Cash Flow or Ownership: Does it Matter?

AT&T’s decision to merge Warner Media with Discovery will inevitably be seen as an unwinding of prior company strategy, following the DirecTV partial asset sale. 

It would not be the first time, as AT&T decades ago assembled and then disassembled the largest collection of cable TV assets in the United States. 

But some might argue it does not matter very much whether AT&T derives cash flow from assets it has a stake in, or owns outright. The new combination of Discovery with Warner Media leaves AT&T with 71 percent ownership of the larger new aset but also $43 billion in cash the firm can use to reduce debt. 

As a full owner, Warner Media generated a bit more than $30 billion in 2020 revenues for AT&T.
The bigger new firm is expected to generate about $52 billion in revenue. That provides AT&T with about $37 billion in annual revenue, based on its 71 percent ownership of the asset. 

So one way to look at the deal is simply to note that, in addition to $43 billion in cash, AT&T immediately gets ownership of a larger revenue stream. 

As some might argue, owning assets in full is less important than generating cash flow. The new collection of assets is poised to produce significantly higher cash flow than the 100-percent-owned Warner Media. 

Some might say that is an example of using leverage productively. 

Others might say AT&T is making a strategy shift, back to focusing on its core connectivity assets. There is a ring of truth there. As much debt as firms such as Verizon and AT&T have taken on to acquire rights to 5G spectrum, it makes sense to deleverage, and content asset sales are one way to do so.

On the other hand, there is significant uncertainty about how much incremental new revenue 5G can generate, and whether it will be enough to compensate for an almost certain loss of half of legacy revenue over the next decade.

Though Verizon and AT&T do need to deleverage, they both also arguably must create big new revenue streams from new services, and not simply a billion dollars here and there. They need to create new businesses producing scores of billions in annual new revenue. 

They might hope to do so with enterprise 5G, but as in the case of fixed network internet access services, even significant gains in market share--if possible-- will not be enough. Though single-digit billion additions to revenue are helpful, they will not be big enough to replace half of current revenue in a decade. That requires scores of billions.

Internet Access Might Not be the Problem Some Claim

Though it always seems to be a contentious matter, virtually all U.S. homes have access to broadband internet access, including cabled networks, satellite providers and fixed wireless internet service providers. A significant number of consumers also prefer to use mobile networks for internet access. 

In November 2019 86 percent  of U.S. residents lived in households that have fixed network high-speed Internet services in the home, says George Ford, Phoenix Center for Advanced Legal & Economic Public Policy Studies chief economist. 

Satellite providers cover virtually the entire continental United States and some 2,000 fixed wireless providers also provide service in rural areas. 

“Almost all broadband providers offer a capable broadband connection for $10-to-$20 per month for qualifying low-income consumers,” says Ford. 

Comcast’s Internet Essentials offers a 50 Mbps service for less than $10 per month for qualifying households, he notes. 

Spectrum’s Internet Assist program offers a 30 Mbps service for $14.99 per month.

Verizon offers a 200 Mbps service for $19.99 per month.

Also, a significant percentage of U.S. consumers and households prefer to use mobile networks exclusively for internet access. Today, mobile substitution  might represent 15 percent to 20 percent of U.S. households. 

Far greater substitution is likely in the future, as mobile networks get faster and per-gigabyte prices drop to levels we associate with fixed networks. At some point, mobile speeds will reach hundreds of megabits per second, probably about the time of 6G. By 7G we might routinely see headline speeds in the terabits per second.

Are U.S. Broadband Prices Too High?

From time to time, the cost of broadband internet access becomes a public policy issue. Some claim prices are too high, the typical argument being that U.S. a la carte prices (the retail tariff for internet access, not purchased in a bundle) are higher than prices in other countries.  

Adjusting for currency and living cost differentials, however, broadband access prices globally are remarkably uniform. 

