Verizon Expects Strong LTE Upgrades, Strong Net New Subscriber Growth, and a Hit to Earnings and Profit Margins

When is strong net new mobile subscriber growth, high take rates for Long Term Evolution fourth generation service and high conversion rates of the best existing customers to 4G service  a problem?

When a highly-competitive environment means there is lots of promotional activity, even by a firm that eschews promotions.

So it is that Verizon Communications announced “strong momentum for wireless customer growth in the fourth-quarter 2014” and “very strong customer demand” for 4G smartphones and tablets on its “More Everything” shared data plans for the fourth quarter of 2014, at the same time it is warning that the company expects pressure on earnings and profit margins.

“The fourth-quarter impacts of its promotional offers, together with the strong customer volumes this quarter, will put short-term pressure on its wireless segment EBITDA and EBITDA service margin (non-GAAP, based on earnings before interest, taxes, depreciation and amortization) as well as its consolidated EBITDA margin (non-GAAP) and earnings per share,” Verizon said.

Such is the competitive environment that Verizon expects that financial pressure even as it expects higher retail postpaid gross additions, both sequentially and year over year.

About 75 percent of Verizon’s quarterly upgrades were “strategic or high-quality,” meaning they represented upgrades from a basic phone, a 3G smartphone or represented an upgrade by a high-value customer.

The percentage of customers choosing the “Verizon Edge” equipment-installment plan option in the fourth quarter of 2014 currently is 24 percent, double the rate of third-quarter 2014, when 12 percent of total phone activations. used the equipment installment plan.

“Total retail postpaid disconnects are trending higher both sequentially and year over year in this highly competitive and promotion-filled fourth quarter,” Verizon said.

40% of Enterprises Will Go "Wi-Fi First" by 2020

Ethernet cabling remains the mainstay for enterprise data connections, but Wi-Fi is becoming a “first choice” of employees, for a number of reasons.

By 2018, 40 percent of enterprises will specify Wi-Fi as the default connection for non-mobile devices, such as desktops, desk phones, projectors, conference room, Gartner analysts now predict.

User reliance on mobility is key. In the emerging economies, users are adopting smartphones as their exclusive mobile devices while in developed economies, multi-device households are becoming the norm, with tablets growing at the fastest rate of any computing device, Gartner says.

Gartner predicts that, by 2018, more than 50 percent of users will go to a tablet or smartphone first for all online activities.

“The use pattern that has emerged for nearly all consumers, based on device accessibility, is the smartphone first as a device that is carried when mobile, followed by the tablet that is used for longer sessions, with the PC increasingly reserved for more-complex tasks,” said Van Baker, research vice president.

Given that consumer shift to untethered and mobile devices, Wi-Fi makes more sense.

“Ethernet cabling has been the mainstay of the business workspace connectivity since the beginning of networking. However, as smartphones, laptops, tablets and other consumer devices have multiplied, the consumer space has largely converted to a wireless-first world," said Ken Dulaney, vice president and distinguished analyst at Gartner. “we expect many organizations to shift to a wireless-by-default and a wired-by-exception model.”

Globally, the “mobile first” trend will be fueled by the ability to buy a smartphone for less than US$100, by about 2020.

By 2018, 78 percent of global smartphone sales will come from developing economies, as well.

By 2018, Gartner expects a $78 average selling price for a “basic phone” to be $78, while a simpler “utility phone” costs $25.

Some low-cost smartphones are expected to reach approximately $35 (unsubsidized) by the end of  2014, compared with the $50 entry-level smartphones seen in 2013.

Implications of "Pervasive" High Speed Access

Though some might focus on findings related to typical high speed access speeds, use of smartphones, cost per delivered megabyte or investment in next generation networks, some might say the key strategic point raised in a new study of G7 high speed access is the movement to “pervasive” access.

And that point is that high speed access evolves over time to a stage where “most end-user connections are wireless, at speeds produced only by wired systems in earlier stages,” the study argues.

Note the prediction: untethered access speeds eventually approach wired network speeds. That has potential implications for the ability to substitute mobile or untethered access for fixed access, as well as for the strategic value of all fixed networks.

