Scaling Up in Video Distribution Now is Risky

Scaling up or out of the video entertainment business is a decision Citi equity analyst Michael Rollins believes Verizon could make if it were to acquire Dish Network.

Ignoring for the moment the mid-band spectrum Verizon would acquire, this latest version of an older story (Verizon “needs” to buy Dish for its spectrum), the thesis runs counter to the general narrative about AT&T’s similar moves in video distribution, where the linear video assets help fuel a move into streaming.

Many observers did not like the AT&T acquisition of DirecTV, as many did not approve of the Time Warner acquisition, either, which positions AT&T with a broader role in the ecosystem most akin to Comcast.

Ignoring for the moment the free cash flow boost provided by both those acquisitions, one objection to the DirecTV purchase was that it represented the acquisition of a company whose product (linear subscription video) is in declining demand.

So the suggestion that Verizon could choose to “scale up” its video subscription footprint by acquiring Dish Network video accounts (though the spectrum holdings arguably are the real prize) would then represent the same sort of bad decision AT&T is reputed to have made.

Verizon has not been keen on an expanded role in consumer video distribution, it is safe to say, in either linear or streaming roles.

And it is arguably a tougher decision now that Netflix has changed the video distribution from a domestic-only to a global business. So now any firm contemplating surviving the eventual consolidation of the U.S.-anchored video streaming business has to decide whether it can gain enough scale to compete with the likes of Netflix, and likely YouTube, Hulu and Amazon.

To be sure, there are a couple different roles. Netflix and Amazon, so far, focus on pre-recorded content. Hulu and YouTube are anchoring their services with live streaming.

It remains unclear which roles Disney will attack, likely some combination of both, as it owns the ESPN live sports franchise plus a deep catalog of movies.

UBS equity analyst John Holulik estimates Disney could get 20-percent to 30-percent take rates from U.S. broadband households by 2024.

The other potential issue is whether success primarily in the U.S. market, or “going global,” is feasible, and a way to remain in the top five or six such services.

For consolidation is inevitable. And all contenders have to factor in how they deal with Netflix, in a multi-subscription market. An April survey from research firm Hub Entertainment Research showed that if consumers had to abandon one streaming service to get Disney+,  44 percent would keep Netflix, while 29 percent said they would keep CBS All Access.

Another survey, by Streaming Observer suggests 60 percent would keep Netflix, while 20 percent would subscribe to both Netflix and Disney+.

source: Streaming Observer

Why Verizon would want to reverse course and get into the crowded streaming field now is unclear. Eventually, consolidation of a few of the leading services seems inevitable, given the presence of brand names such as Netflix, Apple, Disney (ABC, ESPN), YouTube, Amazon, AT&T (Warner Media) and Hulu (Disney) at the top and upper end of the market share ranks, and some others, such as Comcast (NBC Universal), yet to make their moves.

The fate of many smaller services remains quite unclear. To be sure, Verizon eventually could change its mind, but there seems no obvious reason why it has to move now, and whether it has the financial strength to be an acquirer, if it desired to do so.

So scaling “up” in video distribution, from Verizon’s standpoint, seems unlikely. Whether some risky moves will eventually be necessary seems fairly clear, though. With revenue growth rates now very low, Verizon eventually will have to get more aggressive if it wants to boost growth.

Globally, Growth Now is the Issue

The telecom industry has had a historical growth rate of about three percent a year. So growth at rates lower than three percent might well be deemed a problem. According to estimates by STL Partners, only in Africa will growth rates exceed three percent, between 2019 and 2022.

In Europe and Western Europe, growth might well be negative over that period. If telecom service provider costs of capitalare 4.6 percent for debt, and perhaps 10 percent for equity, one-percent revenue growth rates are a key problem.

source: STL Partners

source: STL Partners

One might well argue that capital investment in U.S. fixed networks dropped off sharply in 2000 in large part because such investments no longer were expected to produce revenue growth.

source: Market Realist

Historically, faced with slowing growth, telecom companies have purchased growth by acquiring other firms, in horizontal deals (mobile firms buying other mobile firms; fixed network firms buying other fixed network firms; fixed network entities buying mobile assets; cable firms buying other cable firms).

That will remain an option for some firms. The new problem is that while scale helps with operating costs and gross revenue,  long-term growth might not benefit too much. A bigger firm, growing less than three percent, does not solve the growth problem.  And growth now is the key issue.

