Video Streaming: Growing Mismatch Between Buyer and Seller Expectations

At least in the U.S. market, consumers are showing an apparently conflicting set of views about the value of their video subscription services. On one hand, use of streaming services, including cases where customers buy multiple subscriptions, is increasing.

Use of linear services is decreasing. On the other hand, the remaining customers of the linear services seem to report growing satisfaction and value over the past four years, according to TiVo survey data.

There is a simple explanation for that reported satisfaction and perception of value: as unhappy customers defect for streaming alternatives, a growing percentage of the remaining customers are those who see higher value in their linear choices. That is why, in fact, they do not defect.

Between 2014 and 2017, the percentage of “very satisfied” linear video customers actually has risen from 20 percent to 30 percent, while the percentage of “unsatisfied” customers has dropped from 24 percent or so to 18 percent or so.

That does not mean the erosion of linear accounts will stop. We can see the same trend in satisfaction scores of landline telephone service. As the unhappy customers (or customers who find mobile is a functional substitute)  leave, the remaining customers--who value the service more--will tend to raise satisfaction scores.

source: TiVo

Of course, suppliers might still be unhappy about the apparently-growing “satisfaction” scores, as one reason more survey respondents are satisfied is that they are able to buy skinny bundles that cost less. In other words, the value proposition (fewer channels but lower price) is better with a skinny bundle than a full bundle of channels.

But it also is possible to see a mismatch between consumer expectations and supplier beliefs about the value of any single channel and its corresponding expected price.

Over the past couple of decades, one fact has stood out: consumers generally rate the value of any single TV channel as being worth less than those TV channels believe they are worth.

A recent survey by TiVo confirmed--again--that U.S. consumers generally believe a subscription to a single TV channel “should” cost about $2 a month, with a few channels perhaps having a “fair” price up to $3 a month.

source: TiVo

But no single TV channel contemplating a streaming service (at least so far) will price its service at that rate. Instead, prices are generally an order of magnitude higher ($11 a month or so).

That is a big disconnect.

For any product purchased by any consumer, both value and price matter. Up to this point the price of popular streaming products has not been a particular issue, as value (some amount of popular content) has a far-lower recurring cost (perhaps $11 a month compared to a linear package that offers more content, but also can cost $80 a month or more).

Once consumers start buying multiple streaming channels, the total cost obviously grows. For many consumers, a reasonable benchmark might be $40 a month, the pricing level for skinny bundles.

A consumer buying three streaming services at $15 a month spends more than single skinny bundle linear subscription. If, as some predict, every present channel will be offered on a direct streaming basis, the “value versus cost” evaluation is going to change radically.

In that scenario, buying just three services costs more than a skinny bundle would cost. It is not hard to predict that few channels will gain scale, at that pricing level. Nor is it hard to predict that new forms of bundling are going to become more popular.

source: TiVo, eMarketer

But change will come. As more consumers find they are buying multiple streaming subscriptions, at some point, a customer winds up spending just as much money as they might if they bought a single linear subscription.

To the extent that the value of a streaming subscription is that it “costs less” than a linear subscription, suppliers then will face a new problem, namely that buyers will start to compare not the cost of a single streaming subscription against the cost of a single linear service, but the total cost of all purchased streaming subscriptions against the cost of linear.

At that point, perceptions of value could change, as will buying behavior. Bundles are going to look better, again.

"Dumb Pipe" is Dangerous if You Want Your Telco Business to Survive

It is fairly easy to illustrate the shift in value generation within the internet ecosystem. The phrase “dumb pipe” nicely encapsulates the broad problem, which is that, in the internet era, network access--while essential--is not where most of the value and revenue is being created.

In technology terms, that is by design. The whole point of internet protocol, in the early days, was to protect information and content transmitted across networks from the impact of network disruptions.

The whole point of internet protocol as “the” next-generation network platform of choice is that it offers a low-cost way to deliver information, content and services of any type over a single integrated network.

But internet protocol also logically separates ownership of networks from control of applications that use the networks. That is why voice over IP, over the top messaging and video services have been disruptive. IP allows third parties to create apps and services that provide the value of carrier apps. And, in many cases, those third parties have business models not built on earning direct revenue from providing those features.

