Is Structural Separation Still Relevant?

Australia, New Zealand and Singapore are among nations that have instituted a structurally separated telecom network environment, especially regarding the legacy national telecom networks. 

Infrastructure sharing is a more common trend, as when mobile operators agree to share the cost of cell towers. 

Municipal broadband networks represent a similar effort to create more competition, or higher-quality consumer services, using a wholesale approach where one entity builds and operates the network, and any number of retail providers are allowed to use the network to create their own retail efforts.

Compared to two decades ago, there seems less talk about structural separation as a method for either increasing capital investment or limiting the cost of such investment. Municipal networks, building brand new facilities, seems to be the bigger trend in some markets, such as the United States. 

While it might be too early to draw final conclusions, there already is some mixed evidence of the value of such decisions. Some three decades ago, I was part of a study team looking at a proposal by Rochester Telephone Company to divest its local communications monopoly, creating a wholesale framework, in return for which RTC would be granted freedom to enter the long distance business, at that point.

Rochester Telephone won permission from state regulators to split into separate companies: a regulated wholesaler of telephone services named Rochester Telephone Corp. and an unregulated retailer named Frontier Communications of Rochester.

After approval, RTC become Frontier Corp. in 1995. In August 1995 Frontier Corp. merged with ALC Communications Corp., acquiring in that move Confer Tech International, the world's largest dedicated multimedia teleconferencing company. 

Later in the year Frontier acquired LINK-VTC, a videoconferencing services company. A month earlier, Frontier had purchased Schneider Communications Inc., a long-distance voice and data carrier, and its 81 percent interest in LinkUSA Corp., a long-distance services provider, for $127 million. 

Other 1995 acquisitions were WCT Communications, a West Coast long-distance company; Enhanced TeleManagement, Inc., offering integrated telecommunications services in six states; American Sharecom, Inc., a Minneapolis-based long-distance company; and Minnesota Southern Cellular Telephone Co. Frontier also established its first international subsidiary for integrated services, London-based FronTel Communications Ltd.

In 1999 the company was acquired by Global Crossing. In 2001, Global Crossing North America's local exchange assets, including Frontier Telephone of Rochester and Frontier Subsidiary Telco, and ownership of the Frontier name were sold to Citizens Communications Company, which in 2008 renamed itself Frontier Communications.

I have no idea how well the wholesale model actually has worked out in the former Rochester Telephone service area, but it is not clear to me that competition or investment has been significantly different after the structural separation. 

If I had to guess I’d say the emergence of Charter Communications as a telecom services supplier has had more impact on prices and the quality of service than the structural separation.

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.