What "EBITDA" Instead of "GAAP" Profit Tells You

Without wanting to be unduly bearish, the global “telecom” industry is less healthy than it appears. Consider only the shift that has to be made in describing “profit.” According to Ericsson, global revenue will climb about 2.4 percent each year to 2018, with growth of earnings “before interest, taxes, depreciation and amortization” of one percent to 2018.

That shift from “generally accepted accounting principles” to EBITDA tells the story: the global telecom industry no longer is “profitable” in the GAAP sense.

Companies that operate in capital intensive, such as telecom, “do not give investors accurate depictions of performance through the EBITDA margin,” says Investopedia. In other words, in capital-intensive telecom, EBITDA is inaccurate as a measure of operator performance.

That is why “generally accepted accounting principles, or GAAP, do not include EBITDA as a profitability measure, and EBITDA loses explanatory value by omitting important expenses,” the site says.

Revenue is important, but the more-telling shift is the use of “EBITDA” rather than “profit.” EBITDA is a measure of cash flow, or operating efficiency. That is important, but it is not the same thing as “profit,” commonly understood.

To be sure, there are reasons for using EBITDA: it isolates operating performance, without the potential distortions of financing activities. At the same time, positive cash flow does not necessarily mean a firm is “profitable.”

That is not always a long-term problem. The entire U.S. cable TV industry, in its major urban growth phase, always had high cash flow (EBITDA), but zero profits, as all available cash was plowed back into growth. Eventually, when the construction phase ended, cable operators shifted to actual GAAP “profits.” So cash flow matters. A lot.

The problem for the global telecom industry is that while there is growth, that growth is heavily to be found in Asia and Africa. In most other regions, the business is quite mature or getting that way. Where there is not high growth, use of EBITDA arguably masks some structural issues.

Mergers, acquisitions, new products and operating cost reductions are reflections of the underlying trends. In one clear sense, telecom clearly is a declining industry: all its legacy products are in a mature mode, while some have been declining for more than 15 years (international long distance, voice).

To survive, much less prosper, completely new products, at massive scale, will be needed. That is why “internet of things” and “connected cars” are so important: they hold the promise of supplying those big new revenue sources.

But we have to recognize that the shift to “EBITDA” instead of GAAP “profit” tells you something very fundamental about the business.

source: Ericsson

Mobile is Least-Favored Retail Payment Method, Survey Finds

Retail mobile payments have developed rather more slowly than many have predicted would be the case. The basic objection has been that switching from existing retail payment methods to mobile payment adds too little value to drive rapid switching. That seemingly remains the case.

Security and privacy remain the top stated consumer concerns, though an argument might be made that the real reason is that the innovation simply does not yet add enough value to be worth the “bother.”

When asked about which forms of payment they find most secure, cash topped the list of responses to a survey conducted by Walker Sands. Some 46 percent indicated that was a concern.  Credit cards were cited by 27 percent as “most secure,” while debit cards were seen as most secure by 22 percent of respondents.

Mobile payments ranked last each of the past two years, at one percent, in terms of “preferred method of payment.”

The majority of consumers cite security (61 percent) and privacy (58 percent) as the two primary factors that make them hesitant to use mobile payment applications.

About14 percent of consumers say they have no hesitation to use mobile payment services. There are other issues, such the disparity of retailer terminals able to accept one or more mobile payments systems.

For some of us, those are real, but secondary issues. The key problem remains that value is not high enough to prompt massive behavior change.

source: Walker Sands

OTT ARPU Might Matter More than Number of Accounts

source: Chetan Sharma

The decline of the U.S. linear subscription TV revenue might happen slower than you think, for a number of reasons. Between 2016 and 2019, for example, though the number of over-the-top subscriptions will grow--boosting the number of active accounts by perhaps 12.7 million units, according to eMarketer--revenue will not change as quickly.

To be sure, OTT account volume already has surpassed linear account volume. U.S. linear subscriptions in 2016 represent about 93.8 million subscriptions. Assuming linear accounts do not grow, or decline too fast, that might mean OTT, already the share leader in terms of total accounts (93.8 million 2016 linear accounts and 187 million OTT accounts), will represent as much as 68 percent of all video entertainment subscriptions.

But average revenue per account is highly disparate. Where a U.S. linear around drives between $80 and $120 a month in revenue, an OTT subscription might drive $7 to $11 per account, per month. In other words, linear accounts can represent as much as an order of magnitude more revenue (10 times) as an OTT subscription.

In 2016, U.S. OTT video revenues might have represented $7 billion. Linear video produced $102 billion.