Obviously, the speed match will be highest for optical-to-Wi-Fi connections than for optical-to-mobile connections, partly because of distance effects, partly because of spectrum constraints and partly because for reasons of network architecture.

Basically, bandwidth and speed are inversely related, so short Wi-Fi links will supply faster access than mobile macrocells spanning distances of miles. Additionally, local Wi-Fi has access to more spectrum than any single mobile service provider.

Also, mobile networks reuse spectrum in ways that mean all the available spectrum cannot be used at any single location. Wi-Fi networks can use all available spectrum, at every location, subject to interference issues.

The shift to “pervasive” networking also is significant because it points to the future evolution of the high speed access business: from fixed to mobile and untethered, with a key role played by the fixed infrastructure as a way of extending core network access close to network edges, allowing a high degree of untethered access.

Prior high speed access networks featured a high-performance wide area network optical core, a regional distribution network and then a mid-speed copper access network extending core network transport for distances of perhaps 3.5 miles, in suburban areas.

Increasingly, the optical network core extends deep into the metro-area distribution network, and in the case of optical fiber access networks, to a neighborhood or single location, with copper or radio distribution on a local basis.

That is the case for “fiber to neighborhood” networks that use optical media to an area of a score, or perhaps several hundred homes, with copper media for a kilometer to perhaps a mile, and then local distribution typically using Wi-Fi within a location.

Mobile networks have been built with optical cores connecting to microwave, fiber or copper distribution, and then radio access for towers reaching a few to several miles. More heterogeneous networks now are appearing in dense urban areas, in some cases using small localized cells that cover small areas.

Fiber to home networks extend optical media to actual end user locations, with local distribution typically using Wi-Fi rather than the older Ethernet cable interfaces.  

The study argues that high speed access develops in three distinct phases. At the “basic” stage  

wired telephone, cellular telephone, and cable TV networks are coupled with broadband electronics to provide a basic level of connectivity 10 to 100 times greater than voice networks.

At an “advanced” stage, after more optical fiber deployment, better modulation techniques, more sensitive radios, better signal compression and signal processing, as well as additional spectrum allocation for untethered and mobile use, speed improves another 10 to

100 times.

At the “pervasive” stage, most user connections are mobile or untethered and access speeds better approach fixed network speeds.

Beyond the matter of access speed for untethered and mobile devices, the "pervasive" access also points to expected changes in "fifth generation" mobile networks and application development. When access is pervasive, mobile devices will increasingly represent the way people use the Internet and applications.

And that suggests app development increasingly will revolve around "mobile" interfaces, form factors and input-output methods. Also, as increasingly is the case, apps will shift in the direction of location-specific, activity-aware and sensor-assisted app features.

Thai Telcos Face Higher Costs, Less Revenue

The Thai telecommunications market, which arguably has been unstable over the past decade, looks to get another remake.

A possible merger of state-owned Telecom of Thailand (TOT) and CAT Telecom, a talked-about option since at least 2006, might actually happen, if the Thai government gets its way.

The Thai government proposes to create a new wholesale company providing wide area optical transport services, and also owning the existing mobile tower networks.

Revenue issues for the two state-owned firms arguably have been made tougher by the decision to create a national backbone and tower services firm.

That should negatively affect TOT and CAT, which today are the suppliers of all wholesale communications facilities in Thailand. In effect, the new national backbone network will remove revenue-generating assets. In some cases, where TOT or CAT need those assets to support their own businesses, new costs are added, at the same time.

The current system, where “concessions” rather than “licenses” are the patten, means that 30 percent of retail service provider revenue is owed to the state. Now CAT and TOT might find themselves payers rather than payees for some services.

The potential merger of TOT and CAT, along with the new national backbone network, occur against a  backdrop of an arguably inconsistent and unstable regulatory framework in Thailand.

For mobile services market leader AIS, that means a concession fee for each prepaid customer of 25 percent, and a fee for each postpaid customer of 30 percent.

Most users of voice communications in Thailand have for some time relied on mobile rather than fixed network service provided by private operators, though CAT’s mobile service, majority owned by Hutchison Whampoa, is among the larger firms in the Thai market.

