Verizon Offers Free Year of Netflix with New Bundle

Verizon now is offering a free year of Netflix for new customers buying a $89.99 triple play service.

That offer includes symmetrical 75 Mbps high speed access service, a $150 Visa gift card and a full year of Netflix.  

BTIG analyst Walt Piecyk thinks the marketing message is noteworthy. Though a major supplier of linear video subscriptions, Verizon actually does not mention that fact as part of the promotion.

Instead, the new offer banks heavily on high speed access and over the top Netflix. What that means is that Verizon is dead serious in viewing linear video as a product with less relevance for future revenue than over the top video.

And OTT video has relevance not because it contributes direct revenue, but because it drives buying of high speed access, and Verizon believes it will be able to tie consumption and revenue together in some relatively direct or linear way.

That is not to say linear video is unimportant at the moment. In fact, linear video is the key additional product for a fixed network consumer product bundle, even if linear video is a product with challenged growth prospects.

It is no mistake that Google Fiber sells high speed access and linear video entertainment.  

Dish Network, for its part, had earlier offered six months of free Netflix as a promotion, not so much because Dish could sell more high speed Internet access subscriptions, but simply on the strength of Netflix as a content store.

The point is that service providers (telco, cable, satellite, ISP) need a strategy for dealing with video. That means offering linear video, supporting OTT, doing both or neither are fundamental issues for an access services provider.

The reason is that Industry executives believe the linear business will change, over the next decade, as OTT options grow.

The magnitude and timing of the shift are major unknowns. Also unclear is the business model for being a linear video services provider. And it is clear that Verizon sees less upside than AT&T.

For Verizon, the new wrinkle is mobile-centric content, and the thinking clearly is that there are ways to leverage live events (concerts and sports, especially) specifically in the mobile domain.

Video in the fixed network is a different issue, Verizon executives might argue, because it is anchored by linear video, a product that already has likely passed the peak of its product life cycle, and also because profit margin for linear video lags profits for other products, at least as Verizon experiences the business case.

So what other routes might be taken? Verizon tends to believe that over the top services hold some promise, compared to linear video, even if saving money really is not the issue.

Creation of lower-price linear services now is on the agenda for the linear video business, especially to reach Millennials who never have acquired the habit, or are abandoning the habit of buying linear video.

Ironically, even if “saving money” is the value, many consumers would not be able to save money replacing a linear video subscription with a purpose-built set of alternatives.

At some point, when a consumer watches a fair number of channels, the bundled linear video service, with access from smartphones and tablets on a remote basis, arguably will be a cheaper alternative to buying many individual channels.

But Verizon, AT&T, Comcast and others already see that the key strategy is to leverage end user demand for video to drive high speed access services with some usage component.

In that view, the precise mix of video content options (linear, OTT) matters less than supplying the high speed access customers need to view all that content.

Why "Internet of Everything" Makes So Much Sense

Cisco these days touts the "Internet of everything," and that might not be a bad way to describe what is happening in the world of devices and Internet connections.

Cisco defines the Internet of Everything (IoE) as “bringing together people, process, data, and things to make networked connections more relevant and valuable than ever before-turning information into actions.”

The neatness comes from the fact that the “Internet of everything” definition does not require discriminating between phones, tablets, PCs and all other Internet connected devices.

At least traditionally, the Internet primarily has been a network used by computers and humans, but the way most people encounter the Internet is when using their personal computers, tablets and phones.

And, early on, revenue in the Internet access business has been based on connecting devices people use (phones, PCs, tablets).

The reason the Internet of Things and machine-to-machine applications are terms of art is because the next big wave of growth for access providers is expected to come from connections provided to sensors and devices that communicate mostly with servers, and do not represent people using devices directly.

That matters.

Whole new industries and lines of business are expected to arise as new ways are found to embed sensors in a wide range of settings, using Internet-based communications to inform decision making.

Nevertheless, it sometimes is difficult to clearly delineate “connected device” markets from “smartphone” markets from “machine-to-machine” (M2M) and “Internet of Things” (IoT) markets.

