Mobile TV as Business Model Change

Mobile TV is part of a broader evolution of the subscription TV business model. Some have called this a shift to “TV as an app” (TV consumed over the top). And even when the revenue model is the same as linear TV (subscriptions), much else is different.

Two decades ago, “IPTV” mostly meant a different transmission format (digital rather than analog) and different suppliers (telcos rather than cable TV companies), but the same business model.

Today, the term IPTV has almost no meaning, as all video is digital, over every delivery platform.

For incumbents, the biggest change is that the subscription TV business is becoming much more open. Consumers used to “need” a specific decoder, supplied by a specific supplier, in order to watch their video.

source: Strategy Analytics

These days, consumers often need nothing more than their smart TV, smartphone, their game console, tablet or PC to watch their subscription TV content, with no other equipment required.

That lessens the “lock in” to a specific supplier, eliminates the equipment rental charges and arguably reduces the scarcity value of the traditional linear video subscription.

That is among the important implications of the coming shift to mobile TV services. In one more major way, the TV subscription becomes an experience unshackled from a specific decoder, in some cases a specific supplier or network.

Some incumbents might still prefer to protect the older business model where possible. Some might note, for example, that Comcast’s Xfinity Stream app remains tethered to a linear Xfinity subscription. Others, including Verizon, AT&T or T-Mobile US, seem more inclined to cut their own cords, creating over the top alternatives not anchored to purchase of the legacy product.

As always, the concrete circumstances drive strategic choices. AT&T is the largest U.S. linear services provider, but its delivery platform is satellite, arguably the linear platform declining the fastest. Under those circumstances, forcing consumers to tie an OTT subscription to linear makes less sense.  For AT&T, the competition is Netflix and other streaming services, including real-time streaming.

For Comcast, with the second-biggest linear footprint, hanging on to as much of the linear base as possible makes more sense, given the importance of that revenue stream for Comcast.

For T-Mobile US, mobile video is more a way to add value to its internet access service (also becoming a replacement product for fixed network video-plus-internet bundles).

Advertising potential is the other revenue source that grows as customer scale grows.

source: Marketing Charts

Does a Fixed Network Monopoly Lead to Higher Prices?

Though it is counter-intuitive, “monopoly” internet access service (a single fixed network supplier) might be the best we can hope for, in many U.S. rural areas, and might not, in fact, provide consumer benefit that is worse than a two-provider market would supply.

And internet access prices and speeds, while perhaps not always ideal, are often the same in “monopoly” areas served by just a single provider, as prices are in areas with at least two providers.

Also, wireless providers already offer 25 Mbps service across virtually the entire U.S. market, and 5G will offer even more options.

That is not to say more investment, or more competition in the cabled networks infrastructure is not a good thing for consumers, where it is feasible to support it.

But single-supplier markets, especially in rural areas, often are the result of local market conditions that have a rational basis, and where multiple fixed network competitors might not be feasible.

In many rural areas, service is provided by a cooperative, which tells you quite a lot about how lightly-settled many rural areas are, and how difficult the business case can be.

internet access prices and speeds in single-provider markets are “the same” as prices in markets with two or more competitors, Federal Communications Commission’s Form 477 data from 2015 and 2016 suggests. That, at least, is the conclusion reached by a new study by Phoenix Center Chief Economist Dr. George S. Ford.

Most areas with less competition are rural areas, for obvious reasons: the business case for fixed network or mobile communications is toughest where density is lowest.  There are some 11 million census blocks in the United States with populations of less than 30 persons, on average. That is a difficult degree of density to support with any advanced cabled network, no matter what the physical media.

Since communications services in the U.S. market are provided almost exclusively by for-profit firms, return on investment does matter, and rural areas are where it is hardest to make the case for investment at all. That is why we subsidize rural communications: in the absence of subsidies, it is unclear whether any private actor would make the investment.

FCC data from 2014 showed that 38 percent of U.S. residents had access to more than one provider of broadband (using the definition of 25 Mbps downstream as a minimum) service, 51 percent had access to one provider, and 10 percent had no access to broadband service by a fixed network.

That definition excludes any internet access service below 25 Mbps. At year-end 2016, 92.3 percent of all Americans have access to fixed terrestrial broadband at speeds of 25 Mbps/3 Mbps, up from 89.4 percent in 2014 and 81.2 percent in 2012, according to the FCC.

That statistic ignores satellite access, which does offer 25 Mbps or faster speeds over virtually the entire United States, supplied by two providers. Using the 10 Mbps standard, fixed terrestrial service of 10 Mbps/1 Mbps is available to 96 percent of the population, according to the FCC.

source: FCC  

Still, over 24 million residents (not households) still lack fixed terrestrial broadband at speeds of 25 Mbps/3 Mbps, Ford notes.