The new backbone network presumably means some of the concession fee will flow to the national backbone company, not CAT or TOT.

That, of course, will have negative repercussions for cost structure at TOT and CAT.

Already, the Thai government appears to have asked both CAT and TOT to rapidly reduce costs by 10 percent. That, combined with a loss of some revenue to the new national backbone network, is one reason a merger between the two firms might be necessary.

Common Carrier Regulation of Fixed High Speed Access Would Raise Taxes $90 a Year

Title II common carrier regulation of consumer Internet access--whatever else happens to pricing and investment in next generation networks--also will raise taxes for U.S. consumers.

The Progressive Policy Institute calculated that the average annual increase in state and local fees levied on U.S. fixed network users will be $67 each year, while mobile broadband taxes would grow $72 per line, per year.

The annual increase in federal fees per household will be roughly $17. That implies a potential higher cost of about $84 to $89 a year.

“When you add it all up, reclassification could add a whopping $15 billion in new user fees on top of the planned $1.5 billion extra to fund the E-Rate program,” the Progressive Policy Institute notes.

The higher fees would come on top of the adverse impact on consumers of less investment and slower innovation that would result from reclassification.

Those charges would occur because once Internet service providers are labeled “telecommunications providers” under Title II, their services become subject to both federal and state fees that apply to those services. The two main federal charges are an excise tax and a fee for “universal service.”

The bottom line is that annual residential fixed network high speed access costs would likely go up by $8 in Delaware to almost $148 in certain parts of Alaska, on an annual basis.  

The average fee for fixed network high speed access users would range from $51 to $83 per year.

Mobile phone bills would likely increase by at least that amount, as well.

The additional spending per household for fixed high speed access alone, attributable to the federal universal service program would amount to $2.014 billion (equal to $1.38 per month increase x 12 months x 121.7 million households).

U.S. Linear TV Viewing Drops 4.4% in a Year

Digital video viewing is up by double digits across key adult demographics, while viewing via a traditional TV screen is dropping, according to Nielsen’s new “Total Audience Report.”

The average U.S. adult spent four hours and 32 minutes watching live TV in the third quarter of 2014, down 4.4 percent from four hours and 44 minutes in 2013.

The amount of time spent on time-shifted viewing using a digital video recorder rose to 30 minutes, from 28 minutes in the third quarter of  2013.

Time spent using the Internet on a computer climbed to one hour and 6 minutes, up from one hour, the report noted.

Time spent watching video using a smartphone spiked to one hour and 33 minutes, from one hour and 10 minutes a year ago.

Digital-video usage overall rose 60 percent year over year, from six hours and 41 minutes in the third quarter of  2013 to 10 hours and 42 minutes in the third quarter of 2014.

Time spent watching Internet video was up 53 percent among adults 18 to 49 quarter over quarter, Nielsen reported.

Linear TV viewing for viewers 18 to 49 dropped three percent.

Among adults 25 to 54, viewership of digital content grew 62 percent,  while linear TV declined two percent.

Among adults 55 and older, digital viewing rose 55 percent while linear viewing was flat year-over-year.

Declining Demand a Problem for Growing Range of Telecom Products

The biggest problem arguably faced by the linear video subscription business is declining demand for the product, a trend that already has affected fixed network voice and mobile network text messaging.

New data from Bernstein Research shows TV audiences have continued to decline. And though one should not give too much credence to any one-week change, aggregate cable television audiences dropped eight percent Nov. 17 through 23 of 2014, while broadcast TV viewing dropped nine percent, according to Bernstein Research.

Aggregate audiences are also down over the third quarter of 2014, a possibly more-significant trend. Both cable TV and broadcast TV viewing dropped nine percent.

Children's programming fared even worse, with audiences falling 12 percent in a week, and 15 percent during the quarter, according to Bernstein.

The slipping viewership among young audiences may be because children's programming is particularly vulnerable to competition from streaming services like Netflix and Hulu, some argue.   

Nickelodeon viewership fell 25 percent and Disney Channel viewership fell 24 percent.