“Connected device” sometimes means non-phone devices such as tablets, but sometimes gets lumped in with M2M sensor apps. Some might consider M2M (industrial sensors) part of the Internet of Things, but others might also include smart watches in the IoT category.

In a broad sense, sensing and actuating functions potentially can occur on any Internet-connected device, whether that is a phone, a watch or an industrial sensor.

So the distinction between devices people use, and sensors that talk to servers, is not always clear cut.

In some cases, the Internet of Things might well build on the “Internet of people.” Generally speaking, the IoT refers to sensors using the Internet, while the IoP might refer to humans using the Internet. But what do we make of a smart watch that relies on a smartphone for much of its processing?

In some other cases, sensor networks might use Wi-Fi or bluetooth data from user phones at a venue to create useful data of the sort touted for IoT apps.

As Google Maps uses Wi-Fi data to improve the accuracy of the navigation features of Google Maps, so too can user device data be analyzed to product the sorts of useful information the IoT promises.

Security line wait times, for example, are predicted by use of Wi-Fi signals at the Austin airport, in real time. Meanwhile, use of the historical data might allow optimization of the queueing process.

The point is that although it is useful to have categories such as IoT and M2M, and to distinguish them from the ways people use phones for Internet access and apps, the actual new apps might represent a mix of categories, including new scenarios where phones are viewed primarily as sensors.

In other words, use of sensor data likely will cross boundaries, extending use of devices by people to create new sensing-based value that might more properly be thought of as IoT. Or, as Cisco, likes to say, the Internet of everything.

Will Mobile Churn Start to Rise as Mobile Marketing War Persists?

Logic would suggest that as more customers shift from mobile service contract plans to “no contract” service plans, the amount of churn would increase.

Ever since T-Mobile US launched its “no-contract service” in 2013, observers have speculated about the potential impact on industry churn dynamics, marketing costs and revenues.

So far, that seems to have been less a concern for AT&T and Verizon than for Sprint and T-Mobile US, though likely for reasons that have only a bit to do with the types of service plans offered.

Since at least 2009, U.S. mobile service provider churn rates have stabilized at very low levels--at least for AT&T and Verizon. Sprint and T-Mobile US, on the other hand, have churn rates that are common for a consumer service.

In the first half of 2014, churn rates for the largest four national mobile providers ranged from about one percent for AT&T and Verizon--quite low for a consumer service--to nearly three percent a month for Sprint and T-Mobile US, a rate often seen for consumer services.

Most would attribute the widespread use of contracts as a driver of the lower churn, as a two-year contract tends to create a customer relationship that lasts at least that long.

Others might also focus on family or shared user plans. One observable fact is that when multiple users in a household share a plan, the amount of churn shrinks, as the hassle an cost of switching is much higher than for a single user plan (new phones might have to be purchased, for example).

So fewer customer choosing contract plans should lead to higher churn. One example is the contrast between churn rates of postpaid customers (often on contracts) and prepaid customers (rarely on contracts).

In the past, no-contract service might have been much more characteristic of prepaid service, and in fact prepaid churn has been higher than postpaid churn, for quite some time.

But that approach now is more common in the postpaid space. So observers will be watching for signs that postpaid churn is growing, especially at AT&T and Verizon.

Still, in the third quarter of 2014 AT&T Mobility actually achieved a lower churn rate than it had experienced before, in any third quarter. Skeptics might point to a slight uptick between 0.86 percent monthly churn in the second quarter and 0.99 percent in the third quarter.

That does not confirm a trend, as churn rates fluctuate quarter to quarter.

But some observers warn that could change in the fourth quarter, when a number of customers not on contract decide to buy new iPhones, and might choose service from another provider.

The reason for the concern: AT&T has been offering lower prices on shared data and “no device subsidy” plans for much of the year, in return for customers switching to non-subsidized device plans.

AT&T prefers that approach because it lowers the cost of providing devices for its customers.

But the potential downside is the shift away from contracts.