Still, looking only at Comcast and Charter Communications retail pricing for internet access, the prices are comparable whether those firms have competitors or not, Ford notes.

Also, in many of the nation’s rural areas, cooperatives offer broadband service, and in those areas there arguably is no business model for a second fixed network provider.

Nearly 57 percent of cooperative service territories (by population) are served only by the cooperative. Also, only 55 percent of the cooperatives customers have access to 25/3 Mbps broadband, Ford notes.

The point is that the business model--especially in rural areas where cooperatives are the norm--might not support competitive supply.

source: Phoenix Center

Mobility as a Service Has IoT, Mobile, Smart City Implications

It is hard to envision any flexible, multi-mode transportation system supporting on-demand choice that is not based, fundamentally, on use of smartphones and apps. Nor is it hard to envision the role that could be played by smart city systems that contribute parking, congestion, transit schedules and price information, plus all available modes of transportation, right now.

You might argue that public transit and other for-hire transportation systems have been the full extent of Mobility as a Service (MaaS), primarily seen as a way of increasing public transit ridership and reducing traffic on the road. That might not be the case in the future, and that also will raise questions about investments in public transit , as use of public transit is falling in most major U.S. cities. In fact, ridership has been dropping for three years.

“The fundamental problem is that big-box transit--moving people in 60-passenger buses, 450-passenger light-rail trains or 1,500-passenger heavy-rail or commuter-rail trains--no longer works in American cities,” notes Randal O’Toole, Transportation Policy Center at the Independence Institute director.

So some argue that ridesharing and other new forms of transportation are part of the solution. And it goes without saying that such new forms of transportation will likely rely on use of smartphones and open data to enable real-time choosing of how to get from one point to another point, using all available means of transport.

source: U.S. Department of Transportation

In many parts of the United States, however, MaaS competes not with public transit, but with car ownership.  in 2017, consumer vehicles in service had reached a 64 percent penetration of the U.S. population, the highest of any country.

So in many cities and urban areas, users need to be convinced that MaaS is a suitable replacement for private car usage, not public transit.

Urban transport solutions in dense environments are easier to envision. In such cases, ridesharing, ridesourcing, use of bikesharing, other modes of conveyance, public transit and all other forms of on-demand transportation, integrated into a single platform, are conceivable.

Access to shared data platforms would allow users to determine the best route and price across several end-to-end travel services and modes, according to real-time data such as traffic conditions, time of day and demand, for example.

It is not yet clear whether MaaS reduces, increases or essentially simply shifts the total amount of traffic on city roads. Obviously, the hope is that MaaS could reduce traffic and pollution. But it is fair to say nobody yet knows what might happen if a fully-developed MaaS system were put into place.

New S&P Communications Index: 50% is Alphabet and Facebook

In December 2018, a major reorganization of the Standard and Poors Global Industry Classification System (GICS) will eliminate the “Telecommunication” sector of the system, and replace it with a new “Communication Services” sector whose biggest components--by equity value--will be Alphabet and Facebook.

And that, as much as anything, tells you how “communications” has changed, even if the move is prompted by other issues, such as the paucity of firms in the old Telecommunication index.

The communication sector will include stocks from the information technology,  consumer-discretionary, and telecom service provider areas. Alphabet, at 32 percent, will be the biggest entity in the index, followed by Facebook at 18 percent. Comcast, AT&T and Verizon will represent about eight percent each.

Disney and Netflix, at about six percent each, will also be in the index. But one might note that about half the value of the index is represented by Alphabet and Facebook.

source:  Ritholtz Wealth Management

source:  Ritholtz Wealth Management

Such numbers are among the reasons why many observers believe the old “connectivity revenues” business has to be augmented, in a powerful way, by involvement in new segments of the internet ecosystem. That is true for tier-one service providers in the retail business, but obviously might not be true for the many specialist roles within the connectivity business overall.

Such moves almost certainly will involve growth by acquisition, as organic growth alone will not suffice to replace perhaps half of all current revenue within a decade. In part, that is because legacy connectivity services revenues are flat or declining; in part because revenue per unit is declining; in part because those declines outpace the rate at which brand-new revenue sources can be created and grown, internally. Marginal cost pricing does not help, either.

Nor, in principle, can it be discounted that, eventually, connectivity providers will be potential acquisition targets themselves.  

Maybe Moore's Law is Not Dead

Moore’s Law, at least based on current technology, is slowing, most would agree. But some argue semiconductor technology could jump to a new curve, and thus sustain progress, if new designs, materials and approaches prove to be commercially viable.

So one cannot meaningfully assess whether Moore's Law is dead without specifying the conditions. Chips based on silicon will reach a physical limit. But other materials might replace silicon. Also, chip architectures can change. In other words, "how" chips and systems conduct computing can change.

