Maybe OTT Video Will Prove a Much-Better Business Model than Linear Was

The million accounts AT&T has gotten in just about a year’s time suggest that AT&T might--in this case--have found a way to compete in a mass market over-the-top market that has eluded it and most other tier-one telcos in the voice, messaging and other markets.

That is a not-insignificant achievement.

Some might say that is the second of two big achievements AT&T has pulled off recently. The first was the DirecTV purchase itself, which radically transformed AT&T’s revenue sources. The entertainment group, which includes consumer video and internet access revenues, now is a key reporting segment for AT&T, along with business solutions and consumer mobility.

Revenue from DirecTV more than doubled AT&T’s consumer revenue.

“If you look at what we're getting in our DTV Now customer base now, about 50 percent comes from cord shavers and cord-nevers and 50 percent come from our competitors,” said John Stephenson, AT&T CFO.

Cord shavers are customers who reduce their levels of service; cord-nevers are people who never have purchased a linear TV service (generally younger people). Presumably the “cord shavers” include former DirecTV customers have switched to DirecTV Now.

Presumably, “competitors” refers to other OTT linear services (Hulu, for example).

The other interesting angle is that the OTT business model might turn out to be better than the linear model it replaces, even with the possible disparities in revenue per account. Stephenson notes that activating a DirecTV Now account “requires virtually no capex, because we don't have to send a truck, pull up the ladder climbing the ladder and put on a satellite dish on the side of your house.”

One other advantage is the elimination of the need for decoders and any inside wiring (jumper cables, for example).

Also, since linear accounts are postpaid, there is some bad debt exposure. DirecTV Now is prepaid, which eliminates the bad debt exposure.

AT&T Might Soon Start Taking More Internet Access Market Share

Cable TV has been winning the U.S. internet access “net new subscribers” battle for so long that one might be tempted to argue that telcos have permanently lost the battle.

At least some observers might argue that telcos have permanently lost the internet access market share battle. But one always must be alert for changes. And changes are coming that might allow AT&T and Verizon to start taking more share in internet access, despite a decade of losing share to cable operators.  

Others might argue that a rather historic market share reversal now is possible, at least for AT&T.

At a high level, it might appear that Verizon and AT&T still are losing huge chunks of share to cable operators. That is incorrect. CenturyLink, Windstream and Frontier Communications clearly are in that position. But AT&T and Verizon have either begun to gain share, or are stable, and holding share.

Verizon, for example, has been getting some 40 percent share of internet access in its fiber-to-home service areas, and seems to be adding share, incrementally. AT&T actually has been gaining share.

So it is at least conceivable that Verizon and AT&T could begin a long process of retaking market share as their access line inventory moves to gigabit speed ranges, as new platforms are deployed and marketing initiatives add value in the mobility and video areas.

That would represent a huge break from trends over the past decade. Updated platforms are part of the reason for the potential change.

“If you look at our numbers a few years ago we had 15 million DSL and one million high speed broadband,” said John Stephens, AT&T CFO. “Today we've got about 15 million high speed broadband and one million DSL.”

And where ATT is installing fiber to the home (AT&T has about six million FTTH lines in service}, Stephens says AT&T now is getting 30 percent adoption.

Where AT&T has been marketing fiber to the home for two years, it is seeing take rates greater than 50 percent, Stephens said.

AT&T now expects to reach seven million homes passed by its fiber-to-home network by the end of 2017, reaching perhaps 12.5 million locations by the middle of 2019. “By the time we get finished building we will have 14 million” homes passed by FTTH, Stephens says.

New fixed wireless capabilities coming with 5G, plus mobile substitution, are also likely to be new factors able to reshape consumer internet access market shares. All together, the new platforms might reach as many as 50 million U.S. homes.

One always has to be alert for signs that long-established trends are able to change. The consumer internet market share trend might be among those key changes to watch for.

Google Blocks YouTube Access on Amazon Devices: The Irony is Astounding

Google now is blocking YouTube access on Amazon Amazon Echo Show or Amazon Fire TV devices. Blocking: as in, Google denies Amazon Echo Show or Fire TV users access to a lawful app.

Ironic is it not? That is the sort of “not neutral” practice Google has argued internet service providers must be prohibited from attempting, under “network neutrality” rules.