In the past monopoly era, telcos created and owned content, services devices, infrastructure and actual service revenue. These days, all that is disaggregated.

And even connectivity no longer is a “monopoly” of network service providers.

source: GSMA

In other words, it is hard to sell a product or feature many other suppliers will happlily give away for free. That raises the “dumb pipe” notion, referring to the process whereby traditional network service providers become suppliers of relatively low-value internet access, but not necessarily the applications, products and services that all other entities create and deliver over those access networks.

That is why equity valuations of big internet app companies are growing so much faster than the valuations of “telcos.”

source: GSMA

Longer term, revenue growth is highest for suppliers of apps, content and services delivered over public IP networks (we used to call them “telcos”). Granted, service provider revenue still is growing in Asia, Africa, and parts of Latin America, as more humans buy mobile services and use data access.

But the long-term trend is that once nearly every human uses mobile devices and internet access, revenue opportunities will slow.

So unless you really believe your retail telecom services business can thrive on the strength of internet access revenues, supplemented by some amount of voice or messaging revenue, a move elsewhere within the internet ecosystem is required.

Incremental revenue growth (and profit margins) will migrate up the stack over the next decade, and probably forever.

The caveat is that not every segment of the telecom industry sells to end users (enterprise, smaller business or consumers), and not every segment relies so much on access or transport services. But the classic "telco" serving retail customers really has to worry about surviving on the strength of access revenues increasingly tied to internet access.

source: GSMA

That value “problem” explains why many tier-one service providers are looking for ways to create new value by moving “up the stack” and becoming application providers (again), not as partners but as equity owners.

Who are Tomorrow's Telcos?

Most people who work in the telecom industry do not really need to know too much about industry trends, as much as some of us like to think they do. Most people have jobs that do not require such knowledge, as important as such knowledge might be for those in “C” suites, industry and financial analysts, and some on the staffs of banks and equity underwriters.

Sales forces who actually have direct contact with customers do need some industry knowledge, but more product focused. A salesperson might well need to know at a high level if, when and how a software-defined wide area network (SD-WAN) complements or replaces MPLS, for example.

A salesperson might need to have some high level knowledge of how enterprise conferencing systems work, and the advantages or disadvantages of cloud versus premises solutions, based on enterprise size and workforce deployment.

So at the risk of being irrelevant, here’s a look at just one of the biggest business model changes shaping the fortunes of what we used to call the “telecom” industry (again, with the caveat that not even C-level executives in every single segment of the business need to know this).

Perhaps the most-startling change is that the “telecom” providers are not necessarily the only entities now providing telecom services. In the internet of things arena, there are specialized IoT networks such as SigFox that operate on unlicensed spectrum.

In some countries, Google or Facebook operate as commercial internet service providers. In the United States, Google is a fixed network and wireless internet services provider. In some markets there might also be local government-owned or supported internet access, voice and video networks.

Also, in the 5G era, large enterprises and venues will be able to build and operate their own private 4G and 5G networks, operating very much as enterprise Wi-Fi networks presently work, using unlicensed or in some cases licensed spectrum (Citizens Broadband Radio Service in the United States, other similar shared spectrum possibilities in Europe and elsewhere).

There will other changes. In the coming era of software-defined networks (SDN) and network functions virtualization (NFV), connectivity will be something akin to an object, as that concept is used in modern programming.

To create functionality, a developer combines various objects (compartmentalized functions). There are many advantages, aside from the ability to reuse existing code. Object-oriented programming allows developers to spend more time thinking about what they want applications to do, and less time creating the code to do so.

The frequent metaphor is an automobile. People can drive cars without knowing how engines and transmission systems work.

Here’s the application to telecom services: in a virtualized context, an entity can assemble full connectivity functionality by assembling pieces of discrete existing networks, without building a new physical network.

That might allow an enterprise to assemble all the building blocks of a global network, creating a virtual network that acts like a physical network.

Source: Nokia Bell Labs

In case the implications are not clear, it will be possible for an Amazon, Apple, Facebook, Google or any other enterprise to create its own telecom network services by assembling the functions and integrating them.