Customers generally do not prefer contracts, but service providers like them for a couple of logical reasons: they “lock in” customer accounts at least for the duration of the contract, and smooth out recurring revenue flows.

That logically also lowers marketing cost, as a service provider does not have to work so hard to retain or attract quite so many new customers.

On the other hand, by separating service terms and device subsidies, service providers can market lower recurring costs, and shift some of the costs of providing devices to end users. At least so far, overall revenue seems to be level or up slightly, even if recurring service revenues might be lower.

Some might say that AT&T faces a latent pool of switchers--accounts that are off contract and free to leave, and which also have not switched to a lower-cost shared data plan.

AT&T is likely to find that the actual exposure is single-user accounts, not shared data or family accounts.

And almost nobody would be surprised if the amount of churn among all four national carriers starts to grow a bit, because the mobile marketing war will encourage users to switch.

Ecosystem Conflict Heats up in Mobile Payments Business with Apple Pay Launch

One of the persistent issues for mobile payments is the complex nature of the ecosystem needed to support it, ranging from end user smartphones and willingness to use mobile payment apps; retailer and credit or debit card provider support; as well as participation by clearing networks.

With the launch of Apple Pay, we have seen a rather significant degree of retailer conflict with credit card issuers, each backing a different service.

A group of retailers (Merchant Customer Exchange) are creating their own mobile payment system, CurrentC, set to launch in 2015.

Now there are reports MCX members are disabling the near field communications function of their retail checkout systems, to prevent use of Apple Pay, now viewed as a rival system.

The big battle, though, is not between Apple and the retailer consortium, but between the retailers and the credit card and debit card issuers (banks).

Banks and credit card companies have enthusiastically supported Apple Pay, seeing it as a way to increase the number of purchases people make with their credit cards.

Conversely, Apple has struggled to get merchants to join.

On the other hand, not a single bank backs “CurrentC,” the retailer service that intends to cut out use of credit and debit cards, thus saving retailers the card processing fees.

The CurrentC app, when it launches in 2015, will not link the smarpthone apps with a user’s credit card.

Instead, it will withdraw funds directly from a CurrentC user checking account.

CurrentC also plans to support its own retailer gift cards, use of which likewise will avoid payment of the credit or debit card fees.

Gap, Old Navy, 7-Eleven, Best Buy, CVS Pharmacy, Darden Restaurants, HMSHost, Hy-Vee, Kohls, Lowes, Dunkin’ Donuts, Publix Super Markets, Shell Oil, Sunoco, Target, Walmart, Sam’s Club, Sears, Kmart, Bed, Bath & Beyond, Banana Republic, Stop & Shop and Wendy’s say they will support CurrentC.

Apple Pay, on the other hand, has signed up Bloomingdales, Macy’s, Duane Reade, McDonald’s, Sephora, Petco, Panera Bread, Staples, Nike, Walgreens, Subway and Whole Foods.

You can see the problem: the mobile market, already fragmented, is going to get more fragmented. Softcard, the AT&T, Verizon, T-Mobile US consortium and Google Pay already are in the market.

And one cannot help but think Amazon and PayPal could be key contenders as well.

Those tensions within the mobile payments ecosystem have analogies in the video entertainment and mobile communications businesses as well.

Tensions between video distributors (cable TV, satellite TV and telco TV) are not unusual, especially when contract renewals are underway.

In the mobile communications business, device suppliers such as Apple have different business interests than the service providers, while app providers have different business interests from mobile service providers and device suppliers.

That has mobile service providers and many fixed network service providers lining up against network neutrality rules, while many app providers support those rules.

Though all the arguments advanced by all the contestants claim “consumer benefit,” there is substantial business advantage at stake.

That is not to say those arguments are without merit. But there always are private interests that correspond with every public purpose.

A "No Good" Product Purchased by 79% of All Homes

It is not hard to find critics of U.S. high speed access prices and speeds, which are said to be inferior to services in many other countries. But it is a funny sort of unloved product that 80 percent of households buy.

