Content, Not Speed or Price, is How Mobile Ops Will Compete in Future

A very good rule of thumb, when assessing consumer or business behavior, is to watch what they do, not what they say. For example, telecom executives often tell researchers that their biggest competitors are over the top app providers.

But some would say they take action in ways that suggest the “real” competitors are in fact, other service providers, not app providers, as surveys often suggest is the case.

Not very often does any tier-one telco or mobile service provider actually take a concrete step--and back that with spending commitments--that suggest an app provider really is viewed as a key competitor.

As just one example, leading mobile service providers often adjust their own policies, prices and packages based on what some other major competitor just has done. At other times, actions are taken to distinguish one contestant from others in the market.

Cable operators are not upgrading their networks to gigabit speeds because of Facebook or Netflix, but because of Google Fiber, a facilities-based and direct Internet access and video entertainment competitor.

What executives might be signaling that the leading strategic concern is loss of value, revenue and profit margin from core services to OTT competitors.

That concern is legitimate, but does not conflict with the reality of direct competition from other leading service providers as the driver of real-world actions.

There is an important strategic implication: some app providers--particularly in content areas--will almost certainly emerge as key partners as mobile service providers look for ways to differentiate their offers in ways other than “speeds” and “prices,” the two major ways mobile operators have competed to this point.  

As Long Term Evolution networks--and coming fifth generation networks--are fully deployed by virtually all leading mobile service providers, and if spectrum allocations become more even, among the leading suppliers, “speed” will not be a differentiator.

At some point, neither will “price,” since competitors can match offers when they must. The main reason subscription video average revenue per user has not declined in decades, compared to every telecom service, is that entertainment video is content.

Good content is hard to produce and inherently limited, which has value--and therefore pricing-- implications. That means mobile operators often will bundle OTT video to create distinctiveness, and likely will find other content-related apps useful for the same reason.

Some would point to Netflix and Spotify, Binge On and other efforts as examples.

And that means partnerships between OTT app providers and mobile service providers, as a long-term trend.

source: Openet

The issue is how much differentiation is possible. The answer might vary, market by market, based on regulatory rules enabling or prohibiting certain promotions or policies, such as exempting video consumption from data plan usage, pre-processing video for better bandwidth efficiency, allowing free access to video services or other measures that create differentiated offers.

At the January 2016 AT&T Developer Summit and Hackathon, Tom Keathley, AT&T SVP for wireless network architecture and design, pointed out that video generated between 40 percent and 50 percent of data traffic on the AT&T mobile network and more than 50 percent of traffic on its wired network.

Keathley suggested it would be not unreasonable to expect that entertainment video would grow to perhaps 70 percent of mobile data traffic by 2018.

AT&T would consider efforts such as limiting of video stream quality to match a device screen’s capabilities, perhaps at 480p resolution, as a possibility.

That will enrage some policy advocates who insist “all bits be treated equally.” Whether that is possible, or desirable, is the issue.

But such pre-processing also illustrates why content bundling will be more strategic in the future. It is content that now drives mobile data consumption, while content remains a key means for differentiating one carrier's offer from another's.

Between 2011 and 2016, Revenue per Gigabyte Prices Will Drop 300 Percent

Wi-Fi now has become an important input for mobile operator access cost containment. As usage continues to climb, revenue per gigabyte keeps dropping. 

Offloading traffic allows users to consume lots of data without excessive stress on their data plans.

That offloading also means network capacity investments to cope with usage growth can be delayed longer than otherwise might be the case.

Oddly enough, the bind is real: mobile operators arguably cannot afford to invest enough in their own networks to support all the usage and still have a sustainable business model.

Even if there is some "lost revenue" because users shift to Wi-Fi, and therefore the mobile operator loses usage, the upside is that the operators avoid huge capacity investments.

source: Analysys Mason  

                Average wireless network traffic per connection

source: Analysys Mason

Why Content is a Logical Mobile Service Provider Opportunity

There is a very good reason many mobile service providers now are turning their attention to mobile video, and might also eventually participate in other app efforts: mobile is going to be the dominant screen used to watch video content, mobile is the access platform and the revenue opportunity is large enough to affect earnings.

Even if consumption of digital media is growing, mobile consumption is growing faster, according to comScore.

By 2030, U.K. regulator Ofcom suggests, as much as 60 percent of video content might be viewed on a smartphone screen.

Also, content is at the heart of mobile app usage, daily.

In 2015, U.S. service provider mobile data revenue was $144 billion. TV revenues were $185.3 billion. Mobile has the screens and the delivery mechanism. It simply needs to create a sustainable role in the content and advertising part of the ecosystem.

Marketing and Operating Costs Might Provide the Difference for Small ISPS Deploying Gigabit Internet Access Networks

At a macro level, the consumer telecom business relies on scale. That is why any examination of market share (fixed or mobile) in virtually any country shows a very-small number of names with 80 percent to 90 percent market share.

But there are ways small local providers sometimes can create a sustainable business model.

