Mobile Video Viewing Up 616% Since 2012; Now 45% of All Video Views Globally

There is a good reason why Verizon, AT&T and other tier-one mobile service providers believe mobile video is an attractive opportunity.

Mobile video views have increased 616 percent since the third quarter of 2012, and now make up 45 percent of all video views globally and more than half of all views in some regions, Ooyala reports.

For content less than 10 minutes in length, mobile gets 69 percent of views.

Despite mobile growth, consumers still trend toward larger screens for longer-form content.

For content longer than 30 minutes, connected TV share of time watched was 61 percent, almost doubling since the first quarter of 2015.

Over the past nine months, for video over 10 minutes long, the share of time watched on connected TVs (CTV) has increased from 43 percent to 71 percent.

The point is that consumers universally want to watch some forms of video on their mobile devices, devices increasingly make this possible, while faster networks make the experience pleasant.

Telecom Cost of Capital is a Big Issue, Especially for Some Fixed Network Operators

The telecom industry might be described as akin to the airline industry, in some key respects. Both industries are relatively highly regulated but also subject to lowish barriers to entry on the low end, capital intensive, unionized and subject to global competition.

The cost of capital is key for some providers, in some industries that have net profit margins as low as five percent. In the global airline industry, In 2015 the industry’s return on capital of 8.3 percent will exceed the cost of capital (debt and equity) of just below seven percent, for example.

What that essentially means is that airlines could have invested money in safer vehicles and earned just 1.3 percent less than assuming all the business risk of operating an airline.

Other studies suggest the cost of capital for U.S. airlines is lower, at about 5.64 percent, however, meaning telecom service providers arguably have more margin to work with.

On average airlines will still make less than $10 per passenger carried, according to the International Air Transport Association. That might remind some of you of the grocery business, where profit margins are closer to one percent to two percent, overall.

The industry’s profitability is better described as “fragile” than “sustainable,” said Tony Tyler, IATA Tony Tyler, IATA’s CEO. Some might, by way of analogy, suggest telecom company profitability likewise requires a great deal of work.

Cost of capital in the telecom business might represent between 10 percent and 25 percent of total operating costs.

Airline Industry Net Profit Margin
2015	Net Profit	Net Margin	Profit per Passenger
Global	$33.0b	4.6%	$9.31
North America	$19.4b	9.5%	$22.48
Europe	$6.9b	3.5%	$7.55
​Asia Pacific	​$5.8b	​2.9%	​$4.89
​Middle East	​$1.4b	​2.3%	​$7.19
​Latin America	​-$0.3b	​-0.9%	​-$1.05
​Africa	​-$0.3b	​-2.1%	​-$3.84

​​​​​​​ IATA Economic Performance of the Airline Industry

While U.S. mobile service providers have a 5.5 percent cost of capital, U.S. fixed network cost of capital is 6.31 percent, according to Aswath Damodaran of the NYU Stern of Business.

The big cost there is the cost of equity, at about 8.8 percent for mobile firms and 8.3 percent for fixed network firms. The cost of debt for mobile and fixed segments is 3.67 percent.

Some older studies have found the European after-tax cost of equity at 8.3 percent, for example.

So the search for replacement revenue sources is a major strategic objective for every fixed network services provider, indeed for every legacy communications or content service provider, especially given the high sunk cost of fixed networks and the obvious dwindling of legacy revenue sources.

Some have argued that the rate of return from FiOS has been negative, for Verizon, where cost of capital has been about five percent for fixed network assets, while returns have been as low as 1.2 percent.

source: Peter Klune

source: Peter Klune

Capital investment provides another illustration of business dynamics. Since about 2000, mobile capex has risen, while fixed network investment has declined.

It does not take much insight to note that expected returns from the fixed network business are perceived to be far lower than expected returns from the mobile business.

In fact, since about 2002, capital investment levels in U.S. fixed networks have been negative.

The caveat is that business models for tier-one providers and smaller upstarts--or contestants with different business models--could be significantly different, as many would note capital and operating costs are lower for cable TV companies, compared to their telco peers.

The upsurge of independent Intrernet service providers provides one example of different--and lower--capital and operating costs. Google Fiber provides an example of contestants with different business models.

source: Market Realist

source: CDC

Still Not at Inflection Point for Post-Linear Video Entertainment

In 2015, 4.9 million U.S. households will have dropped traditional linear TV subscription services, according to eMarketer. Perhaps the most-notable 2015 was the rapid deceleration of linear TV subscription service growth.

