Bundling Really Does Work

Bundling of consumer services has been a mainstay of consumer services packaging for decades, for good reasons. Selling a package of services (triple play of voice, internet access, voice, for example) has been shown to reduce churn.

Also, packaging multiple services for one price is a form of discounting, with the advantage that any buyer cannot easily determine how much each constituent service costs, providing some protection against price-based offers from rival providers selling any single one of the services.

source: AT&T

Now Comcast is bundling free speed increases for customers who buy a dual-play package of linear video and internet access.

In its Houston market, Comcast is upgrading such dual-pay customers who have the 60-Megabits-per-second tier and whose internet service is bundled with other Comcast products to 150 Mbps.

Customers on the 150 Mbps tier (and buying one or more services) will see speeds increased to 250 Mbps.

Customers with the 250-Mbps service will see their speeds jump to either 400 Mbps or 1 Gbps, depending on the package.

Those deals seem to require use of the X1 modems, which Comcast wants consumers to have for other reasons, and which use the faster DOCSIS 3.1 platform.

Mobile service providers have found that consumers who buy family or multi-user plans, supporting multiple phones and services on a single account, likewise have found such customers also tend to have lower churn.

A European mobile operator able to bundle multiple services found much-lower churn rates on accounts buying two, three or four services.

source: Merkle Sokrati

In the Canadian market, quadruple-play, triple-pay and dual-play customers have lower churn rates than customers only a single service, by significant margins. The absolute lowest churn happens on accounts with four services, where accounts churned at one-seventh the level of single product accounts.

source: Ivey Business Review

source: IDC, Solon, Virgin Media

Live Streaming Assumes New Importance

As big a provider as Netflix is in the video streaming market, its “on demand” format remains a minority of currently-offered services, which now emphasis “live” or “real time” streaming. A survey of some 300 executives in the streaming business found that 63 percent of services used live or streaming formats.

Sports content seems to drive much of the interest, though for some news content also drives interest in live or streaming content, according to the survey published by Akamai.

source: Akamai

Product Lifecycles Explain Telco IoT, Content Moves

LIke any other product, consumer video entertainment subscriptions have a life cycle, and linear video subscription business now is past its peak, and is beginning a long decline. That process of product maturation now is a well-established trend in the communications business.

Prior products such as fixed network voice, long distance voice and mobile messaging also reached peaks. Fixed network voice subscriptions in the U.S. market peaked around the turn of the century. Long distance voice revenue, which had been declining for decades, likely reached a peak about the same time.

Mobile messaging also is being displaced by over-the-top messaging alternatives. In some markets, mobile revenue peaked in the second decade of this century. U.S. fixed network switched access lines peaked about the same time.  

You can see the impact in many ways, including industry employment. Use of long distance services peaked in 2000, according to the U.S. Federal Communications Commission.

source: FCC

source: FCC

U.S. streaming provider revenue (Netflix and others) grew 41 percent in 2017 to $11.9 billion. Revenue is forecast to reach $16.6 billion for 2018 and $27.6 billion for 2020, according to Convergence Research Group.  

In 2017 U.S. linear subscription revenue grew one percent to $107.6 billion ($94.30 per month average revenue per unit (ARPU). Revenue is forecast to decline slightly to $107.4 billion ($97.90 per month ARPU) in 2018.

We forecast US OTT subscriber households will far surpass TV subscribers in 2020, however US TV subscriber ARPU will be 4 times US OTT subscriber household ARPU down from 6 times in 2017.

Convergence Research estimates linear subscriptions are declining about four percent a year.

Such product lifecycles occur in all industries, and illustrate the reasons why firms such as Comcast, AT&T and Verizon have built, and are trying to increase, the amount of revenue earned from sources beyond connectivity (internet access, voice, messaging).

The same process of broadening revenue sources will happen in the 5G era, as revenue sources will be sought in platform, apps and other non-access areas.

5G Will Hit Inflection Point at 10% Adoption

For any successful consumer product, 10 percent adoption tends to the inflection point. That is the point at which adoption sharply accelerates. That has tended to be the pattern for mobile subscriptions as well.

So it would not be at all unusual to predict that 5G adoption, in any market, will hit an inflection point at about 10 percent adoption. That is basically what a forecast by GSMA Intelligence implies.

source: GSMA Intelligence

You can liken the 10-percent adoption to the shift from bleeding edge innovators to “early adopters,” which is about what 10-percent adoption represents. The key point is that adoption rates tend to accelerate after the 10-percent adoption point is reached.

source: Asymco

source: Samsung

source: Wall Street Journal and others

source: Pew Research Center

Sprint, T-Mobile US HHI Numbers Probably Will Not Pass Antitrust Muster

The proposed merger between Sprint and T-Mobile US is going to have a tough time getting around its score on the Herfindahl-Hirschman Index (HHI), a basic tool used by the U.S. Department of Justice and most other antitrust authorities globally.

The Justice Department will generally investigate any merger of firms in a market where the Herfindahl-Hirschman Index (HHI), a test of market concentration, exceeds 1000 and will very likely challenge any merger if the HHI is greater than 1800.