Odds have proven to be best when operating in smaller markets (not dense urban, not rural).

Prospects arguably are especially picking markets where the dominant providers (cable TV and telco) are bigger “national” names who know their financial results do not hinge on what happens in the smaller markets.

In other cases, the dominant competitors are smaller providers without deep pockets, but also higher overhead and operating costs. You might argue that a small Internet service provider building its own fiber-to-customer facilities will not enjoy any cost advantages over a large tier-one provider, in terms of material costs.

It is conceivable there are some labor cost savings, but permitting, “make ready” and other costs should not be materially different from what other service providers have to pay. The possible exception is the rare instance where another entity is laying new conduit and the ISP can place cabling inside that conduit without paying the cost of digging.

The point is that the business model sensitivity likely hinges on marketing and operating costs.

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.

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.

And that, one might argue, accounts for the ability some small ISPs could have in the new gigabit Internet access market, in some markets, even when new facilities have to be deployed.

source: Seeking Alpha

Escaping "Dumb Pipe" Value and Role Requires Embrace of Content

One can argue about whether telecom and banking are logical partners, as one can argue about the upside for mobile payments and other banking-related transaction businesses. Many have struggled to find sustainable partnerships around social media and messaging apps.

Fewer think entertainment and content are illogical areas that could drive service provider revenue growth.

There is one theme that underlies thinking about all those potential growth avenues. The logic is to make an information asset a “communications” asset.

The reason that is important: in an era where applications are logically separated from network access, the value of access and transport becomes something of a commodity, difficult to differentiate.

Information--especially that related to discrete individuals and firms-- as well as content, are highly differentiated and therefore much more “unique.” And uniqueness creates the foundation for value, and higher retail prices.

Between 1998 and 2015, for example, Internet transit prices fell about three orders of magnitude (by a factor of 1,000).

To be sure, transit prices are but one element contributing to final retail prices. But transit prices, and capacity prices more generally, suggest the direction of pricing trends.

Access networks, observers will note, are not “virtual” or as easy to replace or upgrade as chipsets or consumer devices. That suggests access costs should be sticky to the high side.

But even if “access” involves construction that cannot follow Moore’s Law, the actual trends for Internet access speeds and prices in the United States have nearly followed a path one would expect from Moore’s Law or  Kryder’s Law.  

In fact, if the trend continues, by about 2030, fixed networks and mobile networks will operate at the same speeds, an astonishing development, both technologically and in terms of business implications.

Since capacity increases that fast, but consumer discretionary spending power never does, the price per bit falls dramatically, even if retail prices drop marginally in developed markets, but rapidly in developing markets.

The implications are easy enough to predict: access--by itself--will become, and remain, a relative commodity, in the absence of value added other ways.

source: Fiber Optic Association

source: DrPeering.net

source: advancedsignalz.com

The implication, some of us would continue to argue, is that revenue growth, higher value and profit margins will require escaping the commodity-like “access and transit” function.

The threat posed by a “dumb pipe” role in the Internet ecosystem is precisely the commoditization of the function, and therefore the retail price, sales volumes and profit margins.

Content and information functions, on the other hand, remain capable of differentiation. Future winners in the service provider space likely will succeed in operationalizing that insight.

Verizon Wants to Sell Data Center Business

Verizon Communications is moving to sell its data center assets, reversing an earlier effort to  expand in hosting and colocation services after it acquired data center operator Terremark Worldwide Inc in 2011 for $1.4 billion.

The assets up for sale includes 48 data centers, generating annual earnings before interest, tax, depreciation and amortization of around $275 million.

The move comes at a time when a few U.S. tier one telcos appear to be rethnking their roles in the data center business.

In addition to the possible sale of Verizon data center assets, AT&T and CenturyLink likewise are trying to sell their data center businesses.

Windstream already has divested its data center business.  

So what is going on? Most larger U.S. telcos seem to believe they can obtain the benefits (services for their enterprise customers) without owning the facilities, and can deploy capital elsewhere.

Cincinnati Bell also is monetizing its data center assets, selling ownership shares of its CyrusOne data center business and raising cash to reduce debt.

Some would argue the large telcos also face issues of relevance in the cloud computing  business.

Will Netflix Shift to Focus on Profits After Big Global Expansion

Will Netflix do as Amazon did and shift from growth to reporting some level of actual profits? Possibly.

Netflix, already in more than 60 countries after launching in Japan, Australia and Southern Europe in 2015, might be at a point where it can concentrate on harvesting.

Netflix has estimated it would add about six million accounts domestically and 11 million outside the United States in 2015, reaching 74.3 million total.

Netflix might have net income of $137 million in 2016.

Some analysts project $535 million net income in 2017 and more than a $1 billion by 2018.

Separately, Netflix now has climbed into the top ranks of spending to create original content. Netflix will spend more than CBS, Viacom, Time Warner and Fox Networks on content in 2016, according to MoffettNathanson.

Netfli also will spend more than HBO, Amazon and Hulu.

source: Bloomberg

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