To be fair, it is one matter when a government blocks access to an otherwise  lawful app such as Google search. That bothers supporters of internet freedom, and should bother them.

It is quite another matter if an internet access provider were to try and block a lawful app. Despite all the heated rhetoric, in the U.S. market that has happened--briefly--twice to three times, with rapid reaction by the Federal Communications Commission and equally rapid retraction of those efforts by ISPs.

And, as a matter of policy principle, all U.S. ISPs understand that the FCC will not allow blocking of lawful apps.

Many have argued that internet freedom applies to all in the ecosystem: consumers, app providers and ISPs. Many also have argued that many practices said to be violations of network neutrality (quality of service mechanisms,  free and subsidized app access, zero rating of apps) are in fact, not violations of network neutrality, but only business practices that ecosystem participants are free to experiment with.

So Google’s blocking of its lawful YouTube app from Amazon devices is not, strictly speaking, a network neutrality violation. It might be a dumb business practice that conflicts with the company’s “don’t be evil” ethos, but actual app blocking does not violate existing network neutrality rules.

Nor, some of us would argue, should network neutrality rules be extended to Google and other app providers. But some also would argue that freedom in the internet ecosystem belongs to all, not some.

In actually blocking YouTube access--something no ISP would anymore attempt--Google is acting as a gatekeeper. That is its business right, one might argue.

But neither is Google acting in a way it demands others behave: “not blocking any lawful app.”

It must be said. There are businesses that enjoy the best of all worlds: they are monopolies in practice, but not regulated, as others might be. Cable TV industry executives used to say that, entirely in private.

I am not saying Google or others need to be regulated. They should be free. So should consumers, other app providers, device suppliers and access providers.

Verizon Will Launch Attacks Outside its Fixed Network Footprint with 5G Fixed Wireless

Verizon’s plans to launch fixed wireless using its pre-5G network in 2018 have been positioned by some as a new challenge to cable TV operators. While that certainly is true, the equally-notable development is that Verizon seems to be building its fixed wireless networks in three to five markets outside its existing fixed network footprint.

That means Verizon also will compete head to head with AT&T and possibly other fixed network operators as well.

Recall that, since about the mid-1980s, when the AT&T monopoly was broken up, the new fixed network businesses did not compete with each other, but had exclusive territories. While mobile operators mostly have competed directly, head to head, for most of the industry’s existence, direct head to head competition between AT&T and Verizon has been marginal to non-existent.

Now, for the first time, it appears that Verizon is about to launch a relatively significant assault “out of territory” with its 5G-based fixed wireless network.

It is not yet clear whose market share Verizon will take. But Verizon’s market entry is sure to rearrange and disrupt existing market share in those markets, with AT&T (or other incumbents) and the local cable operator likely to lose share.

As we have seen so many times, “high prices” in any competitive market are a magnet for new competitors.

Is DirecTV Now a Breakthrough?

It is highly unusual and rare for any “telco-owned” over the top service to compare well with other application provider offers of the same type. Think about telco-owned messaging, voice or mobile app platforms and you get the point.

Unusually, then, AT&T’s “DirecTV Now” service gets top marks from analysts at UBS evaluating the value of current over the top “live” video services, which lead in “value’ rankings at numerous price points from $20 a month up to $70 a month.

The UBS analysis did not look at the full on-demand services such as Netflix, but only the services offering “live TV.” Some believe the OTT “live streaming” services eventually will develop as an important segment within the overall streaming market that includes “on demand” services such as Netflix that specialize in pre-recorded content, rather than “live” or “real-time” TV.

source: UBS, Business Insider

At the moment, the notion of “skinny bundles” captures the idea behind OTT live TV streaming. The idea is that there remains significant demand for “live TV” (linear channels). But there is less appetite for larger, more-expensive live TV bundles.

In many cases, on-demand services such as Netflix are complementary, as Netflix does not support or offer live TV. In essence, OTT live TV streaming captures demand that remains for over the air TV broadcasting, sports, news, events and other scheduled TV series consumption.

source: BCG

The point here is that a tier-one telco seems to be creating OTT live TV services that have appeal at multiple price points, and might even be deemed competitive with other similar services. If that translates into significant market share growth, it will represent a major victory for at least one telco in the effort to fashion OTT apps and services that do have mass appeal and significant market share.

