$20 Sling TV by Dish Network Will Test Theories about Potential Streaming Markets

Dish Network, at long last, is launching a $20-a-month TV streaming service that notably includes ESPN and 11 other channels.

Sling TV is the first stand-alone streaming service that does not require a prior subscription to a linear video service, and importantly will include ESPN. That matters because, up to this point, live sports programming has been known as a “firewall” against greater cord cutting. Pre-recorded video is available from the major streaming services and from some of the networks directly.

But live sports have been unavailable in a streaming service. So ESPN will provide a major test of live sports exclusivity on linear subscription services, and the ability of live sports to glue subscribers to linear video.

Sling TV will offer live feeds of sports, news and scripted shows on TVs, computers and mobile devices, with programming  from ESPN, ESPN2, TNT, ABC Family, Food Network, HGTV and Travel Channel as part of the 12-channel package.

But, so far, no broadcast TV networks or the most-watched cable news channel, Fox News, are part of the package.

The $20 Sling TV base package features add-on packs with additional kids and news programming, available for $5 each.

Most observers would say a package including the major local TV networks plus sports and perhaps HBO is the likeliest candidate for a winning, but stripped-down, streaming package. So the Sling TV will not be a full test of that thesis.

Still, the availability of ESPN is a big deal, as it attacks the “live sports firewall” that most believe props up demand for linear TV services.

Dish is betting that Sling TV will prove attractive to Millennial consumers not interested in traditional linear video packages. But the package also might appeal to families with children.

To be sure, some studies suggest Millennials actually buy linear video subscriptions at a higher rate than often assumed. Some 62 percent to 65 percent of Millennials surveyed by Deloitte in 2012 reported they bought subscription TV services and had no plans to change.

Other studies suggest a significant minority of Millennials do not buy linear TV services, though.

Sling TV will test the theory that “skinny” packages of programming will satisfy some consumers unhappy with the traditional linear packages, unwilling to spend so much on linear video and more willing to watch streaming content, especially when consumers can receive over the air programming directly on their TVs.

Ultimate Impact of T-Mobile US Attack Remains Unclear

Most consumers should cheer T-Mobile US efforts to disrupt the U.S. mobile market, which some would characterize--not without reason--as a structural duopoly. Between them, Verizon and AT&T have about 73 percent consumer market subscriber share, and about 80 percent of enterprise account share.

Even if observers are right to worry about the long-term health of the mobile market, the benefits of the T-Mobile US pricing attack are creating better value for consumers. The issue is what happens longer term.  

Most would likely say a return to monopoly is unwanted, just as most would likely prefer robust competition, consistent with long term sustainability. And that will be the trick: fostering maximum feasible competition while not endangering the long term ability of suppliers to reinvest in next generation networks.

It is a tough balance to achieve.

Right now it is hard to say, as the U.S. mobile market has a structure some of us would say is fundamentally unstable. That isn’t to argue about who will gain, or lose, in the coming years. It is to argue that the present market structure does not have the classic form of most stable markets.

It also is possible to argue that the U.S. mobile market is close to stable, though.

Some would cite the rule of three or four in making that argument.

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. In other words, the top provider has market share double that of number two, which in turn has market share double that of number three.

The U.S. mobile market now is bifurcated, with AT&T and Verizon--depending on how one measures--roughly equivalent, with Sprint and T-Mobile US far behind.

Still, some might argue the market is effectively competitive, and is currently becoming more competitive. Dish Network, for example, potentially will enter the market, and Comcast certainly will as well. How each firm makes its entry will affect possibilities for changing the market structure.

The point is that the U.S. mobile market is in a period of instability.

Economists differ on the effects of duopolies on the market. According to the Cournot model, duopolies lower prices, although they not so much as markets with perfect competition, a condition marked by market circumstances in which no one participant dominates.

The Bertrand model of competition, on the other hand, predicts that duopolies will eventually lower prices as much as perfect competition would. Like most theoretical models of economic forces, both the Cournot and the Bertrand models can be persuasive, but neither is viewed as definitive.

Nobody believes the mobile business ever will be as competitive as retail apparel, for example. But few probably believe a duopoly or monopoly is a good idea, either. The issue is what market structure might yield the greatest amount of competition. Some might call that a contestable market.

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.

And that is why revenue growth, and subscriber growth, are so important. When markets are allowed to consolidate, all competitors who survive must grow faster than the market average, one might argue.

