11 percent of homes for not buying fixed Internet access.

Libraries were important locations of Internet access across all income and educational brackets (used by 11 percent of households nationally), but especially so for unemployed householders (20 percent), households with school-age children (18 percent) and African Americans (16 percent).

The larger point is that all assessments of “Internet use” now have to contend with end user preferences, not simply take rates and availability. Increasingly, consumers choose to use one, the other, or both, in ways that suit them.

Retail price and affordability remain important, but might not be the crucial issues. Consumers need to see value in relationship to price, as is true for all products and services. Only 79 percent of respondents say they own a PC, for example.

At least historically, not using a computer was a very good reason for not buying high speed access. These days, there are other reasons to buy high speed access. In a growing number of cases, video entertainment or gaming might drive the decision, not just PC operations.

source: NTIA

Mobile phone use among rural Americans also grew by five percentage points to 85 percent between 2011 and 2012.

Mobile phone use among urban Americans increased more slowly during this same period, from 86 percent to 88 percent, matching the two percentage-point increase to 88 percent in mobile phone use among all Americans 25 and older.

Still, affluent mobile phone users and those with college degrees were more likely to engage in a range of activities on their devices than those with no high school diploma.

For example, 57 percent of mobile phone-using college graduates checked email on mobile devices, compared with 19 percent of users without a high school diploma.

And 63 percent of users with family incomes of $100,000 or more said they used their devices for email, compared with 27 percent of users with family incomes below $25,000 – a 36 percentage-point gap.

The report found that 28 percent of households still do not use broadband at home. Those households not online at home cited a lack of interest or need (48 percent) as the main reason why, followed by 29 percent who said they could not afford home Internet service.

Keep in mind that mobile broadband usage is higher than fixed network usage. In the United States, mobile broadband adoption already had reached 90 percent by 2012.

Fixed high speed access still is important. But there increasingly are different ways consumers can mix and match their Internet access choices. Mobile might be the most-important choice for many consumers.

Spectrum Futures 2014

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