Comcast and At&T Both Have a Portfolio Approach to Media and Connectivity

AT&T and Verizon are not the only U.S. connectivity firms facing calls to divest content assets. Some observers want Comcast to get out of the content business to focus on connectivity. Note Comcast’s response. 

“We believe in media and technology,” Brian Roberts, Comcast CEO, has said. Those two go together, Roberts said. 

But note a subtle qualification. “It’s not really vertically integrated, it’s delivering to customers and viewers experiences and memories and things like our theme parks.”

“We see the two working together,” he added.

Though virtually all observers describe AT&T’s spinning out its DirecTV and Warner Media assets as getting out of the business, that actually is incorrect. AT&T retains a 70-percent ownership stake in both businesses. 

It removes the assets from its books, and monetizes up to 30 percent of the assets. But make no mistake, AT&T still owns 70 percent of both businesses, but now does not have to manage those assets. 

Think of it this way, as Comcast does: the connectivity and content businesses are not vertically integrated, as some might have described the former arrangement with DirecTV and Warner Media. But both aspects of the ownership model provide value. 

But both the Comcast and AT&T content ownership strategies allow both firms to diversify assets, revenue streams and markets. Both derive the benefits of ownership, cash flow and profits. 

Though Comcast consolidates the results, AT&T does not. 

Still, essentially, both firms have a business footprint that extends beyond connectivity services, “up the stack.” Most believe AT&T benefits by allowing its management to focus on its connectivity business. But AT&T still owns 70 percent of DirecTV and Warner Media (which will be merged with Discovery and managed by Discovery). 

Keep in mind that many expected or touted growth areas--internet of things, edge computing, private networks, control of unmanned aerial or autonomous vehicles--also, to one extent or another--move connectivity firms beyond connections, and towards platforms and apps. 

A portfolio approach arguably allows participation in a wider swath of revenue and value upside, while still allowing a focus on the core connectivity business. It is a defensible approach, if not always a popular tack for financial engineers who profit from transactions.

How Will Cable Operators Re-Architect to Add Upstream Bandwidth?

Hybrid fiber coax upgrades intended to increase upstream bandwidth can take a number of forms. Shrinking the serving areas; switching to fiber-to-home and re-architecting the network for different frequency plans are the typical choices. 

For operators who want to delay the shift to FTTH, moving from the standard HFC low-split design, and substituting a mid-split or high-split frequency plan, are the two architectural choices other than shrinking the fiber node serving areas or moving to an entirely-new FTTH network. 

As always, incrementalism is favored. Comcast appears to prefer the mid-split option, while Charter seems to be leaning towards a more-radical high-split approach. In terms of capital investment, the mid-split choice might be a shorter-window bridge to FTTH, while high-split might allow a longer window before FTTH is required. 

More symmetrical bandwidth is a large part of the thinking.  

DOCSIS 4.0 is going to force decisions about which path to take to support symmetrical multi-gigabit-per-second speeds of as much as 10Gbps downstream and up to 6 Gbps upstream.

source: Comscope 

Hybrid fiber coax networks still use frequency division, separating upstream and downstream traffic by frequency. So when a cable operator contemplates adopting mid-split or high-split designs, there are implications for active and passive network elements, especially for the more-radical high-split design. 

At this point, executives also will ask themselves whether, if radical changes are required, whether it would not be better to simply switch to fiber-to-home. 

source: Broadband Library 

Our notions of mid-split and high-split frequency plans have shifted a bit over the years, as total bandwidth has grown beyond 450 MHz up to 1.2 GHz. A designation of “mid-split”  made more sense in an era where total bandwidth was capped at about 450 MHz or 550 MHz. In those days, 108 MHz to 116 MHz of return bandwidth was perhaps 42 percent of the usable bandwidth. 

Hence the “mid-split” designation. 

Likewise for high-split designations, where as much as 186 MHz was designated for the return path, the return bandwidth represented as much as 67 percent of usable bandwidth on a 450-MHz coaxial cable system. 

source: Broadband Library  

Definitions remain, though with some new standardization of return bandwidths. “Mid-split” now features 85 MHz of return bandwidth, while “high-split” offers 204 MHz of upstream bandwidth. 

source: Broadband Library  

“Ultra-high-split” designs also are being investigated, where the upstream spectrum’s upper frequency limit can be 300 MHz, 396 MHz, 492 MHz, or 684 MHz, says Ron Hranac, consulting engineer. 

What remains true is that the ability to wring more performance out of hybrid fiber coax plant has proven more robust than many expected a decade ago. 

Also being considered are full duplex designs that swap time division for frequency division multiplexing. That is an option for DOCSIS 4.0 networks, and is a break from the frequency division HFC has used.

source: CableLabs 

Full duplex networks would allow the upstream and downstream traffic to use the same spectrum at the same time. That would require an HFC upgrade to a node-plus-zero amplifiers” design that is similar to fiber to the curb. The drop to the user location still uses coaxial cable, but without any radio frequency amplifiers. 

source: CableLabs 

The whole point of all these interventions is to supply more upstream or return bandwidth than HFC presently provides. 

source: Qorvo

Cable operators are a practical bunch, and will prefer gradualism when possible. So one might hypothesize that either mid- or high-split designs will be preferred. 