Firms might make mistakes when trying to grow outside the connectivity role. But staying exclusively in that role, as a strategy, might also falter, as it does not offer a path to growth.

Open Access to MDU Internal Wiring Sounds Great, Until You Think About the Physical Issues

Lots of problems in the communications business that would seem to be simple are, in fact, often somewhat complicated, and often costly. If you know people who work in outside plant (cable and telco, especially), and you ask about why it is that multiple dwelling units often are the last-wired homes in a city, you are going to get a couple of consistent sets of answers.

Unlike the detached single-family home environment, building owners have the legal right to refuse a service provider’s desire to wire the building. Residential single-family homeowners cannot prevent a service provider from building access plant down the street or alley.

Building owners can, in fact, bar access to an MDU or other large private property. So even if the network runs down the street or alley, the right to access the MDU internal wiring network, building basement, rooftop or other spaces can be denied. Obtaining such rights has to be negotiated building by building, as well.

That is why MDUs often are the last to get any telco or cable service, on a uniform and timely basis, in a city.

To promote competition, the obvious answer for many has been to do an “open access” approach within each building, assuming the building owner agrees, where multiple providers can use the internal wiring.

Sounds reasonable, no? But that is where one has to talk to the outside plant experts. For any sort of voice, video or data network, there always is a network demarcation point of some sort.

Also, it is easy to criticize the Federal Communications Commission for not favoring local laws requiring open access to internal wiring networks, as pro-competitive as that sounds.

There actually are all sorts of reasons having to do with cumbersome interface and cabling issues that creates.

For a single-family, detached home, that is a plastic network interface unit on the side of a house. For an MDU, something more complex is required. Typically, that is some sort of wiring chasis that demultiplexes a signal stream, allowing individual tenants to get access to a service, using the internal riser network.

Sure, in principle one might place multiple interface panels, side by side, in a basement, closet, panel or pedestal. Even assuming security is not an issue (it is), the solution for service to any particular unit within the building would involve running a jumper cable from one interface panel to another panel where the internal wiring all terminates.

If you have talked to people who run data centers--or spent time in such centers--you know the wiring mass can be quite substantial. There is great need for detailed labeling and some method to tidy up the mass of cables.

So picture a basement wall having to support multiple wiring panels, one for cables that terminate in each living unit on every floor, then some way to route jumper cables from each of the separate service provider termination units. Again, ignore the fact that the security of each service providers termination panel has to be provided, but also the ability to physically disable rival provider jumper cables, so that any new provider can connect to the in-building riser network.

Imagine the growing number of abandoned cables that accumulate every time a single customer changes service providers. It is messy and ultimately unworkable.

Probably few of us who are would-be customers like the practice of exclusive contracts on MDU properties. That restricts choice. On the other hand, the physical challenges of allowing multiple suppliers to connect to internal wiring networks is not an easy problem to solve, without creating complicated and bulky equipment issues in whatever space is used for network terminations.

Multiple service providers having access to each and every potential customer location in an MDU sounds reasonable enough. But there are physical constraints, especially over time as more customers move in and out, start and then terminate service, with the old cables being stranded.

To the best of my knowledge, a new service provider is under no legal obligation to remove older cables that had been used by any other service provider. And that means lots of unused, stranded cables that may or may not be marked, take up space and make installation and subsequent repairs more difficult.

Verizon Changes Revenue Reporting

Not to be cynical or skeptical, but a change in Verizon reporting segments that is nearly revenue neutral in the near term also means it will be easier to segregate high margin from lower margin product lines, as well as bolster growth opportunities in both reported segments, instead of facing a future where mobility grows and the fixed network stagnates and declines.

In the past, Verizon has reported fixed line network revenues separately from mobile network results. The reporting methodology focuses on consumer and business revenues, no matter which networks are used.

The revenue pie charts look quite similar. Over time, assuming most of the internet of things revenue winds up being enterprise driven, there is a reasonable chance of showing business unit revenue growth as well. Absent these changes, it is not clear the entire fixed network business would do anything but shrink.

source: Verizon

That Verizon’s overall growth now is driven by mobility services is not new. What is new is the way Verizon expects to report revenue and growth. Ignoring for the moment any potential advantages Verizon might gain in sales efficiency and fulfillment, the reorganized reporting should make it easier for Verizon to show revenue growth in each segment, instead of facing a situation where the fixed network contributions continue to fall.

source: Verizon

"U.S. Behind" Meme is Popular, if Historically Almost Meaningless

The U.S. is falling behind meme never goes away, where it comes to communications. The latest assertion is that the United States is falling behind in 5G. That claim has been made many times in the past, and always has proven wrong.

