When Might Cable, Telcos Devote 100% of Bandwidth to High Speed Access?

Tier-one U.S. cable TV companies and telcos face interesting access bandwidth challenges as demand for high speed access requires more capacity, while linear video also competes for that bandwidth.

Eventually, one might surmise that nearly all bandwidth on the access networks could be devoted to Internet access, that occurring when the linear TV business has become so challenged by on-demand delivery that virtually all entertainment video is delivered using streaming, rather than dedicated linear bandwidth.

The transition is the issue. U.S. cable TV operators, still the leading providers of linear programming, are steadily allocating more bandwidth for high speed access, in an incremental way that makes more efficient use of available bandwidth on hybrid networks.

Verizon, where it has FiOS deployed, reserves 870 MHz of bandwidth for linear video, but does so using a separate optical wavelength from that used to deliver high speed access and voice services. That means, as a practical matter, that linear video does not compete with bandwidth required to deliver high speed access.

In other words, linear TV and high speed access are not in a “zero sum” situation where more bandwidth for high speed access must come from bandwidth used to deliver video.

AT&T, on the other hand, uses an access technique similar that of the cable TV operators, where all services are delivered over a single physical medium, with bandwidth shared between all applications.

Like the cable TV operators, AT&T (except where it is deploying fiber to the home), has to make “zero sum” decisions about allocation of its access bandwidth. More bandwidth for high speed access must be created or taken from video bandwidth.

Should AT&T succeed in buying DirecTV, one potential future development, aside from the ability to compete for nearly 100 percent of the linear video business, nationwide, is to reclaim nearly 100 percent of access bandwidth to deliver high speed access services, as video might be delivered using DirecTV. That might not happen right away, as regulators require a transition period where AT&T is barred from switching existing U-verse video customers to DirecTV.

Cable TV operators switched from a mix of analog and digital TV signals to “all digital,” in part, to free up bandwidth for high speed access.

AT&T might eventually be able to act in the same way to reclaim bandwidth, by shifting all linear video to the separate satellite network.

Cable operators might someday shift even more bandwidth, if streaming delivery becomes the norm. That would be a radical step, and would be contemplated only at the point operators concluded they would be no worse off, in terms of revenue, by switching to streaming delivery on an all-IP network, and abandoning linear formats.

Cable operators do not seem to anywhere close to that point, yet. But they already foresee the possibility. The DOCSIS framework aims for 10 Gbps downstream, one Gbps upstream. It is hard to see how that could happen unless virtually all bandwidth were devoted to high speed access.

In that regard, Broadcom has announced gigabit speeds on hybrid fiber coax networks using its new DOCSIS 3.1 cable modem system-on-a-chip capability.

The new chip relies on use of two OFDM 196 MHz downstream channels and two 96 MHz OFDM-A upstream channels. Modern HFC networks feature something up to 948 MHz of total downstream bandwidth.

So two 196-MHz OFDM channels would represent consumption of about 392 MHz of downstream bandwidth, or about 40 percent of total available downstream bandwidth on an HFC network operating up to 1002 MHz in a standard frequency plan.

source" Volpefirm

The objective, eventually, is support for 10 Gbps downstream and 1 Gbps upstream. But that likely would occur only after the linear video subscription model has run its course, and been abandoned for streaming access.

Why Internet of Things Might, and Might Not, be the "Next Big Thing" for Telcos

Even if one agrees that the Internet of Things represents the single biggest future revenue opportunity for tier one telcos, some perspective is needed. The obvious way mobile or fixed network service providers might gain from IoT is a dramatic increase in the number of connected devices.

As a matter of perspective, consider that there are, in early 2015, perhaps 3.5 billion mobile phones in service. In a decade, some believe there will be as many as 30 billion to 50 billion additional devices connected to the Internet.

Broadly speaking, that suggests an order of magnitude (10 times) more connected devices than now are in service. If so, the upside will come directly from more subscriptions and indirectly from higher data usage or ancillary services related to Internet connectivity.

But many predict most of the new connected devices will use local wireless connections (Bluetooth, for example).

Still, on a base of 50 billion devices, some think an incremental one billion to two billion additional mobile connections are likely to be driven by IoT.

So the impact on Internet subscriptions (mobile or fixed) is not so clear. Still, it would be hard to name another area where the financial upside for telcos is higher, since the number of connected devices increases by about an order of magnitude with every generation of computing technology. Virtually all observers see something similar happening with IoT as well.  

Even if connection growth is substantial (one billion to two billion new mobile connections, for example), IoT will represent a huge new revenue stream for mobile service providers or fixed network telcos largely if the service providers are able to become part of the applications portion of the IoT business.

The reason is simple enough. IoT sensor connections, which might represent a few dollars of monthly revenue, are expected to drop into the cents per month range over time. Even two billion new mobile connections, at $1 a month, would add $24 billion in global mobile service revenue.

That is helpful, but in a business currently earning at something higher than $1.2 trillion worth of annual revenue, that is about two percent of current revenue. If that is all IoT ever represents for the telecom industry, it would be a rather small revenue contributor.

