The 30% Rule Usually Works

I may have an overly-simplistic way of looking at the odds of big mergers in the access business, but there is a simple rule of thumb: antitrust opposition arises in the access business whenever any single provider is poised to exceed serving more than 30 percent of U.S. households.

It’s a simple rule of thumb, but it tends to work. In that regard, the Comcast purchase of Time Warner Cable, had it succeeded, would have given Comcast access to 84 million U.S homes, representing about 70 percent of the entire population, in a market where AT&T, the biggest provider in terms of homes reached, might potentially reach 50 million homes.

If total U.S. homes are about 123 million, and occupied units are about 116 million, then Comcast would have had access to 72 percent of U.S. homes. AT&T, by way of contrast, has access to 43 percent of U.S. homes.

“Access” is different than “active account at that location,” though. Since there are two to four major suppliers of any single service in every market, the market share held by any single provider is a fraction of total addressable homes.

AT&T knows it will not be allowed to increase its fixed network footprint. Comcast positioned its acquisition bid as being primarily about video accounts, where market share would have been held at about 30 percent.

Others had said the relevant “market” was high speed access, not video. Had the deal been approved, Comcast would have had about 57 percent share of the high speed market, and an overwhelming share of accounts in the fastest speed categories, and the widest footprint of gigabit and 2 Gbps service availability.

Verizon Communications, for its part, recently reported it had 42 percent adoption of FiOS Internet access services where FiOS is available, and 30 percent FiOS entertainment video adoption where that service is available.

At AT&T first quarter results were less robust. In the quarter, AT&T had U-verse TV adoption of 22 percent and U-verse  high speed access adoption of 21 percent.

High Speed Access was the Relevant Market for Antitrust Officials Looking at Comcast Bid to Buy Time Warner Cable

I may have an overly-simplistic way of looking at the odds of big mergers in the access business, but there is a simple rule of thumb: antitrust opposition arises in the access business whenever any single provider is poised to exceed serving more than 30 percent of U.S. households.

It’s a simple rule of thumb, but it tends to work. In that regard, the Comcast purchase of Time Warner Cable, had it succeeded, would have given Comcast access to 84 million U.S homes, representing about 70 percent of the entire population, in a market where AT&T, the biggest provider in terms of homes reached, might potentially reach 50 million homes.

If total U.S. homes are about 123 million, and occupied units are about 116 million, then Comcast would have had access to 72 percent of U.S. homes. AT&T, by way of contrast, has access to 43 percent of U.S. homes.

“Access” is different than “active account at that location,” though. Since there are two to four major suppliers of any single service in every market, the market share held by any single provider is a fraction of total addressable homes.

AT&T knows it will not be allowed to increase its fixed network footprint. Comcast positioned its acquisition bid as being primarily about video accounts, where market share would have been held at about 30 percent.

Others had said the relevant “market” was high speed access, not video. Had the deal been approved, Comcast would have had about 57 percent share of the high speed market, and an overwhelming share of accounts in the fastest speed categories, and the widest footprint of gigabit and 2 Gbps service availability.

Microsoft Cloud Revenue is Really Growing Fast

It remains difficult to precisely estimate the amount of cloud service revenue Microsoft actually generates, as it once was difficult to determine the size of Amazon’s Amazon Web Services business.

Microsoft’s cloud revenue is spread across a couple of business units, and also is bundled with revenue from non-related products.   

IDC expects the overall cloud infrastructure market to top $32 billion in 2015, with public cloud claiming $21 billion of the market, roughly double its private cloud peer.

Until a day ago, it has been guesswork to determine how much of that public cloud market is owned by Amazon. As it turns out, analyst estimates were very close, estimating AWS revenue at roughly $5 billion in mid-2014.

Analyst Karl Keirstead at Deutsche Bank, had estimated current AWS annual revenue of about $6 billion. As it turns out, that is the current run rate.

Microsoft now is viewed as the number two provider, by revenue share, with a blistering sales growth rate. Some think Microsoft’s cloud revenue run rate (the most recent quarter, times four) is about $4 billion annually.  

New Rule: No Triple Play Provider can Grow by Acquisition Beyond 30% Share of Any Single Service

The emergence of the triple play bundle now has affected its first big merger victim, one might argue. In the past, the rules for market leaders were fairly simple. In the voice, linear video and now high speed access market (it seems), the old rule of thumb was that no service provider would be allowed to gain more than 30 percent share.

Every large telco knows that, and Comcast likewise has known it would bump up against the 30 percent rule when it proposed buying Time Warner Cable.

It seems the math is a bit more limiting now, since no single bundle provider can have more than 30 percent of voice, linear video, high speed access of any other future consumer service that might be created in the future.

So now service providers have to worry not only about failing, and modest success, they also have to worry about robust success, as too much customer share in any one segment makes the evaluation of expansion through acquisition in any other area problematic.

