Verizon Puts Muscle Behind A LA Carte and Streaming Strategy

Verizon wants to make omelets.  It has to break eggs.

Did Verizon Just Screw The Content Giants? http://m.seekingalpha.com/article/3106216?source=ansh $VZ, $DIS, $FOX, $FOXA

Level 3 And Verizon Agree To Share Cost Of Network Upgrades

That is the way large networks and Internet domains always have interconnected. And it makes sense.

When networks exchange roughly equal amounts of traffic there is no structural problem. When traffic is unequal,  the sending network imposes costs on the receiving network. "Sending network pays" is how it works.

And how it should work, in fairness.

Level 3 And Verizon Sign Interconnect Agreement: Agree To Share Cost Of Network Upgrades http://m.seekingalpha.com/article/3106406?source=ansh $LVLT, $VZ

ESPN Sues Verizon Over Skinny Bundles that Do Not Include ESPN

ESPN obviously sees the Verizon skinny bundle as a bigger threat than DirecTV’s skinny bundle. Verizon excludes ESPN from the base tier, relegating ESPN to an optional sports tier.

DirecTV does something similar, albeit on a smaller scale, by allowing consumers to purchase a basic tier without ESPN, though most of the packages do seem to include ESPN.

So Verizon’s approach likely is going to affect more consumers. Verizon has been sued, and DirecTV has not been sued.

55% of U.S. Internet Homes Buy OTT Video

Some 55 percent of U.S. households with Internet access now subscribe to an over the top streaming (OTT) video service, up from 44 percent in 2013, Parks Associates estimates.

Subscriptions are highest among households with a younger head-of-household, with 72 percent of households headed by those 18 to 24 and 71 percent of households headed by those 25 to 34 having an OTT service subscription.

That alone might not suggest a tipping point, or inflection point, is nearing. More significant are moves by content suppliers to create stand-alone streaming services not dependent on a prior purchase of a standard linear service.

AT&T Acquisition of DirecTV Seems Likely, for Good Reasons

As a rule of thumb, I tend to assume U.S. regulators will nix any acquisition by a market leader that produces an outcome where a single entity controls more than 30 percent national market share.

That math suggested Comcast would not be allowed to buy Time Warner Cable, since Comcast’s share of high speed Internet access would exceed 57 percent.

The only issue, after the Federal Communications Commission raised the definition of broadband to a minimum of 25 Mbps, was how much higher Comcast’s share would grow.

By way of contrast, an AT&T that has acquired DirecTV would still only have a maximum of 17 percent share of the U.S. Internet access market. The actual share, under the new 25-Mbps definition, is not clear, but would be less than 17 percent. And linear video share would not exceed 27 percent, in a line of business universally recognized to be declining, in any case.

That is why rumors of merger approval seem logical. Even if the acquisition consolidates one of the major linear video providers, the new entity has 27 percent market share, and faces almost-certain declines over the next five to 10 years.

What if Nobody Wants to be the "Carrier of Last Resort?"

AT&T has about 17 percent share of the U.S. Internet access market, assuming none of its lines now fail the new definition of 25 Mbps. Most consumers buying satellite Internet, and probably most customers buying fixed wireless services likewise now are purchasing Internet access, but not, strictly speaking, what the Federal Communications Commission calls “broadband” or “high speed access.”

Beyond the issue of FCC regulatory fiat redefining a few industries out of business (most satellite and fixed wireless access services), causing a statistical, overnight decline in “broadband” adoption in the United States, and rendering multi-year tracking of Internet access more difficult, there are other perhaps perplexing issues in the U.S. Internet access business.

In a competitive market, some of us would argue, the low cost provider wins. In the fixed network Internet access market, that is cable TV.

So it is noteworthy that Verizon has been shifting capital investment into mobile, and generally away from its fixed networks.

