Will LEOs be Mobile Partners or Competitors?

Once before, the shocking growth of mobile services essentially killed the business hopes of low earth satellite providers. Iridium, Globalstar and Teledesic are among the ventures that failed to gain traction because mobile services suddenly satisfied the demand the satellite providers hoped to supply.

Round two now is coming, as several proposed new low earth orbit satellite constellations (LEOs) prepare for commercial operations, in addition to O3b, which already is in business.

O3b already is supplying 2 Gbps of backhaul for mobile operators, according to David Burr, O3b VP.

To be sure, at least a couple of the ventures hope to escape danger by holding themselves out as potential partners for mobile operators. But not all.

At least one business plan, and possibly two,  aim to provide Internet access directly to end users, perhaps globally. That will provide new competition for mobile service providers and others who provide Internet access on a retail basis to consumers and businesses.

But the retail Internet access might not be the only business segment to be challenged if the LEO constellations are successful.

As crazy as it might sound, LEOsat believes it can relay traffic, satellite to satellite, with latency lower than undersea backhaul on fiber networks. That could make LEOsat, and possibly also SpaceX, a competitor to long haul undersea networks.

LEOsat, for example, proposes to launch a new constellation of low earth orbit satellites to provide backhaul for a number of customer segments, ranging from maritime communications to enterprise private links for high speed trading.

The new wrinkle is that LEOsat proposes to do so entirely using its space segment, with latency lower than undersea optical fiber. That is something Elon Musk at SpaceX also has said could be a use for the LEO constellation it proposes to launch, as well.

But some, including OneWeb, plan to sell Internet access directly to end users. “Our value proposition is capacity, low investment cost and coverage of  every inch of the globe,” sys Dave Bettinger, OneWeb CTO. “Our prime mission is residential connectivity,” but O3b also sees opportunities in the maritime, aeronautical and mobility segments, also.

O3b expects to be fully operational in 2019.  

So the issue is what mobile operators will do. One might expect they will begin to move faster with their own plans to bring Internet access to hundreds of millions of potential users, not waiting for LEO constellations to serve them first.

And that, in turn, could pose grave dangers for LEO providers. Mobile operators destroyed LEO business plans before. Will they do so, again?

"Do as I Say, Not as I Do"

The “evidence paints a complex portrait of a company working toward an overall goal of maintaining its market share by providing the best user experience, while simultaneously engaging in tactics that resulted in harm to many vertical competitors.”

That quote from an actual Federal Trade Commission report might sound like a reason for imposing strong network neutrality rules.

Extracted from a 160-page FTC report, the conclusion does not, in fact, refer to any ISP, or any content slowing, blocking or acceleration.

It refers to Google, the company whose mantra used to be “don’t be evil,” and what the report says were efforts by Google to use its monopoly power to quash competitors.

Ironically (or maybe worse, perhaps it is venial), the antitrust agency rejected the report’s conclusions and cleared Google of any wrongdoing.

To be fair, this illustrates a danger. For those of us who believe antitrust remedies always are possible when bad actors emerge in the Internet ecosystem, and for that reason no additional “protections” (more laws, more rules) are required, this represents a potential failure.

The FTC failed to follow through when its own studies suggested there was abuse of commercial power in the ecosystem.

On the other hand, despite the failure to act, the market itself seems to be moving clearly to reduce Google’s dominance in search (Facebook and others are shifting the “search” process away from Google).

An irony here is that Google might have been vastly more implicated in potential antitrust activity, on a broad scope, compared to the two documented instances of Internet service provider content blocking, both of which were quickly squashed by the Federal Communications Commission.

That is a precedent some will say shows the necessity of strong network neutrality rules. Others would say that if a problem did ever develop at scale, the FTC would have acted, and that the FCC acted in the past without any such rules.

Ironically, a company that has pointed to potential non-competitive behavior by others actually has engaged in such activity, on a broad scale, itself.

Google’s actions  likely helped to entrench monopoly power over search and search advertising,” the FTC report says.