All except the two largest share competitors will be either losers and eventually eliminated.

So 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.

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.

Any firm not willing to do so loses share. If every contestant is willing to do so, then prices and margins will be forced down by overcapacity until at least one firm 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.

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 U.S. mobile market is unstable.

Of course, some might argue that is broadly true of the entire global industry. Fixed network revenues are shrinking, mobile revenue growth is slowing, flat or negative. Competition arguably has grown and there are high capital investment requirements for new networks and spectrum.

Revenue growth is driven by mobile Internet access, but that eventually will slow as well, necessitating a search for new revenue streams. And there are other issues.

AT&T has pension obligations of perhaps $56 billion--more if AT&T’s assumed annual return on its pension assets (stocks and bonds) of about eight percent falls short. The obligation is less if AT&T is able to sustain higher rates of return on its pension assets. Basically, strong equity markets help, low interest rates hurt.

It isn’t unusual, but AT&T’s pension plan pension plan also is underfunded by perhaps $9 billion.

In the fourth quarter of 2012, for example, both Verizon and AT&T booked charges against income that caused losses. And they are not alone.

U.S. firms part of the Standard and Poors 500 Index had in 2013 perhaps $440 billion of actual pension plan losses not yet reflected on their books.

Pension obligations are not at the top of the list of concerns about the long term future for the mobile industry, either for suppliers, consumers or policymakers and lawmakers. But pension obligations illustrate the the importance for multiple stakeholders in a vibrant mobile industry, long term.

European telecom regulators, for example, recently have started to adjust policies to balance  support for competition with support for investment and long term sustainability of the industry.

Future TV is Coming, But the Business Model Remains Unclear

Some research findings are bound to be obvious. Most people in the United States either drive a car, use public transportation, eat a meal outside the home or use a mobile phone. So a study showing that to be true would not surprise you.

Neither are you likely to be surprised if told three out of four U.S. households already use some form of “on demand” video entertainment, as a new survey has found.

And most of us would likely agree that some form of on-demand delivery is going to be the norm in the future.

About 76 percent of U.S. households have a digital video recorder, subscribe to Netflix or use video on demand services from a cable or telco provider, the Leichtman Research Group study discovered.

Some 26 percent of households use two of the services and 11 percent use all three services.

Beyond the assumption that a shift to on-demand is coming, it is hard to accurately predict how the business model might change, even if such changes have happened often, before.

User behavior with respect to video entertainment--and business models--have changed significantly over the past half century. “Television” was “broadcast TV" 50 years ago, using a simple "free to end user," advertising-supported business model.

About the 1980s, a big change began.

In addition to broadcast TV, “cable TV” began to grow in urban areas, though it had been a product sold largely in rural areas since the 1950s. The new adoption was driven by a new value proposition, however. The new business model was "subscriptions," even if advertising eventually became a significant revenue stream.

Broadcast TV was a new ad-supported medium. Rural cable TV was a “distant signal access” business based on end user subscriptions. There were other changes, though.

Urban cable TV was an “additional choice” service, featuring new channels and content formats not available “over the air.” It had to be. Why else would people pay for something they already got "for free?"

With the advent of videocassette recorders, followed by digital video disc players, “home video” became a new segment of the business, providing the first “watch what you want, when you want to” value proposition. Video rental and later packaged video purchases became the additional new revenue models.

“Video on demand” services then were created by video subscription providers to try and capture some of that market demand, with a transaction-based "pay per view" model.

Today’s Netflix, Amazon Prime, YouTube and other streaming services, plus use of digital video recorders, are the latest version of “on demand” consumption, using a mix of subscription, advertising and pay per view revenue models.

Broadly, “television” has been augmented by “video,” and linear by on-demand formats, for decades. Along the way, new distributors and revenue models have been created. But none have directly displaced the linear video subscription business.

But the continuing movement to "on demand" will eventually lead to efforts at direct disruption and substitution.

It probably comes as no surprise that 62 percent of U.S. households that subscribe to a linear video service have a DVR. In addition to “choice,” consumers increasingly want to “watch what they want, when they want it.”

It would be easy enough to predict a continuing shift to on-demand formats. What is harder is to accurately predict what business models will emerge.

The LRG survey found 36 percent of linear video subscribers also use Netflix, and that 36 percent of those Netflix subscribers stream video daily. About 72 percent stream weekly.

One might safely suggest that--eventually--on-demand subscriptions will begin to grow at the expense of “linear” formats.

