Disney Plans to Cannibalize Itself

As the video entertainment market shifts to over-the-top distribution methods, content providers will face a problem telcos are well aware of, namely revenue issues caused by product substitution.

Much of the cost to Disney of launching its new streaming services will come from increased operating costs, as it will have to market itself, instead of relying on its distribution partners to do that. UBS has estimated that cost at about $806 million annually.

That is not even the biggest cost, though. As many legacy product providers often find, new products often simply cannibalize existing products.

When an internet service provider using digital subscriber line shifts to newer platforms such as fiber to the home, it loses a DSL account for every existing customer it converts to a fiber access. So net gains are the issue, as a telco trades lost DSL accounts for new fiber accounts.

That problem is obscured a bit by the fact that few telcos in the U.S. market have completely replaced their copper access lines. So, in some areas, there is not an opportunity to even swap fiber lines for copper lines.

That is akin to the problem Disney will face in “going direct” to consumers with its content.

Unlike third-party distributors, Disney does not have a “cost of goods” line item, as it owns its own content. That is a huge plus.

On the other hand, Disney will have a huge “lost revenue” problem, as it loses licensing revenue presently earned by supplying third parties with Disney content. That is very much like the “fiber for DSL” problems faced by telcos. Creating the new platform necessarily causes losses on the old platform.

UBS estimates that Disney’s film TV licensing alone could suffer a $2.1 billion a year loss, and that its streaming licensing through services like Netflix might all $500 million in additional current revenues.  

source: UBS

So before the Disney streaming services can hope to achieve breakeven, they start with a potential loss of up to $2.6 billion in annual lost current revenues from licensees who will not be able to buy that content from Disney. It is a high hurdle.

UBS estimates Disney must find  32 million customer accounts, at a $9 a month subscription fee, to reach breakeven on an operating basis. Though Netflix has 100 million accounts globally, Netflix is unusual. Most of the network-specific streaming services have single-digit million accounts, at least so far.

HBO Go has perhaps 3.5 million subs, while all the CBS streaming accounts might number about four million.

So the biggest single business problem for Disney is the lost revenue it will incur when it stops licensing its content to other distributors.

U.S. TV Antenna Households Increase to Nearly 16 Million Homes

One sign that consumers are unbundling their video entertainment purchases is the increase in purchasing and use of over-the-air antennas, presumably then combined with subscriptions to one or more streaming services.

A study sponsored by Ion Media and conducted by Nielsen shows the number of broadcast-only homes has increased 41 percent over the last five years, to 15.8 million households.

That shift, in turn, is part of a larger rearrangement of buying preferences in the video entertainment business, which has consumers shifting buying to over-the-top streaming services, reducing or halting the buying of linear services and use of streaming services.

The report finds that broadcast-only homes have a higher percentage of young viewers (median age 34.5) than total TV households (39.6).

Some 39 percent of broadcast-only homes have children in the household, compared to 34 percent of total TV households.

The new reliance on over-the-air antennas is part of a range of other trends including a shift to mobile video, cord cutting of linear video subscriptions, a shift to skinny bundles and use of streaming services.

The shift to use of over-the-air TV is related to a larger problem in the communications business, namely the process whereby products and services become features. In the case of broadcast TV, the shift if from paying for a linear video subscription that also includes the local off-air channels, to buying an antenna to avoid paying for such content access.

Vodafone Has 50 Million IoT Accounts

Vodafone says it is the first global IoT provider to amass 50 million internet of things connections, adding about one million new connections a month, with particularly strong performance in the automotive, healthcare and utilities sectors, Vodafone says.

In 2016, global IoT revenues earned by mobile operators was in the range of Eur 11 billion, according to Berg Insight. Average revenue per connection was Eur 1.40 on average, ranging from Eur 0.30 in some developing countries to Eur 3.00 in developed countries.

Some 56 percent of organizations have integrated IoT data into their existing core business systems such as ERP, cloud hosting platforms, analytics tools, and mobile applications.

About 55 percent of IoT adopters in the Americas surveyed by Circle Research have seen revenue growth by greater than 20 percent following IoT implementation.

Globally, IoT now accounts for 24 percent of the average IT budget,  equivalent to IT spending around cloud computing or data analytics, Vodafone ’s fourth annual Internet of Things (IoT) Barometer Report says.

Pangea Will Come Again: Earth in 250 Million Years

Video Becomes Part of Core Telecom

The global telecom and media market will generate $1.58 trillion in revenues in 2021 from 11.96 billion connections, according to Ovum. Video entertainment largely accounts for the growth, as that product becomes a mobile and fixed service provider core offering.

