Bundling or Tying is at Heart of EC Charge Against Google (Always Is)

The European Commission argues that by tying use of the Android OS and Google Play to a phone supplier's offering of Google's search engine and browser, Google quashed potential competition. 

But many would argue Android is not a monopoly. There are other choices, aside from Android and the iPhone OS. But few end users or phone manufacturers have chosen to use those alternatives. Tying or bundling always raises issues, though. 


source: Statista 

Will Autonomous Vehicles Increase Video Consumption?

Executives at AT&T seem certain that new video screens are going to emerge as passengers start spending more time in autonomous vehicles. The argument is that if people are riding, but not required to drive, then video viewing time might well increase beyond present levels.

The biggest potential changes might come from people with long commutes, though even users of autonomous or even ridesharing vehicles for shorter trips around town would logically become potential new audiences.

Consumer behavior still is a barrier for subscription-based or pay-per-view approaches. Consider an airliner a ridesharing vehicle. How many passengers do you notice buying a video entertainment service during the flight? Not many.

Ad-supported content obviously will have a bigger potential audience, and especially for ridesharing services, rather than auto owners. The immediate problem is that the economics of substituting ridesharing for auto ownership, in most parts of the United States, do not exist.

Using Uber or Lyft (or a taxi) for episodic travel often makes more sense than renting a car. What is not yet clear is whether it will soon make sense to use ridesharing instead of owning a car, in some instances.

It probably is easy enough to argue that car ownership still makes more sense, financially, than full time ridesharing for most families and individuals, in most areas of the United States.

Some attempt to include “cost of your time” in calculating the benefits of ridesharing, compared to car ownership, but most of us cannot name another individual who really would consider that value in trying to assess ridesharing versus auto ownership.

Assume the cost of most Uber or Lyft rides is about $2 a mile. Assume you really need to move about 12,000 miles a year. The ridesharing might then cost about $24,000 a year. The Internal Revenue Service uses a figure of $0.545 per mile for use of autos for business purposes.

So owning a vehicle and using it 12,000 miles a year represents about $6,540 a year (including depreciation of the vehicle, insurance and operating expenses, but not parking).

At such rates, ridesharing represents out of pocket costs about four times higher than owning a vehicle.

So while many of us would consider ridesharing as a full alternative to auto ownership, the economics do not yet work, for people who live in suburban areas, or even in many urban areas other than New York or San Francisco.

There are Limits to How Much Mobile Data People Want to Consume

As much as connectivity is untethered and mobile; as important as internet apps now are in the mobile value proposition; as much as consumers keep increasing their data consumption, we tend to vastly underestimate consumer behavior as a moderating influence on mobile data consumption.

An analysis of mobile tariffs and mobile data consumption by Tefficient found only a weak correlation between average revenue per user and data usage, for example.

That is not what one might expect. The analysis shows that, in most countries, mobile data consumption is 3 Gbytes per month, or less, no matter whether overall recurring charges are high or low.

That seems to fly in the face of both economics and the Tefficient data, which also shows that mobile data prices and usage are directly correlated (high price leads to low usage; low prices lead to high usage). So something else is at work.

source: Tefficient

Among the logical explanations for those findings are that mobile subscriptions represent a bundle of features, including messaging, voice, device rental, plus possible bundling with other services (fixed network voice, fixed network internet access, mobile or fixed video subscriptions) that affect unit cost. So mobile data is one of many determinants of retail recurring costs.

Also, Wi-Fi offload plays a role, representing a majority of mobile device data access in many markets. End user behavior also matters, as it seems people use mobile data in different ways than data used while stationary (at home or at work).

source: Tefficient

Still, the Tefficient data suggests even at low prices, people only want to do so many things, or spend so much time, on mobile internet apps. And that is reflected in mobile data usage.

Ironically, the one development that changes the overall usage curve is the use of 5G platforms to supply fixed access.

Verizon Will Flip Mobile Economics Upside Down

Verizon is going to flip mobile network economics upside down as it builds commercial 5G-based fixed wireless capabilities.

Make no mistake, this is a fundamental reworking of assumptions about mobile network cost and retail pricing of mobile data consumption.

The big challenge for firms such as Verizon, which want to build new 5G-derived platforms to supply fixed wireless, is that doing so will fundamentally challenge traditional thinking about the cost of wireless networks.

Fundamentally, network cost will have to be radically lower if the 5G platform, operating in fixed mode, is going to be competitive with fixed network usage and retail prices. Basically, cost per gigabyte has to drop by an order of magnitude (10 times) or more, if any 5G-based network hopes to compete, head to head, with fixed network internet access.