The staff report from the agency’s bureau of competition recommended the commission bring a lawsuit challenging three Google practices. The move would have triggered one of the highest-profile antitrust cases since the Justice Department sued Microsoft Corp. in the 1990s.

The revelations will not be helpful to Google, which is fighting European regulators worried precisely about this sort of behavior.

FTC staff said Google’s conduct “helped it to maintain, preserve and enhance Google’s monopoly position in the markets for search and search advertising” in violation of the law.

An additional irony is that action might now be taken just at a point when Google’s dominance already is challenged by the shift to mobile content consumption, where “search” or “discovery” happens in different ways.

As the old adage suggests, it is a case of locking the barn after the horse has already gotten out.

Looking forward, one might argue Google already is on the strategic defensive, making any potential new restrictions a bit late, and likely unnecessary.

Still, some might note the irony.

Google might have actually engaged in widespread and arguably successful anticompetitive behavior, where ISPs already were covered by FCC no-blocking rules, and have actually never been shown to engage in “slowing” or “speeding up” content of competitors.

It's a blemish on the record of a firm whose products and inititiatives valued by so many, and brings to mind so many adages. "People who live in glass houses should not throw stones. "Do as I say, not as I do."

Streaming Services Ask for Zero Rating and Quality of Service

Even though most of how the new common carrier regulation of Internet access is going to work, important questions already are being raised about business model and service innovation on several fronts.

T-Mobile US, for example, might face scrutiny of its Music Freedom feature, which allows T-Mobile US customers to stream music without incurring data charges. Such zero rating is viewed by some as a violation of network neutrality rules, since it does not treat all bits equally.

Separately, HBO, Showtime, and Sony Corp. reportedly have asked major Internet service providers such as Comcast about having their over the top streaming services delivered as managed services, which would offer quality of service features enhancing quality.

The network neutrality rules created by the Federal Communications Commission forbid anything but “best effort” access for consumer Internet services, but do not cover managed services such as carrier voice or standard cable TV services that use the same physical facilities as those used to support Internet access.

Reportedly, the streaming firms want not only quality of service features, but also a zero rating feature similar to Music Freedom, allowing customers to stream at will without having the usage count against usage buckets.

Some have argued it is precisely the need for quality of service features, for many services, that make “best effort only” rules objectionable.

Ironically, we now find, immediately after passage of the rules, app providers looking to secure the advantages of quality of service (treat some bits unequally) mechanisms that enhance app performance.

There is, to be sure, a difference between “Internet-based applications” and “private network applications that use Internet protocol.”

Many private networks use IP technology and platforms, but are not public Internet apps. Carrier voice and video provide some examples. Other enterprise apps, health and safety apps, security and other services are “managed” services not necessarily using the public Internet, even if they use IP platforms.

The internal contradictions are certain to grow. Ironic, don’t you think?

No Signs of Stability in U.S. Mobile Market

T-Mobile US unveiled a new set of initiatives aimed at attracting business customers, and an expanded program to take consumer share  from other U.S. mobile carriers, as part of its Uncarrier 9.0 announcement.

Sprint earlier this month launched new programs to encourage switching as well.

With some observers wondering how long the U.S. price and promotion war might moderate, or end, the answer seems to be “not yet,” even if no price war lasts forever.

Under other circumstances, a reasonable expectation might be that we face at least another year of unusual efforts at price disruption, to be followed by a period when the leading contestants have adjusted enough to show they can weather the attack, and the attacker or attackers find they have gained share, but now have to switch to improving profits.

Under other circumstances, one might argue the price war will last as long as T-Mobile US and Sprint  believe they can continue to add net new customers every quarter.

If the rate of net additions starts to flatten, then T-Mobile US, for example, will have to begin weighing a shift in strategy from price disruption to earning profits.

One other likely predictor is that the war will end when U.S. market structure stabilizes into a structure with a clear number one, a number two that has no easy way to displace the top provider, and a number three provider large enough to sustain itself in that position, with the number four supplier far behind the other three.