“Core” telecom revenues have been in the range of $1 trillion annually, in recent years. To sustain those revenues, video entertainment increasingly is seen as a new “core” offering.

source: FCC

Using that example, much of the future telecom service provider revenue growth will come from other applications. Many expect that will happen as new internet of things apps develop, and as service providers are able to create new roles for themselves in those areas.

The United States  will be the world’s largest telecom/media market by revenues, with $402 billion in 2021 generated from 805 million connections.

U.S. revenues will be 25 percent of the global total in 2021, compared to US connections, which will be seven percent of the global total.

China will be the biggest market in 2021, as measured by accounts. China will have 2.4 billion connections, representing 20 percent of the global total, and the second-largest market in terms of revenues, with revenues of $220 billion in 2021.

But growth largely will come from emerging markets. The world’s top ten markets ranked by revenue growth from 2016 to 2021 will be concentrated in the Middle East, Africa, and Asia-Pacific regions. The markets in order of revenue CAGR are Myanmar, India, Kenya, Indonesia, Ghana, Tanzania, Nigeria, Iran, Uganda, and Pakistan.

Mobile will be a big contributor everywhere, but content will be a bigger revenue source in some markets.

In 2021, the mobile market will generate 87 percent of total telecom/media revenues in Africa and 70 percent in the Middle East, compared to 50 percent in North America and 49 percent in Western Europe.

Still, mobile  will dominate the market overall, with revenues of $933 billion and nine billion connections in 2021. Fixed broadband will generate $288 billion in revenues in 2021, ahead of entertainment video at $239 billion and fixed voice at $122 billion.  

Roaming Revenues to Shrink 11% in 2017

Juniper forecasts that annual mobile roaming revenues, worth an estimated $54 billion in 2016, will decline to $48 billion in 2017 as revenues generated from increased usage in many markets fail to offset those lost by lower roaming charges in the EU.

That represents an 11 percent decline in 2017.

But that is only part of a larger problem, Juniper Research suggests. Globally, account growth continues, as customers in developing countries become mobile subscribers. But that essentially accounts for all account growth in the global business.

And then there is revenue. We might already have reached “peak mobile,” in terms of revenue. In other words, it is conceivable that total industry revenue will begin to shrink, from this point forward, for the foreseeable future.

In part, that is a result of account saturation (everyone who wants to buy the service already does so) as well as declining average revenue per account.

The bigger potential problem is value shifts within the internet ecosystem, which the whole telecom industry now is part of.

Telecom is not a “growth” industry. To be sure, “telecom” was not a growth industry in its monopoly phase, either. It was a utility. In the competitive era, telecom has managed to grow its revenue and scale, based largely on huge growth of mobility services in developing nations.

In developed markets, “telecom” arguably has reached saturation. And that is the larger problem: how to reignite at least enough growth to allow the industry (especially in developed markets, at the moment) to maintain steady revenue growth rates, as legacy revenues shrink.

source: Juniper Research

source: Strategy Analytics

source: A.D. Little

CenturyLink Faces a "Two Types of Network" Problem

CenturyLink has an interesting problem. It earns most of its money from enterprise and business customers, but it has a consumer communications business that covers the most-rural territory of all the entities formerly known as “Baby Bells.”

In fact, CenturyLink now earns as much as 88 percent of revenues from business customers, and nearly all its profit.

Prior to the Level 3 merger, CenturyLink claimed enterprise, small business and wholesale  revenue would amount to 76 percent of total revenue.

source: CenturyLink

CenturyLink might have as many as 17 million access lines in service. Since it does not report total access lines anymore, it is difficult to say with precision what profit margin contribution now is made by the consumer business, except to note that internet access accounts for about 46 percent of consumer segment revenue, with consumer voice contributing about 41 percent of total revenue.  

So what is interesting is that CenturyLink operates as a business services specialist--akin to a competitive local exchange carrier, metro fiber provider or long-haul capacity provider--but still also operates a huge network of relatively low density consumer access lines.

That means CenturyLink likely makes most of its profits from the business segment, with higher profit margins, compared to the consumer segment. That is not a terribly unusual state of affairs for a tier-one fixed network service provider in the U.S. market with universal service obligations.

More than most tier-one service providers, CenturyLink would really benefit from lower-cost platforms to supply high speed internet access services, without having to install fiber to home facilities in rural areas.

Unlike AT&T and Verizon, CenturyLink does not own mobile network assets that will help, in that regard. On the other hand, perhaps CenturyLink can provide small cell backhaul service to those and other firms.

But CenturyLink faces severe capital constraints. It has grown by acquisition, which means high debt loads. CenturyLink gross revenue also is declining, in both business and consumer segments, and has to pay out a high dividend.

One might argue that among the big strategic problems CenturyLink faces is that it is an amalgam of two different types of businesses: a largely-rural fixed network business using one type of network and a separate enterprise services business that uses different facilities.

source: FCC, CenturyLink