Ironically, the fear that service providers would not be able to afford to build and operate such networks seems to be proving manageable.

In other words, there is reasonable hope that 5G networks offering orders of magnitude better performance also will be affordable enough to compete head to head with fixed networks as suppliers of internet access.

“A prerequisite for continued data usage growth is that the total revenue per gigabyte is low,” say analysts at Tefficient. In some markets, such as the United States, Canada and Switzerland, where tariffs actually have been high and usage has been low, a disruptive challenge is coming from (of all things) Verizon, one of the biggest incumbents in the market.

source: Tefficient

What Verizon must do, in using 5G fixed wireless to compete head to head with other fixed network internet service providers, is flip the economics on its head.

Where tariffs are low, usage is higher, as you would expect. And that is the case in the U.S. market, which has high mobile data tariffs, and low usage. To compete against fixed network service providers, Verizon will have to be operate as a supplier of low tariff, high usage services, the polar opposite of where it is now in its mobile business.

And that is among the most-astounding facets of the strategy of using 5G both as a fixed wireless and a mobile platform. Such a blending arguably would have been impossible before the era of commercialized millimeter wave spectrum, cheaper small cell radios, fiber-deep networks, better radios and modulation techniques, cheap signal processing, massive multiple-input, multiple-output radios and even new ways to integrate unlicensed and shared spectrum.

Taken together, all those technologies are the foundation of Verizon’s effort to flip the network cost model so much that it can literally move from being a  “high cost, low usage” provider to being a successful supplier of “low cost, high usage” internet access, in a single mobile generation.

That is the underappreciated aspect of 5G fixed wireless.

What Else Could AT&T Have Done, Instead of Buying Time Warner?

With the caveat that the DirecTV and Time Warner acquisitions by AT&T remain controversial in some quarters, the arguments for both remain simple enough:

• AT&T’s core businesses are shrinking
• AT&T has to generate new revenues at scale
• AT&T needs that revenue to generate high free cash flow, to pay its high and growing dividend
• AT&T has done so historically mostly by acquisition
• Beyond which, AT&T has to reposition itself as has Comcast, in additional areas of the internet ecosystem

AT&T needs to generate lots of free cash flow to support its dividend payouts, which historically range between 50 percent and 100 percent of free cash flow. That is hard to do on a declining base of revenues, even if AT&T did not have a strategy of constantly raising its dividend over time.

          AT&T Dividend Payout Ratios (Dividends as a Percent of Free Cash Flow)

source: Seeking Alpha

Among the primary objections to the DirecTV and Time Warner acquisitions was the amount of debt AT&T would have to take on. This is a valid concern. AT&T has to execute on its plan to significantly reduce debt levels over several years.

Supporters of the DirecTV and Time Warner acquisitions might point out that without big acquisitions, AT&T would have had trouble sustaining free cash flow and its dividend strategy, as organic growth was not high enough to accomplish those tasks.

And it is hard to imagine where else AT&T could have found logical acquisitions that the company could afford, and that fit its core business strategy. Whatever else one might say, media assets have a lower multiple of price to equity than most other assets in the internet app and platform space, in computing or business services.

And a rational observer would likely agree that any big acquisitions must have some reasonable hope of synergy. Consumer video entertainment and video content assets are big enough to “move the needle” for AT&T.

Though we might debate the wisdom of the DirecTV deal, it seems to be working, at least in its role as free cash flow producer. Many have argued that AT&T should instead have made bigger investments in its network. Some of us do not see how that would have generated incremental revenue and free cash flow fast enough to matter.

For AT&T and other developed market tier-one telcos, huge new revenue sources must be found to replace shrinking connectivity revenues.

source: Seeking Alpha

AT&T’s first quarter revenue revenue trends (legacy business, prior to Time Warner impact) show the basic problem: the core business is declining. That trend compares with a “whole-industry” revenue picture that  is generally flat to just slightly positive.

                           AT&T First Quarter Revenue Trends

source: Seeking Alpha   

You can see the same trend for AT&T free cash flow, in the first quarter of the last three years.

            AT&T Free Cash Flow, First Quarter, Last Three Years

source: Seeking Alpha

In the end, one must ask what else could AT&T done with its capital to produce an immediate boost to revenue and cash flow, at higher levels or at less cost. Even if AT&T might have preferred investing in internet app provider assets with higher growth, such assets are quite expensive, compared to media assets.

Sure, acquiring assets in the coming internet of things space would be sound, but cannot move the needle on current revenue and free cash flow.

Sure, AT&T might fail to execute well, or might be tripped up by some other exogenous event. But the fundamental thinking is sound enough.