Value Drives Prices for Spectrum, as for All Other Assets

Spectrum assets are fundamental for facilities-based mobile operators, perhaps only interesting for some fixed network operators. That perceived value drives prices buyers are willing to pay for spectrum licenses.

But some mobile operators in some markets apparently place a much-higher value on mid-band spectrum licenses than others.

The prices paid for the C-band spectrum have varied widely, according to the Global Mobile Suppliers Association. As with all purchases of any sort, perceived value directly affects prices buyers are willing to pay. 

“The amount operators are prepared to spend depends on the degree of competition, the amount of suitable spectrum they already hold, the length of license available, the extent of the coverage/performance requirements that are attached to the license and the economic value of (the amount of money spent by) each mobile end user in the country/territory concerned,” GSA says. 

source: GSA 

Of the 2021 auctions that GSA has data for, only the U.S. auction achieved a higher than recent average price. It would be a reasonable conclusion that, using the GSA criteria, U.S. mobile operators valued the C-band assets highly. 

The U.S. market remains competitive and the amount of mid-band assets for two of three major providers was exceedingly limited. Also, U.S. spectrum licenses are essentially perpetual. Unlike the situation in some other countries, mobile service providers do not have to bid again for their licenses, once awarded. 

So the ability to “pay once” creates more perceived value, compared to a “buy every X number of years” regime. 

The 2021 US auction of 3.7 GHz to 3.98 GHz spectrum delivered a record high price for C-band spectrum of $0.875/ MHz/Pop, significantly higher than the recent average price of $0.120 per MHz-Pop.

source: GSA 

But U.S. mobile operators also place higher value on millimeter wave spectrum, compared to most other countries. Perhaps that is because U.S. operators expect huge increases in end user demand that millimeter wave assets will address. 

Mobile operators are expected to run out of capacity in at least half of sites in many parts of the developed world within the next four to five years, as traffic density, particularly in dense urban areas, is expected to steadily increase, McKinsey has forecast. 

That is a safe prediction, demand for mobile data always has grown over time.

source: Ericsson  

In fact, the value of 5G is in large part driven by the value to mobile operators who can use it to increase capacity. Mobile data consumption is rising everywhere, meaning mobile operators must plan for extensive investment in capacity.

source: Ericsson 

“More” is the trend in every region. Within a half decade, by some estimates, demand will grow by three to four times current levels. In fact, one good argument for adopting a next generation mobile network about every decade is precisely that doing so helps mobile operators lower their “cost per bit” in an environment where it is very difficult to raise prices enough to cover much-higher usage. 

source: McKinsey

 A survey conducted by McKinsey a few years ago showed a disparity in operator attitudes, however. In most regions, return on investment was a big issue. North American mobile operators were significantly less concerned about ROI. 

source: McKinsey 

Perhaps the simple reason is that North American average revenue per account and per user is among the highest in the world. Simply, North American mobile operators can expect higher revenue per unit when they invest. 

source: S&P Global Market Intelligence

Danger to Profits, Operating Costs and Manual Processes Seem Top of Mind for Enterprise Execs: DX Concern is Really Not CX

Even allowing for a substantial measure of “this is what I am supposed to say,” enterprise executives rank the danger to profits and operating costs by 2023 as much more important issues than threats to customer experience, which is among the least likely to suffer from disruption in the near future. 

source: McKinsey 

What stands out in a recent McKinsey survey of 1140 senior enterprise managers is the concern that existing products and revenue models could be endangered and that new digital products must be created. 

source: McKinsey 

Even when some equate “digital transformation” with “customer experience,” that does not seem to be the way most enterprise profit center managers, C titles or directors seem to see matters. As always, the ability to generate profit at desired levels tops all other concerns, with operating costs also top of mind as that affects profits.

One Way a Return to the Office Might Decrease Team Spirit

A study of 9,000 U.S. workers by ADP Research Institute finds some unexpected--and many expected--employee attitudes about remote work. 

“Social connection, promotion opportunities and work-life boundaries are the most-cited benefits of on-site work,” according to employees. You might expect that. 

Perhaps unexpectedly, employees believe a return to the office will lessen--not increase--team spirit. Credit gossip, cliques and other forms of social behavior for this belief. 

As you might expect, in-the-offce work leads to more  organic communication. Some 77 percent of on-site workers say they engage in spontaneous conversations with their teammates during the work week. Only 60 percent of remote workers say that happens. 

On-site workers report a shorter workday--on average, one hour less--than remote workers. Those working remotely are more likely to say they have longer days post-Covid (39 percent) compared to on-site workers (21 percent). 

Fully 57 percent of employee think that their managers prefer on-site employees over remote workers. And 50 percent of managers themselves say that they actually do prefer on-site employees when making decisions on hiring and promotions. 

source: World Economic Forum 

Nearly half of employees say that “productive” (44 percent) and “undistracted” (48 percent) are more likely to be traits describing on-site workers and not remote workers. 

