What Happens to "Triple Play" Strategy when Voice and Linear Video Both Have Dwinded?

As foundational as the “triple play” bundle of voice, linear video entertainment and high speed access now is in the U.S. consumer telecom services market, it is bound to change as over the top subscriptions gain traction.

If that seems an unremarkable statement, consider that AT&T CEO Randall Stephenson--presently working to acquire DirecTV--also says says it is “inevitable” that the traditional bundle of cable television channels will crumble as more content travels “over the top.”

“Crumble,” he said. So what about DirecTV, the sort of operation that will be negatively affected by the shift?

AT&T is fully prepared for erosion of the DirecTV customer base over time, as over the top streaming becomes a bigger market reality.

Verizon, for its part, has been more circumspect about linear video in recent years, arguing that the company doesn’t actually make much money from linear video subscriptions, and actually has more confidence in eventual over the top solutions.

The apparent differences in video strategy on the part of AT&T and Verizon might be less than they appear. It is a matter of timing only in part. Probably equally significant is that AT&T has a larger fixed network geographic footprint than does Verizon.

Linear video really is a scale business, and AT&T would benefit more than Verizon does from a successful linear video adoption rates by its customers. In the past, smallish numbers of video-capable households have been an issue for AT&T and Verizon.

For both firms, as for cable TV operators, the issue is the timing of the shift.

At the moment, many would argue that the “essential bundle” is high speed access plus linear video. How that might change in the future, when streaming video is the replacement product for linear subscription TV, is the issue.

But the timing matters. AT&T is betting that owning DirecTV will provide value long enough to justify the acquisition.

Still, if “channels crumble,” does the linear video business model also crumble? Even as it hopes to invest billions in linear video, AT&T also is saying the business eventually will diminish. So what happens to the triple play?

Verizon Predicts 2015 Results Similar to 2014: But What if Competition Gets Worse?

As has been the case for a couple of years, Verizon Communications fourth quarter 2014 financial results were robust enough to be the envy of many other tier-one service providers in the developed world. Top-line revenue growth was nearly seven percent.

Verizon also added two million net mobile accounts.

Verizon predicted continued solid growth for 2015, which many will consider even more important than fourth quarter results.

For 2015, Verizon expects consolidated revenue growth of at least four percent, profit margins (EBITDA) consistent with full-year 2014 results and strong free cash flow generation.

Mobile segment operating revenue climbed 11  percent in the fourth quarter.

Full-year total revenues to $87.6 billion, up 8.2 percent compared with full-year 2013.

Mobile segment operating income margin was 23.5 percent. Service EBITDA margin was 42 percent in the quarter. Full-year mobile segment EBITDA was 48.5 percent.

So no worries, eh? Well, that depends. How much competition Verizon faces in the U.S. mobile market is part of the uncertainty. Near term, the issue is T-Mobile US, Sprint and AT&T. But it looks as though Google will start to be a new factor in 2015.

In other words, past assumptions will have to be revised if Google gets into the mobile business in a significant way, adding even more instability in the market.

Verizon reported a loss of 54 cents per share, compared with earnings per share of $1.76 in the same quarter of 2013.

Revenue growth was strongly driven by equipment revenues, not service revenues. That is a nuanced performance, as observers had predicted that revenue would shift from recurring service revenues to device revenues as service providers shifted from a “subsidy” model to an “installment plan” model.

Recurring service revenue grew about 2.8 percent, down from the seven percent rate in the first quarter of 2014.

Also, mobile net adds were driven by tablet accounts, a trend that has been in place for more than a year. Of the two million net adds, 1.4 million were tablet accounts. So it is no surprise that average revenue per account dipped from $161.2 in the third quarter to $158.80 in the fourth quarter.

Mobile service profit margins dropped from 47 percent to 42 percent sequentially. Recurring service earnings dropped about eight percent (EBITDA).

In the fixed network segment, total revenues were $9.6 billion in fourth-quarter 2014, down 1.6 percent year over year.

Consumer revenues were $4 billion, up 4.1 percent compared with fourth-quarter 2013, with FiOS revenues representing 77 percent of the total.

If the competitive pressure accelerates, it is hard to say whether current expectations prove to be realistic.

Stand-alone Streamed HBO Might Cannibalize Linear HBO Quite a Lot, Study Suggests

HBO keeps arguing that its new streaming service targets consumers who buy high speed access, but not linear video subscriptions or HBO. In other words, a stand-alone, streamed version of HBO will not cannibalize HBO as sold by its video distributiors.