In the past, it has been argued that the United States was behind, or falling behind, for use of mobile phones, smartphones, text messaging, broadband coverage, fiber to home, broadband speed or broadband price.

It is an old pattern of claims. Consider voice adoption, where the best the United States ever ranked was about 15th globally, for teledensity (people provided with phone service).

With the caveat that some rural and isolated locations never got fixed network phone service, not many would seriously argue that the supply or use of fixed network voice was an issue of any serious importance for the nation as a whole, though it is an issue for rural residents who cannot buy it.

Some even have argued the United States was falling behind in spectrum auctions.  What such observations often miss is a highly dynamic environment, where apparently lagging metrics quickly are closed.

In the specific case of 5G, the forecast and service activation data suggest the United States is among the very-first commercial deployers of 5G.

The other metaphor often used is that 5G is a race, with rewards of some type accruing to the earlier adopters, often said to be economic growth or perhaps market share in the 5G infrastructure or applications business.

The precedent often cited is leadership in 4G. Policymakers and analysts often say that U.S. “leadership” in 4G access lead to--or enabled--leadership in other areas, such as platforms, apps and services.

This is subtle. Is there is a general or universal correlation between early and ubiquitous deployment of 4G and leadership in platforms, apps and services? For example, nobody refutes the notion that the biggest global brands in internet platforms, apps and services are based in China and the United States.

But was 4G--or something else--responsible for that development? To be sure, 4G was the first mobile air interface whose “killer app” was mobile internet. So 4G enabled app development. But, though, necessary (you need the platform to enable the apps), was 4G sufficient?

Globally, 4G has not enabled similar levels of growth, something European policymakers directly or indirectly worry about.  If 4G really was the catalyst for economic growth, such growth should be heightened on a broader basis, and that has not clearly happened.

So one might argue the opposite position: fast 4G deployment allowed firms in some countries to move faster because they already were positioned to lead in mobile applications and services.

To make the crude argument, Shenzen in China and Silicon Valley in the United States already existed, and already were best placed to lead in mobile internet apps, services and platforms. In other words, simply deploying 5G does not confer any particular advantages if the skills levels, existing competencies, capital resources, legal frameworks and existing role in internet ecosystem industries does not already exist.

One might argue with greater effectiveness that the U.S. market “needs” more mid-band spectrum allocation. But spectrum allocation potential in various countries varies, depending on what other claimants already have rights to use mid-band spectrum. Much of the U.S. mid-band spectrum already is allocated to other users, requiring spectrum clearance or sharing to move those resources to 5G use.

In the U.S. market, virtually all mid-band spectrum between 3.1 GHz and 4.2 GHz already is allocated for other licensed users.

source: T-Mobile US

While it is true in one sense that U.S. mobile operators have “less access” to mid-band spectrum in those ranges, it is because other users have rights to use it: there is little unallocated mid-band spectrum in the U.S. market.

source: CTIA

That is one reason why spectrum sharing has emerged as such an important platform in the U.S. market. The larger point is that past arguments about U.S. “falling behind” have proven to be temporary or commercially irrelevant.

One can argue, for example, that the United States lags in fiber-to-home deployment. It does, statistically. But that ignores the widespread availability of cable TV gigabit internet access using hybrid fiber coax platforms. The “lag” is statistically correct. The commercial reality is that gigabit internet access is widely available from cable operators, reducing the market opportunity for FTTH.

One always has to evaluate these “falling behind” claims in context. Historically, all such gaps have functionally been temporary, or superseded.

Is Mobile Account Churn Highest Among Biggest Spenders?

The latest American Customer Satisfaction Index data on U.S. customer satisfaction with mobile service has some findings that require explanation. For the first time, ACSI asks respondents how much they spend on mobile service.

Nearly 70 percent of customers indicate a spending level between $1 and $100 on their wireless bill, accounting for no more than 35 percent of service provider revenue, ACSI says.

If I understand the data correctly, about 18 percent of the customer base spends between $101 and $150 per month, or between $250 and $500 each month. Note that the group in the $151 to $249 range is not enumerated. Nor is data reported for any accounts spending more than $500 a month.