Some forecasters believe U.S. IoT application revenue already had reached the $1.4 billion range in 2014, representing 39.9 million accounts, expected to grow to 51.7 million accounts by the end of 2016.

IoT app revenues were estimated to grow from $1.43 billion in the second quarter of  2014 to $1.54 billion at the end of 2016 with a semi-annual growth rate of 1.4 percent.

In other words, average annual revenue for an IoT application was about $29.87 a month, according to one estimate by Compass Intelligence. Compare that to estimated IoT Internet access revenue of perhaps $3 a month.

Most of that activity undoubtedly includes the embedded base of industrial sensors deployed over the last three or four decades to support energy management or other industrial processes.

So the fundamental issue for tier-one telcos and mobile service providers is that most IoT revenue will be dominated by application providers, not “access,” as has been true of the Internet so far.

As telcos have struggled to find ways to create and own the key applications on the Internet, they likewise will have to strive mightily to create a role in the applications and services parts of the IoT ecosystem, to participate in most of the revenue upside.

That suggests IoT will be important for telcos and mobile service providers in the enterprise customer portions of their businesses. Fleet management operations, oil and gas, public safety or transportation, utility and factory operations are likely to be among the top vertical market opportunities.

Smart watches and other consumer IoT devices are unlikely to matter very much. That means it is not yet clear when fixed connections will be used, and when mobile connections are necessary (automobile apps, oil drilling platforms, aircraft).

If you had to make a bet, right now, about the most-promising big opportunity for tier-one telecom providers--something big enough to replace about half of all current revenue over about a decade--IoT would be the choice many would make.

The only other category that might rival IoT is streaming video, in part because of the indirect stimulation of demand for Internet access services. Assume there are about 142 million U.S. mobile Internet users. Assume there are about 85 million fixed high speed access accounts in service, for a total of 227 million connections.

Assume IoT helps drive increased purchasing of high speed access representing $5 per account, per month, or $60 annually. That might imply increased revenues of perhaps $13.6 billion in the U.S. market.

If U.S. telecommunications revenue overall is about $400 billiion, that would represent a revenue boost of about three percent.

In other words, it is hard to see how incremental IoT access revenue “moves the revenue needle” very much. If IoT is to drive significant new revenues, it would have to come from the applications and services side of the business.

Consider the impact of streaming video, by way of comparison. Assume a potential market of 80 million streaming video accounts, representing monthly revenue of $10, or $120 a year.

Assume telcos could gain 20 percent share of that market. That implies 16 million accounts with annual revenue of about $1.9 billion. If average monthly revenue were $40 a month, representing annual revenue of about $480, the industry upside might be $7.6 billion. Again, that is about two percent of U.S. industry revenues.

With fixed and mobile revenue slowing, flat or declining, the “next big thing” will matter. To be sure, there are lots of smaller and important things to be done.

But nothing might matter more than discovering big new markets and services to drive growth beyond today’s leaders. After all, the industry already has watched revenue leadership shift from fixed voice to mobile and voice to data. Video services will help, in some cases. Expansion out of market will help as well.

But organic growth still has to hinge on a new wave of services yet to be created, even if out of region expansion, video or fixed-mobile integration also drive additional revenues.  

Right now, it would be hard to name a category of services with more potential than Internet of Things, as fuzzy as that concept might be, since IoT represents many potential new markets and services, ranging from fitness trackers and watches to industrial and traffic sensors and in-home or in-car automation services.

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. That implies potential new Internet connections of as much as the same number.

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. Big new business opportunities are tough to pin down, in terms of concrete business models. Think of the Internet itself. In mobile, creation of sizable and concrete 3G and 4G revenue models took time.

But IoT remains in an early stage. For example, a recent survey of executives found they lack a clear perspective on the concrete IoT business opportunities, as promising as the field might be.

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. Whether that also means service provider hopes are misplaced is the issue.

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. But it will matter much more, for service providers, if they can create sustainable roles on the application side of the business. Patience will be required.

The Internet of Things likely will develop as many other technology-enabled markets do. Concepts are spawned in university computer labs, then are commercialized over time. That used to take the form of campus--enterprise-consumer. These days, the pattern is as likely to be campus-consumer-enterprise.

However, much like artificial intelligence, IoT might take a bit longer to gain widespread adoption. Some technologies embedded in products can be spot deployed (computers, watches, tablets, game systems).

Others require extensive ecosystems to be created (air traffic control systems, airports, reservation systems, distribution networks, aircraft, The first “Internet-connected Coke machine was demonstrated in 1982, for example. So we have been aware of Internet-connected machines for 30 years.

Technology enables new markets, but though necessary, is not sufficient to create them. Consumers and firms first need to see the value, and only then can viable and sustainable business models be created.

A great wave of expectation will be dashed initially, as growth forecasts prove too optimistic. Then, after a gestation period that could last as long as a decade, the practical value will be understood by end users, followed by a non-linear adoption pattern that occurs rather suddenly.

$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.