But there are some hints in a new survey that as much as 91 percent of the most-likely buyers of a streamed, stand-alone HBO service are, in fact, present buyers of HBO as part of their linear video subscriptions.

If so, the risk of cannibalization of linear versions of HBO, or perhaps even the whole linear video subscription, is extremely high. 

The new study by Parks Associates  finds 17 percent of U.S. broadband households are likely to subscribe to an over-the-top (OTT) video service from HBO.

Among these likely subscribers, 91 percent are currently buying linear video subscriptions, and nearly half say they would cancel their linear subscription service after subscribing to theHBO OTT service.

The research firm reports the average head of household in a U.S. broadband household watches nearly 3.5 hours of OTT video each week on a TV set.

Households with high speed access in 2010 consumed about 1.6 hours a week of Internet delivered video. In 2014, such households watched three hours a week.

In 2010, about 17 percent of video viewing in high speed access homes •was on devices other than the TV. By 2014, that figure increased to over 31 percent.

As you might guess, consumer younger than 35 watch less than seven hours a week of linear video on a TV. In 2013, the typical U.S. adult watched 4.5 hours a day. In other words, typical weekly TV viewing in 2013 represented 31.5 hours.  

Young consumers are also far more likely to say that online video is just as good as subscription TV, Parks Associates says.

The average monthly amount paid by broadband households for a linear TV subscription service has grownfrom $74 to $82 over the past three years, says Parks Associates.

The average amount paid per month for a triple play package (subscription TV, landline voice, and broadband) increased from $146 to $160 over the same period.

T-Mobile US Alters Credit Policies to Spur Smartphone Purchases

T-Mobile US, in a new credit policy it calls “Smartphone Equality,” will use a different approach to assessing potential customer credit, a move T-Mobile US expects will allow it to sell smartphones to a significant number of new customers.

The problem, says John Legere, T-Mobile US CEO, is that as many as 50 percent of potential buyers do not qualify for the best plans T-Mobile US and other leading U.S. mobile service providers offer.

“For years, companies have based decisions about who gets the best prices and even access to basic products and services solely on credit scores churned out by software from a credit bureau,” says Legere.

“With today’s announcement, every T-Mobile customer who’s paid their wireless phone bill on time for 12 straight months will qualify for our very best device pricing on every smartphone and tablet we sell − including zero down with no interest and no credit check,” says Legere.

Legere is banking on one key assumption: that “our relationship with that customer is actually a better predictor of future behavior than their credit history.”

Some will worry about the potential exposure T-Mobile US might be taking in terms of bad debt. Others will look for further pressure on AT&T and Verizon net customer additions.

Verizon Wireless added 2.1 million net retail connections in the fourth quarter of 2014, including close to two million net retail postpaid connections.

On the other hand, churn was  higher than usual churn and profit margins dipped. Verizon reported a quarterly loss of 54 cents per share, compared with earnings per share of $1.76 in the fourth quarter of  2013, based in part on charges related to benefit and pension plans.

T-Mobile US is counting on the new policies to increase the number of smartphone and tablet customers in its customer base, a development that spurs adoption of mobile data plans and bigger mobile data plans.

More Channel Conflict in U.S.. Mobile Business

The loosely-coupled Internet ecosystem perhaps is not like some other tightly-coupled ecosystems that might tend to break down if there were channel conflict.

In some industries, industry segments have contractual relationships with each other, because the output from one segment is a necessary input for the next segment.

That is not true of the Internet ecosystem, where, almost by design, the value chain can work, to an extent, without any formal business relationships between participants, because the value chain is loosely coupled.

And channel conflict is growing within the Internet ecosystem. Google, for example, works on a number of fronts to reduce device and Internet access prices, for example.

And is when Google is not directly competing with other participants in the value chain, by becoming an Internet service provider in its own right, producing its own tablets and phones, or perhaps by becoming a mobile service provider as well.

That is neither illegal nor unethical. One might argue it is a rational business strategy. But it is a strategy built on channel conflict, perhaps a new type of competitive dynamic in a business with intra-segment competition.

In other words, mobile service providers are used to competing with each other. Telcos and cable TV companies are used to competing in the fixed network triple play business. App providers are used to competing with other app providers in many segments.

What has been happening more often is that competition now is developing between providers in different segments.

Recently, the U.S, mobile service provider business has been in the throes of a fierce marketing battle. Now, if Google enters the business, in another attempt to force down prices of yet another segment of the Internet ecosystem, channel conflict will grow even more.

Up to a point, one might argue that is a healthy thing, in the sense of markets producing better products, at lower cost. But channel conflict produces lots of friction between segments, not only within each segment.