Were OTT subscription revenues (advertising or transaction revenues also will be generated) to grow 10 times, that would still directly displace a bit less than the current value of linear subscription revenue.  

source: Strategy Analytics

One way of looking at the market is that a customer contemplating purchase of an entertainment video service can buy a single linear subscription, or perhaps 10 OTT accounts, and spend the same amount of money per month.

If one assumes that over-the-air broadcast TV can be gotten using an off-air antenna, for no monthly subscription price, and pre-recorded material from OTT, then the third bucket of content is “live sports” and, for a small number of customers, 24-hour news.

So the issue, long term, is which bundles of purchases allow a potential consumer to replicate all--or enough--of the wanted content using OTT sources only (and assuming over-the-air TV can be gotten at no incremental cost), and what that implies for total monthly spending.

Linear services are adding more features (including OTT or on-demand access), so the issue is not a simple “linear versus on-demand” dynamic.” Also, more linear content is being packaged in OTT form. And few customers want “all” the programming currently offered in big linear bundles. Relatively few want any of the highly-specialized channels, many do not want sports, most do not want news and off-air is an alternative for traditional broadcast network fare.

Logic suggests consumers will evaluate value against price, suggesting a workable set of OTT replacements, for most consumers, will offer “most” of what a linear subscription features, at lower price.

That implies lower revenue per account, and likely lower total monthly spending per user or per household. The reason is what happens in a typical product lifecycle. At some point, every popular product saturates, and revenue per account, as well as industry revenue, falls. Some might argue that OTT is a “new” industry with a “new” growth curve. Others might see OTT as the replacement product for linear delivery.

Both points of view can be correct, simultaneously. One other observation likely is germane. The internet tends to create product replacements that produce less revenue than the legacy business model. The phrase “trading digital dimes for analog dollars” illustrates the notion.

Since most of the primary underlying cost of content is driven directly by content rights access (perhaps 40 percent of total cost in the linear model), and since owners will act to protect those revenue streams, we might surmise that content costs are unlikely to fall much, in the transition from linear to OTT delivery.

source: eMarketer

Will Connected Car be the "Next Big Thing?"

The broad trend in the information technology business, and for many consumer products, is that more value is generated from services rather than the core products. That is likely going to be true in the auto business as well, with revenues and profits shifting from hardware (cars) to software, from products (vehicles and accessories) to services.

Mobility services, though perhaps shrinking as a percentage of total ecosystem revenues, might well increase as a percentage of ecosystem profits. That is one reason some tier-one mobile operators are so focused on connected car services.

For AT&T and Verizon, the carrot is that the United States is expected to be the single largest connected car market in 2022.

source: pwc

source: pwc

source: pwc

Softbank OneWeb Investment Poses Challenges in Every Rural Market

Softbank’s big investment in OneWeb, taking a 40-percent stake for $1.2 billion, almost assures that the proposed low earth orbit satellite constellation will launch. There are some other direct and potential consequences, especially a change in the business models of some or all other existing internet service providers.

The revenue model for fixed networks has been getting worse for decades, as customers for voice desert, leading to a stranded asset problem that worsens. Also, in most parts of the world, most people get internet access using their mobile phones, not the fixed network.

In the United States, internet access has become a product segment dominated by cable TV companies. Video entertainment always has been a tough business for smaller cable operators or telcos, as they do not have the scale required to drive costs out of the business. And linear TV is, by every estimate, mature and declining.

You might think OneWeb, which plans to blanket every inch of the earth’s surface with internet connectivity, is of primary value in developing, rural or maritime settings. That might be true.

But it also is true that OneWeb also further erodes the business model for rural telcos, cable TV companies, fixed wireless operators and satellite internet firms alike. OneWeb might partner with, or compete with, mobile operators as well, rendering their existing platforms increasingly uneconomic.

For similar reasons, OneWeb might pose challenges for municipally-owned networks as well, providing another option and therefore shrinking the addressable market for a municipal internet operation. You might think that is an issue only in rural areas of developing countries. OneWeb makes clear it is an issue for potential customers in all rural areas.

OneWeb says it plans to market its service both to “rural areas across the United States and emerging markets.”

Even if one argues that 5G networks will not soon provide gigabit speeds to rural users--if ever--one must conclude that if OneWeb launches, it will immediately “overbuild” all rural areas of the United States and elsewhere, offering a new alternative to fixed and geostationary satellite, as well as fixed wireless access.