And then there are tweaks such as creating specialized chips for specific purposes, or applying more-clever programming.

Also, many are working on ways to improve performance by using either custom designs or more-clever programming. In the past, nobody really bothered too much with those approaches because fundamental progress at the physical layer was prodigious.

In the past, silicon technology has driven Moore’s Law because components became smaller. But silicon-based approaches are getting near a physical limit of atomic size. “A Skylake transistor is around 100 atoms across, and the fewer atoms you have, the harder it becomes to store and manipulate electronic 1s and 0s,” scientists say.

So a growing constraint is the cost of manufacturing chips that are ever-smaller. That is one reason why GlobalFoundries decided to exit production of advanced processors, for cost reasons.

In that sense, commercial profit now is becoming a big issue. Intel recently has said that issues 10-nanometer fabrication would delay its shift to seven-nanometer production, for example. And some predict potential revenues for even-smaller chips will fail to cover investment costs. That is why GlobalFoundries got out of the business of making advanced processors.

Smaller transistors now need trickier designs and extra materials. And as chips get harder to make, fabs get ever more expensive.

In the future, to get Moore’s Law back on track, manufacturers will have to rely on new architectures and new materials. There is hope that human ingenuity can succeed. What matters is the economics of computing--its cost versus performance--rather than simply being a matter of physics and manufacturing costs.

source: The Economist

Will India Create Its Own Internet

Most things in life are complex. So it should come as no surprise that for every legitimate social or public policy issue, there are corresponding financial interests. That simply cannot be escaped.  Efforts to place obstacles in the path of firms such as Google, Facebook or Amazon are the result of concerns over monopoly, to be sure.’

But the opposition also comes from business competitors who hope to benefit, governments who fear their countries will once again be left behind as the internet ecosystem reaches its next stage, or that the economic benefits of leadership in any area related to advanced technology, computing, communications or applications will be concentrated in China and the United States.

That is the formal reason the Indian government will issue new policies to prevent foreign firms from dominating India’s internet ecosystem.

India, for a variety of reasons (huge internal market, developed state of its information technology industries) might be among the few countries that could hope to do so. India is big enough that it could effectively wall off its internal internet from the global internet, if it chose to do so.

That is why new rules on “privacy” also are weapons for countries that hope such measures will slow down the U.S. and Chinese firms.

Many worry about trade wars. This one is real, as viewed by many governmental leaders. There are legitimate public policy issues at stake, of course. But there also are perceived economic advantages at stake, as well.

India is among the few countries globally that could follow the Chinese model of walling of the global and open internet.

No Competitive Moats for Telcos, Cable,Satellite?

Financial analysts frequently do disagree about prospects for any particular public telecom, cable, satellite or other communications firm, as well as the suppliers to them. So it is not surprising that some are bearish on AT&T, Verizon, Vodafone and other tier-one service providers.

In a broad way, many could argue that business model changes now are starting to affect most telcos globally, even if there has been a growth divergence between developed market and developing markets for more than a decade.

The fundamental problem is market saturation, where it comes to all legacy services that drive revenue, leading many to predict a major wave of consolidation lies ahead, caused at least in part by spectacular change in revenue sources.

Much of that change is driven by changes in the value of access. At least some knowledgeable observers argue that massive consolidation, reducing the number of global tier-one carriers by about 90 percent is what some believe is coming.

One financial analyst worries because tier-one communications service providers appear to have no competitive "moats"  that protect it from competition.

Telcos, in fact, are considered low-growth dividend payers, but companies in low-margin, hyper-competitive industries tend to be risky payers that cut their dividends when times get tough, some argue.

Telcos also are not "future proof,” with business models impervious to disruption by technology or substitute products and revenue models.

Some say “safe” firms and industries have demand for the underlying products that is growing or at least very stable.

Safe dividend-payers also should pay out a relatively low percentage of its earnings as dividends, some critics argue.

On all those dimensions, some worry about the tier-one telcos.

The worries are not misplaced. Many could agree that big threats exist. But that is precisely why some observers are insistent that tier-one telcos act as though they will have to replace at least half their revenue over the next decade . Indeed, they likely will have to do so in every decade.

Few likely believe this will be easy. That is why so many believe massive consolidation is inevitable. But some firms in the industry have been able to achieve such transitions, once or twice over the last few decades.

Service providers whose revenue models once were driven by long-distance and business revenues then evolved to models based on mobile communications. Cable TV providers who once sold only subscription TV now drive their businesses on the strength of internet access revenues.

Consumer-focused cable now also will find its future revenue growth lead by services for business customers rather than consumers.

Firms that operated only in a single country now routinely operate in many countries. And a few now earn substantial revenues from content and related lines of business rather than communications services.

It will not be easy to sustain almost-perpetual revenue model transitions. But neither is it impossible.