Open networks, virtualized networks, software-defined functions and physical facilities that might be owned by any number of providers (traditional telecom and others) will enable such capabilities.

source: GSMA

source: GSMA

5G Capex: In Line with 4G, Higher than 4G or Less Than 4G?

Some 5G skeptics believe 5G is risky, in terms of early deployment (perhaps all would agree 5G is a reasonable bet in a decade) because incremental new revenue is insufficient to pay for the network, or that capital investment will be too high, in relation to the revenue potential.

Those fears are reasonable enough, if more true in some markets than others, though. Consider only capital investment requirements.

If the number of cell sites to provide coverage grows by to two orders of magnitude (100 times), that has capital investment implications. Plus, many argue, all those new radio sites require backhaul or fronthaul, which means more investment on the transport network.

(Brief note, backhaul refers to the part of the network that moves traffic between the core network and the edge of the network. That includes traffic to and from the cell site or the last active network element before the subscriber location.  Fronthaul is a form of “backhaul” that refers to the part of the network that moves traffic from centralized radio base stations to antenna sites. For most people, the distinction between fronthaul and backhaul is immaterial.)

Were all things equal, that expansion of cell sites would imply huge increases in capital investment, leading to a doubling to tripling of investment, some might argue. Others would say there will be an increase in capex, but only on an incremental basis (low single digits increase).

A growing number of observers might actually argue there will be flat to lower capex requirements, based on use of open source, virtualized platforms, reuse  or deployment of existing assets (tower sites, fallow spectrum), plus ability to aggregate (bond, essentially) licensed and unlicensed spectrum assets, plus huge amounts of new spectrum, including lots of unlicensed spectrum or lower-cost shared spectrum.

source: European Commission

It is reasonable to expect specific 5G spending to ramp up as the networks are built. The issue, in part, is what that will cost, per tower or per potential customer. And that is where there is significant uncertainty.

source: Edge of Cloud

Also,  tier-one service providers generally spend about the same amount, every year, on overall capex. What tends to change is the destination of that spending. And though capex climbs in the early years of a new mobile network build, that is accompanied by reductions in other areas.

The point is that firm capex tends to be relatively flat, year to year. That suggests mobile operators will find ways to keep capex within limits (as a percentage of revenue, for example). “Overall, capex for North America over the period is likely to grow slowly, slightly below the rate of revenue growth, at an annual average rate of 0.5 per cent per year between 2014 and 2020,” GSMA has said.

Skeptics will say that does not include a ramp up to build 5G, though.

source: Jeffries

source: Mobile World Live

Though 5G will use “all of the above” frequency assets (there will not be, as in prior networks, fixed bands to support the network), the use of huge amounts of new millimeter wave spectrum is key.

Basically, we will be able to use an order of magnitude (10 times) to two orders of magnitude (100 times) more spectrum than presently is available to support all mobile operations that had previously been unusable for technical reasons: earlier analog and digital platforms would have been too expensive.

Moore’s Law, small cell architectures, open source and spectrum aggregation (unlicensed spectrum used directly with licensed spectrum) now mean those assets can be deployed commercially.

The point is that 5G is perhaps as likely to represent incremental capex levels (“like” 4G in terms of capex) as it is to represent some hypothetical “huge increase” in capex. History suggests actual practice is more likely to represent continuity with past spending than a break with past practice (much higher investment for 5G).  

Big Changes in Mobile Value Proposition, Roles, Revenue Coming?

The choice of internet protocol as the foundation for modern networks has been fateful for application and service providers. As Verizon CEO Lowell McAdam has said recently, in 2000 Verizon could  monetize the entire stack (26:58),  as it was vertically integrated and created and controlled all the apps provided over its network.

Today, Verizon has to compete horizontally, monetizing apps and features “above the network layer,” since it no longer controls or creates most of the applications used by its customers.

That is the difference between a fundamentally “open internet” app platform and the older “closed” telecom platform. McAdam would say the “iPhone changed everything.”

What he means, in large part, was that, in the smartphone era, people are “customers” only for a few Verizon-supplied apps (internet access, carrier voice and messaging, the Oath ad platform or connected car and other possible internet of things apps), but “users” of a universe of third party apps and services.