Under other circumstances, one might argue we are close to a stable market.

In a classic oligopolistic market, one would expect to see an “ideal” (normative) structure something like:

Oligopoly Market Share of Sales
Number one	41%
Number two	31%
Number three	16%

source: economicsonline

We are not too far from that pattern. In terms of revenue share, Verizon in early 2015 has about 39 percent share, while AT&T had 33 percent. One might argue both Verizon and AT&T will lose much incentive to engage in promotional behavior when AT&T no longer believes it can catch Verizon, and the number three contestant no longer really believes it can catch number two, for example.

The number-three supplier, in terms of revenue, is Sprint, at about 15 percent revenue share. It is almost precisely where one would predict the number-three supplier would be.

The issue, right now, is that T-Mobile US believes it must grow, or eventually be acquired. Of late, T-Mobile has been rapidly gaining share, with the intention of supplanting Sprint at the number three position.

The problem is that U.S regulators seem unwilling to allow an acquisition of T-Mobile US by Verizon, AT&T or Sprint. That means only a new contestant could do so. And that means the classic oligopoly structure cannot form.

Among the variables are Dish Network’s need to enter the market or sell its spectrum; Comcast’s expected entry and then any future moves by a large Internet player (Google, Apple or another firm).

U.S. Revenue Share
Firm	%
Verizon	39
AT&T	33
Sprint	15
T-Mobile US	12

With the caveat that spectrum is not revenue, the U.S. mobile spectrum ownership picture remains likewise unstable.

Spectrum Share
Provider	Percent
Sprint	29
AT&T	21
Verizon	17
Dish Network	15
T-Mobile US	12

The point is that the U.S mobile market does not presently resemble a stable oligopoly market, not do the medium term competitive prospects suggest the market will assume such a form.

That means, no matter how long the immediate marketing war lasts, the market will remain unstable.

Strategically, Comcast is expected to enter the market, at some point. Cablevision Systems Corp. already has done so, though as a niche provider with greatest potential impact in its limtied home operating area. Comcast almost certainly will have to enter as a national provider.

Dish Network either must enter the market as an operator, or forfeit the rights to spectrum that presently accounts for as much as 80 percent of its total market value.

And then there are the other contenders, including Google, which it is believed soon will be entering the mobile market, and Apple, a perennial potential actor in the market as well.

Even if the biggest current question mark is what Dish Network will do, Dish decisions will not affect the unstable market structure, since Dish entry would not eliminate a major contestant. Nor would a spectrum sale do so.

Verizon arguably has the greatest gap between revenue share and spectrum share. But some say Verizon cannot afford to buy that spectrum at prices Dish Network would ask for, or that regulators would not allow Dish to sell to Verizon.

Sprint has excess spectrum and T-Mobile US cannot afford to buy much more.

So Dish Network might yet actually move ahead and become a service provider, adding one more contestant. Dish might become a wholesale capacity supplier, which would not increase the number of retail suppliers.

It might try to buy T-Mobile US. Or it might sell the spectrum. If so, the buyer is likely to be another company not presently in the mobile business in a significant way, such as a Google or a Comcast or another firm.

Dish might also try to create a new type of mobile supplier--focusing on mobile TV.

In all those scenarios, the number of suppliers would not contract to a stable pattern.

OTT Video Choices are Growing; So is Hassle

Buying over the top video subscriptions is getting more complicated, which is one reason why some argue new OTT bundles are going to emerge.

Heavier video consumers are going to find the cost of buying everything they want a la carte, one by one, is more expensive than choosing a “big” bundle and then augmenting with a specialized service or two.

At least so far, consumers who favor “live” television arguably remain better off buying a bundle, rather than aggregating single channels. For starters, many of those “high demand” channels are not yet available in any bundles, or on a stand-alone basis.

For many, that means sports. For a smaller number, that means news.

Consumers whose primary interests include movies and documentaries can do fairly well with the “new” bundles built by Netflix, for example. Some consumers with such interests might buy on a “video on demand” basis.