The 2019 average price of a broadband internet access connection--globally--was $72..92, down $0.12 from 2017 levels, according to comparison site Cable. Other comparisons say the average global price for a fixed connection is $67 a month. 

Looking at 95 countries globally with internet access speeds of at least 60 Mbps, U.S. prices were $62.74 a month, with the highest price being $100.42 in the United Arab Emirates and the lowest price being $4.88 in the Ukraine. 

According to comparethemarket.com, the United States is not the most affordable of 50 countries analyzed. On the other hand, the United States ranks fifth among 50 for downstream speeds. 

Another study by Deutsche Bank, looking at cities in a number of countries, with a modest 8 Mbps rate, found  prices ranging between $50 to $52 a month. That still places prices for major U.S. cities such as New York, San Francisco and Boston at the top of the price range for cities studied, but do not seem to be adjusted for purchasing power parity, which attempts to adjust prices based on how much a particular unit of currency buys in each country. 

The other normalization technique used by the International Telecommunications Union is to attempt to normalize by comparing prices to gross national income per person. There are methodological issues when doing so, one can argue. Gross national income is not household income, and per-capita measures might not always be the best way to compare prices, income or other metrics. But at a high level, measuring prices as a percentage of income provides some relative measure of affordability. 

Looking at internet access prices using the PPP method, developed nation prices are around $35 to $40 a month. In absolute terms, developed nation prices are less than $30 a month. 

According to a new analysis by NetCredit, which shows U.S. consumers spending about 0.16 percent of income on internet access, “making it the most affordable broadband in North America,” says NetCredit.  

In Europe, a majority of consumers pay less than one percent of their average wages to get broadband access, NetCredit says. In Singapore, Hong Kong, New Zealand and Japan,  10 Mbps service costs between 0.15 percent and 0.28 percent of income. 

A normalization technique used by the International Telecommunications Union is to attempt to compare prices to gross national income per person, or to adjust posted retail prices using a purchasing power parity method. 

source: ITU 

Gross national income is not household income, and per-capita measures might not always be the best way to compare prices, income or other metrics. But at a high level, measuring prices as a percentage of income provides some relative measure of affordability. 

Looking at internet access prices using the purchasing power parity method, developed nation prices are around $35 to $40 a month. In absolute terms, developed nation prices are less than $30 a month.

So Far, 5G is Mostly about Entertainment

It is a little hard to determine at this point how the mass market will ultimately find value in 5G networks. Right now most 5G customers, in most markets, remain either innovators or early adopters. The former just want to have the latest thing; the latter typically are looking for some productivity advantage. 

So far, according to Ericsson research, early 5G users have increased engagement with some applications or use cases. Gaming, streaming music and video, virtual or augmented reality app use has increased. 

source: Ericsson 

None of that yet suggests a mass market trend, however, beyond the consumption of more entertainment content. 

Whether mobile service providers do a good or poor job marketing; despite initial coverage or battery life issues; before clear new use cases emerge for most users, 5G adoption eventually will reach more than 85 percent. Every next-generation mobile network has done so. 

Eventually, value propositions will be clear. But there perhaps remains a “crossing the chasm” challenge that has not yet been overcome: we have yet to make the leap from the “innovator” stage of uptake to most “early adopters.” Though 5G adoption has moved into the “early majority” phase in a few countries, globally 5G remains in the “innovator” stage. 

source: Geoffrey Moore 

At least 300 million smartphone users could take up 5G in 2021, Ericsson believes. But compared to global mobile subscriber count of five billion, 5G adoption remains far below one/tenth of one percent. 

Across the 20 lead markets where 5G commercial networks are available, an average four percent of consumers own a 5G smartphone and have a 5G subscription, Ericsson notes. That suggests markets in those 20 countries remain in the early adopter stage, and have yet to cross the chasm into the mass market. 

source: Ericsson

Sales of 5G-capable phones is misleading as well, as perhaps a fifth of 5G phones are used on 4G subscription plans, Ericsson notes. 

