Altice Makes History: Enters U.S. Cable TV Market

For the first time ever, a significant European telecom company is getting into the U.S. cable TV business.  

Altice is buying Suddenlink Communications, the fifth-largest U.S. cable TV company, ranked by subscribers, for $9.1 billion deal. Some believe the move is preparatory to a bid for Time Warner Cable as well.

Suddenlink operates in Texas, West Virginia, Louisiana, Arkansas and Arizona. Its sales grew six percent in 2014 to $2.3 billion and operating profit grew at a similar pace to reach $905 million.

Altice is expected to emphasize aggressive cost cuts and profit margin, rather than growth.

Altice owns French cable company Numericable, the second-biggest supplier, and also is the second-biggest mobile service provider in France.

Inidia Now is Center of Net Neutrality Policy

India now is the fulcrum of debate over “network neutrality” principles, as regulators ponder possible rules that extend from “no blocking of lawful apps” to “no packet priorities” and “no zero rating of apps.”

Internet.org, the organization founded by Facebook that promotes app access by mobile users without buying a data plan, believes the India rules are highly important, as Internet.org believes some form of app subsidies are required to rapidly increase use of the Internet by mobile users in many developing markets.

Any rules that bar the offering of apps on a curated and “zero rated” basis (no mobile data charges incurred) would imperil the whole project, which aims to acquaint non-users with the value of the Internet.  

While defending Internet.org and zero rating, it appears Facebook might also be looking at backup plans that would be much more costly, such as Facebook paying for as much as 33 percent of the cost of a user’s data charges.

Whether even that approach would be allowed is the question.

Vodafone, India's second-biggest mobile operator, says it is waiting before making any decisions on zero rating until the telecom regulator Telecom Regulatory Authority of India  and the Department of Telecom resolve the matter as part of their review of net neutrality rules overall.

Unintended consequences (outcomes that are not the ones foreseen and intended by a purposeful action) are important. Such unforeseen implications are why it is so hard to create public or private policies that actually work only as intended.

Benefits, drawbacks and even perverse unintended consequences can happen. Drawbacks are unintended new problems caused by solutions to other problems.

A perverse effect is worse, producing an outcome contrary to what was originally intended.

Ironically, one unintended consequence of strong net neutrality rules that prohibit packet acceleration or zero rating is that Internet adoption could be slowed and innovation thwarted.

The Progressive Policy Institute argues that bans on quality of service mechanisms--including paid priority deals--undermines innovation for real-time applications like telemedicine and high definition voice.

Potential low-income users also suffer when subsidies such as zero rating are outlawed.

High Prices Will Deter Verizon from Bidding on New Spectrum

High spectrum prices might encourage Verizon Wireless and possibly other mobile service providers to use the other tools at their disposal to increase effective bandwidth.

Verizon isn't as hungry for spectrum as it once was, in part because prices have gotten too high, Verizon CFO Fran Shammo suggested at a J.P. Morgan investor conference.

Shammo said that given the premium at which spectrum went in the most recent AWS-3 auction increases the value of alternative approaches, such as adding more small cells.

"I think that the AWS-3 auction has given the FCC a little bit of a challenge around unintended consequences," Shammo said.

Basically, the high AWS-3 prices likely encourage TV broadcasters to hold out selling their licenses unless they get similar, or even higher prices. That means less spectrum will be made available.

At the same time, with the Federal Communications Commission also considering bidding rules that would further reduce the amount of spectrum available to major carriers, the gains Verizon could make are further limited, and likely also work to push prices higher.

"When you bid up spectrum so high and now you have broadcasters sitting on the sidelines thinking their spectrum is worth a certain amount of money, and then you have where the FCC is trying to draft the rules around favoring some carriers over others, I think you have a problem,"  Shammo said.

Unlike the recent spectrum auctions in India, where service providers virtually had to acquire new licenses to support their present operations, and therefore had to spend whatever it took to do so, Verizon and some other U.S. mobile service providers will not “need” to rely on spectrum purchases to expand bandwidth.

As always, assuming a reasonable amount of physical spectrum is available, service providers can use network architecture to effectively reuse existing spectrum, and take advantage of offloading to Wi-Fi more extensively.

In 10 Years, Verizon Communications Will Have Zero Copper Network Revenue

Increases or declines of any quantity at a 10-percent rate are serious matters. If anything grows at 10 percent annually, it doubles in 10 years. If something declines at a 10-percent annual rate, it disappears in 10 years.

It’s something to ponder seriously: Sowmyanarayan Sampath, Verizon Communications SVP of transformation says Verizon’s copper-based revenue is declining eight percent to 10 percent a year.

At that rate, the revenue stream disappears in a decade. If you want to know why tier-one telcos want to decommission the old “public switched telephone network,” that is why.

Will Video Profits Go to Zero?

With the caveat that 15 years is a time horizon too great to yield meaningful projections, Jason Bazinet, Citi Research analyst believes linear video distributor profit margin could fall to zero in 15 years.

That would be quite a shock in an industry segment used to 37 percent profit margins , as estimated by consulting firm EY.

Cable networks like AMC Networks, Discovery and Starz are projected to be among the networks whose present margins are in the 37 percent range.

Cable operators had 41 percent margins by the end of 2014, but not on the strength of their video entertainment operations, it appears. Cable operator margins “continue to remain the highest” among media and entertainment sectors.

But the key is the “continued growth in high-margin data and business-to-business services.” It isn’t so clear how well linear video might fare, if more consumers abandon the service. Zero profit margins are a possibility, some claim.  