Google Reportedly to Enter U.S Mobile Service Provider Market

Google reportedly is considering becoming a full-fledged mobile service provider in the U.S. market, entering the market as a mobile virtual network operator. The rumor is not new. Google has been looking at becoming a mobile ISP for some time.

Google might arguably have been motivated to launch Google Fiber to create widespread pressure on other leading Internet service providers to up their speeds. 

The move into mobile likely has several strategic drivers. Google has to transition to a new role in mobility as the value of its traditional search business is pressured by mobile alternatives for its traditional search-driven advertising business. 

That might account for the move into mobile operating systems, devices and apps. 

But Google also benefits from lower Internet access prices, and might believe its own entry could help drive down mobile Internet access price.

Following Google's launch of Google Fiber, and its $1 billion investment in SpaceX to support the creation of a huge fleet of low earth orbit satellites to provide Internet access, the move would highlight the increasingly porous boundaries between Internet ecosystem providers, with most of the move into adjacenies happening on the part of application providers.

That is characteristic of newly-competitive markets and also of mature markets, as contestants either move to secure adjacencies. Sometimes that is to enhance the core value of the core role, and sometimes is driven by a need to create new revenue streams that compensate for revenue losses in the core business. 

The boundaries between ecosystem participants tend to become more porous as competition increases. That is why app providers become access providers, or app proviers become device suppliers. In other cases, device suppliers become app providers. 

In other cases video content suppliers become voice and data providers, while voice and data providers become video entertainment suppliers. We sometimes forget that for the better part of two decades, Internet service providers have worried that firms such as Google, Facebook or Amazon might beome access service providers.

That fear already has proven justified. Google Voice, then Google Fiber, and now perhaps Google mobile are initiatives undertaken by Google to directly compete with former partners in the ecosystem, even if the partnerships are functional, and not strictly based on contractural relationships. 

Can Elon Musk Disrupt a Significan Part of the Global Bandwidth Business?

It has been quite some time since satellites carried a significant portion of global bandwidth. That role has been assumed by the networks of optical fiber cable circling the globe, instead.

But Elon Musk wants to shake that up in the same way he wants to shake up the auto business, satellite launch business, the Hyperloop transportation system and SolarCity, the retail solar power business.  

And make no mistake: although most of the potential impact and attention will be focused on the objective to delivering Internet access to billions of people, there are other potential disruptions for the capacity industry.

Almost lost in the reporting about the proposed new venture is the potential to challenge--as crazy as it might seem--the long haul business. In fact, Musk seems to be focusing on the possibility that, over the long term, satellite displaces much of the long haul bandwidth network business now based on undersea cables.

“The long-term potential is to be the primary means of long-distance Internet traffic and to serve people in sparsely populated areas,” said Musk.

That will strike some as fanciful. But this is Elon Musk. He seems to specialized in commercializing “fanciful” products.

It is a scientific fact that light travels as much as 40 percent faster through a vacuum than through an optical fiber. When that can be turned into a commercial fact (content and information with up to 40 percent less latency) is the question.

The newly-announced satellite Internet venture would feature hundreds to thousands of satellites in low earth orbit. Such LEO constellations have been proposed before (Iridium and Teledesic come to mind).

Some might be skeptical that the new venture will succeed at one of its potential business models, namely providing retail Internet access to billions of people globally. Iridium and Teledesic, other touted LEO satellite networks, did not get off the ground, or survive.

For some, the more intriguing question is where LEO satellite networks could grab a significant portion of global long haul traffic. That will strike many as fanciful. But this is Elon Musk, so the question merits more than a casual dismissal.

For starters, the satellite fleet will provide its own backhaul. And if the potential base of retail users is billions of people, that could be a substantial amount of capacity in its own right. The fleet presumably will be used both to beam signals to and from the ground stations, but also possibly between the satellites in orbit.

Among the questions that will be raised is how the new venture will get rights to use spectrum.

But LEO satellites are lighter, less expensive to launch and require less operating power than geostationary satellites typically used to provide services such as DirecTV and Dish Network, for example.

In addition, LEO systems can use from smaller and presumably less-expensive ground stations. All those attributes, plus lower latency, play a part in thinking that LEO satellite fleets can solve the problem of infrastructure for billions of people not within reach of Internet access networks.

Latency performance is a major advantage. Satellite latency makes use of applications such as Skype, online gaming, and other cloud-based services a bit of a challenge.

“Our focus is on creating a global communications system that would be larger than anything that has been talked about to date,” Musk said. That sounds like Elon Musk.