Many would predict that will have negative repercussions for linear video suppliers. Might Netflix or some new firm not yet founded emerge in a dominant role in a post-linear television business? Or will the advantages of bundling for many consumers reemerge?

Will the bundled approach go away, or will most consumers find new forms of bundling more valuable than one-off subscriptions?

Cable subscribers pay an average of $85.80 a month (with many paying well over $100), yet watch only about 17 of the 189 channels in their cable bundle. Netflix, in contrast, costs just $9.99 a month. So some surveys suggest only 24 percent of 18- to 24-year-olds have cable, compared to  61 percent who pay for a stand-alone streaming service.

Or will linear video providers be able to leverage their existing business to capture much of the new non-linear business?

Scale matters in the TV business, and if networks widely decide to license access to their content on a stand-alone streaming basis, or on a wholesale business to streaming services, existing scale could well prove decisive.

“Direct to end user” marketing and fulfillment costs are substantial, and no existing linear network has the infrastructure in place to do so on a low-cost basis. It seems doubtful many consumers are willing to pay $20 or more for access to a single network’s content. But it is not clear most networks can afford to charge less.

That suggests a distributor and bundling role still will be necessary, even when all major networks are willing to license content for streaming delivery.

Why Internet of Things Matters

With the Internet of Things at the peak of its hype cycle, we will all be hearing predictions of non-linear growth. Many forecasts, for example, call for deployment of 20 billion or 30 billion IoT units by 2020.

The stakes for telecommunications service providers are huge. If one assumes that most tier one service providers will have to replace about half their current revenue over about a decade’s time, and if one assumes the broad IoT category represents the best candidate for driving as much as half of that new revenue, it matters greatly whether service providers actually can do so.

In other words, practitioners hope that the broad IoT category can drive new revenue growth, within a decade, representing about 25 percent of all current revenues. That is a big deal, especially if the industry proves unable to grow all other new revenue sources at a level representing about 25 percent of current proceeds.

The uncertainty is palpable, at the moment.

A recent survey of executives watching the market admit they lack a clear perspective on the concrete IoT business opportunities. That isn’t as flaky or fuzzy as it might seem.

Few would have been able to predict the many revenue models and businesses created by the Internet, either. Of course, the key qualifier is that revenues earned by service providers within the Internet ecosystem are a fraction of total revenues.

A few years ago, some analysts had predicted that, by 2020, the market for connected devices would be between 50 billion and 100 billion units. The point is that projections already have proven too optimistic.

None of that is at all unusual. But service providers are pinning rather large hopes on their ability to create a big new business in IoT.

Semiconductor executives surveyed in June 2014 by McKinsey said the Internet of Things will be the most important source of growth for them over the next several years—more important, for example, than trends in wireless computing or big data.

Those hopes might be misplaced, though. “For players in the traditional semiconductor market, the Internet of Things may spark some growth, but it certainly will not change two percent industry growth today to the 10 to 15 percent growth we had in the 1980s,” one industry executive says.  

If so, that might imply that hopes for massive new service provider revenues might also be excessively optimistic, at the moment.

Important innovations in the communications business often seem to have far less market impact than expected, early on.

Even really important and fundamental technology innovations (steam engine, electricity, automobile, personal computer, World Wide Web) can take much longer than expected to produce measurable changes.

Quite often, there is a long period of small, incremental changes, then an inflection point, and then the whole market is transformed relatively quickly, but only after a long period of incremental growth.

Mobile phones and broadband are among the two best examples. Until the early 1990s, few people actually used mobile phones, as odd as that seems now.

Not until about 2006 did 10 percent of people actually use 3G. But mobiles relatively suddenly became the primary way people globally make phone calls and arguably also have become the primary way most people use the Internet, in term of instances of use, if not volume of use.

Prior to the mobile phone revolution, policy makers really could not figure out how to provide affordable phone service to billions of people who had “never made a phone call.”

IoT might prove to mimic that pattern. And that is the optimistic scenario. Not all innovations prove to have such impact.

Still, the reason the industry needs to create viable and big business models around IoT is that it now is the single best hope for replacing about a quarter of all current revenues.

We might reasonably expect video entertainment, mobile data and out or market expansion to produce additional revenue representing about a quarter of the size of existing firm activity.

The issue there is that some of those gains are “zero sum.” Gains by one contestant come only at the expense of another contestant, and do not represent net market growth. IoT is among the few big new revenue sources that actually grow the market.