About 33 percent of those surveyed believe it makes no difference to productivity or distraction whether someone is remote or on site. 

Remote workers are more likely to say that communication with their manager (or with direct reports if they are a manager) has deteriorated (26 percent). In contrast, just 14 percent of on-site workers whose boss also works on-site say communication has decreased.

What Changes for Enterprise Spending After Covid?

As someone who believed Covid would end sooner than it has, and would not have as much long-lasting impact on enterprise work practices, there is some new evidence suggestive of long-term changes. The issue is that the changes pull in different directions. 

To be sure, as the pandemic is not yet “over,” it might not be possible to assess the magnitude of potential shifts for some time. Still, there is some evidence that external collaboration impact might be the opposite of internal collaboration impact. 

Also, face-to-face meetings might be more important for some roles--such as sales--than for customer support, training and marketing. Meeting clients is seen as the top reason to resume travel, according to a Deloitte survey, while internal meetings and training are more likely to stay online.

U.S. spending on business travel is expected to only reach 25 percent to 35 percent of 2019 levels by the fourth quarter of 2021, and 65 percent to 80 percent a year later, according to a Deloitte survey of 150 travel managers.

To the extent that more remote work is going to be a permanent change, it is worth noting that collaboration and productivity trends might not be as rosy as many self-reports suggest. 

A study by researchers of Microsoft employees shows firm-wide remote work caused the collaboration network of workers to become more static and siloed, with fewer bridges between disparate parts. Furthermore, there was a decrease in synchronous communication and an increase in asynchronous communication.

Company-wide remote work caused business groups within Microsoft to become less interconnected, the researchers say. 

Remote work also reduced informal collaboration. Furthermore, the shift to firm-wide remote work caused employees to spend a greater share of their collaboration time with their stronger ties, which are better suited to information transfer, and a smaller share of their time with weak ties, which are more likely to provide access to new information, the study suggests. 

The researchers  suggest that hybrid and mixed-mode work arrangements may not work as firms expect. 

To be sure, long-term effects might not be the same as the short-term effects. the period of time over which we measured the causal effects of remote work are quite short (three months), and it is possible that the long-term effects of firm-wide remote work are different. 

For example, at the beginning of the pandemic, workers were able to leverage existing network connections, many of which were built in person. This may not be possible if firm-wide remote work were implemented long-term.

In other words, social capital decays over time. 

The point is that we might see several trends that run counter to each other, with new “distributed and remote” work modes producing less face-to-face interaction, while sales activities might need to be reinstated for sales operations. 

On the other hand, many enterprises also will find less need for face-to-face support for some internal operations and some customer-facing tasks. 

On a broader level, we might look at an analogy to changes wrought by widespread use of the internet and mobility.  Every content business you can think of was changed, first by the internet and then by mobility. 

To the extent that the internet reduced information gaps or friction, demand for trade shows, magazines and newspapers actually fell. Much the same has happened with mobile-based communication and media. Newspaper revenues fell while online revenue grew. 

Home video shifted to online. Linear subscriptions shifted to internet-based subscriptions. Music likewise shifted from physical media to internet delivery.

In the business world, software distribution also shifted from physical media to online fulfillment; products to services. With quality broadband nearly ubiquitous, computing shifted from local to remote, as well.   

To the extent that trade shows, trade journals and specialized business publications were needed to reduce information friction, there simply was less need once the internet made information more transparent and easy to get. 

There may be parallels with the ways business information and commerce changes after Covid. Demand for some activities will decline while others replace them. Business travel, trade shows and collaboration itself might be altered on a permanent basis.

Cincinnati Bell Goes Private

Cincinnati Bell is among the latest to go private, as the firm has been acquired by Macquarie Infrastructure Partners. Iliad in France wants to do so and Altice Europe did so earlier in 2021.

Among the key drivers for those privatizations is the perception by asset owners that public markets will not positively reward the firms, in terms of equity valuations, commensurate with their revenues, cash flow or potential growth prospects.

Another key driver is private equity firms with lots of private capital to invest, and assets that offer long-term and predictable cash flows.

 

That, in turn, is matched by desire to invest by pension funds and other entities with long time horizons that view infrastructure assets as equivalents to other long-duration fixed-income assets such as bonds.

 

Also, asset diversification is another motivation for investors.

  

There is a good reason why any number of public telecom firms have been taken private, and why others are considering similar moves: high debt, low growth and poor operational performance. And connectivity providers are not the only type of firms facing investment issues.  

That is a fairly-common prescription for any public company to be taken out of the public markets by private equity, and many public telco assets  fit the bill. 

source: Focus Finance

One defining characteristic of infrastructure assets is their monopolistic position. We tend to forget that for most of the history of the industrialized world, much of the funding for large scale public infrastructure such as roads, canals and railroads has come from private sources of capital. And that includes telecommunications in the United States. 

source: Maria Sward 

The function of private equity also has included the rehabilitation of firms that are not performing financially. Private equity buys a public asset, restructures and then sells the asset, often within about a five-year period. 

source: Bain