And even allowing for its use in a lobbying capacity, AT&T now says its own fixed network is more costly than that of the cable operators that now are the market leaders in high speed access, in the U.S. market. AT&T's fiber to the neighborhood network cannot keep pace with the bandwidth offered by cable and other competitors, AT&T has told the FCC.

So AT&T increasingly will have to shift to fiber to the home to keep pace, as Verizon already has done with FiOS.

The problem is that the new investment will occur in the context of declining profit margins in the fixed networks business overall. Voice revenue is declining, linear video is expected to decline, and cable has the more efficient, and faster, Internet access services.

Put bluntly, the ability of a telco--even a tier one telco--to compete against a well-capitalized cable TV company is doubtful, long term, in the fixed network business.

That might be a shocking conclusion. But evidence points in that direction. It is fashionable, perhaps even directionally correct, to say that the fundamental strategic importance of a fixed network is mobile backhaul.

But that statement also suggests the revenue potential of a fixed network is shrinking. Special access might have been a high-margin service that drove profits for networks that recovered their costs substantially from consumer services.

But such business-focused services (backhaul) were not huge gross revenue drivers.

It is too easy to argue that telcos will discover huge new revenue sources to revive the fixed networks business, so there is no strategic issue. It is possible such revenues will never be found, leaving cost reduction or exiting the business the options.

That does raise issues for regulators. What if no single service provider wishes to, or can afford to be, the “carrier of last resort?”

And if the intent is to create and sustain incentives for any service provider to take on that role, what has to change? We don’t have clear answers, yet.

Scarcity and Abundance Have Strategic Implications for Access Providers

We sometimes forget just how much the telco business model is built on scarcity. Only a few fixed networks are viable, long term, in any community.

How many facilities-based mobile service providers are viable, long term, in any country, remains a question, but the number is probably three to possibly four.

Also, with consumer bandwidths climbing into the gigabit range in some markets, speed is going to drop away as a relevant constraint on experience or business models, just as processor speed and memory have ceased to constrain apps and devices.

App and device suppliers long have understood the implications of abundance of bandwidth and processing power for their businesses. Abundance means lower retail prices are possible.

Bandwidth suppliers long have understood this as well, which explains the fear of "commodity dumb pipe" services.

But abundance always has been a key enabler in the Internet ecosystem, at least for app and device providers. It can be argued that firms ranging from Microsoft to Netflix have been built on the notion that neither bandwidth nor processing power or memory would be fundamental constraints on business models.

That model has not worked quite so well in the mobile service provider business, in part because spectrum available for communications use always has been scarce, and licensed access meant whatever resources were available would remain fairly scarce.

That is why unlicensed access, or releasing vastly more spectrum for communications uses, undermines service provider “scarcity” value.

In all, AT&T now holds spectrum licenses worth more than $91 billion, estimates Goldman Sachs analyst Brett Feldman. He also estimates the value of Verizon's spectrum at $79.4 billion.

The current equity value of all AT&T stock is $176.5 billion, implying that spectrum alone represents 51.6 percent of AT&T’s total equity value.

Verizon’s market value is $207.9 billion, implying that Verizon’s spectrum represents 38 percent of total valuation.

Feldman estimates that the U.S. mobile industry, plus Dish Network’s spectrum represents $368 billion in value.

All that could change dramatically in the future, though, as shared spectrum, unlicensed spectrum and dynamic spectrum alternatives are made possible. All those methods could reduce the amount of licensed spectrum mobile service providers have to buy or reduce the market value of current holdings.

To be sure, many proponents of unlicensed spectrum believe releasing much more spectrum in that way will reduce the scarcity value of licensed spectrum held by mobile service providers.

Dish Network owns rights to use spectrum worth perhaps $50 billion, if actually deployed, and virtually nothing if Dish Network does not put the spectrum into commercial use, or sell the rights to some other company able to launch commercial services.

T-Mobile US might own about $55 billion worth of spectrum, while Sprint owns more than $67 billion worth of spectrum, according to Goldman Sachs.

That value is based on scarcity. But what is scarcity is replaced by abundance?