Rate of Cord Cutting Slowing?

“The number of current pay-TV customers who plan to cut the cord has actually declined, and the number of hours spent watching old-fashioned, time-slot television is growing,” said Peter Cunningham, Technology, Media, and Telecommunications Practice Lead at J.D. Power.

To be clear, a new J.D. Power survey only shows that the rate of decline has slowed. The percentage of customers who say they plan to cut the cord on pay-TV during the next 12 months has declined to eight percent this year from nine percent in 2016, the company says.

source: Mary Meeker

The study might be interpreted as suggesting streaming and linear viewing modes are reaching some sort of equilibrium. We will have to wait and see. Many other forecasts suggest that newer modes (mobile, especially) are growing, though that does not directly speak to the issue of linear versus on-demand viewing.

Despite growing satisfaction with streaming video services and widespread use of DVR and video on-demand, the number of hours spent watching regularly scheduled television programs has increased by nearly an hour between 2015 and 2017, J.D. Power says.

In a typical week, households have spent an average of 17.4 hours watching regularly scheduled programming in 2017, up from 16.6 in 2015.

source: BCG

Why Voice is Not Central for Next Generation Networks

A fateful decision was made when the global telecom industry decided the next generation network would be based on Internet Protocol, and not some traditional architecture such as ATM.

All of today's strategic issues around "over the top" services and value grow directly from that architectural choice, since IP fundamentally separates network access and all applications that run over the IP networks.

By definition, all apps are "over the top," no matter who owns those assets. In choosing to build the next generation networks on IP, the industry also chose to create the "dumb pipe" business model.

Even when telcos sell carrier voice, those services architecturally will operate "over the top."

At the same time, voice is receding as the core revenue driver.

According to Reza Arefi, Intel director of spectrum strategy, nobody is working on voice as part of 5G at any of the core standards bodies. That might come as a shock to many observers, but simply seems to point to the changing value of various revenue streams in the access business, and the fundamental way applications are created and delivered on modern networks.

The lack of focus on voice also is a reflection of changes in the core requirements for modern communications networks, where the growing range of capabilities come in the “connecting computing devices” area, not voice or messaging.

Also, the growing reality is that voice is a feature, less a key revenue driver. It is a key function, to be sure; just not the driver of revenue growth.

That, in part, explains the lack of work on voice as a core feature of 5G. That “neglect” is not new. You might recall that the 4G standard also did not originally support voice, either.

It might be reasonable to argue that 5G standards work does not include voice support because voice is seen as a service supported on 4G. Others might argue some extension of voice over Wi-Fi will be part of the solution.

Consider revenue drivers for the industry globally, which are predicted by STL Partners to continue declining significantly.

source: STL Partners

Nearly 1/2 of Linear Video Customers Might Consider Switching Next 6 Months

source: Tivo

Nearly 84 percent of respondents to the most-recent Tivo survey of consumers still buy a linear TV service, while 16 percent of respondents do not. “Price” was cited by 85 percent of the non-buyers as the reason for not subscribing. About 46 percent reported using a streaming service as an alternative.

Even if the top reason for not buying a video subscription is “price,” the actual reason likely is “value,” including both demand for video and its price.

Of the 83.9 percent of respondents who subscribe to pay-TV service, 8.9 percent have switched providers in the last three months, Tivo says. When asked if they planned to leave their current service providers in the next six months, 6.3 percent said they plan to cut their pay-TV service entirely.

Another  8.1 percent plan to change to another provider. In addition, 4.5 percent plan to switch to an online service or app. About 30.6 percent report they might make a change.

Altogether, 49.5 percent of respondents could potentially leave their current entertainment video provider in the next six months, Tivo says.

Fully 56.1 percent of respondents report they would stay with their current provider if they could choose and pay for only the channels they typically watch. Another 38.8 percent would stay if all video providers (Netflix, Hulu, Amazon Video and so forth) were combined into one place.

IoT Awareness Still Low

Many executives, in many industries, might be unaware of internet of things business value, a survey by Analysys Mason suggests.

In a survey of 1600 IT and telecoms decision makers in enterprises worldwide, Analysys Mason found 12 percent of small/medium businesses and 18 percent of large enterprises already had IoT systems operating.

On the other hand, 52 percent of SMEs and 40 percent of large enterprises were “unaware of IoT or not interested in it,” Analysys Mason found.

“Overcoming a lack of awareness in IoT is more important than technology issues,” Analysys Mason suggests.

None of those findings would surprise many observers. Present use of sensor networks is common in some industry verticals and for some applications, but it would be reasonable to argue that the big growth has yet to begin.

                     Percentage of enterprises at each stage of IoT development, 2017

The U.S. market currently has the highest levels of adoption of IoT solutions, but China is expected to surge.