So Verizon now finds it has to work much harder at creating value and therefore revenue beyond the “internet connectivity” function. That is the foundation for all thinking about “moving up the stack” (supplying actual end user apps and services, not just access to the internet).

Even access is a problem, though. With 5G, for the first time, many customers--perhaps most-- will have choices to abandon fixed networks entirely, as they earlier abandoned use of fixed networks for voice.  Some users already are abandoning fixed network internet access and simply using their mobile phone accounts.  

The business implications could not be more profound. As everyone now knows, in the IP  framework, “usage” does not have a linear relationship with “service provider revenue.”

We are familiar with the fact that perhaps 80 percent to 90 percent of mobile device data usage happens “indoors.”  But that does not have a direct relationship with service provider revenue, as much of that connectivity happens over third party facilities (Wi-Fi) most-frequently not owned by the service provider, and from which the service provider earns no direct revenue from usage.

source: Informa

With the rise of new indoor connectivity options--including private 4G LTE, aggregation of Wi-Fi and mobile spectrum assets, possible venue communications providers and mobile speed and pricing that is directly competitive with fixed network plans --changes could be coming.

And it is far from certain how all those changes will play out. In fact, some would predict that, in a 5G era where mobile access is price and speed competitive with fixed alternatives, many users will start to rely on their mobile connections all the time, instead of shifting to Wi-Fi when indoors.

That could reverse recent trends, where Wi-Fi offload has been hugely significant. Nearly half of consumers surveyed about their connection choices suggest that with unlimited plans and 5G performance and price, they would simply stay on the 5G network all the time, as there would be no performance or cost advantage to shifting to Wi-Fi.

source: GSMA

That very fact (80 percent of data usage happens indoors, typically using Wi-Fi) is a foundation of retail pricing plans and strategies emphasizing “pay only for what you use” data access plans.

That also is behind thinking that some new ecosystem roles could be created, with large enterprises and venues possibly building their own “indoor” 4G and 5G networks, or integrators providing such services.

The point is that business models built on outdoor and indoor connectivity could change as 5G arrives. What is not so clear is precisely how matters change. Mobile operators could reclaim some relevance as providers of “indoor” connectivity. On the other hand, enterprises might reemerge as providers of their own premises networking, including mobile for the first time.

How all that affects revenue and perceived value remains unclear. One could argue that, in the 4G era, the value of a mobile connection remains “everywhere” connectivity, even if only about 20 percent of the actual fulfillment is from the outdoors mobile network.

In the 5G era, indoor fulfillment might shift back towards the mobile network, or could move away from Wi-Fi and towards specialized “indoor mobile” networks with varying ownership. In either case, the mobile service value proposition should increase.

The other big possible change is a shift in perceived value of fixed internet access versus mobile access. More customers might conclude that their use cases allow complete cutting of the fixed network cord.

Two Biggest U.S. Voice Providers are Not Telcos

Sign of the times: each of the two largest U.S. cable TV companies now have more voice subscribers than does AT&T, the largest fixed network telco.

In the fourth quarter of 2017, Charter Communications had 10,405,000 residential lines while Comcast had 10,351,000 accounts in service.  AT&T had 10,333,000 lines. So, for the first time, the largest U.S. “telephone companies” were cable TV providers, not telcos.

A key qualification is required, however. Mobile is the way most U.S. residents use voice services. Well over half of U.S. homes (53 percent, according to the U.S. Centers for Disease Control) have no fixed telephone service at all. As recently as 2004, nearly 93 percent of U.S. homes had fixed network voice service.

And, as always in the internet era, usage and revenue can be very different matters. In 2011, for example, U.S. consumer spend on fixed network voice had dropped from 65 percent to perhaps 26 percent, compared to 2001 levels, while mobile revenue grew from 25 percent to nearly 50 percent of total household spend, according to analyst Chetan Sharma.

