AT&T Acqusitions Still Controversial, if Necessary

It never is hard to find critics of the Time Warner acquisition or DirecTV before that. While acknowledging that DirecTV has underperformed expectations, one can make the argument that the cash flow advantages still outperformed other assets AT&T might have acquired. 

Organic revenue growth often is tough, and a firm such as AT&T requires huge amounts of free cash flow to support its dividend payments, debt reduction and capital investment needs. Sure, the video entertainment business is changing. But you would be hard pressed to name any other acquisitions AT&T might have made that boosted free cash flow as much as DirecTV. 

Also, AT&T could not have afforded many other high-growth, high cash producing assets that were substantial enough to move the free cash flow needle. Even if mobility and business services produce higher profit margins, AT&T was not in position to acquire more mobile market share, because of antitrust concerns. 

Nor is it clear whether any business segment assets could be acquired domestically or internationally that would be big enough to move the cash flow needle, and also fit a strategic rationale. 

Keep in mind that AT&T always has grown principally by acquisition; only then secondarily by organic growth. Also, there are relatively few consumer services that are highly purchased, and video entertainment is one of those. 

The right declining businesses can throw off lots of free cash flow, and might serve as a foundation to create a next generation of products that have growth prospects. AT&T was betting this would be the case with DirecTV. 

Still, free cash flow is a big driver of AT&T thinking. Sure, now debt reduction is a priority, but that happens when a company’s growth strategy virtually requires big acquisitions.

SpaceX Starlink Constellation Should be Active over Canada and Northern U.S. by June

SpaceX has successfully launched another 40 satellites into low earth orbit, bringing the Starlink constellation of LEO broadband satellites up to 175.

Assuming SpaceX continues putting satellites in orbit at a rate of 60 satellites per launch, 11 more Falcon 9-Starlink missions this year will meet the 800-satellite threshold for "moderate" levels of internet coverage. That could happen by June 2020. 

By the end of 2020, there should be about 1,500 Starlinks in orbit. Internet service providers in Canada and northern parts of the United States, take note: Starlink will be able to supply consumer and business internet access across those regions by about June. 

It is not yet clear how Starlink will price its service. Right now, geostationary bandwidth represents perhaps 0.6 percent of consumer internet access connections, according to Northern Sky Research. 

source: Northern Sky Research

Forecasts must assume dramatic reductions in earth station costs, with consumer pricing not too far from current expectations, if LEO-based internet access is to be competitive with GEO service and fixed networks (wired and wireless). 

In many regions, internet access does not reach high levels until consumer prices drop below about five percent of gross national income per person. In the United States and Canada, competing with other alternatives will require getting recurring service costs even lower, into the one percent range, most likely, as that is where existing consumer services are priced. 

source: NSR

Of course, in the early going, price subsidies are likely to be important, as earth station gear will likely not enable low consumer service prices. Longer term, it is possible that LEO service winds up being more important for business customers than consumers, though.

How Will Industry Replace $35 Billion in Annual Revenue Losses Every Year?

Globally, mobile operator voice revenue will drop to $208 billion by 2024 from $381 billion in 2019, Juniper Research now forecasts. That is not a new trend, as voice revenue has been under severe pressure for two decades, and not principally because of VoIP substitution. 

After about 2000, consumers began to place more and more of their long distance calls directly from their mobiles, instead of landline phones, in large part because of financial inducements to do so. The net impact, shown here in the U.S. market, was a decline in fixed network calling, a decline in purchasing of fixed network voice lines, and, as a consequence, a decline in voice revenue. 

source: National Exchange Carrier Association

In fact, one can argue that it was a shift of consumer demand to mobility, with domestic long distance calling included at essentially no charge, that drove mobile demand.

Starting about 2001, a domestic long distance call might still have cost an additional 10 cents per minute on a fixed line, but a zero incremental charge when calls were placed from a mobile device. 

That disrupted the industry profit model, which was built on long distance revenue. 

source: Technology Policy Institute

Of course, competition did not help, either, and that process had already been driving lower prices, since at least 1983. 

source: FCC

If Juniper Research estimates prove correct, $173 billion worth of revenue will be removed from service provider ledgers, in total, between 2019 and 2024, to the tune of roughly $35 billion annually. Those are significant numbers, as all that revenue has to be replaced, somehow. 

For any single service provider, no matter how large, $1 billion in annual new revenues is not easy to acquire, harder still to build. 

source: U.S. Department of Justice

All that is why some observers believe connectivity service providers must discover or create a few new and big sources of revenue to replace voice, messaging and now even video entertainment revenue. My own prediction is that the new revenues will have to have magnitude of about 50 percent of present revenue in 10 years.