About 79 percent of U.S. households get a fixed network broadband Internet service at home, according to Leichtman Research Group. If that seems unremarkable, consider that a decade ago, just 20 percent of U.S. homes bought high speed access service.

One comment likely is worth making: if U.S. consumers were fundamentally unhappy with high speed access, they would not buy it. Similarly, as much as people tend to complain about high cable TV prices in surveys, purchase rates are higher for linear video entertainment than for high speed access.

About 84 percent of surveyed U.S. homes buy a linear video entertainment subscription, Leichtman Research says.

That does not mean consumers are equally happy with all providers of those services, or necessarily “highly satisfied” with the services in general. But such high buy rates indicate that the vast majority of U.S. homes see high speed Internet and video entertainment as highly important services “good enough” to buy right now.

Ask a consumer if a product they presently buy could be made improved, and might cost less, and most likely will say the products could be better and could be cheaper.

But one good rule for market research is to follow the money, and watch what people do, not what they say they do, or might do.

And behavior can change, when a much-better product alternative is made available. That is true for Apple iPhones or Google Fiber.

Since broadband access now accounts for 95 percent of all households with Internet service at home, there are an additional five percent of Internet-using homes apparently purchasing dial-up access. That might represent perhaps three percent of U.S. homes.

The high speed access adoption rate is an increase from 94 percent in 2013,  89 percent in 2009, and 33 percent a decade ago.

Also, about 63 percent of surveyed adults access the Internet on a smartphone, up from 44 percent in 2012.

For the most part, people buy both mobile and fixed Internet access. Some 59 percent of respondents say they get Internet service at home and on a smartphone.

But there is a mobile Internet equivalent of fixed telephone line cord cutting. About 24 percent of all “not online at home” respondents report they access the Internet on a smartphone, up from 19 percent in 2013 and 12 percent in 2012. So the percentage of “mobile-only” Internet access users doubled over the last two years.

AT&T Essentially Disables Apple iPad Air 2 Universal SIM

In a development that illustrates the tensions within the mobile ecosystem, AT&T apparently locks the Apple universal SIM that comes with the new Apple iPad Air 2, a feature Apple embedded to make it easier for device users to switch mobile data plans without having to manually insert a new subscriber information module.

For Apple, the feature adds distinctiveness and value and makes easier the end user task of connecting to mobile Internet access networks.

For the participating mobile service providers, the capability makes new potential customer sampling and sign-up easier, but also makes leaving easier.

That tension between business interests in an ecosystem are not uncommon. Linear video entertainment providers and program networks routinely tussle over contracts, and service interruptions, as part of the bargaining process, are far from unusual.

Some also believe the strategic reason firms such as CBS and Time Warner (HBO) are launching over the top services is to create more pressure on traditional distributors including cable, satellite and telco TV providers.

In the mobile services business, some mobile service providers, in the past, have simply blocked use of over the top VoIP apps.

So the long term implications of the new universal subscriber information module in the new Apple iPad Air 2 are not clear. And what happens with the iPad Air likely is not the big question.

Many would be quick to note that the long-term implications would likely occur on the phone side of the business, not tablets.

If customers were able to switch mobile carriers “on the fly,” the amount of churn would likely increase, as the amount of competition likely also would increase, at least for some types of account plans.

Contract accounts would still remain relatively stable. But consumers on no-contract plans might be a bit more likely to consider switching at least once a month. The biggest change in behavior might come for consumers on prepaid plans.

The “connect on demand” feature likely is best used by device owners who only sometimes need mobile access, as it seems designed to offer most value for users who need temporary access to mobile connectivity.

The new SIM is essentially a “software-based” technology, eliminating the need for manually inserting a physical SIM to activate service from a particular carrier.

The new SIM sits in the same slot as a regular nano-sim and can be swapped out. That means a traveling user will be easily able to buy temporary or short-term access from a local mobile phone network without having to pre-order a new SIM or purchase one in a shop on arrival.

Neither Apple nor the tier-one service providers are dumb. Each will have thought about balancing potential gain and potential pushback.