The U.S. market has an HHI of about 2500.

Three years ago, the very same proposed transaction would have occurred where the U.S. market had an HHI score of about  2,766. But following a merger of Sprint and T-Mobile, the score would be 3,252. Is the market less concentrated now?

The last time Sprint and T-Mobile US tried to merge, three years ago, Craig Moffett of MoffettNathanson calculated that the wireless industry currently had an HHI score of 2,766.

But following a merger of Sprint and T-Mobile, the score would be 3,252. That suggests an increase in concentration of about 486 points. So it did come as a surprise that regulators signaled opposition to the merger.

Do you think the market is significantly less concentrated than three years ago? AT&T and Verizon are probably slightly down, share wise, from three year ago levels. T-Mobile clearly is up, but Sprint is down, MVNOs are flat and others have lost share.

source: Statista

To be sure, the U.S. market is not as concentrated as many other markets. Looking at the biggest 36 mobile markets globally, analyst Chetan Sharma found that the average HHI score of a typical market ranks 3440 on the scale.

Developed markets have an HHI of 3270. So the U.S. market, with an HHI of 2500, lies between “heavily concentrated” and “moderately concentrated.”

The point is that DoJ is looking at a major market concentration move in a market that already is, by its own tests, moderately to heavily concentrated.

While it always is conceivable that U.S. Department of Justice attorneys will ignore their traditional horizontal merger guidelines, it seems unlikely that any proposed horizontal merger increasing the Herfindahl–Hirschman Index by more than 200 points will have an easy time being approved.

The agency generally considers markets in which the HHI is between 1,500 and 2,500 points to be moderately concentrated, and consider markets in which the HHI is in excess of 2,500 points to be highly concentrated.  

Transactions that increase the HHI by more than 200 points in highly concentrated markets are presumed likely to enhance market power under the Horizontal Merger Guidelines issued by the Department of Justice and the Federal Trade Commission.  

The proposed AT&T acquisition of T-Mobile would have resulted in AT&T having 43.7 market share, resulting in an HHI of 3,335, an increase of 951 points. It is no surprise that the merger effort failed.

The AT&T acquisition of T-Mobile also would have raised HHI scores by more than 200 points in 94 percent of markets. By some estimates, HHI would have increased by more than 416 points.

The latest proposed merger should probably find an HHI change of close to that 416 points, not much less than the 486 points that lead the DoJ to oppose the AT&T acquisition of T-Mobile US.

Will Federated Networks Ever Have "Owners Economics?"

Have you noticed how there is a need for, and move towards “federation” in most parts of the computing and telecom ecosystem? In other words, interoperability between networks and systems is federation.

Federation can be defined as “a group of computing or network providers agreeing upon standards of operation in a collective fashion.”

The typical practical arrangement is when two distinct, formally disconnected, telecommunications networks, that may have different internal structures, interconnect. When different messaging platforms agree to interconnect, that is another example of federation.

In computer systems, to be federated means users are able to send messages from one network to the other. In other words, federation means interoperability.

You can see this federation trend in the move to multicloud computing, when resources from multiple cloud providers can be amalgamated to work as one functional system.

Google Project Fi federates mobile device access from Wi-Fi, Sprint or T-Mobile US networks.

That last example suggests possibilities, as telecom networks increasingly become virtualized. Federation is about the creation of virtual networks, incorporating multiple physical network assets.

So here’s a big question. Will “owner’s economics” change in a world where federation is widely possible? Up to this point, it has been difficult for mobile virtual network operators to compete, sustainably, with competitors who own their own infrastructure.

In a virtualized environment, will that remain true? As we have seen with cloud computing, the economics of “owned capabilities” compared to “rented capabilities” already has changed.

Will something like that happen with telecommunications capabilities? In other words, might it be possible, in the future, to create virtual (federated) communications networks that rival physical networks? And could the economics change, to where a virtualized network has economics at least equal to those of a physical network?

It is an empirical question that will be answered in the concrete, at some point. In other words, might an app, platform or service provider be able to create virtual networks that cost less than using owned physical facilities?

Probably more to the point, can new capabilities be created out of federated networks that are driven by value, not cost? Can federated networks do things that single networks cannot? And does that increase in value offset the costs of using a virtualized approach, even if more costly than a physical network approach?

We must wait to see how the economics play out.

Source: Nokia Bell Labs

Sprint T-Mobile Merger Approval Still Seems Questionable

The odds that the new proposal to merge Sprint and T-Mobile US could clear antitrust review do not seem to be different from three years ago, when the same deal was proposed, and was opposed by the U.S. Department of Justice.

In fact, DoJ opposition to the vertical merger of AT&T and Time Warner assets, would suggest the conditions are worse. Win or lose their antitrust lawsuit, has DoJ signaled it is more open to big horizontal mergers of the specific type it opposed just three years ago, and when it has opposed a vertical merger many believe should not have caused concern?

Some argue this is not an instance of “consolidation.” That is simply untrue. We would move from four facilities-based tier-one suppliers to just three, at least until some time in the future, when one of the three experiences a major business reversal and some tier-one supplier in the internet ecosystem decides it needs such assets.