By about 2020, smaller U.S. cable TV companies are going to experience zero profit margins on their linear video programming businesses, according to the American Cable Association.

Internet bandwidth, despite all worries about the “dumb pipe” implications, arguably is the highest-margin product most ISPs can sell. Mobile operators might also have relatively high profit margins on voice and messaging, but with low gross revenue in some cases, and declining gross revenue in other cases.

Only the high speed access product has both high gross revenue and high profit margins.

One issue is precisely how high profit margins might be, for various providers.

Smaller ISPs, as you would guess, tend to have lower margins than some tier-one ISPs. One study of smaller Australian and New Zealand ISPs estimates gross profit margin between 26 percent and 39 percent, for example, before adding in overhead and other costs not directly related to access, transit costs or backhaul.

Some might claim cable’s broadband gross margins are about 95 percent, versus 60 percent for video, according to Craig Moffett, Sanford C. Bernstein & Co. analyst.

That is not so. That figure by Moffett applies only “cost of goods sold” against revenue.

Moffett’s cost of goods sold takes into account only the day-to-day costs of running the network, as opposed to building it. In other words, COGS includes only out of pocket operating and marketing expenses, for example, not amortization of the network construction.

This produces gross profit margins that make cable companies’ profits look artificially high.

Net margins are another matter, since gross margin does not include all other overall and allocated costs.

Many estimates now suggest that net profit margin for video entertainment services now routinely are as low as 20 percent, where once net margins were about 40 percent. The same is true for broadband access, which estimates now suggest are about 40 percent, not the 97 percent “gross margin” figure.

Whatever you think the relevant percentages are, there is no question but that, for cable operators, Internet access bandwidth increasingly is more valuable than video entertainment bandwidth, as the profit margins are roughly double those of video entertainment service.

The point is that video distributors, in most cases, do not make profit margins higher than 20 percent, and the direction of change is lower. Competition, declining sales and higher marketing expense are among the reasons why profitability arguably is dropping.

So even if a 15-year time horizon is too far away to be meaningful, profit pressures are growing.

LTE Subs Doubled in 2014

The global Long Term Evolution fourth generation market doubled in size to 445 million users in 2014, with annual growth in the number of LTE users will remain above 70 percent between 2015 and 2016, according to Digitimes Research.

By 2016 there will be 1.466 billion LTE users, representing 70 percent of the total number of global mobile broadband (3G and 4G) users.

Driving that growth is the Asia-Pacific region, especially China. The Asia region will surpass North America to become the world's largest consumer LTE market

in the first half of 2015.

Separately, the wireless trade association “4G Americas” predicts LTE connections have reached 498 million accounts worldwide, with Asia surpassing North America in total subscribers.

China LTE subscribers are the reason Asia has so many LTE subscribers. South Korea is among the countries with high LTE adoption rates, at about 59 percent of all mobile users on the LTE networks there.

LTE-Advanced deployment also is a major industry trend. Some 116 mobile operators, about 30 percent of all LTE operators, are investing in carrier aggregation technology worldwide and are at various stages of deployment.

Some 17 percent of LTE operators have commercially launched LTE-Advanced service.

Most LTE-Advanced system deployments support speeds of 150 Mbps up to 300 Mbps downlink and 50 Mbps on the uplink.

Of 52 commercially launched LTE-Advanced systems, 30 support the maximum 300 Mbps theoretical peak downlink speed, operating in 20 countries: Australia, Austria, Belgium, Estonia, Finland, Germany, Greece, Hong Kong, Jersey, Norway, Portugal, Romania, Russia, Singapore, Slovenia, South Korea, Spain, Switzerland, UAE, and the United Kingdom.

Globally, 393 operators have commercially launched LTE systems in 138 countries, according to the Global mobile Suppliers Association.

About 644 operators are investing in LTE  across 181 countries. GSA predicts there will be 460 commercially launched LTE networks in operation by the end of 2015.

What is the Value of the Fixed Network?

What is the strategic value of the fixed network in a mobile-dominated communications market? Ironically enough, backhaul. One way of looking at the volume of access is to note that, in 2013, about 59 percent of all traffic used “wireless” access. But that might overstate “mobile” and understate “fixed” access.

In 2013, 41 percent of traffic used a classic “fixed” connection, while 55 percent used Wi-Fi, according to Cisco. By 2018, perhaps 61 percent of traffic will be generated by  Wi-Fi connections, 15 percent by the mobile networks and 24 percent by the fixed network.

But if one assumes Wi-Fi is the default “in building” distribution, then as much as 96 percent of device traffic used an untethered connection. In 2018, the fixed network, despite mobile access growth, might still represent as much as 85 percent of all device Internet access.

In other words, the most important, and most dominant role for fixed networks is backhaul of Internet traffic.

The distinction between “mobile” and “fixed,” in that sense, is almost moot. By 2018, only 15 percent of traffic volume will directly use the mobile networks.

All the rest will be backhauled through the “fixed” network.

And, increasingly, even some of the “mobile” traffic will use unlicensed spectrum and the Long Term Evolution non-licensed access protocols (both LTE-U and license assisted access).

The present difference between the protocols is that LTE-U does not use “listen before talk” while LTE-LAA does use “listen before talk.”

LTE-U s likely to reach commercial use sooner, as it is allowed in China, Korea, India and the United States, markets big enough to drive early and massive adoption.

What remains unclear are the actual advantages in cost per bit using either form of LTE in unlicensed spectrum or just staying with Wi-Fi access as the complement to LTE.

In all three cases, though, the value of the fixed network is as a backhaul mechanism for the great bulk of device traffic.