Internet of Things = Growth for Mobile Operators

In a word, the Internet of Things is strategic for the mobile industry because it represents “growth.”

Once every human being who wants to use a mobile phone is doing so, after every phone is equipped for Internet access, after nearly every customer uses the Internet, after usage-driven charges have grown, what could possibly drive the next big wave of revenue growth?

Emphasize the word “big.” In a business where revenue is measured in hundreds of billions of dollars, modest new markets do not move the needle. Only revenue sources driven by big new markets will have the scale to matter.

Assuming such concerns are correct, IoT is big enough to move the needle.

Mor than 50 billion IoT devices are expected to be connected with as much as US$8.9 trillion in annual revenue by the year 2020.

According to GSMA studies and forecasts, mobile  IoT communications are predicted to account for over 10 percent of the global market by 2020. That should represent about $45 billion in service revenue annually.

source: GSMA

source: GSMA

U.S. Linear Video Subscribers Shrink in 3Q 2015

The second quarter tends to be seasonally difficult for providers of linear video entertainment services. That tended to be the case in 2015 as well. In the third quarter, the notable third quarter developments are that Verizon was the sole provider to add subscribers across both periods.

In the third quarter, aside from Verizon, only DirecTV and Charter added net new accounts. Dish Network and AT&T’s U-verse were the biggest losers.

With the caveat that any single provider can, at any time, deliberately undertake actions that will reduce or increase subscriber volume, the industry lost about 375,000 net accounts in the third quarter.

source: Wall Street Journal

6.4 Billion Connected Things in 2016, Gartner Says

In 2016 there will be 6.4 billion connected things will be in use globally, up 30 percent from 2015, and will reach 20.8 billion by 2020, according to Gartner.

In 2016, 5.5 million new things will get connected every day.

Gartner estimates that the Internet of Things (IoT) will support total services spending of $235 billion in 2016, up 22 percent from 2015.

"Aside from connected cars, consumer uses will continue to account for the greatest number of connected things, while enterprise will account for the largest spending," said  Jim Tully, vice president and distinguished analyst at Gartner.

Gartner estimates that four billion connected things will be in use in the consumer sector in 2016, and will reach 13.5 billion in 2020

Internet of Things Units Installed Base by Category (Millions of Units)
Category	2014	2015	2016	2020
Consumer	2,277	3,023	4,024	13,509
Business: Cross-Industry	632	815	1,092	4,408
Business: Vertical-Specific	898	1,065	1,276	2,880
Grand Total	3,807	4,902	6,392	20,797

Source: Gartner

In terms of hardware spending, consumer deployments will amount to $546 billion in 2016, while the use of connected things in the enterprise will drive $868 billion in 2016.

Internet of Things Endpoint Spending by Category (Billions of Dollars)
Category	2014	2015	2016	2020
Consumer	257	416	546	1,534
Business: Cross-Industry	115	155	201	566
Business: Vertical-Specific	567	612	667	911
Grand Total	939	1,183	1,414	3,010

Source: Gartner

John Chambers Illustrates New Regulatory Influences on Business Strategy

Talking about why Cisco and Ericsson have created a massive global partnership, Cisco Executive Chairman John Chambers pointed out the key impact regulatory considerations now have on business strategy.

Noting that the technology industry requires speed, and while acknowledging that small acquisitions still make sense, Chambers said neither Cisco nor Ericsson could have positioned themselves globally for the anticipated coming markets by making big acquisitions.

The problem is that such deals simply take too long to get clearance. "If it takes six months to get through a regulatory board and then another year to combine,” Chambers noted.

If one believes “this industry will be won and lost in the next three years,” a big acquisition or merger is a recipe for failure. In fact, Chambers believes a partnership, not a joint venture or big acquisition, is the only way forward, if the market is moving so fast.

“While we are a huge believer in big-to-small and big-to-medium acquisitions, partnerships, if you can do them, are the way to go large-to-large. Joint ventures add an extra level of complexity, you have an over-riding group, a board, and that slows you down," said Chambers.

Ericsson and Cisco might be wrong about the required speed. They might yet find the partnership fails to deliver the expected benefits.

But the point made by Chambers about regulatory clearance is instructive. Business strategy in a fast-moving industry now is shaped in profound new ways by the time it takes to win regulatory approval of major acquisitions or mergers.  

In Era of Streaming Video, ISPs Have to Invest More, As Contention Ratios Have Changed

Video streaming is changing principles that underpin the design of fixed networks, including contention ratios that incorporate assumptions about the amount of resource sharing any network can support.

The practical impact is that the advent of video streaming reduces contention ratios. That, in turn, means more capital investment, since less sharing of resources is possible. In the past, some networks could support narrowband traffic at contention ratios of about 50:1.

Today, in U.S. urban markets, contention rations have dropped to 2:1 at peak hours. That represents an order of magnitude drop in contention ratios.

In large part, the new problem is that video is a very bandwidth-heavy media type. So users consume more bandwidth per minute than they used to do. Also, entertainment video consumption peaks in the evening hours.

As always, networks are sized for peak load, not average load. So investment has to support peak video load in the evening hours. That long has been the case for Internet traffic, but video magnifies the problem.

At peak hour, Netflix alone represents as much as 35 percent of traffic.

source: DVinfo

Can OTT Video Accounts be as Lucrative as Linear Accounts?

Logic would suggest an over the top video account, with gross revenue of $20 to $30 a month, is not going to be as profitable as a linear video account with gross revenue of $50 to $100 a month.