Internet access spending grew from 20 percent of household budgets in 2001 to about 33 percent in 2011, Sharma estimates. Video entertainment spend grew from less than 10 percent of budgets in 2001 to about 24 percent of budget by 2011.

source: Chetan Sharma

source: Centers for Disease Control

Such is the misfit between our legacy names for things and the new reality. Cable TV companies increasingly make most of their money from internet access, not voice. “Telcos” now likewise make most of their money from internet access, not voice.

Eventually, at least some major service providers will find they make 40 percent or more of total revenue from a range of services not directly related to internet access, voice or messaging. That already is the case for Comcast, and is close to the reality for AT&T, which earns about 31 percent of total revenue from entertainment video.

In fact, Comcast earns only about 29 percent of total revenue from its legacy TV business. Just as important, Comcast now earns about 37 percent of total revenue from applications, not services related to the access network (video, voice, internet access).

Over time, many tier-one service providers are going to have a similar profile, earning 40 percent or more of total revenue directly from applications (consumer and business), not managed services related to the ownership of the access network.

Full Mobile Substitution for Internet Access Coming?

Quite often in business, as well as in physics and the natural world, the equivalent of quantum changes happen. A quantum change is like the change of state of water from ice from solid to liquid, or liquid to gas, gas to liquid or liquid to solid.

The key analogy is that a series of almost-unremarkable quantitative changes accumulate before a nearly-instant change of state happens. A recent example is the change in viewer habits from linear video to on-demand (initially VCR tapes, then DVDs, then streaming) to over-the-top alternatives.

Other examples can be seen in the “long distance” business in the United States. Because of the 1984 breakup of the Bell system, a discrete “long distance” business--separate from the local telephone business-- was created.

Competition--initially from MCI--gradually lead to lower prices overall. Then AT&T launched “Digital One Rate,” which eliminated the price distinction between “local” and “long distance” services, first in the fixed network business and then the mobility business as well.

Over a period of decades, consumer behavior changed, in response. People discovered it made more sense to place outbound “long distance” calls on their mobile phones, since it cost quite a bit less than calling outbound from a fixed network phone, and started calling “long distance” more.

Then, as the price of calling using a mobile also fell, people began abandoning their fixed lines.

The point is that a series of quantitative changes (prices, usage) eventually reach a tipping point, where a qualitative change happens.

The upshot is that we have seen “mobile substitution” happen in waves. First, substitution of mobile for fixed network voice. Then mobile texting as a substitute for voice and email.

Then mobile internet access began to displace fixed network consumption. Now we are seeing quantitative change in entertainment video consumption, from fixed to mobile.

Eventually, those quantitative changes can result in qualitative change, in the same way that earlier transformations have occurred, namely, mobile substitution for fixed.

Though it seems unlikely, based on today’s value proposition (fixed access offers more speed, much-lower prices per bit, higher consumption limits), that value proposition will gradually shift.

We already are seeing the early glimmers of change. Consider the bandwidth issues. Basically, orders of magnitude more usable spectrum, plus lower cell site costs, made possible by new architectures and platforms, accompanied by retail pricing innovations, are narrowing the gap between fixed network internet access and mobile alternatives.

Consider the use of small cells.

In 2017, 62 percent of Verizon’s wireless deployments were small cells. Verizon believes next generation networks will require an order of magnitude (10 times) to two orders of magnitude (100 times) more antenna locations than previous 3G and 4G networks.

AT&T says that the U.S. mobile industry will deploy more small cells in the next three and a half years than the number of macro cells deployed in the last 35 years.

Some argue the industry cannot afford to deploy so many small cells. That ignores the price changes for such cell sites. Where a macrocell might cost $300,000, small cells mountable on light poles, for example, might cost two orders of magnitude less than a macrocell.

Just a few years ago, at lower volume, such small cells might have cost an order of magnitude less than a macrocell, but volume always matters.

So here’s the quantum change possibility: 5G networks will, for the first time, allow consumers to choose a mobile solution for internet access, with no penalty in terms of access speed, usage limits or cost.

“Our research indicates that 5G networks have the potential to leapfrog the capacity of cable operators’ HFC networks,” said Peter Rysavy, Rysavy Research principal. “5G technology is a threat to cable operators” because 5G capacity and performance will meet or exceed that provided by a hybrid fiber coax or even optical fiber connection, in most cases.