It remains unclear whether mobile operators will choose to partner with OneWeb, but the OneWeb terminals support LTE, 3G, 2G and Wifi, so the opportunity is there. It is conceivable that OneWeb becomes a wholesale partner for mobile operators, much as it is possible the Project Loon balloon fleet could become a wholesale partner for mobile companies across the United States, as Alphabet has been attempting in Asia, for example.

The point is that OneWeb further undermines the business model, in rural areas, for virtually all other internet access providers, with the possible exception of mobile operators. It also is true that some existing providers might also seek wholesale partnerships with OneWeb as well. The issue there is scale. If multiple suppliers buy wholesale access from OneWeb, what does that do for the existing assets (fixed telephone networks, cable TV networks, geostationary satellite services, fixed wireless, mobile networks)?

What Seems to Have Been Key Business Model Issue for Google Fiber?

To the extent that Google Fiber has found its business model unattractive, the issue remains “why?” Any number of issues could have been contributors, ranging from take rates to construction cost. But take rates are the most-likely source of trouble for the business model, both for the core internet access product and video services.

Expectations for Google Fiber once were much higher. A 2013 survey found that about a third of households had subscribed . A 2014 survey commissioned by Bernstein Research conducted a door-to-door survey of five Kansas City neighborhoods where Google Fiber was being sold, finding  take rates as high as 75 percent, in some neighborhoods.

In Wornall Homestead, the highest household median income neighborhood ($116,000 annual income) Bernstein surveyed in 2014, it found that 83.1 percent of respondents were taking Google Fiber service. About 15 percent were subscribing for the “no charge” 5-Mbps service, but all the rest were buying the gigabit service.

That is a historically-unprecedented take rate for an “overbuilder.” In the Community College, the neighborhood with the lowest median income neighborhood ($24,000 annually) 27 percent of respondents were taking Google Fiber service.

Some 26 percent actually bought the gigabit service, while seven percent subscribed for the “free” 5-Mbps service. That level of adoption, in the first year, would be in line with take rates seen when firms such as Verizon began offering FiOS, for example, and better than most overbuilders

have achieved in the first year.

Obviously such take rates were not widely replicated in other markets and neighborhoods. In fact, it appears take rates might have reached 20 percent in Kansas City, but far less than that in the additional markets Google Fiber entered. That is based on the assumption that

Assume Google Fiber had about 70,000 to 75,000 video subscribers by the end of 2016. Then assume those video accounts represented about 15 percent of total revenue-generating accounts.

That might imply that as many as 467,000 revenue-generating accounts, and perhaps 70,000 “free” accounts in service, for a total of 537,000 accounts in service. Some have estimated Google Fiber has about 450,000 internet access subscribers, for example.

At a 20-percent take rate, that implies Google Fiber passes some 2.68 million homes. Varying assumptions about video take rates as a percentage of total, one could derive paid accounts ranging from 318,000 to 638,000, or homes passed between 1.6 million and 3.2 million.

It’s guesswork, as Google Fiber never has released any information about either subscribers or homes passed.

One has to assume that adoption rates were less than 20 percent, or that costs were much higher than forecast, with the single most-significant sensitivity being the take rate.

A take rate of 20 percent in the first year would be considered a success by virtually any other internet service provider entering the market for the first time, and there is no particular reason to believe Google’s network and construction costs were too much different from any other ISP doing a new build.

While make-ready costs conceivably were lower, the business case is not so sensitive to those costs. Construction costs, and then materials (cable, customer premises gear) and drop activation are the dominant drivers of expense.

Canada Wants 50 Mbps Internet Access in Rural Areas

As has been obvious for some time, internet access now is the primary “basic” function of a fixed communications network serving consumers. So it is that the Canadian Radio-television and Telecommunications Commission (CRTC) has “declared that broadband access Internet service is now considered a basic telecommunications service for all Canadians.”

As a practical matter, that now means the CRTC is shifting its regulatory focus from wireline voice to broadband services, including shifting universal service funding from voice to internet access. In addition to focusing the annual $100 million universal service fund from voice to internet access, the CRTC also is creating a new fund that will invest up to $750 million over and above existing government programs, for a period of five years.

The CRTC also has set targets for the basic telecommunications services requiring speeds of 50 megabits per second  downstream and 10 Mbps upstream for fixed broadband Internet access services.

As you would guess, rural areas are where the problem is most acute.

About 82 percent of Canadian consumer already can purchase service at 50 Mbps to 99.99 Mbps, but only about 29 percent of Canadians can buy such service in rural areas.

Source: CRTC report

Source: CRTC report