AT&T Now is a "Modern Media Company"

This slide from the AT&T quarterly earnings call tells you quite a lot about how AT&T sees itself, and how differently it sees itself from its past. AT&T is said to be “a modern media company.” The building blocks of that business include content, advertising, distribution networks and high-speed networks.

Sure, AT&T has business (enterprise) operations and assets in Latin America and Mexico. Its single biggest revenue generator still is consumer mobility. But all those assets are infrastructure to support content, advertising and distribution, AT&T now emphasizes.

source: AT&T

Honolulu

It’s summer, so I was reading the book Honolulu (really enjoyed it). The protagonist is a Korean picture bride, and my maternal grandmother was a picture bride.

That got me to thinking about when my maternal grandfather immigrated to Hawaii.

Here is the Port of Honolulu record of his arrival, in 1905, on the steamship Korea, at age 15.

He worked in the cane fields, like everybody else. Probably hated it, like everybody else. 

Eventually he became the now stereotypical Korean corner grocer (some things do not seem to have changed much). 

Grandma met him for the first time on the docks. 

"People" Versus "Households" Can Make a Huge Difference

Fewer people in the U.S. market subscribe to linear video subscription services than in the past, that is clear. But there are some possible subtle qualifications worth noting. Traditionally, linear video subscriptions were purchased by “households,” much as traditional voice services were purchased.

Over-the-top subscriptions are purchased by people, as are mobile subscriptions, the key import being that the universe of potential OTT video subscriptions is far larger than the potential universe of linear video accounts.

So comparing OTT subscriptions and linear video accounts is not exactly an “apples to apples” exercise.

Overall, 186.7 million U.S. adults will watch linear TV (cable, satellite or telco) in 2018, down 3.8 percent over 2017, according to eMarketer. Whether that corresponds in a linear way to subscriptions is not so clear, since most U.S. households are multi-person.

According to eMarketer, the number of cord-cutters (adults “who have ever cancelled pay TV service and continue without it”) will climb 32.8 percent in 2018 to 33.0 million. Again, it is a nuance, but if a single household with three residents “drops service,” it is conceivable that the number of people reporting they are cord cutters is three, not one.

source: eMarketer

Headline Numbers on Linear Video Hide Other Trends

By now, nobody is surprised to hear that linear video subscriptions continue to drop or that over the top subscriptions are growing. In aggregate, there are more U.S. paid streaming accounts than linear accounts in service.

Net changes in revenue and accounts are harder to describe, as every quarter and year, some new accounts are added on both linear and streaming ledgers, partly because of churn (customers switching providers), sometimes because of moves (accounts are cancelled at one location but possibly added at another location), temporary suspensions.

In fact, linear revenue might actually be growing, even as accounts dwindle.

Netflix has some 55 million U.S. accounts, while Amazon Prime has some 90 million subscribers. All the largest linear video providers together have about 92.2 million accounts.

But since linear subscriptions represent many times more revenue than a typical linear video subscription, revenue losses are happening, even for firms such as AT&T that sell both linear and streaming video, and even when the net change in streaming accounts offsets the loss from linear accounts.

source: Statista

Total revenue is another story, as monthly subscription revenue earned by a linear account can be an order of magnitude greater than the revenue from any single OTT streaming account.

source: Ovum (Informa)

Among the bigger issues is the rate of decline of linear subscriptions, which seems to be accelerating. Net changes (including new accounts and customers switching providers) typically mean the gross losses are less than headline numbers might indicate.

In 2017, for example, the major U.S. providers lost about 1.5 million accounts, up from some 760,000 in 2016, according to Leichtman Research Group.

The big swing was that streaming services owned by the linear providers gained 1.5 million accounts, nearly the amount lost by the two satellite services.

In that case, the net losses by linear providers were about zero, even if the switch was from higher-revenue linear to lower-revenue streaming accounts.  

source: cg42

source: UBS

For Regulators and Suppliers, Competition and Investment are Inversely Related

Communications regulators and service providers always face a cruel tradeoff: over the long term, investment that boosts revenue tends to be inversely related to the amount of competition.