At least so far, though, video on demand has been far less popular than subscription services, judged by sales volumes. Consider only the matter of monthly cost. A month’s subscription to Netflix, Hulu or Amazon Prime (if a consumer never used the free shipping feature) is $8 to $9.

Depending on the content purchased on a video on demand basis, costs might range from 99 cents to $5 per title. It doesn’t take much VOD buying before that option is much more expensive than Netflix.

The new part of the buying matrix, though, is the availability of live television over the top, in a bundle in the $20 to $35 monthly range. Sony Playstation Vue costs about $50 to $70 a month, as it replicates the traditional cable TV bundle, offering perhaps 85 channels.

Will a New Apple Streaming Service Cannibalize Linear Video? If So, How Much?

It’s still too early to know what impact HBO Now, any future Apple TV effort, Sling TV and other efforts will have on linear video subscriber numbers, except to note that, at the very least, the new services will limit growth for linear services by diverting new subscribers to the over the top services.

Baird Equity Research estimates that if Apple can achieve 10 percent adoption of U.S. broadband households, Apple "could generate $4 billion of annual service revenue,”

Baird Equity Research says.

If the U.S. linear video subscription business represents about $90 billion in annual revenues, then Apple, at such levels, might then be a business that is about four percent the size of the U.S. linear video market.

Separately, Business Insider Intelligence estimated that a new Apple streaming service will gain more than four million U.S. subscribers in its first quarter on the market, 7.4 million at the end of 2016, and 10.7 million by the end of 2018.

That would translate to revenue of more than $4 billion a year by the end of 2018.

The important observation is that if an Apple streaming service actually reached those levels, it would be a stunning achievement, as the number of U.S. homes having broadband, but not buying linear video, might be about 10 million homes.

Unless one assumes that nearly 100 percent of homes with high speed access, but no linear video, a significant percentage of new Apple streaming customers would have to come from the ranks of existing linear video customers.

Is a Price War Going to Break Out in Satellite Backhack Business by 2017?

Fears about overinvestment, overcapacity, plunging capacity prices and market share disruption happen periodically in many businesses, and within the last couple of decades have devastated large portions of the telecommunications industry.

That is about to happen again in the satellite business, but in a way that resembles the overinvestment in capacity in the undersea and terrestrial backhaul businesses during the telecom boom and bust from about 1997 to 2002 or so.

In that instance, huge amounts of capital were invested in long haul networks to support the explosion of Internet companies requiring capacity.

Too much, as it turns out.

Many will not remember Globalstar, Iridium or Teledesic, all using business models based on huge fleets of new satellites, using low earth orbit, not the geostationary satellites that are the industry mainstay.

The huge unmet need back then was voice communications, since mobile service at that time was expensive and lightly purchased by consumers. The problem, as outlined by David Burr, O3b Networks VP, was that mobile service unexpectedly caught fire with consumers, closing the LEO-based business market window.

Simply, mobility fulfilled market demand for voice communications, at the expense of fixed networks and LEO providers alike.

Rapid mobile adoption basically killed the earlier generation of LEO business plans and companies, argued  David Burr, O3b VP, essentially absorbing the demand the earlier LEO connectivity providers had hoped to serve.

“Where is that danger now?” Burr asked. Some of us might argue the answer is the same as last time: mobile service providers.

Some veterans of those ventures continue to work in the satellite industry, and were again speaking from the podiums at Satellite 2015. Firms such as OneWeb, O3b and LEOSat, plus others such as SpaceX were there, suggesting the new wave of potential LEO constellations that could disrupt business models and pricing across much of the satellite industry.

To be sure, different business models are being floated. Some providers plan to attack the consumer Internet access retail market. Others will focus on enterprise or business user segment.

Still others will seek roles in backhaul, either “conventional” backhaul for mobile operators, for example, or less traditional backhaul that competes directly with undersea capacity suppliers.

It’s too early to say how it will all play out. But it is clear that industry capacity and latency performance will be challenged, starting about 2017, if LEO capital and launch plans remain on track.