That has not happened in the internet era. DirecTV Now might be among the first examples of an access provider actually creating a new mass market app that gains significant share. To be sure, some will say DirecTV Now mostly cannibalizes AT&T's own DirecTV service. Time will tell.

How Fast Will Linear Video Decline?

The conventional wisdom now is that over the top (online) video services are displacing linear video services. According to the latest forecast from The Diffusion Group, the conventional wisdom is correct.

Take rates (household penetration) of linear video services will decline from 85 percent of U.S. households in 2017 to 79 percent in 2030, according to TDG. But other TDG metrics suggest faster declines.

Some might argue the rate of change now modeled by most observers actually understates the degree of change. Up to this point, forecasters have (correctly) called for modest but steady declines in linear video take rates.

But some might note that market changes caused by new technology tend to follow a rather predictable “S” curve, where initial changes are quite modest, followed by fast changes when an inflection point is reached.

That means linear projections are proven wrong, as the rate of change actually becomes non-linear, usually after about 10 percent adoption of the new technology. That actually already has happened, in the U.S. market, in terms of adoption of OTT video services.

There are at least 187 million OTT video accounts in service, compared to roughly 93 percent household penetration of linear video.  So, counting by accounts, OTT video adoption is far beyond 10 percent, well over 100 percent adoption of households, as there are perhaps 126 million U.S. households.

As with mobile subscriber identity modules, some people might use more than one SIM. Some households have multiple subscriptions.

source: Learn Marketing

Up to this point, OTT has been a substitute for linear video, but not a complete substitute, as often happens early in the adoption cycle of new technology products. Over time, the new technology platform becomes more robust, eventually becoming a fully-fledged substitute for the legacy technology.

TDG predicts that, by 2030, roughly 30 million U.S. households--representing 26 percent of all U.S. households--will live without a linear service of any type.

So legacy video penetration will fall from 81 percent of U.S. households in 2017 to 60 percent in 2030, down 26 percent.

That estimate includes losses of traditional services to over the top services that stream “live content in real time,” as well as using the on-demand format favored by Netflix, Amazon Prime and others.

So, using that set of definitions, legacy linear video might drop substantially between now and 2030. That is just one reason why some find U.S. Department of Justice concerns about excessive potential market power if AT&T buys Time Warner to be somewhat odd.

The linear video market itself already is changing in ways that make "dominance" a problem that goes away as the market itself goes away. And even the new OTT market features average revenue per account perhaps seven to eight times cheaper than the linear product OTT replaces.

Product Substitution is Among Biggest Problems for Access Providers

It has been the case for a decade that access provider executives believe they compete with Google even more than with other service providers, as a 2011 survey of telco executives found.

That thesis will be tested as the U.S. Department of Justice evaluates the AT&T acquisition of
Time Warner. Not only is the acquisition a vertical merger, but the larger marketplace battle is between firms such as AT&T and application providers.

source: STL Partners

One argument AT&T makes is that the video entertainment business now operates

globally. Where Netflix has 100 million accounts globally, AT&T might have about 24.4 million U.S. subscribers and about 12.45 million video subs in Latin America.

Beyond that, the linear video business  is shrinking, replaced by growing over the top alternatives. There already are about 194 million over the top video subscriptions in service in the U.S. market.

source: eMarketer

The point is that consumer markets are changing fast, with new internet-delivered products displacing traditional linear TV.

Though most of the competition involves product substitution--over the top displacing carrier services--Google has become an actual internet service provider and mobile services provider.

source: Vision Mobile

The big change, though, is the shift in value from vertically-integrated carrier services--voice, messaging, linear video--to over the top applications that work on any access connection.

The business implications are stark: access providers increasingly become “dumb pipes” offering lowish value, where differentiation is quite difficult, unless mobile carrier access can be recrafted as an application platform. That is easy to say, hard to achieve.

That shift is illustrated by revenue composition at AT&T’s landline business, where it comes to consumer revenue. About 72 percent of that revenue now is earned supplying video entertainment (an app), just about 15 percent selling internet access (the “dumb pipe”).

source: Business Insider