So regulators always face policy tradeoffs. Regulators can emphasize investment or competition, but arguably not both--at high levels--equally and simultaneously. Up to a point, competition creates incentives for investment. But only up to a point.

The reasons are obvious enough. If regulators take a wholesale-based approach, with one network serving all retail providers, the facilities provider’s incentives to invest are limited by government policy. By definition, all retail providers get access at the same rates and terms and conditions. So, as competition increases, incumbents who generally build the wholesale facilities lose ever more market share.

Facilities-based competitors find that incentives to invest increase as the number of competitors is effectively limited (by merger, less wholesale market entry), since contestant market share increases. And that means higher gross revenues and generally higher profit margins.

Also, investment in internet access facilities is something of a zero-sum game.

Internet access providers long have known that there is no linear relationship between data consumption and revenue earned for providing that access. On the other hand, there is a somewhat linear relationship between cost per bit and data consumption.

New data from the U.K. Department for Digital, Culture, Media & Sport shows that although mobile customer spending on mobile internet access is roughly flat between 2012 and 2016, data consumption and cost per bit show a relatively inverse and linear relationship.

As mobile data consumption increased by an order of magnitude over those years, the cost per bit dropped by an order of magnitude.

The business model implication is clear: increasing end user data consumption does not lead to revenue increase.

source: Department for Digital, Culture, Media & Sport

How Many Gigabit Networks in U.K. Market?

Where facilities-based fixed communication networks compete, business models always are contingent on market share. Where just two equally-skilled and financially-endowed contestants face each other, it is reasonable for each competitor to expect take rates of 50 percent, on a network that passes every location.

That strands half the invested capital in the access network. In practice, since adoption is never 100 percent, the addressable market theoretically is less than 50 percent for each supplier.

Additional competition reduces the potential market share yet further. In the U.S. market, some 20 to 30 percent of households already are mobile-only for internet access, reducing the potential share for two competitors to no more than 40 percent each.

source: Deloitte

Mobile substitution also will, in the 5G era, vastly complicate the fixed network business model. “The distinction between fixed networks and mobile networks is increasingly being eroded,” the report says. “In some places 5G could provide a more cost effective way of providing ultra-fast connectivity to homes and businesses.”

Such substitution already has happened for consumer voice, and consumer internet access and subscription video are the next big areas of potential shift.

That poses further threats to the fixed network business model, as potential market share will will even further in the direction of mobile platforms.

In the U.K. market, for example, BT’s network passes nearly every location, but BT itself has about 37 percent market share, according to a new report by the U.K. Department for Digital, Culture, Media & Sport.

Wholesale customers on the Openreach network include Sky (24 percent share), TalkTalk (12 percent) and smaller providers. There also are some facilities-based providers operating on a localized basis.  

Virgin Media is the primary facilities-based competitor and has 20 percent market share, while passing a bit more than half of U.K. households. It might not be unreasonable to argue that Virgin will be the first operator to offer gigabit internet access at scale, as a disproportionate share of UK. customers with faster speeds are on the Virgin network.

Housing density is the other key variable. About a third of U.K. households are in areas dense enough that as many as three competing gigabit networks can be built. That logically includes the Openreach, Virgin Media and one additional competitor on a local basis.

Perhaps half of U.K. households might be in areas dense enough that two gigabit network providers can survive.

About 20 percent of homes are in low-density areas where only a single network is likely to be possible (subsidized or not).

So the study sees three basic deployment scenarios. In areas representing 80 percent of U.K. homes, two or more gigabit-capable networks are possible. That includes larger cities and towns.

Other, less dense areas might support only a single network. That might include about 10 percent of all U.K. homes.

Very rural areas, representing about 10 percent of homes, will need subsidies to support building of a single new network.  

The big unknown is the degree of mobile substitution, which will make the business case for fixed networks tougher.

35% of U.S. Hispanic Households are Mobile Only for Internet Access

Mobile substitution, long a feature for voice services, now is a growing reality for internet access. According to CTIA data, 20 percent of U.S. households rely exclusively on their mobile devices for internet access, up about 54 percent from 2015 levels.

That trend is even more pronounced in Hispanic households, where 35 percent of smartphone users rely solely on mobility for internet access; lower-income households and younger households.

source: CTIA