The two groups ($101 to $151; $250 to $500) have lower customer satisfaction and are less loyal than the customers spending $100 or less. “In fact, these customer groups account for about 40 percent of the revenue lost to annual customer churn across the industry,” ACSI says.

ACSI did not provide any further detail that would provide greater insight on churn rates by spending level. Also, since the wording is “wireless bill,” not “per phone,” we must assume the total monthly spending includes multi-device accounts.

There is not enough detail to determine whether the reported expenditures include payments by customers whose mobile spending is part of a bundle with fixed network services.

One possible and logical explanation for the findings is that consumers who pay less are more satisfied than those who pay more. What might not make sense is that consumers who buy multi-user plans--and therefore presumably pay less per line--are less satisfied than customers who buy one-device service.

That perhaps 30 percent of accounts produce 65 percent of revenue might not come as a surprise. Even assuming no enterprise accounts were tallied, we might well assume that higher-spending accounts include users with high international travel and therefore roaming charges.

Perhaps it is the roaming charges that lead to lower satisfaction and higher churn for the bigger-spending accounts.

Customer satisfaction with wireless telephone service is up 1.4 percent to a score of 75 on the American Customer Satisfaction Index’s 100-point scale. That is towards the lower third of industry scores.

But subscription TV and internet access services score dead last among all industries. And satisfaction with fixed network phone service appears to be basically unchanged.

source: ACSI

5G Will Affect Network Architectures

Before the advent of mobile communications, networking architectures all were simple. Public networks (telcos) supplied wide area communications to a premises, while inside buildings customers created their own internal distribution networks.

Architectures are less clear now that new platforms such as Citizens Broadband Radio Service and spectrum sharing and aggregation are emerging. One might argue that “mobile” architectures might, in many cases, take the older fixed network form.

The classic example is the consumer in-home network or any business local area network, with a clear physical and logical point of demarcation between the WAN and the LAN.

The WAN consists of assets owned by the service provider and the LAN facilities are owned by the consumer, tenant or building owner.

source: Router-Switch

That became more complicated with the advent of mobile networks, which theoretically provide direct connection to the end user device, no matter where it is located. In practice it sometimes is more complicated.

A smartphone can be used as a Wi-Fi hotspot, which then creates a private network within a premises or any other local area. In that case, the public network (WAN) terminates at the device acting as the hotspot, all other potential devices connected to the hotspot then constituting the LAN.

In other cases a multi-radio Wi-Fi network with repeaters also creates a more-substantial LAN.

Indoor coverage, always an issue since 3G, is going to become a bigger challenge in the 5G era, when higher frequencies in the mid-band and millimeter wave region will be employed. And that is going to recreate the space within which LANs make sense.

Signal propagation is the reason: many 5G signals, while adequate outdoors, will have signal strength issues indoors. One way to illustrate this, shown below, is that signal propagation through walls, from the public network (cell towers), decreases with an increase in frequency.

source: Surecall

Another illustration illustrates the principle that cell site signal loss increases with frequency, while coverage decreases.

source: Look Far

All of that means there is potential new terrain for 5G and subsequent mobile networks to use the WAN-LAN framework, where private networks might assume greater roles inside buildings. That, in turn, means there might be new roles created for connectivity providers.

As Boingo and others have specialized in creating private Wi-Fi networks for venues, so it might happen that entities also provide 5G mobile coverage indoors. Whether that is the mobile operators, neutral-host providers or enterprises and consumers themselves remains to be seen.

CBRS, for example, can provide indoor coverage or traditional access to premises for 4G mobility services. The former use case is most likely with enterprise venues; the latter will be most common in consumer settings. CBRS can be used to create indoor private 4G networks. CBRS also might be used to support small cell or wireless fixed access networks.

Indoor 5G coverage methods already are available. In some cases service providers with licensed spectrum will deploy the systems. In other cases, third parties might use unlicensed spectrum to create their own indoor networks.

Ericsson 5G Radio Dot Launch from Ericsson

The point is that from both a business model and technology standpoint, heterogeneous mobile networks are coming. In some cases, service providers directly will deploy indoor infrastructure in the form of small cells.

In other cases they may partner with third parties to install and operate such infrastructure. In yet other cases enterprises or consumers might create their own LANs.