That is not yet a significant percentage of total U.S. homes, but the rate of abandonment is increasing. Cord cutting rates were higher by nearly 11 percent in 2015, year over year, and is projected to accelerate.

If the eMarketer figures prove correct, then we might still not be at an inflection point, where the rate of change goes non-linear, even by 2019.

Some 21 percent of U.S. consumers would prefer to spend less on their linear TV services, according to GfK MRI.

Those defectors represent 49 million potential lost accounts, according to GfK MRI study.

About 22 million people (nine percent) want to spend more.

One key difference between the two groups:  70 percent of consumers who want to spend more say “live” TV is “very important” or “important.” Of consumers who say they would prefer to spend less, 50 percent say live TV is very important or important.

The important observation, however, is the importance of the inflection point. When that point is reached, linear service abandonment rate will skyrocket, in a very short amount of time. 

Contestants not in position for the change will not survive, as there will be no time to build a next-generation offer from scratch, once the inflection point is reached.

At least for the moment, we remain in a period of quantitative changes that precede the inflection point. Then the market changes will be qualitative.

In other words, the winners are getting into position now. That is likely why AT&T soon will announce the creation of its own mobile video streaming service, and why Verizon already has done so.

While there is no guarantee of success, the market's eventual winners will emerge from the contenders ready to scale fast, when the moment for a change to a post-linear market arrives.

Will Video Streaming be the Initial Killer App for Verizon 5G?

Verizon has reconfirmed what it said in September 2015 about launching commercial 5G  (technically, pre-5G) service in the United States in 2017.

It seems likely that the initial use case will be mobile entertainment video, given Verizon’s belief that mobile video is the way it can win in the post-linear video entertainment business, its launch of go90, its new mobile streaming service, the acquisition of AOL and likely additional moves.

Using 5G to support mobile streaming makes sense in a targeted sense will make sense. Many would argue that 4G was different than 3G primarily because 4G made mobile streaming feasible, and an enjoyable experience,  for the first time.

Eventually, Internet of Things is expected to be the biggest likely important new app category enabled by 5G. But most consumers are going to encounter the clearest use case in streaming video.

A Verizon executive had said in September that  Verizon will begin field trials of 5G technology within the next year, with plans for start of commercial service, in some form, in 2017.

If you recall the introduction of Long Term Evolution (LTE) 4G, you remember that the first emphasis was on mobile data access, not phones, simply because suppliers had not yet produced LTE phones in mass quantities, and one initial early adopter segment were users who wanted much-faster access for their personal computers.

Since it is highly possible the full set of 5G standards will not be fully ratified by 2017, Verizon might be in a pre-5G mode, operating a commercial service that will appeal most to some user segments whose business cases are insensitive to use of a “pre-standard” but largely compliant deployment scenario. Video delivery is one such case.

Rapid adoption of what it believes to be a superior technology platform is very much part of Verizon’s understanding of its position in the U.S. market, and its basic strategy, which is to lead in the area of platforms and platform-based quality.

Roger Gurnani, chief information and technology architect for Verizon, earlier had said he  expects "some level of commercial deployment" to begin by 2017”. That's far earlier than the time frame of 2020 that many in the industry have pegged for the initial adoption of 5G technology. But the video streaming angle fits with that earlier comment.

Other mobile providers also have said they will launch commercial service as well.

South Korea hopes its wireless carriers can deploy a trial 5G network in 2018, in time for the Winter Olympics in Pyeongchang.

Japan hopes to have a 5G network running in time for the 2020 Summer Olympics in Tokyo. The Chinese government, meanwhile, has also pushed for the aggressive deployment of 5G technology.

If you use the rule of thumb that the mobile industry introduces a next generation network about every decade, that would suggest 2020 is the point at which Verizon would want to deploy 5G, nationwide, as it deployed 4G in 2010.  So 2017 might be an even-faster introduction than is typical.

“I showed my board the service in November,” said Lowell McAdam, Verizon CEO. “You don’t ever go to a board with something that’s not real.”

In Most Competitive Markets, The Low Cost Provider Wins

It has long been my contention that, in a competitive market, the low-cost provider wins. So average revenue per account, while important, arguably is not as important as operating cash flow, operating costs as a percentage of revenue, and therefore actual profit margin.