And that is why IoT matters.

Telecom Ecosystem Tension Grows as Business Model is Stressed

A lawsuit filed by five banks for losses related to credit card hacking illustrates in a new way the business tensions within an ecosystem can erupt. In a lawsuit filed by five banks, the plaintiffs are seeking to recover their costs of coping with a massive data breach at Target, alleging that Target was negligent.

The cost of replacing credit and debit cards from a 2013 data breach has been estimated at $400 million.

In the telecommunications business, similar tensions exist between content owners and networks and video subscription distributors over the price, terms and conditions of content rights.

Networks want higher per-subscriber fees and carriage of many new channels. Distributors want lower costs and fewer requirements to carry many new channels with low viewership.

Device suppliers depend on service providers for distribution, but mobile service providers chafe at the notion the perceived value of mobile subscriptions is driven by the devices brands.

Operating system suppliers have a complex relationship with their device partners and service providers. In some cases, service providers have hoped at least one additional major operating system could arise to create more competition for Apple iOS and Android.

Some would-be suppliers have tried. But consumers and software developers have yet to be convinced.

Consumers generally have benefitted, with lower voice prices, lower mobile Internet access prices and lower fixed network Internet access prices, globally. In the developed world, where speeds have climbed, prices have declined on a “percent of household income  basis” since at least 2008.  

If you are a U.S. consumer who purchased 768 kbps or T1 Internet access in the mid to late 1990s, actual prices paid have dropped, even if speeds have grown by an order of magnitude or more.

Any industry relies on a complex web of relationships between value chain participants, from end user customers at one end to regulators and infrastructure suppliers at the other end. And those relationships often are unsettled, especially when competition and profit margins are under pressure.

ISPs, Social Media, Subscription TV Score Below Average for Consumer Satisfaction

It might be worth noting that consumer satisfaction is rarely directly related to customer spending, customer retention or churn, even if one assumes the relationship would be quite direct.

Sometimes people keep buying services, and show relatively low churn, even for products they claim to be somewhat unhappy with.

Of the five worst-performing industries routinely tracked by the American Customer Satisfaction Index are Internet social media, health insurance, airlines, subscription TV services and Internet access services.  

Few industries have offered less satisfaction to consumers over time than commercial airlines or several of the telecommunications services, but health insurers have fallen substantially since 2005.

While subscription TV and Internet service providers earn the very lowest ratings among 43 industries in the Index, health insurers share a berth close to both airlines and social media among ACSI’s bottom five industries for customer satisfaction.

Ranked on a 100 point scale, where 100 is the highest score, ISPs score 63, at the very bottom. Video entertainment services rank at 65. Airlines score a 69, health insurance at 70 and social media at 71.

It might be worthwhile to consider that if a highly-used and apparently highly popular and free service such as social media earns only a 71 score, it might not be so clear what is being measured, or why participants rank satisfaction for a well-used and free service lower than average.

Mobile service scores a 72, while fixed service gets a 73 satisfaction score. The average industry scores 76 to 77.  

Most people could think of plausible reasons why dissatisfaction would be high for airlines, communication services or health insurance.

Insurance claims processes are complex and arguably more frequently used than other types of insurance interactions. That means the odds something will prove irritating is higher than for some other products.

High premiums, deductibles and co-pays also provide easy sources of irritation. Constant price hikes for video subscriptions are a constant irritant. It might be harder to understand the unhappiness with Internet access services. 

Perhaps consumers do not like the additional recurring payments or quality perceptions. Airline service unhappiness might be easier to understand. Service quality has declined as providers have struggled to provide the low fares people want, and still earn a profit.

Some products not tracked by the ACSI, such as payments for housing, automobiles or groceries, might well show levels of unhappiness as well, as such expenditures provide constant reminders of how much consumers are having to pay.

Bank of America, which has a large mortgage portfolio, earns a 69 ranking, the same score as earned by airlines.

Consolidated Edison scores a 69 as well.

In other words, it is possible that many monthly subscription services are a cause of irritation.

Other products, even groceries, might escape that source of unpleasantness. Supermarkets as a category earn a 78 score, for example.

Also, keep in mind that the median satisfaction score ranges between 76 and 77. The absolute highest score earned by any industry is 82, the absolute lowest score is 63. ACSI does not provide the equivalent of a "margin of error" for the rankings, but a few points, higher or lower, might be the equivalent of "noise."