Comcast now has reached a point where it likely cannot expect to gain any more fixed network customer share--defined as percentage market share for any of the triple play services--through acquisition.

As AT&T discovered with its failed effort to buy T-Mobile US, once that 30-percent limit is reached--in any single segment--growth by acquisition is blocked.

AT&T’s effort to buy DirecTV only has a shot at success because AT&T will not exceed 30 percent share in fixed network voice, linear video or high speed access.

Comcast Will Look for Another Big Deal, but Not Domestic Consumer Access Assets

The Comcast decision to abandon its pursuit of Time Warner Cable might be viewed through the lens of competition policy, industry structure or product lifecycles.

One might speculate about whether the abandoned deal ultimately promotes investment, competition or innovation.

One can debate the impact on industry structure or future strategy choices. Some might see an impact on the linear video product itself.

But the deal actually might have very little impact in any of those domains.

Comcast might have a little less scale, and still lack a footprint in the New York market. But consolidation in the cable industry will continue, and no combination of mergers is likely to change the fact that the owner of Time Warner Cable assets will be the second-biggest operator, as presently is the case.

Comcast would not, in any case, had gained much share in video, though its leadership in the Internet access space would have increased significantly. As with other firms such as AT&T that have had big scale acquisitions blocked, Comcast will look elsewhere for growth.

That might include international, non-access assets or non-fixed access assets.

But the need to transform revenue sources and packaging does not change. Investment might be affected by regulatory uncertainty, but the degree of competition is increasing, so investment as a defensive measure will be necessary.

Nor will the continuing evolution of media be affected. The trend, for decades, has been in the direction of consumers watching “what they want, when they want to and where they want to.”

As AT&T pivoted elsewhere, so will Comcast. There will be consequences for Comcast, Time Warner, Charter Communications and others who would have been affected by a successful acquisition. But the dynamics of the market will not change.

It has been rather clear for some time that Comcast would not be allowed to gain more access market share (a general rule is that no single access provider is allowed to gain more than 30 percent share).

Comcast will look for another big deal. LIke AT&T, that is the way the firm has grown.

One simple observation: it is inconceivable that Comcast does not have a major mobile capability within a decade; likely within five years.

AWS is Profitable, and a $5 Billion Annual Business, with a $6 Billion Run Rate

The most interesting number in the Amazon first quarter earnings report was confirmation that Amazon Web Services indeed generates $5 billion a year in revenue and earned $1.6 billion in the quarter. This is the first time Amazon has reported quarterly revenue for AWS.

The other interesting numbers are AWS growth rates--50 percent or so--and the fact that AWS is profitable, with about a current $6 billion run rate annually. AWS earned $265 million in the quarter.

In the first quarter of 2015, operating cash flow increased 47 percent to $7.84 billion for the trailing twelve months, compared with $5.35 billion for the trailing twelve months ended March 31, 2014.

Free cash flow increased to $3.16 billion for the trailing twelve months, compared with $1.49 billion for the trailing twelve months ended March 31, 2014.

Net sales increased 15 percent to $22.72 billion in the first quarter, compared with $19.74 billion in first quarter 2014.

Excluding the $1.3 billion unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales increased 22% compared to first quarter 2014.

Operating income increased 74 percent to $255 million in the first quarter, compared with operating income of $146 million in first quarter 2014.

Net loss was $57 million in the first quarter, or $0.12 per diluted share, compared with net income of $108 million, or $0.23 per diluted share, in first quarter 2014.

Project Fi: Back to the Future

Google’s Project Fi contains a amount of irony. Though talk and text are flat rated (all you can eat), Internet usage is metered.

Think about that: consumer advocates always argue that people want and need unlimited usage, and it is only the “greedy” Internet service providers that want to match consumption with end user payments.

But Project Fi actually positions consumption-related pricing as a consumer good.

Beyond that, metered pricing, consumption pricing or per-bit pricing--take your pick--actually is a throwback to the earliest days of consumer Internet access. That was the way America Online, the first mass market dial-up ISP, priced Internet access.

People did not like it, and usage surged once AOL moved to unlimited pricing. Now Project Fi moves back to that older model.

Pricing is linear, and based on consumption.

That’s ironic. Linear pricing--metered usage--is the traditional way service providers generally have sold their products. Unlimited use was the innovation.

Now Project Fi insists that strictly metered consumption is, in fact, quite pro-consumer, compared to buckets of use that almost always feature breakage (consumers pay for what they do not use) or “overage” charges when they exceed their allotments.

Consumer advocates generally have argued such plans are not consumer friendly, but also have opposed metered usage as well.

Perhaps Google is trying to spur mobile ISPs to invest more in infrastructure (more than they seem already to be doing) by creating new incentives for supplying capacity. Ironically, ISPs have preferred metered pricing all along.