              Percentage of enterprises with operational IoT solutions, by country/region, 2017

source: Business Insider

Enterprises Might Drive Incremental 5G Revenue

source: Bell Labs

If you work in the telecom industry long enough, you are likely to discover yourself changing focus from time to time. Having started out in cable TV, consumers were really 100 percent of my focus. When I switched to the competitive side of telecom, enterprises, wholesale and small and mid-size businesses became the focus.

When the internet hit, it was clear that consumer apps were going to drive growth and change, so I switched back to following consumer apps, business models and revenue streams almost exclusively.

I’m pretty sure that another shift back to enterprise is coming, since 5G is likely to be about enterprise, in terms of business success, incremental revenue and growth. Internet of things is the driver, since IoT will be “purchased” by enterprises and businesses, either to serve business users or consumers.

Some other inklings are that even enterprise wireless traffic looks to be on the cusp of significant change, according to Bell Labs.

Looking only at video, which is driving bandwidth requirements globally, there might be a shift there as well. Where today video is driven by consumer content and video, in the future it is possible that video will be driven by IoT devices.

Those are huge shifts. This time around, though, the emphasis likely will be on vertical industry shifts to IoT, not the particularities of access platforms.

source: Bell Labs

What Takes the Place of Mobility Over the Next Decade?

One fundamental rule I use when analyzing telecom service provider business models is to assume that half of current revenue has to be replaced every decade. One example is the change in composition of Verizon revenue between 1999 and 2013. In 1999, 82 percent of revenue was earned from the fixed network.

By 2013, 68 percent of revenue was earned by the mobile network. The same sort of change happened with cash flow (“earnings”). In 1999, the fixed network produced 82 percent of cash flow. By 2013, mobility was producing 89 percent of cash flow. The fixed network was creating only 11 percent of cash flow.

source: Deloitte

The picture at AT&T was similar. In 2000, AT&T earned 81 percent of revenue from fixed network services. By 2013, AT&T was earning 54 percent of total revenue from mobility services.

source: Deloitte

Also, consider CenturyLink. In 2017 (assuming the acquisition of Level 3 Communications is approved), CenturyLink will earn at least 76 percent of revenue from business customers. In the past, CenturyLink, like other rural carriers, earned most of its money from consumer accounts.

The point is that CenturyLink now is unusually positioned with respect to business revenue, earning a far greater percentage of total revenue from enterprise, small or mid-sized businesses and wholesale services, compared to other major providers.

After the combination with Level 3, CenturyLink will earn no more than 24 percent of total revenue from all consumer sources, and that contribution is likely to keep shrinking.

source: CenturyLink

The big strategic issue is how revenue drivers will change over the next decade. As impossible as it seems, today’s mobility services are not likely to produce half of total revenues in a decade.

Up the Stack or Forward in the Value Chain?

Sometimes, moving up the stack is a business strategy, as hard as it is to achieve. More often, horizontal acquisitions for scale have driven telecom service provider acquisitions.

Sometimes, moving forward into the ecosystem supply chain also can work. Paradoxically, moving forward in the video entertainment subscription business (often understand as integrating lower inputs into a finished product or service) also means moving up the stack.

Either approach--up the stack or forward integration--is risky, in part because such moves represent moves outside the present understood core competence, but also because other firms will tend to resist buying horizontal functions and services from a key competitor.

Moving up the stack sometimes can mean acquiring assets that are a foundation for today’s core offerings. That paradoxical move is not, strictly speaking, a move “down the stack,” but is an example of vertically integrating a “cost of goods” input.

The best examples likely are video content producers. Owners of networks provide the core value behind the purchase of streaming video services. Strictly speaking, they operate up the stack.

Functionally, they are the basis for service provider video entertainment offers, a cost of goods that is almost a “down the stack” input, in a business sense. In other words, a video service cannot be created without access to the content consumers want to buy. In that sense, content is a raw material needed to build a video entertainment service.

source: http://keydifferences.com

Most telecom acquisitions have been of the horizontal variety, where a company buys additional assets in its existing place within the ecosystem (more access assets). That is an example of growing scale within the same business, instead of growing scope by occupying new roles within any ecosystem.

source: http://keydifferences.com

You might argue that acquiring such assets, that are required horizontally for all suppliers in a market, are a logical way for access providers to move up the stack. It never is easy, for simple reasons.

When making a horizontal acquisition, the acquiring firm simply gets bigger, doing what it already does. That means the acquiring firm already understands the business, and can hope to take out costs.

Moving into a different role within the ecosystem means moving outside the area of believed core competence. That always carries more business risk.

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Also, when a function, or set of assets, is required by all service providers in a particular market, those competitors will logically try and avoid using a set of horizontal assets owned by a key competitor. So it is harder to occupy a new horizontal role. New business competencies are required, but competitors also will try and escape using the horizontal platform, if they can.