More Fios Price Transparency

Some service providers may not like the idea, but greater price transparency seems to be coming to the consumer part of the fixed network business. 

For decades, U.S. cable TV and telco service providers have relied on service bundles (dual play, triple play, sometimes quadruple play) to create value, partly by offering discounts for such packages. The other angle was that bundling allowed service providers to sell more units of products consumers did not actually want. 

Many consumers buy triple-play packages containing landline voice only because the overall price is less than buying internet access and video entertainment. 

That strategy now is loosening, if not fully unraveling, in large part because two of the constituent services--voice and linear video--have diminishing demand. 

So Verizon has moved to what it calls Mix and Match on its Fios fixed network service, allowing  customers to buy Internet and TV plans without use of a traditional bundle. The upside for consumers is that it is no longer necessary to buy a bundle to get the best prices. 

Price transparency is a big advantage. In a traditional triple-play bundle, it is not possible for customers to determine what each constituent service costs. Under Verizon’s Mix and Match format, all prices are transparent: consumers know exactly what each component costs. 

Under Verizon’s new plans, it is clear that residential home phone service (probably before taxes and fees) is rated at $20 a month, internet access costs $40 to $80 a month, depending on speed tier, while video can cost $50 to $90. 

The building block, in most cases, will likely be internet access, the one service all fixed network service providers will use to anchor their business models. 

Customers then can buy linear service in a new way, choosing five channels from the palette of 200 networks, using YouTube TV or buying a linear package of 300 or 425 channels. 

Once upon a time, cable TV gross profit margins were in the 40-percent range. Today, most are probably lucky to get 10 percent net margins. Small telcos and cable operators never were able to earn much--if anything--offering video services. And there is some evidence that streaming service margins are lower than linear. 

Also, profit trends have flipped. A decade or two ago, video profit margins outstripped those of internet access. Up to this point, it has mostly been small telcos and cable companies in rural areas that have pondered abandoning video services. Now Verizon is signaling that it does not see the upside, either. 

source: Verizon 

Market Share Shifs after Disney+ Launch?

Market share shifts are inevitable as new video streaming services launch. Here is what one analyst believes will happen as Disney+ launched in late 2019. 

source: eMarketer

How Much Agility is Possible?

The problem is that large organizations with lots of regulatory scrutiny and long-lived, sunk assets might be incapable of agility, to a large degree. 

How Much Will Households Spend on Video Streaming?

Are U.S. streaming video subscription customers already showing signs of reaching the limit of willingness to spend on such services? One survey has been interpreted that way. The majority of respondents to a survey (59 percent) are not willing to pay more than $20 a month for any single streaming TV service, according to a recent survey of more than 2,600 U.S. consumers sponsored by The Trade Desk, a supplier of programmatic ad buying. The survey was conducted by YouGov. 

Some 75 percent of consumers indicated they would not pay more than $30 a month for video streaming. A couple of caveats are in order. Consumers taking surveys often casually say they will or will not do something. Those responses often do not match with their actual behavior. 

And, obviously, it is in the business interest of a programmatic ad buying firm to convince wider sections of the market that advertising support is required to reduce overall end user cost.

The money quote: “The survey indicates a willingness from consumers for streaming services supported by ads, particularly if the format and pacing of commercial breaks differ from traditional TV content,” The Trade Desk says.

The issue, as always, is that consumers prefer ad-free formats, but also prefer not to spend too much money on such content. Hence, the delicate balance of revenue models: recurring payment with no ads, recurring payment with some ads or lots of ads but no recurring payments. 

It’s all about perceptions of value, as consumers prefer no ads, but will tolerate them, up to a point, to save money. “Given the choice between getting something for free or paying for the exact same thing, they’ll make the choice to get it for free,” said Randall Rothenberg, Interactive Advertising Bureau CEO. 

“Consumers are willing to view ads if it means their subscription costs go down,” The Trade Desk notes. That tendency can be seen in toleration of advertising across multiple formats and venues.  

It is possible to argue that the willingness to spend responses will prove incorrect. Many of us would be quite comfortable with forecasts that total spending on streaming video could top $40 a month, and for significant numbers of consumers will reach about $80 a month to $100 a month. 

And there are heavy-user households that likely already are spending more than that on total video entertainment (linear plus over the top services). Another survey taken in 2019 already found at least five percent of consumers willing to spend $70 or more on video streaming services per month. 

The other issue is that content is going to fragment onto different services. And some surveys suggest a clear majority of viewers will buy a whole service to see one particular favored show. So no matter what consumers now believe, they will be confronted with a more-fragmented content market that creates new incentives to buy multiple streaming services. 

The point is that it is not unreasonable to expect that most households will not ultimately find they spend much less than they do at present, for video services.