That might not necessarily be the case, some would suggest. On a net basis, after including subscriber acquistion costs that factor in the cost of discounts, the gap might be narrower than most would tend to believe.

That said, linear video providers continue to struggle to retain their current linear video subscribers. And some, including Dish Network, now make no distinction between an OTT and a linear account.

In the third quarter of 2015, DISH activated approximately 751,000 gross new subscribers, compared to approximately 691,000 gross new subscribers in the prior year's third quarter.

Net subscribers declined approximately 23,000 in the third quarter, compared to a loss of approximately 12,000 in the third quarter 2014.

The company closed the third quarter with 13.909 million subscribers, compared to 14.041 million subscribers at the end of third quarter 2014. That represents a loss of 132,000 accounts.

In the second quarter, Dish lost about 83,000 net accounts. If one assumes the second quarter is seasonally the toughest quarter for any linear video supplier, then Dish Network’s third quarter performance indicates a sharp acceleration of churn trends.

Dish executives might say more-stringent credit policies and a willingness to lose some “lower-quality” customers contribute to the apparent churn. In other words, Dish was willing to lose some “unprofitable” customers.

“One of the other things that we're looking at is that we do have customers that are unprofitable for us today, and they're unprofitable because they call multiple times during the month, they are always asking for discounts,” said Charlie Ergen, Dish Network CEO. “And I think it's just smart business that over time that we wean those customers off of our service.”

“Sometimes the best return you get is to let a customer go,” said Ergen.

Average revenue per user in the third quarter totaled $86.33, compared to the year-ago period's ARPU of $84.39. The churn rate was 1.86 percent compared to 1.67 percent for third quarter of 2014. In the past, churn would have fallen between the second and third quarters.

For the three and nine months ended Sept. 30, 2015, Dish has included all of its Sling TV live, linear streaming over-the-top Internet-based television services in the company's total subscriber metrics.

And observers will likely have to readjust their thinking on average revenue per account, as well as marketing cost, as more accounts migrate to over the top packages with different (lower) price points.

Though the new metrics yet are developing, some might make the argument that, in principle, OTT accounts of smaller gross revenue might yet supply net revenue equal to, or higher than, linear accounts.

That argument hinges on different costs to acquire an account. And some would claim that the discounts required to get a new linear video account represent marketing costs that now are higher than ever. Where new customer costs had been $300 per addition a couple of decades ago, they now are about $700 per new account in a strict sense, but more like $1,000 per new account if one counts the value of discounts, according to Roger Lynch,  Sling TV CEO and Dish EVP, Advanced Technologies.

Also, customer lifecycles arguably are lower than in the past, because of all the competition.

“So I think, logically, the lifecycle of a customer today in linear is less than it was three years ago or four years ago or five years ago,” said Lynch.

The notion is that an OTT subscriber might be just as profitable as a linear account, when all marketing costs are included, compared to a linear account.

The largest U.S. linear video suppliers lost about 471,000 net accounts in the second quarter of 2015. Those service providers serve about 95 percent of total U.S. accounts.

Dish reported revenue totaling $3.73 billion for the quarter ending Sept. 30, 2015, compared to $3.68 billion for the corresponding period in 2014. Subscriber-related revenue increased to $3.7 billion from $3.65 billion in the year-ago period.

Net income attributable to Dish Network totaled $196 million for the quarter ending Sept. 30, 2015, compared to net income of $146 million from the year-ago quarter.

Has Common Carrier Regulation Affected Large ISP Capital Investment?

It is hard to say for certain whether Internet service provider capital investment is up, down or flat since the imposition of common carrier regulation on consumer Internet access services.

Some claim investment is higher, across the board.

Others claim that investment is up at select ISPs such as Comcast, Time Warner Cable, and the wireless division of Verizon.

Still others claim that we should ignore changes to ISP capex in the first quarter of 2015, since that quarter’s activity does not represent on-going investment decisions.

Others say capex is down.

source: Hal Singer

Hal Singer, Progressive Policy Institute senior fellow, argues that large provider capex was down significantly in the first nine months of the Title II era for AT&T (-21 percent), Charter (-23 percent), and US Cellular (-11 percent).

On net, Singer argues, capex fell by $2.9 billion across the largest ISPs excluding Sprint, T-Mobile, and US Cellular (the pure wireless ISPs).

Including the pure wireless ISPs still results in an aggregate decline of nearly $2 billion relative to the same period in the pre-Title era.

That would appear to be a break in pattern. According to USTelecom, broadband capex increased every year since 2009. Indeed, broadband capex increased by nearly 10 and three percent in 2013 and 2014, respectively.

Some of us would not pin all capital investment trends on any single driver. Business strategy, need to reserve capital for other purposes, completion of upgrades and competitive threats (Google Fiber, for example) all are factors.

On balance, ISPs have to weigh investment returns with competitive threats. Sometimes, competition forces investments that might have sub-optimal financial returns, but are necessary for competitive reasons.

That long has been the case for smaller fixed network telcos, and might now be at work for all fixed network or mobile service providers.

In other words, asked to explain why fiber to the home investments were required, executives might privately have conceded that actual net revenue growth was not the driver. Instead, fiber to the home was a strategic investment; something necessary so firms could continue in business.

In essence, fiber to the home would allow telcos to trade market share with cable TV; gaining video entertainment market share while losing voice market share and splitting the Internet access market.