For the moment, no matter the service provider, it still will make most sense for an iPad Air 2 owner to buy a long-term plan for mobile Internet access, if that is something routinely required.

The obvious value is when users are roaming, or need mobile access for a short time, for some reason.

Mobile service providers not only hope the ease of activation will encourage more sampling of mobile connectivity for the iPad Air 2, which could lead to a long-term subscription, but also increase sales of roaming service.

But AT&T seems to have concluded the downside is greater than the potential upside.

RiteAid "Blocks" Apple Pay, Google Wallet

RiteAid seems to have decided its backing of the Merchant Customer Exchange (MCX) mobile payment initiative conflicts with accepting either Apple Pay or Google Wallet payments.

At the moment, RiteAid does not support either Apple Pay or Google Wallet payments.

So should RiteAid be legally compelled to support Apple Pay or Google Wallet? Most likely would disagree. The implicit reasoning might entail some thinking that RiteAid is free to sell whatever products it wants, and be paid any lawful way it chooses.

Retailers, like many other businesses, make decisions all the time about what products to sell, how to sell them and how to distribute them. Manufacturers often must pay for the privilege of being featured in the best locations on retailer store shelves, for example.

Newspapers, magazines and television stations makes decisions every day about publishing or televising some stories, rather than others.

The point is that quite a lot of discretion normally is exercised by most companies selling most products, as a routine occurrence.

True functional monopolies tend to be treated differently. Most are familiar with the notion that some products are “natural monopolies.” Roads, water systems, electrical grids and wastewater systems provide examples.

But some other businesses that have in the past been seen as natural monopolies, might not be such clear cases. Railroads, cable TV networks, airports and telecom networks have at points in time been viewed as natural monopolies.

There now are greater practical questions about whether that really is the case. Some might argue the issue tends to be the possibility of functional oligopolies or monopsonies, not strictly monopolies.

Many now would argue that, although not natural monopolies, it might still be the case that only a few leading providers can prosper in some businesses with “scale” economics.

Still, the view policymakers have of these industries really does matter. A true natural monopoly might never have any competition, so regulation makes sense. Competitive markets do not require such regulation.

Somewhere in the middle are markets where scale matters, but monopoly is not a fundamental or natural characteristic.

That is why RiteAid deciding which payment methods to accept does not require regulation. Some might argue sewers, highways, electricity or water systems are natural monopolies, and do need regulation.

Video entertainment services, linear or over the top, are not monopolies, and require no regulation of content, anymore than RiteAid must be required to accept all known forms of payment.

But there is a popular notion that Internet access, which is not a natural monopoly, requires regulation of the sort typical of such industries, namely “common carrier” rules that might prescribe what products can be sold, how they might be packaged and what they might legally cost.

Public policy choices have consequences. And one consequence of regulating industries that are not natural monopolies, as though they were, will tend to depress investment and suppress innovation.

Some might not care. One can always point to instances, in any area of commerce,  where material interests among ecosystem participants conflict, and where an economic or financial loss by one part of the value chain results in material benefit for other parts of the value chain.

For buyers, higher prices are a burden; for sellers a benefit. Retail product costs for consumers also represent the basis for wages for workers in the selling industries and firms.

So long as markets operate, such tensions within any product ecosystem can adjust, over time. What arguably does not work so well are imposed rules that actually prevent such adjustments, which is what common carrier regulation tends to do.

To oversimplify a complex matter, RiteAid should not be forced to accept Apple Pay or Google Wallet.

Neither, for similar reasons, should RiteAid be told what lawful products it can sell, or how much it can charge for those products, or where those products can be displayed.

Every other competitive industry and firm likewise should be allowed to craft its offers as it deems the market prefers. That might, in some industries, involve accepting advertising, product placement fees or other support that defrays end user cost.

That is why “sponsored data” or “free apps” that people can use without incurring charges or usage are significant. The extend access to desired apps and services, and save consumers money, while still creating a revenue model for the sponsoring entities.

Common carrier regulation is a hammer for which every problem is a nail.