In that regard, consider subscriber acquisition costs, a figure that typically includes attributed marketing costs, including discounts and other promotions, per subscriber, for linear TV and mobile service.

Dish Network and AT&T’s DirecTV (prior to acquisition by AT&T) subscriber acquisition costs were about $868, on average. Comcast incurred SAC costs of $1980 per new account, while CenturyLink had $2352 per new account.

It has been estimated that some independent third party suppliers, such as Ting, spend only about $125 to acquire a new video customer.

That is not the only key long-term input, since Ting also pays high prices for its content, compared to Comcast, AT&T or Dish Network.

The important point, though, is the substantial gap in customer acquisition costs.

The same sort of disparity exists for mobile service provider subscriber acquisition costs. Verizon invests about $484 to get a new mobile account. AT&T invests about $583 to get a new mobile account, while T-Mobile US invests only about $169.

Sprint, on the other hand, has to spend a whopping $1440 to get a new account, while Ting spends perhaps $80.

There is, in other words, an order of magnitude difference between Ting SAC and costs for tier-one competitors.

In the mobile realm, Sprint spends an order of magnitude more money than its other tier-one competitors, and two orders of magnitude more than Ting.

To be sure, there are many more elements to full business models, so subscriber acquisition cost differentials are not directly indicative of overall business model advantages or disadvantages.

But they do suggest how much room might exist for competitors.

Non-facilities-based service providers in the U.S. competitive local exchange industry, formed in the wake of the Telecommunications Act of 1996, which deregulated U.S. voice services,  largely failed.

One key reason was a not-compelling cost structure, once mandatory wholesale discounts were revised from about a 60-percent level of retail prices to perhaps 20 percent from retail prices.

Up to this point, only U.S. cable TV operators, who already had network assets, marketing organizations and other assets, managed to become serious competitors in the voice and Internet access business.

What seems to be happening is that new independent competitors are discovering that, under some circumstances, they can afford to build fiber to home networks, and operate them efficiently enough, to make a business case work, where larger providers, with higher embedded costs, have not been able to do so, as well.

The issue now is the number of local markets where that is possible, especially now that tier-one providers are moving to boost delivered Internet access speeds up to a gigabit, albeit at low triple-digit prices, where many independents price price below that level, in high double-digits.

source: Seeking Alpha

source: Seeking Alpha

20% of U.S. Consumers Might Drop LInear TV in 2016, Survey Finds

About 20 percent of consumers could ditch their cable TV subscriptions in 2016, according to a survey by accounting firm PwC, which surveyed 1,200 U.S. consumers for its report.

According to PwC, 79 percent of U.S. consumers subscribe to some form of linear subscription TV, but 23 percent indicated they had reduced levels of service over the last year.

About 16 percent of respondents disconnected in the last 12 months, while five percent said they never had subscribed to a linear video service.

The study also found that while the average subscriber receives 194 channels, they regularly watch just 17 channels.

Some 77 percent of 18-to-24 year olds view “television” using the Internet.

In 2014, 91 percent of consumers said they could see themselves subscribing to cable in the following year. In 2015, that figure dropped to 79 percent, implying more than 20 percent of consumers could drop their cable subscriptions in the next year.

Can Verizon Transform Itself?

For decades, observers have argued about whether telcos could fundamentally transform themselves--and their businesses--for the Internet age, meet competitive challenges and protect or grow the value of their businesses. To be sure. that is a problem for any large enterprise.

But it is a challenge all tier one telcos must master, or else. And though many would agree most cable TV companies are more nimble than most telcos, both face similar structural issues (saturation and decline of core markets). So success in one industry segment offers at least some expectation that feat is repeatable.

As it no longer is possible to view Comcast as a “cable TV” company with a business model built on distribution services and communications access, so Verizon has made some efforts to shift its business model incrementally towards “over the top” services separated from Verizon’s access services.

Those Verizon initiatives include Hum, the vehicle communications service, and go90, the video entertainment service. Both are available to everyone, not just to Verizon mobile subscribers.

To be sure, neither contributes a significant portion of Verizon revenue.

So it is hard to say, yet, whether Verizon will be able, over time, to significantly diversify its revenue sources away from “captive” access and distribution services, and towards over the top apps. Few seem to question the strategy; more might worry about execution.

But Verizon is going to try. "We are disrupting ourselves," said Lowell McAdams, Verizon CEO. "We think of ourselves as a technology company with solid telecom assets."