Millimeter Wave Could be Revolutionary

It is easy to underestimate the impact of commercialized millimeter wave spectrum. Since supply and demand always matters in any market, the sheer amount of millimeter wave spectrum, as well as its cost, is going to enable new business strategies.

The impact will be intensified as well by other related developments (small cells, spectrum sharing, massive multiple-input multiple output radios, better modulation techniques) that will greatly expand spectrum availability and also lead to lower prices for spectrum.

Though it is generally underestimated, millimeter wave spectrum and the other associated technology trends will enable wireless networks--for the first time--to directly challenge fixed networks for internet access customers, with features that are at least as good as fixed networks (and sometimes better), and with retail pricing that also is comparable.

Conversely, that is going to be a key business model challenge for tier-one operators of fixed access networks, which might well see accelerated market share loss, and greater stranded asset problems for their fixed network operations.

That is worth keeping in mind as Verizon readies its 5G strategy. Verizon has the smallest fixed network footprint among tier-one internet access suppliers in the U.S. market.

Comcast passes (can actually sell service) about 54 million homes. Charter Communications passes some 50 million home locations.

AT&T’s fixed network passes perhaps 62 million U.S. homes. Verizon, on the other hand, passes perhaps 27 million locations.

What that means is that Verizon has a clear interest in using 5G fixed wireless to expand its addressable market by more than 35 million U.S. homes that it cannot reach today, giving Verizon a fixed network footprint that is comparable to its key rivals.

And that attack will be based on use of 5G millimeter spectrum and fixed wireless mode. That might make Verizon a rarity in the U.S. market: a tier-one service provider that actually can earn lots of incremental 5G revenue by taking fixed internet access network share away from other key competitors.

Many observers believe 5G will rely mostly on 5G value for internet access, in the early years.

For the most part, though, it is likely that all mobile operations will largely replace 4G accounts with 5G accounts, offering some incremental new revenue, but not too much.

But even if 5G does not immediately lead to huge new revenue streams and new internet of things and ultra-low latency use cases, it is likely to enable a key near-term Verizon growth strategy, namely growth by taking market share now held by competitors in fixed network internet access markets.

While that might not address other long-term issues, taking market share is a proven way for attackers to boost growth and revenues in the near term. That is precisely what cable TV operators did in voice, are starting to do in mobile services what some telcos now are doing in video (both access and content).

Long term, gaining additional market share in internet access does not address what Verizon and other service providers must do to replace shrinking revenues in their legacy connectivity and linear video subscription businesses.

Nor does that same strategy make as much sense for Verizon’s other fixed network competitors. Comcast is focused on international growth; AT&T on content and other “up the stack” opportunities, with some international growth; Charter Communications has to upgrade its access networks and figure out what to do about “up the stack” content or other growth strategies.

Sprint and T-Mobile US do not have the resources or will to do much more than try and gain share in the core mobile business, for the time being. CenturyLink already has made a huge transformation into an enterprise services company with a big legacy consumer telecom business.

The point is that there is no single, universal strategy for 5G. Each company will move ahead based on its perception of other elements of its growth strategy.

Amazon Alexa, Echo Enable Voice-Controlled Speakerphone

Amazon's Alexa app and Echo voice appliances can be used to make (no incremental cost) voice calls to other Alexa users and devices, showcasing one more way voice over Internet Protocol has become a substitute for legacy calling.  

Alexa also can call “most phone numbers in the United States, Canada and Mexico” as well, essentially turning the Echo device into a voice-controlled speakerphone.

As is common with VoIP services, there are some limitations. There is no support for “911” emergency calls, premium-rate numbers (“1-900” numbers or other toll numbers, abbreviated dial codes (“211,” “411,”), dial-by-letter numbers (e.g. “1-800-FLOWERS”) or international calls to countries other than the United States, Canada and Mexico.

Of course, there is more than substitution going on. As legacy carriers move to replace their own calling services with IP platforms, some amount of former legacy voice then might be counted as part of the “VoIP” category.

But the largest impact is substitution, a process that occurs elsewhere in the telecom market. Consider demand for international bandwidth. In the early decades of the internet, “IP transit” was a product that service providers and transport providers bought and sold to move internet traffic, in addition to wholesale capacity of other types.

These days, much of the “public market” has essentially vanished, as major app providers and enterprises build and operate their own networks, obviating the need to buy capacity services from a service provider.

On routes across the Atlantic Ocean, such private networks carry 70 percent of all IP traffic. On Pacific crossings, private networks carry nearly 60 percent of traffic. On routes within Asia, private networks carry 60 percent of traffic.

The point is that IP-based apps and services cannibalize demand for existing services. That is as true for undersea capacity as it is for voice and messaging services.

source: Telegeography