With a vested interest in rapid 5G uptake, Ericsson notes some early behavioral changes, but also suggests consumers are still waiting for viable new use cases and value. 

“5G users spend two hours more per week using cloud gaming and one hour more on augmented reality (AR) apps compared to 4G users,” Ericsson says. Some  20 percent say they have decreased their usage of Wi-Fi usage after upgrading to 5G. 

But indoor coverage limitations and a lack of compelling new use cases inhibits consumer uptake, Ericsson says.

Some 70  percent of consumers polled on behalf of Ericsson say they are dissatisfied with the availability of innovative 5G services and expect new applications making use of 5G.

One possibly important caveat: satisfaction metrics for 4G and 5G occur across very-different market segments. At this point, 4G is used by nearly everyone in mature markets. 5G serves an innovator or early adopter customer in most markets. Those customer segments have very different expectations. 

Innovators seek out novel technology; it’s like a hobby for them. Value, price and ease of use are not very important. Novelty is the driver: “it’s new.”

Early adopters, though quick to understand the benefits of new technology, do not value technology for its own sake. They value what new technology allows them to accomplish. In most markets, we are still in the early adopter stage. Already, though, value has become a more-important driver of adoption. That is likely why “what can it do for me?” has become something of a barrier to faster adoption. 

The early majority customer, in contrast, is practical. If a product seems useful, they will try it. But value has to be clear. Also, this type of customer will not tolerate “difficulty of use.” The technology has to be easy to use. And by this point, value--and therefore price and terms of use--matter. 

Late majority consumers are not confident in their ability to deal with technology and often buy from big companies, only after people they know use new products. 

Laggards are those consumers who, for personal and/or economic reasons, are not looking to buy new technology.

That likely accounts for the amount of interest in “innovative” features and use cases those surveyed on behalf of Ericsson express. 

The survey identified five jobs or outcomes that consumers hope 5G will accomplish:

• To be productive and efficient

• To be creative

• New ways of connecting and socializing

• The need for novelty (thrill, surprise, discovery)

• Rewarding me-time.

All that suggests there is yet work to be done in creating clear new use cases of value for most people. 

source: Ericsson

 

The Allen Curve and Hybrid Work

The Allen curve and the Ikea effect (sunk costs increase commitment) suggest why permanent hybrid work models will be tricky and possibly even difficult to sustain. The Allen curve suggests that physical proximity really matters for team building and communications. 

source: WeKnowScreens 

People seated within 10 meters of one another have the highest probability of communication. Employees who sit more than 25 meters apart have a low probability of communication. Team members sitting within the 10-meter to the 25-meter zone are likely to communicate at least once per week.

The issue is how to apply Allen principles to remote workers. 

In his 1977 book, Managing the Flow of Technology, Thomas J. Allen was the first to measure the strong negative correlation between physical distance and frequency of communication. 

The “Allen curve” estimates that we are four times as likely to communicate regularly with someone sitting six feet away from us as with someone 60 feet away, and that we almost never communicate with colleagues on separate floors or in separate buildings.

The Allen curve holds, some argue. In fact, as distance-shrinking technology accelerates, proximity is apparently becoming more important. Studies by Ben Waber show that both face-to-face and digital communications follow the Allen curve.

In one study, engineers who shared a physical office were 20 percent more likely to stay in touch digitally than those who worked elsewhere. And co-located coworkers emailed four times as frequently as colleagues in different locations. 

 

source: Harvard Business Review 

“We do not keep separate sets of people, some of whom we communicate with by one medium and some by another,” Allen said. “The more often we see someone face-to-face, the more likely it is that we will also telephone that person or communicate by another medium.” 

In the hybrid office, where some people are in person and others are remote, working from home has serious implications for being recognized and appreciated and getting bonuses and promotions, the concern might be.

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Private Networks Used to be LANs; then Wi-Fi. Next: 4G and 5G