Immediate 5G Value is Capacity, Irrespective of New Revenue Opportunities

In addition to brand-new revenue sources that should develop later in the 5G era, the immediate and practical value of 5G is to supply ever-growing capacity demands, even as 4G gets more efficient and other platforms come to commercial usage.

And 4G will continue to supply more bandwidth for the next five years, though at a declining incremental rate of increase after perhaps 2020, according to Michael Murphy, Nokia Networks CTO, North America.

source: Nokia Networks

source: Nokia Networks

The ability to aggregate Wi-Fi and unlicensed spectrum to mobile spectrum will add some bandwidth. So will 3.5 GHz spectrum, both licensed and unlicensed. But most of the new capacity will have to come from 5G, using a combination of techniques and new bandwidth.

Netflix Price Increase Illustrates Power of Powerful Brands

Consumers are price conscious, it is safe to say. So what requires explanation are instances where consumers--while seeking value--are willing to spend money for value. And perhaps nothing better illustrates the value of a valued brand.

Consider the coming increase in Netflix prices. One survey by The Diffusion Group suggests that a price increase of just $1 more per month, eight percent of Netflix subscribers are likely to cancel Netflix.

Netflix is raising the cost of its basic tier by a dollar, from $8 to $9 a month. The standard tier now will $2 more per month, up from $11 to $13, while the premium tier cost will rise from $14 to $16.

source: TDG

With the very-important caveat that consumers often say they will, or will not, do something, some of us would bet that Netflix now provides enough value that the overwhelming proportion of consumers will not desert. That did not happen the last time Netflix raised prices, for example.

Perhaps just as important, a recent price increase of similar magnitude by Amazon Prime--which some surveys suggested might have catastrophic results--did not slow growth, even if some customers might have departed.

Consider the impact when Amazon Prime raised it prices by 20 percent, from $99 annually to $119 annually, in 2018. According to one study, a whopping 45 percent of Amazon Prime customers indicated they would cancel their membership. Obviously that did not happen.

Undoubtedly there was some churn. But it appears the price increase did not have a devastating impact. According to one survey, perhaps six percent did cancel. But U.S. and global Amazon Prime memberships continued to climb.

source: Morgan Stanley

source: Consumer Intelligence Research Partners  

There are other likely impacts, as well. As Netflix raises the price umbrella, other valued streaming services will have more room to raise their own prices. That might include Amazon Prime itself, Hulu and possibly HBO Now.

On the other hand, higher prices for Netflix make harder the challenge for the scores of upstart and specialized services hoping to gain a foothold in the streaming market.

So Amazon Prime, Netflix and Apple provide key tests of the expected value of a brand, which is precisely that a valued brand allows a supplier to charge more. Valued brands can raise prices. Commodity suppliers generally have a hard time doing so.

source: eMarketer

Global Networks Now are Designed for Video

Nearly 80 percent of all global data traffic now consists of video, according to Cisco.

sources: The World Bank, Statista

By perhaps 2021, all traffic on global IP networks--save 18 percent--will consist of video, according to Cisco.

About 58 percent of downstream traffic on the global internet is video streaming content. Web traffic is about 17 percent of total, while gaming represents about eight percent of total downstream traffic.

Upstream traffic is dominated by video (especially user-generated video), web interactions and file sharing.

source: Sandvine

source: Sandvine

Also, net traffic growth is happening on private networks, rather than public networks.

source: TeleGeography

source: TeleGeography

Really "Off Road" Vehicle Concept

How Many "Mass Market" Service Opportunities Exist?

Skepticism about telco or cable involvement in the subscription video business is understandable: consumer demand is changing in ways that reduce the size of the market.

On the other hand, the consumer communications segment of the business is dominated by the four anchor services” mobile, fixed broadband, subscription video and fixed phone service, with little to no growth in each product line, at least in most developed markets.

It has long been a truism that consumer spending--in communications or entertainment--tracks growth of income (national gross domestic product, household income). The caveat is that demand for some products has declined markedly (fixed network voice), is declining (linear video subscriptions), or is growing slowly (fixed network internet and mobility).

source: Ofcom

Even in growing markets such as Asia, there simply are not that many products “most” consumers will buy, and most of what they do buy is related to mobile service.

source: Analysys Mason

The big point is that there are very few products “most” consumers will buy. And subscription video of all types (linear or on-demand; streaming or as a managed service; over the top or bundled) is among the few “mass market” services access providers can enter, once they have reached maturity in mobile voice and data; fixed network voice and data.

When Will Netflix Reach Positive Free Cash Flow?

Netflix and Amazon have been fearsome attackers of existing business models. Both firms also are equities that worry investors, often expressed as a concern over when free cash flow (and eventually actual profits) will be generated.

Eventually, as with any other company, positive free cash flow, then profits, must happen.

Morgan Stanley believes Amazon could reach free cash flow positive status could happen in 2021.

That, Morgan Stanley believes, can happen even as Netflix continues to invest heavily in content. In fact, Morgan Stanley believes Netflix is spending more than generally believed on content overall (including both original and licensed content). Other observers tend to agree with the higher figures for content rights.

Netflix spending was boosted dramatically in 2018.

source: Business Insider

NBCUniversal invests the most in original programming at the moment, to the tune of about $10.2 billion. Fox and Time Warner each spend a bit more than $8 billion. Disney has been spending nearly $8 billion, while Netflix has sharply boosted original content spending to perhaps $8 billion.

Amazon, on the other hand, has seen better free cash flow in recent years, by some estimates, even if razor thin.  

Streaming Video Bundles are Coming

The whole point of multi-product bundling, for a supplier, is to sell more products, often at lower cost, while boosting consumer perceived value. The attraction for buyers might be a bit more complex.

Saving money or convenience typically are cited as the value of bundled product purchases. But higher value at lower cost is likely the key benefit, as consumers view bundles, so long as buyers also have the option of buying a la carte.

It always has seemed inevitable that streaming subscriptions would be bundled, or at least made easier to buy within a single account, creating new forms of subscription video products that somewhat mimic the older linear video bundles of channels.  

Roku and Amazon Prime are among the firms that have been enabling such discretionary purchases.

What has not yet occurred is the ability to functionally bundle Netlfix, Hulu and Amazon Prime in the same way that a Starz or HBO subscription can be added to an Amazon Prime or Roku account. But that is coming, many believe.

The point is that if video content is balkanized--each studio ecosystem in essence becoming a channel--many consumers are going to prefer a bundle of channels that includes several of the major studio ecosystems in one account.

Some might argue that the value of such multi-product purchases is convenience: having only one bill to deal with instead of multiple accounts and billing arrangements. Some believe that is an overstated value. The real value is savings.

That seems unlikely to happen at first, in part because profit margins are pretty thin in the streaming business, to begin with, and thinner still for distributor partners. Still, some research suggests sales volume increases when bunldes of complementary products are packaged together.

In the case of streaming services, success might hinge on whether Netflix, Amazon Prime, Hulu and other services are seen as complementary, or substitutes.