“This isn’t a case of going from four to three wireless companies,” says T-Mobile US CEO John Legere. He notes the existence of other mobile virtual network operators and a few regional providers. But the merger most certainly reduces the number of facilities-based tier one providers from four to three.

Some might say the proposed deal occurs “under different conditions” than three years ago, when the U.S. Department of Justice signaled its opposition. True, Comcast is an operating MVNO now. Charter is set to enter the market as well, as an MVNO. But market share has not budged much.

Also open to question are the consumer benefits. Virtually all equity analysts have been in favor of consolidation from four to three mobile companies because that would reduce competition and allow all the firms to raise prices.

T-Mobile and Sprint also argue the deal will not lead to layoffs. What merger of this size has not been accompanied by “merger synergies” that reduce headcount?

“This combination will also force AT&T, Charter, Comcast, Verizon, and others to make investments of their own to compete,” T-Mobile US and Sprint say. Those firms already are investing as fast as their capital budgets will allow.

It is not surprising that Sprint and T-Mobile US argue their proposed merger will lead to faster 5G investment, U.S. 5G leadership, lower prices, create jobs, higher economic growth and more competition in the mobile business. What, after all, would they say?

“This combination will create a fierce competitor with the network scale to deliver more for consumers and businesses in the form of lower prices, more innovation, and a second-to-none network experience – and do it all so much faster than either company could on its own,” said John Legere.

No offense; Legere is a brilliant competitor. But many of the claims are questionable, some would argue. “Faster investment?” It is hard to argue that the four facilities-based mobile service providers are not investing in 5G platforms as fast as their capital budgets will allow.

To be sure, a merged Sprint and T-Mobile US could invest more rationally, but likely not faster: they are running as fast as they can, right now. And by “rational,” less. That is why the argument in favor of the merger includes the claim that “neither company standing alone can create a nationwide 5G network.”

For that claim to make sense, one would have to believe T-Mobile could not have done so on its own. I doubt anybody believes that, given T-Mobile’s own recent claims about how fast it is moving, and how much spectrum it has to do so.

Sprint is challenged financially, to be certain. But it never has been clear Sprint would survive as a stand-alone company in any case. Most observers would likely agree “somebody” eventually will buy Sprint.

But is T-Mobile the “best” buyer, if industry lines are blurring, as Legere argues? Would not a tier-one app provider, a major device supplier, a big cable TV company better match the profile of an industry that now fuses content, apps and access? In that sense, the proposed Sprint merger with T-Mobile creates a bigger horizontal mobile company, to be sure.

But the strategic need still remains: ownership of apps, content and access assets are the future. This merger creates scale in access, which is helpful, to be sure. But the move does not address the future moves that then would become necessary: merger again with a big firm in the apps, platform or device area.

In fact, the scale of the new company likely reduces the odds many firms could envision such an acquisition. And there is a good argument to be made that if the industry is changing (access, platform, apps and content all fusing), as the two firms claim, this move does not help them do so. It simply creates more scale. That is helpful, but leaves unanswered the question of how to strategically reposition in a market that devalues "access only" or "content only" providers.

“There is no way we were going to build four national 5G networks,” some might argue. Many would argue that is not true. One way or the other, all four facilities-based providers are moving to 5G, as fast as they can.

And there are other ways for either T-Mobile or Sprint to get some assets (backhaul for small cells) they might need, if in fact each requires as much small cell support as do AT&T and Verizon. Those are open questions.

The proposed new company would not--despite the claims--get the country  to 5G any faster. AT&T and Verizon are moving as fast as they can, no matter what.

As for the claim that such a merger improves chances of “competing with China in the global 5G race,” other questions have to be raised. Where is the competition? Access? Or is the competition fundamentally in the platform, apps and infrastructure supply areas? If so, having another big supplier of “access” does not help much.

In fact, a combined new firm will obviously spend less on infrastructure than the stand-alone companies would have. That is why they want to merge, in part.

Also, the new firm does not create new platform, app or content capabilities. It is, by definition, a horizontal merger of like access assets.

The two firms argue their merger will lead to more competition in rural markets, beyond the fixed network providers. That could happen, at the margin. But more competition in rural markets, by wireless substitution, is coming, anyway, and not just from mobile suppliers.

The merger might, as Sprint and T-Mobile US argue, lead to creation of a better competitor in the enterprise mobility area. That also is possible, to an extent.

The main points, though, are that the stated rationales might be quite the opposite of the probable impact in some cases, are neutral in many other instances and helpful at the margin, as the companies claim.

But it seems unlikely that much as changed in terms of likely antitrust opposition. Much, observers say, will hinge on AT&T getting antitrust approval to acquire Time Warner. But that is a vertical merger that absolutely does not reduce competitors in the market, quite unlike a horizontal merger that will reduce competition.

And DoJ resistance even to the vertical merger, after declaring opposition, three years ago, to the same proposed Sprint merger with T-Mobile, does not bode well for the same transaction, three years later.